##### 



EXHIBIT 13 INTERGRAPH CORPORATION AND
SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS 2003December 31,
    
    (Restated)
    
    2002(in thousands, except share and per share
amounts)AssetsCash and cash equivalents
    
    $
    265,782
    
    
    $
    490,097Short-term investments
    
    
    
    
    
    
    15,927Total cash and short-term investments
    
    
    265,782
    
    
    
    506,024Accounts receivable, net
    
    
    150,927
    
    
    
    152,187Inventories, net
    
    
    15,443
    
    
    
    19,397Other current assets
    
    
    37,673
    
    
    
    39,795Total current assets
    
    
    469,825
    
    
    
    717,403Investments in affiliates
    
    
    9,499
    
    
    
    20,700Capitalized software development costs, net
    
    
    29,520
    
    
    
    29,830Other assets, net
    
    
    12,500
    
    
    
    16,889Property, plant, and equipment, net
    
    
    51,099
    
    
    
    50,818Total Assets
    
    $
    572,443
    
    
    $
    835,640Liabilities and Shareholders EquityTrade accounts payable
    
    $
    23,052
    
    
    $
    17,850Accrued compensation
    
    
    38,726
    
    
    
    31,541Other accrued expenses
    
    
    40,835
    
    
    
    35,730Billings in excess of sales
    
    
    49,970
    
    
    
    43,908Income taxes payable
    
    
    26,912
    
    
    
    67,477Short-term debt
    
    
    
    
    
    
    169Total current liabilities
    
    
    179,495
    
    
    
    196,675Deferred income taxes
    
    
    13,465
    
    
    
    16,260Other noncurrent liabilities
    
    
    548
    
    
    
    995Total noncurrent liabilities
    
    
    14,013
    
    
    
    17,255Shareholders equity:Common stock, par value $0.10 per share - 100,000,000 shares
authorized; 57,361,362 shares issued
    
    
    5,736
    
    
    
    5,736Additional paid-in capital
    
    
    201,240
    
    
    
    206,888Deferred compensation
    
    
    (1,552
    )
    
    
    Retained earnings
    
    
    608,308
    
    
    
    586,020Accumulated other comprehensive income (loss)
    
    
    12,790
    
    
    
    (659
    )826,522
    
    
    
    797,985Less  cost of treasury shares (21,259,223 at December 31, 2003,
and 11,198,767 at December 31, 2002)
    
    
    (447,587
    )
    
    
    (176,275
    )Total shareholders equity
    
    
    378,935
    
    
    
    621,710Total Liabilities and Shareholders Equity
    
    $
    572,443
    
    
    $
    835,640
 The
accompanying notes are an integral part of these consolidated
financial statements.




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##### 



INTERGRAPH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME Year Ended December 31,
    
    2003(in thousands, except per share amounts)
    
    (Restated)
    
    2002
    
    2001RevenuesSystems
    
    $
    296,886
    
    
    $
    287,899
    
    
    $
    301,483Maintenance
    
    
    131,099
    
    
    
    121,513
    
    
    
    125,305Services
    
    
    98,018
    
    
    
    91,665
    
    
    
    105,273Total revenues
    
    
    526,003
    
    
    
    501,077
    
    
    
    532,061Cost of revenuesSystems
    
    
    150,837
    
    
    
    146,525
    
    
    
    153,790Maintenance
    
    
    49,173
    
    
    
    55,162
    
    
    
    66,367Services
    
    
    74,047
    
    
    
    65,550
    
    
    
    78,578Total cost of revenues
    
    
    274,057
    
    
    
    267,237
    
    
    
    298,735Gross profit
    
    
    251,946
    
    
    
    233,840
    
    
    
    233,326Product development
    
    
    58,958
    
    
    
    50,669
    
    
    
    53,892Sales and marketing
    
    
    101,338
    
    
    
    96,689
    
    
    
    96,258General and administrative
    
    
    74,330
    
    
    
    69,945
    
    
    
    71,467Restructuring charges (credits)
    
    
    3,952
    
    
    
    2,106
    
    
    
    (384
    )Income from operations
    
    
    13,368
    
    
    
    14,431
    
    
    
    12,093Intellectual property income (expense), net
    
    
    5,784
    
    
    
    434,471
    
    
    
    (4,006
    )Gains on sales of assets
    
    
    3,421
    
    
    
    17,214
    
    
    
    11,243Interest income
    
    
    6,588
    
    
    
    6,886
    
    
    
    7,427Other income (expense), net
    
    
    (2,128
    )
    
    
    (3,830
    )
    
    
    2,161Income before income taxes and minority
interest
    
    
    27,033
    
    
    
    469,172
    
    
    
    28,918Income tax expense
    
    
    (4,745
    )
    
    
    (91,135
    )
    
    
    (8,500
    )Income before minority interest
    
    
    22,288
    
    
    
    378,037
    
    
    
    20,418Minority interest in earnings of consolidated subsidiaries
    
    
    
    
    
    
    (285
    )
    
    
    (476
    )Net income
    
    $
    22,288
    
    
    $
    377,752
    
    
    $
    19,942Net income per share- basic
    
    $
    0.49
    
    
    $
    7.87
    
    
    $
    0.40- diluted
    
    $
    0.47
    
    
    $
    7.47
    
    
    $
    0.39Weighted average shares outstanding- basic
    
    
    45,549
    
    
    
    47,991
    
    
    
    49,578- diluted
    
    
    47,583
    
    
    
    50,536
    
    
    
    51,620
 The accompanying notes are an integral part of these consolidated financial
statements.




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##### 



INTERGRAPH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31,
    
    2003(in thousands)
    
    (Restated)
    
    2002
    
    2001Cash Provided By (Used For)Operating Activities:Net income
    
    $
    22,288
    
    
    $
    377,752
    
    
    $
    19,942Adjustments to reconcile net income to net cash
provided by operating activitiesDepreciation
    
    
    8,206
    
    
    
    9,677
    
    
    
    11,917Amortization
    
    
    17,503
    
    
    
    15,535
    
    
    
    14,307Non-cash portion of restructuring charges
    
    
    3,520
    
    
    
    2,069
    
    
    
    Provision for losses on accounts receivable
    
    
    2,662
    
    
    
    3,851
    
    
    
    1,348Gains on sales of assets
    
    
    (3,421
    )
    
    
    (17,214
    )
    
    
    (11,243
    )Income taxes payable
    
    
    (40,436
    )
    
    
    57,872
    
    
    
    (1,328
    )Noncurrent portion of deferred income taxes
    
    
    (2,798
    )
    
    
    13,695
    
    
    
    (4,043
    )Net changes in other assets and liabilities
    
    
    26,742
    
    
    
    (3,677
    )
    
    
    (6,431
    )Net cash provided by operating activities
    
    
    34,266
    
    
    
    459,560
    
    
    
    24,469Investing Activities:Net proceeds from sales of assets
    
    
    19,532
    
    
    
    35,168
    
    
    
    12,934Purchases of property, plant, and equipment
    
    
    (9,982
    )
    
    
    (10,713
    )
    
    
    (9,675
    )Purchases of short-term investments
    
    
    (34,089
    )
    
    
    (270,088
    )
    
    
    (11,035
    )Proceeds from short-term investments
    
    
    49,822
    
    
    
    266,654
    
    
    
    Capitalized software development costs
    
    
    (10,033
    )
    
    
    (11,294
    )
    
    
    (4,827
    )Business acquisitions, net of cash acquired
    
    
    (2,030
    )
    
    
    (7,317
    )
    
    
    (2,904
    )Other
    
    
    481
    
    
    
    (2,398
    )
    
    
    (2,025
    )Net cash provided by (used for) investing activities
    
    
    13,701
    
    
    
    12
    
    
    
    (17,532
    )Financing Activities:Gross borrowings
    
    
    31
    
    
    
    81
    
    
    
    1,653Debt repayment
    
    
    (200
    )
    
    
    (3,655
    )
    
    
    (28,518
    )Treasury stock repurchase
    
    
    (290,670
    )
    
    
    (83,588
    )
    
    
    (1,875
    )Proceeds of employee stock purchases and exercises
of stock options
    
    
    13,870
    
    
    
    12,389
    
    
    
    3,818Net cash used for financing activities
    
    
    (276,969
    )
    
    
    (74,773
    )
    
    
    (24,922
    )Effect of exchange rate changes on cash
    
    
    4,687
    
    
    
    5,525
    
    
    
    (2,090
    )Net increase (decrease) in cash and cash equivalents
    
    
    (224,315
    )
    
    
    390,324
    
    
    
    (20,075
    )Cash and cash equivalents at beginning of year
    
    
    490,097
    
    
    
    99,773
    
    
    
    119,848Cash and cash equivalents at end of year
    
    $
    265,782
    
    
    $
    490,097
    
    
    $
    99,773
 The accompanying notes are an integral part of these consolidated financial
statements.




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##### 



INTERGRAPH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY AccumulatedAdditional
    
    
    
    
    
    
    
    
    
    Other
    
    
    
    
    
    TotalCommon
    
    Paid-in
    
    Deferred
    
    Retained
    
    Comprehensive
    
    Treasury
    
    ShareholdersStock
    
    Capital
    
    Compensation
    
    Earnings
    
    Income (Loss)
    
    Stock
    
    Equity(in thousands, except share amounts)Balance at January 1, 2001
    
    $
    5,736
    
    
    $
    214,079
    
    
    $
    
    
    
    $
    188,326
    
    
    $
    (15,931
    )
    
    $
    (114,210
    )
    
    $
    278,000Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,942
    
    
    
    
    
    
    
    
    
    
    
    19,942Other comprehensive loss:Foreign
currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,385
    )
    
    
    
    
    
    
    (1,385
    )Net unrealized holding losses on investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,287
    )
    
    
    
    
    
    
    (3,287
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,270Repurchase of 195,000 shares of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,875
    )
    
    
    (1,875
    )Issuance of 147,780 shares under employee stock purchase plan
    
    
    
    
    
    
    (746
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,143
    
    
    
    1,397Issuance of 344,555 shares upon exercise of stock options
    
    
    
    
    
    
    (2,585
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,006
    
    
    
    2,421Balance at December 31, 2001
    
    
    5,736
    
    
    
    210,748
    
    
    
    
    
    
    
    208,268
    
    
    
    (20,603
    )
    
    
    (108,936
    )
    
    
    295,213Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    377,752
    
    
    
    
    
    
    
    
    
    
    
    377,752Other comprehensive income:Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,366
    
    
    
    
    
    
    
    9,366adjustments
Net unrealized holding gains on investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,724
    
    
    
    
    
    
    
    22,724Reclassification adjustments for
gains included in net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12,146
    )
    
    
    
    
    
    
    (12,146
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    397,696Repurchase of 4,734,100 shares of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (83,588
    )
    
    
    (83,588
    )Tax benefits related to stock option plans
    
    
    
    
    
    
    4,283
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,283Issuance of 107,806 shares under employee stock purchase plan
    
    
    
    
    
    
    (115
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,630
    
    
    
    1,515Issuance of 966,946 shares upon exercise of stock options
    
    
    
    
    
    
    (8,028
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,619
    
    
    
    6,591Balance at December 31, 2002
    
    
    5,736
    
    
    
    206,888
    
    
    
    
    
    
    
    586,020
    
    
    
    (659
    )
    
    
    (176,275
    )
    
    
    621,710Comprehensive income:Net income (Restated)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,288
    
    
    
    
    
    
    
    
    
    
    
    22,288Other comprehensive income:Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,091
    
    
    
    
    
    
    
    13,091adjustments
Net unrealized holding gains on investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,170
    
    
    
    
    
    
    
    1,170Reclassification adjustments for
gains included in net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (812
    )
    
    
    
    
    
    
    (812
    )Comprehensive
income (Restated)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    35,737Repurchase of 11,372,420 shares of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (292,534
    )
    
    
    (292,534
    )Tax benefits related to stock option plans
    
    
    
    
    
    
    5,180
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,180Issuance of 79,580 shares under employee stock purchase plan
    
    
    
    
    
    
    155
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,308
    
    
    
    1,463Issuance of 1,157,114 shares upon exercise of stock options
    
    
    
    
    
    
    (11,480
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,707
    
    
    
    7,227Issuance of 75,000 restricted stock awards
    
    
    
    
    
    
    497
    
    
    
    (1,704
    )
    
    
    
    
    
    
    
    
    
    
    1,207
    
    
    
    Amortization of deferred compensation
    
    
    
    
    
    
    
    
    
    
    152
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    152Balance at December 31, 2003(Restated)
    
    $
    5,736
    
    
    $
    201,240
    
    
    $
    (1,552
    )
    
    $
    608,308
    
    
    $
    12,790
    
    
    $
    (447,587
    )
    
    $
    378,935
 The accompanying notes are an integral part of these consolidated financial
statements.




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##### 



INTERGRAPH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 NOTE 1  SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation:The consolidated financial statements include the
accounts of Intergraph Corporation (the Company or Intergraph) and its
majority-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation. The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires that management
make estimates and assumptions that affect the amounts reported in the
financial statements and determine whether contingent assets and liabilities,
if any, are disclosed in the financial statements. The ultimate resolution of
issues requiring these estimates and assumptions could differ significantly
from the resolution currently anticipated by management and on which the
financial statements are based. The Companys operations are divided for operational and management purposes
into four separate business segments, along with a Corporate oversight function
(Corporate): Intergraph Process, Power & Offshore (PPO), Intergraph Mapping
and Geospatial Solutions (IMGS), Intergraph Solutions Group (ISG), and
Intergraph Public Safety, Inc. (IPS). See Note 15 for a description of these
business segments. The Companys products are sold worldwide, with the United States and Europe
representing approximately 83% of total revenues for 2003. Cash Equivalents and Short-Term Investments:The Companys excess funds are
generally invested in short-term, highly liquid, interest-bearing securities,
which may include short-term municipal bonds, time deposits, money market
funds, commercial paper, and U.S. government securities. The Company limits
the amount of credit exposure from any single issuer of securities. The
carrying amounts reported in the consolidated balance sheets for cash and cash
equivalents and short-term investments approximate their fair value. For
purposes of financial statement presentation, investments with original
maturities of three months or less are considered to be cash equivalents, and
investments with original maturities of greater than three months but less than
a year are considered to be short-term investments. The Companys investments in debt securities are stated at a carrying value
which approximates fair value and any unrealized holding gains and losses are
reported as a component of Accumulated other comprehensive income (loss) in
the consolidated balance sheets. At December 31, 2003, and 2002, the Company
held various debt securities maturing within three months or less with fair
market values of approximately $173.9 million and $420.1 million, respectively.
The Company had no debt securities with maturities greater than three months
but less than a year at December 31, 2003, and approximately $15.9 million at
December 31, 2002. Gross realized gains and losses on debt securities
sold during the three-year period ended December 31, 2003, were not
significant, and there were no significant unrealized holding gains or losses
on debt securities at December 31, 2003, or 2002. Inventories:Inventories are stated at the lower of average cost or market.
The Company regularly estimates the degree of obsolescence in its inventories
and provides inventory reserves on that basis. An inability of the Company to
accurately




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##### 



forecast its inventory needs related to its warranty and maintenance
obligations could adversely affect gross margin and results of operations. See
Note 2 for a summary of inventory balances. Other Current Assets:Other current assets reflected in the Companys
consolidated balance sheets consist primarily of prepaid expenses, non-trade
receivables, the current portion of notes receivable from sales of various
non-core businesses and assets, refundable income taxes, and the Companys net
current deferred tax asset. See Notes 11, 16, and 17 for a discussion of
significant transactions affecting these components. Investments in Affiliates:Investments in companies in which the Company
believes it has the ability to influence operations or finances are accounted
for by the equity method. Investments in companies in which the Company does
not exert such influence are accounted for at fair value if such values are
readily determinable, and at cost if such values are not readily determinable. The Company owned approximately 32% of Bentley Systems, Inc. (BSI) at
December 31, 2003. The Company does not account for its investment in BSI
under the equity method due to a lack of significant influence. (See Notes 16
and 17 for further discussion of the Companys business relationship with BSI.)
The book value of the Companys investment in BSI was approximately $9.2
million at December 31, 2003, and 2002. Since BSI is a closely-held company,
the Company cannot readily determine the fair value of this investment. Capitalized Software Development Costs:Product development costs are charged
to expense as incurred; however, the costs incurred for the development of
computer software that will be sold, leased, or otherwise marketed are
capitalized during the period from when technological feasibility of the
product has been established until the product reaches the point of general
availability. Such capitalized costs are amortized using the straight-line
method over the estimated useful life of the project, which is typically a
period of two to seven years. Amortization of these capitalized costs,
included in Cost of revenues  Systems in the consolidated statements of
income, amounted to $10.3 million in 2003, $5.8 million in 2002, and $4.2
million in 2001. Although the Company regularly reviews its capitalized development costs to
ensure recognition of any decline in value, it is possible that, for any given
product, revenues will not materialize in amounts anticipated due to industry
conditions that include price and performance competition. Should this occur,
the net realizable value of capitalized development costs would decline,
producing adverse effects on systems cost of revenues and results of
operations. Due to net realizable value concerns, the Company did not
capitalize product development expenses of $12.2 million, $10.5 million, and
$8.6 million in 2003, 2002, and 2001, respectively, for costs normally eligible
for capitalization. Accumulated
amortization (net of certain fully amortized projects) in the consolidated
balance sheets at December 31, 2003, and 2002, was $24.9 million and $14.6
million, respectively. In 2000, the Company entered into a research and development services agreement
to develop an advanced, next-generation shipbuilding software product for the
design of commercial and military vessels. The agreement provided that the
customer was responsible for the cost of development until software acceptance,
which occurred in the second quarter of 2003. An amendment signed in 2002
included a commitment for the Company to spend $3 million on research and
development services with the customer over a period of two years from the date
of software acceptance. As of December 31, 2003, $1.2 million had been spent
towards this commitment. In addition, per the 2002 amendment, the Company is
obligated to purchase a prescribed amount of research and development services
from the customer based on the amount of maintenance




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##### 



revenue received from the
customer from the date of software acceptance until the end of the agreement.
As of December 31, 2003, $1.7 million had been spent towards this commitment.
The agreement terminates in October 2004, during which time the Company expects
to spend an additional $2 million towards this commitment. Before software
acceptance occurred, services revenues and costs related to the agreement
totaled approximately $501,000 and $772,000 respectively, for 2003, $2.9
million and $1.8 million, respectively, for 2002, and $2.8 million and $1.9
million, respectively, for 2001. The amendment signed in late 2002 reduced the
services rates charged by the Company by 50% resulting in costs being higher
than revenues in 2003. Research and development expenses incurred prior to the
agreement totaling approximately $9.7 million were capitalized and are included
as a component of Capitalized software development costs, net in the
consolidated balance sheets at December 31, 2003, and 2002. In April 2003,
when software acceptance occurred, the Company began amortizing these costs
over seven years. Other Assets:Other assets reflected in the Companys consolidated balance
sheets consist primarily of purchased software and intellectual property
(IP) rights (see Notes 4 and 17). Property, Plant, and Equipment:Expenditures for property, plant, and
equipment are capitalized at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets. See Note 5
for a summary of property, plant, and equipment balances. Other Noncurrent Liabilities:Other noncurrent liabilities reflected in the
Companys consolidated balance sheets consist primarily of accruals for excess
building space, a deferred gain on the sale and leaseback of a European office
building, and the final payment due in January 2005 in connection with a
business acquisition. Minority Interest:Effective October 1, 2002, the Company purchased the 40%
ownership interest in Z/I Imaging Corporation (Z/I Imaging) held by Zeiss for
approximately $6 million in cash and the transfer of certain reconnaissance
camera assets. Since October 1, 2002, Z/I Imagings assets, liabilities, and
results of operations are included in the Companys consolidated financial
statements as a component of the IMGS business segment. Zeiss former minority
interest in the earnings of this subsidiary is reflected as Minority interest
in earnings of consolidated subsidiaries in the Companys consolidated
statements of income. Treasury Stock:Treasury stock is accounted for by the cost method. Treasury
stock activity for the three-year period ended December 31, 2003, (consisting
of stock option exercises, purchases of stock by employees under the Companys
stock purchase plan, and the purchase of shares for the treasury) is presented
in the consolidated statements of shareholders equity. During 2003, the Company purchased approximately 10 million shares of its
common stock for $260.4 million via a modified Dutch auction tender offer
completed in December 2003. During 2003, the Companys Board of Directors (the
Board) increased the funding for the existing stock repurchase plan from $175
million to $250 million. The Board also extended the termination date for the
program from December 31, 2004, to December 31, 2005. During 2003, 2002, and
2001, respectively, the Company purchased approximately 1.4 million, 4.7
million, and 195,000 shares for approximately $30.2 million during 2003
(excluding the modified Dutch auction tender offer), $83.6 million during 2002,
and $1.9 million during 2001. Revenue Recognition:The Company recognizes revenue in accordance with the
Securities and Exchange Commission




---



##### 



(SEC) Staff Accounting Bulletin (SAB)
No. 101, Revenue Recognition in Financial Statements, SAB No. 104, Revenue
Recognition, issued in December 2003, and the American Institute of Certified
Public Accountants Statement of Position (SOP) No. 97-2, Software Revenue
Recognition. SAB No. 101 and SOP No. 97-2 outline basic criteria that must be
met prior to the recognition of revenue, including persuasive evidence of a
sales arrangement, delivery of products and performance of services, a fixed
and determinable sales price, and reasonable assurance of collection. For
revenue recognition purposes, the Company considers persuasive evidence of a
sales arrangement to be receipt of a signed contract or purchase order. For systems sales with no significant post-shipment obligations, the Company
recognizes revenues based upon estimated delivery times, generally less than
five days after shipment, for the equipment and/or software shipped, with any
post-shipment costs accrued at that time. Revenues on systems sales with
significant post-shipment obligations, including the production, modification,
or customization of software, are recognized by the percentage-of-completion
method, with progress to completion measured on the basis of completion of
milestones, labor costs incurred currently versus the total estimated labor
cost of performing the contract over its term, or other factors appropriate to
the individual contract of sale. The total amounts of revenues to be earned
under contracts accounted for by the percentage-of-completion method are
generally fixed by contractual terms. The Company regularly reviews its
progress on these contracts and revises the estimated costs of fulfilling its
obligations. Due to uncertainties inherent in the estimation process, it is
possible that completion costs will be further revised on some of these
contracts, which could delay revenue recognition and decrease the gross margin
to be earned. Any losses identified in the review process are recognized in
full in the period in which determined. For arrangements with multiple elements, the Company allocates revenue to each
element of a transaction based upon its fair value as determined by vendor
specific objective evidence (VSOE). VSOE of fair value for all elements of
an arrangement is based upon the normal pricing and discounting
practices for those products and services when sold separately. The Company
defers revenue for any undelivered elements, and recognizes revenue when the
product is delivered or over the period in which the service is performed, in
accordance with the Companys revenue recognition policy for such element. If
the Company cannot objectively determine the fair value of any undelivered
element included in bundled software and service arrangements, including
implied maintenance or specified upgrades, the Company defers revenue until all
elements are delivered and services have been performed, or until fair value
can objectively be determined for any remaining undelivered elements. When the
fair value of a delivered element has not been established, the Company uses
the residual method to record revenue if the fair value of all undelivered
elements is determinable. Under the residual method, the fair value of the
undelivered elements is deferred and the remaining portion of the arrangement
fee is allocated to the delivered elements and is recognized as revenue. Revenues from certain contracts with the U.S. government, primarily cost-plus
award fee contracts, are recognized monthly as costs are incurred and fees are
earned under the contracts. Maintenance and services are provided on both an as needed and long-term basis.
Maintenance and services provided outside a maintenance contract are on an as
requested basis and revenue is recognized as the services are provided.
Revenue for maintenance and services provided on a long-term basis is
recognized ratably over the terms of the contract. Billings may not coincide with the recognition of revenue. Unbilled accounts
receivable occur when revenue recognition precedes billing to the customer, and
arise primarily from commercial sales with predetermined billing schedules,
U.S. government sales with billing at the end of a performance period, and U.S.
government cost-plus award fee contracts.




---



##### 



Billings in excess of sales occur
when billing to the customer precedes revenue recognition, and arise primarily
from maintenance revenue billed in advance of performance of the maintenance
activity and systems revenue recognized on the percentage-of-completion method.
Amounts billed to customers for shipping and handling costs are classified as
revenues in the consolidated statements of income with the associated costs
included as a component of cost of revenues. Foreign Currency Exchange and Translation:Local currencies are the functional
currencies for the Companys Canadian subsidiaries, a Japanese subsidiary, and
all but one of the Companys European subsidiaries. The U.S. dollar is the
functional currency for all other international subsidiaries. Foreign currency
gains and losses resulting from remeasurement or settlement of receivables and
payables denominated in a currency other than the functional currency are
included in Other income (expense), net in the consolidated statements of
income. Net exchange losses totaled $1.4 million in 2003 compared to a net
exchange gain of $277,000 in 2002, and a net exchange loss of $1.5 million in
2001. Translation gains and losses resulting from translation of subsidiaries
financial statements from the functional currency into U.S. dollars are
included as a component of Accumulated other comprehensive income (loss) in
the consolidated balance sheets. Stock-Based Compensation Plans:The Company maintains a stock purchase plan
and three fixed stock option plans for the benefit of its employees and
directors. Under the stock purchase plan,
employees may purchase stock of the Company at 85% of the closing market price
of the Companys stock as of the last pay date of each calendar month. No
compensation expense is recognized for the difference in price paid by
employees and the fair market value of the Companys stock at the date of
purchase. Under the fixed stock option plans, stock options may be granted to employees
and directors at exercise prices that are equal to, less than, or greater than
the fair market value of the Companys stock on the date of grant.
Compensation expense, equal to the difference in exercise price and fair market
value on the date of grant, would be recognized over the vesting period for
options if granted at less than fair market value. In accordance with the disclosure provisions of Statement of Financial
Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation,
the Company has elected to apply Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and related Interpretations in
accounting for its stock-based plans. Accordingly, the Company has recognized
no compensation expense for these plans during the three-year period ended
December 31, 2003. Had the Company accounted for its stock-based compensation
plans based on the fair value of awards at grant date consistent with the
methodology of SFAS No. 123, the Companys reported net income and income per
share for each of the three years would have been impacted as indicated below.
The effects of applying SFAS No. 123 on a pro forma basis for the three-year
period ended December 31, 2003, are not likely to be representative of the
effects on reported pro forma net income for future years as options vest over
several years and as it is anticipated that additional grants will be made in
future years.




---



##### 



Year Ended December 31,
    
    
    
    2003(in thousands, except per share
amounts)
    
    

    
    (Restated)
    
    2002
    
    2001Net income
    
    As reported
    
    $
    22,288
    
    
    $
    377,752
    
    
    $
    19,942Deduct: Total
stock-based employee
compensation expense
determined under
fair-value-based method
for all awards (net of
income tax for 2002 and
2003)
    
    
    
    
    (1,530
    )
    
    
    (1,935
    )
    
    
    (3,318
    )Pro forma
    
    $
    20,758
    
    
    $
    375,817
    
    
    $
    16,624Diluted income per share
    
    As reported
    
    $
    0.47
    
    
    $
    7.47
    
    
    $
    0.39Pro forma
    
    $
    0.44
    
    
    $
    7.44
    
    
    $
    0.32
 Income Taxes:The provision for income taxes includes federal, international,
and state income taxes currently payable or refundable and income taxes
deferred because of temporary differences between the financial statement and
tax bases of assets and liabilities (see Note 11). Net Income Per Share:Basic income per share is computed using the weighted
average number of common shares outstanding. Diluted income per share is
computed using the weighted average number of common and equivalent common
shares outstanding. Employee stock options are the Companys only common stock
equivalent and are included in the calculation only if dilutive. For the years
ended December 31, 2003, 2002, and 2001, these dilutive shares were 2,034,000,
2,545,000, and 2,042,000, respectively. Comprehensive Income:Comprehensive income includes net income as well as all
other non-owner changes in equity. With respect to the Company, such non-owner
equity items include foreign currency translation adjustments and unrealized
gains and losses on certain investments in debt and equity securities. The
Companys comprehensive income or loss for each year in the three-year period
ended December 31, 2003, is displayed in the consolidated statements of
shareholders equity and in Note 9. Reclassifications:Certain reclassifications have been made to 2002 and 2001
amounts to provide comparability with the current-year presentation. NOTE 2  INVENTORIES Inventories at December 31, 2003, and 2002, are summarized as follows: December 31,(in thousands)
    
    2003
    
    2002Raw materials
    
    $
    6,295
    
    
    $
    7,011Work-in-process
    
    
    3,538
    
    
    
    2,856Finished goods
    
    
    2,939
    
    
    
    3,457Service spares
    
    
    2,671
    
    
    
    6,073Totals
    
    $
    15,443
    
    
    $
    19,397




---



##### 



Inventories on hand at December 31, 2003, and 2002, relate primarily to
continuing specialized hardware assembly activity in the Companys IMGS and ISG
business segments, and to the Companys continuing warranty and maintenance
obligations on computer hardware previously sold. Amounts currently reflected as work-in-process relate primarily to sales
contracts accounted for under the percentage-of-completion method. NOTE 3  ACCOUNTS RECEIVABLE Concentrations of credit risk with respect to accounts receivable are limited
due to the diversity of the Companys customer base. The Company performs
periodic credit evaluations of its customers financial condition and generally
does not require collateral. During the two years ended December 31, 2003, the
Company experienced no significant losses related to trade receivables from
individual customers or from groups of customers in any geographic area in any
business segment. Revenues from the U.S. government were approximately $137.1 million, $136.9
million, and $143 million in 2003, 2002, and 2001, respectively, representing
approximately 26% of total revenue in 2003, and 27% of total revenue in 2002
and 2001. Accounts receivable from the U.S. government totaled approximately
$23.5 million and $26.7 million at December 31, 2003, and 2002, respectively.
The Company sells to the U.S. government under long-term contractual
arrangements, primarily indefinite delivery, indefinite quantity, and
cost-based contracts, and through sales of commercial products not covered by
long-term contracts. Approximately 83% of the Companys 2003 federal
government revenue was earned under long-term contracts. Accounts receivable include unbilled amounts of $42.8 million and $41.1 million
at December 31, 2003, and 2002, respectively. These amounts include amounts
due under long-term contracts of approximately $25.4 million and $23.8 million
at December 31, 2003, and 2002, respectively. Accounts receivable also include
retainages of approximately $246,000 and $2.8 million at December 31, 2003, and
2002, respectively. The Company maintained reserves for uncollectible accounts, included in
Accounts receivable, net in the consolidated balance sheets at December 31,
2003, and 2002, of $13.8 million and $15.4 million, respectively. NOTE 4  INTANGIBLE ASSETS The Companys intangible assets include capitalized software development costs
(included as a
separate line in the consolidated balance sheets and discussed in Note 1) and
other intangible assets, including patents and licenses (included in Other
assets, net in the consolidated balance sheets).




---



##### 



At December 31, 2003, and 2002, the Companys intangible assets and related
accumulated amortization consisted of the following: 2003
    
    2002Accumulated
    
    
    
    
    
    
    
    
    
    AccumulatedGross
    
    Amortization
    
    Net
    
    Gross
    
    Amortization
    
    Net(in thousands)Capitalized software
development
    
    $
    54,423
    
    
    $
    (24,903
    )
    
    $
    29,520
    
    
    $
    44,417
    
    
    $
    (14,587
    )
    
    $
    29,830Other intangible assets
    
    
    48,011
    
    
    
    (39,694
    )
    
    
    8,317
    
    
    
    44,988
    
    
    
    (32,522
    )
    
    
    12,466$
    102,434
    
    
    $
    (64,597
    )
    
    $
    37,837
    
    
    $
    89,405
    
    
    $
    (47,109
    )
    
    $
    42,296
 The Company recorded amortization expense of $17.5 million and $15.5 million
for the years ended December 31, 2003, and 2002, respectively. Based on the
current intangible assets subject to amortization, the estimated amortization
expense for each of the succeeding five years, and thereafter is as follows:
$18 million in 2004, $6 million in 2005, $4 million in 2006, $3 million in
2007, $3 million in 2008, and $4 million thereafter. NOTE 5  PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment at December 31, 2003, and 2002, are summarized
as follows (in thousands): December 31,
    
    2003
    
    2002Land and improvements (15-30 years)
    
    $
    6,286
    
    
    $
    8,291Buildings and improvements (30 years)
    
    
    83,080
    
    
    
    76,621Equipment, furniture, and fixtures (3-8 years)
    
    
    63,963
    
    
    
    80,258153,329
    
    
    
    165,170Allowances for depreciation
    
    
    (102,230
    )
    
    
    (114,352
    )Totals
    
    $
    51,099
    
    
    $
    50,818
 NOTE 6  FINANCIAL
INSTRUMENTS Information related to the Companys financial instruments, other than cash
equivalents and stock investments in less-than-50%-owned companies, is
summarized below. Short-term Debt:The Company had no debt at December 31, 2003. At December
31, 2002, the Company had $169,000 in short-term debt. This debt was repaid in
January 2003. Convertible Debenture:As part of the proceeds of the April 1999 sale of its
InterCAP subsidiary to
Micrografx, Inc. (Micrografx), the Company received a $5.8 million
convertible subordinated debenture due on March 31, 2002. Due to financial and
operational difficulties being experienced by Micrografx, the Company wrote off
the value of this debenture, $5 million in 2000 and the remaining $797,000 in
2001. The 2001 write-off is included in Other income (expense), net in the
2001 consolidated statement of income.




---



##### 



On October 31, 2001, Corel Corporation, a Canadian software company, purchased
Micrografx. In order to facilitate this purchase, the Company agreed to accept
$3.8 million, plus accrued interest of $485,000, for complete settlement of its
convertible subordinated debenture. The total settlement is included in Other
income (expense), net in the 2001 consolidated statement of income. Stock Warrant:As part of the proceeds of the October 1999 sale of its
VeriBest business segment, the Company received a warrant to purchase 500,000
shares of the common stock of Mentor Graphics at a price of $15 per share. The
warrant was subsequently valued at $300,000 using the Black-Scholes option
pricing model as of the date of sale of VeriBest. The Company sold the warrant
to Mentor Graphics for $2 million in October 2001. A gain of $1.7 million was
recognized on the sale and recorded as a component of Other income (expense),
net in the 2001 consolidated statement of income. Forward Exchange Contracts:At December 31, 2003, and 2002, the Company had no
forward exchange contracts outstanding. The Company is not currently hedging
any of its foreign currency risks. NOTE 7  DEBT AND LEASES The Company leases various property, plant, and equipment under operating
leases as lessee. Rental expense for operating leases was approximately $15.8
million in 2003, $16.8 million in 2002, and $18.3 million in 2001. Subleases
and contingent rentals are not significant. Future minimum lease payments, by
year and in the aggregate, under noncancelable operating leases with initial or
remaining terms of one year or more are as follows: Operating Lease Commitments(in thousands)2004
    
    $
    11,9542005
    
    
    7,2902006
    
    
    4,9592007
    
    
    3,2732008
    
    
    1,374Thereafter
    
    
    22,866Total future minimum lease payments
    
    $
    51,716
 At December 31, 2003, the Company had no debt. In September 2002, in order to reduce the cost of issuing letters of credit,
the Company established a $12.5 million credit line with Wells Fargo Bank to
cover its outstanding letters of credit secured by $15 million of
interest-bearing securities. This credit line was reduced on January 20, 2004,
to $6 million secured by $8.2 million of interest-bearing securities. Under
this arrangement, the Company earns interest on the securities and withdrawal
of securities is allowed, but the Company is required to maintain a level of
securities sufficient to cover total outstanding letters of credit (which
totaled $4.9 million at December 31, 2003, and $10.9 million at December 31,
2002).




---



##### 



NOTE 8  SUPPLEMENTARY CASH FLOW INFORMATION Changes in other assets and liabilities, net of the effects of business
acquisitions and divestitures, in reconciling net income to net cash provided
by operations are as follows: Year Ended December 31,
(in thousands)
    
    2003
(Restated)
    
    2002
    
    2001(Increase) decrease in:Accounts receivable, net
    
    $
    9,474
    
    
    $
    10,536
    
    
    $
    15,409Inventories, net
    
    
    4,309
    
    
    
    3,601
    
    
    
    352Other current assets
    
    
    8,719
    
    
    
    (3,641
    )
    
    
    12,330Increase (decrease) in:Trade accounts payable
    
    
    5,583
    
    
    
    (5,301
    )
    
    
    (11,690
    )Accrued compensation and
    
    
    1,046
    
    
    
    (12,876
    )
    
    
    (18,940
    )other accrued expenses
Refundable income taxes
    
    
    (5,069
    )
    
    
    (97
    )
    
    
    3,753Billings in excess of sales
    
    
    2,680
    
    
    
    4,101
    
    
    
    (7,645
    )Net changes in other assets and liabilities
    
    $
    26,742
    
    
    $
    (3,677
    )
    
    $
    (6,431
    )
 Cash payments for income taxes were approximately $41.2 million, $20.8 million,
and $8.3 million in 2003, 2002, and 2001, respectively. Cash payments for
interest in those years totaled approximately $171,000, $338,000, and $2
million, respectively. Significant non-cash investing and financing transactions in 2003 included a
$5.2 million tax benefit on disqualified dispositions of employee stock options
and $1.9 million of accrued expenses related to the modified Dutch auction
tender offer. For 2002, significant non-cash investing and financing transactions include a
$27.3 million favorable mark-to-market adjustment on the Companys investment
in 3Dlabs Inc., Ltd. (3Dlabs), offset by a reclassification adjustment of
$16.6 million upon the sale of its investment in 3Dlabs stock. (See Note 9 for
additional details on comprehensive income). In addition, in second quarter
2002, the Company sold its shares in 3Dlabs to Creative Technology Ltd.
(Creative), receiving Creative stock valued at $26.8 million as partial
consideration. Disqualified dispositions of employee stock options during 2002
resulted in a $4.3 million tax benefit. Significant non-cash investing and financing transactions in 2001 included the
receipt of common stock with a value of approximately $10 million as additional
consideration for the sale of the Companys Intense3D graphics accelerator
division, offset by a $2.7 million unfavorable mark-to-market adjustment. The
mark-to-market adjustment is included in Accumulated other comprehensive loss
in the December 31, 2001, consolidated balance sheet. Also included in 2001 is
a $10.1 million increase
to a note receivable as additional consideration for the fourth quarter 2000
sale of its civil, plotting, and raster product lines.




---



##### 



See Note 17 for further details regarding the Companys acquisitions and
divestitures during the three-year period ended December 31, 2003. NOTE 9  COMPREHENSIVE INCOME Comprehensive income is computed as follows: Year Ended December 31,
(in thousands)
    
    2003
(Restated)
    
    2002
    
    2001Net income
    
    $
    22,288
    
    
    $
    377,752
    
    
    $
    19,942Unrealized holding gains (losses) arising during the
period
    
    
    1,170
    
    
    
    22,724
    
    
    
    (3,287
    )Reclassification adjustment for realized gains included
in net income
    
    
    (812
    )
    
    
    (12,146
    )
    
    
    Translation adjustment for financial statements
denominated in a foreign currency
    
    
    13,091
    
    
    
    9,366
    
    
    
    (1,385
    )Comprehensive income
    
    $
    35,737
    
    
    $
    397,696
    
    
    $
    15,270
 The 2003 and 2002 unrealized holding gains are shown net of $437,000 and $2.4
million, respectively, in taxes. There was no income tax effect related to the
items included in other comprehensive income for the year 2001. See Note 11
for details of the Companys tax position, including its net operating loss
carryforwards and policy for reinvestment of subsidiary earnings. NOTE 10  RESTRUCTURING CHARGES In June 2002, the Financial Accounting Standards Board issued SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal Activities, which
addresses financial accounting and reporting for costs associated with exit or
disposal activities. SFAS No. 146 is effective for exit or disposal activities
that are initiated after December 31, 2002, with earlier application
encouraged. The Company applied this standard subsequent to December 31, 2002,
as reflected in the following section. In 2003, the Company recorded $4 million in restructuring costs in an effort to
realign costs with revenues in certain areas of the Companys business. These
expenses are reflected in Restructuring charges (credits) in the 2003
consolidated statement of income. The Corporate business segment recorded $2.5
million in restructuring expense for employee severance benefits and the
termination of several operating leases. The IMGS business segment recorded
$1.5 million in restructuring expense for severance. All restructuring
activities were completed by December 31, 2003. One-time severance benefits
totaled $2.9 million, of which $432,000 was paid prior to December 31, 2003.
Lease termination costs totaled $1 million, and other associated costs were
$23,000, all of which will be paid subsequent to 2003. At December 31, 2003,
the total remaining accrued liability for 2003 restructuring
was $3.5 million and is reflected in Other accrued expenses in the Companys
consolidated balance sheets. In 2002, the Company recorded $2.1 million in restructuring charges as a result
of combining the Utilities and Communications business with the IMGS business
segment. Severance costs associated with the business reorganization totaled
almost $1.6 million. The remaining restructuring costs consisted of accruals
for idle building space. These expenses are reflected in Restructuring
charges (credits) in the 2002 consolidated statement of income. Cash outlays
in 2003 and 2002 approximated $1.9 million and $38,000, respectively. Currency
translation decreased the remaining 2003 liability by




---



##### 



$97,000. At December 31,
2003, and 2002, the total remaining accrued liability for 2002 restructuring
was $119,000 and $2.1 million, respectively, and is reflected in Other accrued
expenses in the Companys consolidated balance sheets. Although no restructuring efforts were implemented in 2001, severance
liabilities of $384,000 related to restructuring efforts from 2000 were
reversed in response to unanticipated attrition. This expense reversal is
reflected in Restructuring charges (credits) in the 2001 consolidated
statement of income. In first quarter 2004, the Company expects to record $1.2 million in
restructuring charges as a result of realignment in the PPO business segment.
The Company does not anticipate any further restructuring charges to be
recorded during 2004 as long as the Company remains on its 2004 plan. NOTE 11  INCOME
TAXES The components of income from operations before income taxes and minority
interest are as follows: Year Ended December 31,
    
    2003(in thousands)
    
    (Restated)
    
    2002
    
    2001U.S.
    
    $
    14,298
    
    
    $
    463,487
    
    
    $
    18,010International
    
    
    12,735
    
    
    
    5,685
    
    
    
    10,908Income from operations before income taxes and minority interest
    
    $
    27,033
    
    
    $
    469,172
    
    
    $
    28,918
 Income tax benefit (expense) from operations consists of the following: Year Ended December 31,
    
    2003(in thousands)
    
    (Restated)
    
    2002
    
    2001Current benefit (expense):Federal
    
    $
    (369
    )
    
    $
    (64,797
    )
    
    $
    (2,008
    )State
    
    
    3,416
    
    
    
    (15,809
    )
    
    
    (387
    )International
    
    
    (5,817
    )
    
    
    (1,828
    )
    
    
    (6,028
    )Total current
    
    
    (2,770
    )
    
    
    (82,434
    )
    
    
    (8,423
    )Deferred benefit (expense):Federal
    
    
    (2,138
    )
    
    
    (6,665
    )
    
    
    (103
    )State
    
    
    (41
    )
    
    
    (1,064
    )
    
    
    (9
    )International
    
    
    204
    
    
    
    (972
    )
    
    
    35Total deferred
    
    
    (1,975
    )
    
    
    (8,701
    )
    
    
    (77
    )Total income tax expense
    
    $
    (4,745
    )
    
    $
    (91,135
    )
    
    $
    (8,500
    )
 Deferred income taxes included in the Companys consolidated balance sheets
reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
carrying amounts for income tax return purposes. Significant components of the
Companys deferred tax assets and liabilities are as follows:




---



##### 



December 31,(in thousands)
    
    2003
(Restated)
    
    2002Current Deferred Tax Assets (Liabilities):Inventory reserves
    
    $
    4,049
    
    
    $
    8,882Vacation pay and other employee benefit accruals
    
    
    4,861
    
    
    
    3,923Other
financial statement reserves, primarily allowance for doubtful accounts and warranty
    
    
    4,198
    
    
    
    5,519Profit on uncompleted sales contracts
    
    
    (748
    )
    
    
    (827
    )Other current tax assets and liabilities, net
    
    
    7,295
    
    
    
    3,45219,655
    
    
    
    20,949Less asset valuation allowance
    
    
    (16,410
    )
    
    
    (12,934
    )Total net current asset (1)
    
    
    3,245
    
    
    
    8,015Noncurrent Deferred Tax Assets (Liabilities):Net operating loss and tax credit carryforwards:U.S. federal and state
    
    
    
    
    
    
    International operations
    
    
    24,936
    
    
    
    21,229Depreciation
    
    
    (5,978
    )
    
    
    (5,350
    )Capitalized software development costs
    
    
    (10,909
    )
    
    
    (11,833
    )Other noncurrent tax assets and liabilities, net
    
    
    1,122
    
    
    
    (3,142
    )9,171
    
    
    
    904Less asset valuation allowance
    
    
    (22,636
    )
    
    
    (17,164
    )Total net noncurrent liability
    
    
    (13,465
    )
    
    
    (16,260
    )Net deferred tax asset (liability)
    
    $
    (10,220
    )
    
    $
    (8,245
    )
 (1) Included in Other current assets in the consolidated balance sheets. The valuation allowance for deferred tax assets increased by $8.8 million
primarily due to an increase in international net operating losses and other
international deferred assets for which no benefit is currently recognized.
The valuation allowance for 2003 consists primarily of reserves against the
deferred tax assets of international operations. If realized, these reserved
tax benefits will be applied to reduce income tax expense in the year of
realization. Net operating loss carryforwards are available to offset future earnings within
the time periods specified by law. At December 31, 2003, the Company had
international net operating loss carryforwards totaling approximately $74.5
million that expire as follows: December 31, 2003
    
    International Net Operating Loss Carryforwards(in thousands)
    
    (Restated)Expiration:3 years or less
    
    $
    5,0004 to 5 years
    
    
    19,5006 to 10 years
    
    
    900Unlimited carryforward
    
    
    49,100Total
    
    $
    74,500




---



##### 



A reconciliation from income tax expense at the U.S. federal statutory tax rate
of 35% to the Companys income tax expense from operations is as follows: Year Ended December 31,
    
    2003(in thousands)
    
    (Restated)
    
    2002
    
    2001Income tax expense at federal statutory rate
    
    $
    (9,462
    )
    
    $
    (164,210
    )
    
    $
    (10,121
    )Tax effect of U.S. tax loss carried forward
    
    
    
    
    
    
    71,670
    
    
    
    2,619Tax effect of U.S. tax credits carried forward
    
    
    
    
    
    
    10,882
    
    
    
    State income taxes, net of federal tax benefit
    
    
    1,934
    
    
    
    (10,276
    )
    
    
    (257
    )Tax effects of international operations, net
    
    
    (1,433
    )
    
    
    (809
    )
    
    
    (1,844
    )Tax effect of audit settlements
    
    
    4,112
    
    
    
    
    
    
    
    Tax effect of tax-exempt investments
    
    
    825
    
    
    
    
    
    
    
    Other, net
    
    
    (721
    )
    
    
    1,608
    
    
    
    1,103Income tax expense
    
    $
    (4,745
    )
    
    $
    (91,135
    )
    
    $
    (8,500
    )
 The Company does not provide for federal income taxes or tax benefits on the
undistributed earnings or losses of its international subsidiaries because
earnings are reinvested and, in the opinion of management, will continue to be
reinvested indefinitely. At December 31, 2003, the Company had not provided
federal income taxes on earnings of individual international subsidiaries of
approximately $45 million. Should these earnings be distributed in the form of
dividends or otherwise, the Company would be subject to both U.S. income taxes
and withholding taxes in various international jurisdictions. Determination of
the related amount of unrecognized deferred U.S. income tax liability is not
practicable because of the complexities associated with its hypothetical
calculation. Withholding of approximately $3.1 million would be payable if all
previously unremitted earnings as of December 31, 2003, were remitted to the
U.S. Company. NOTE 12  STOCK-BASED COMPENSATION PLANS The Intergraph Corporation 2002 Stock Option Plan was approved by shareholders
in May 2002. Under this plan, the Company reserved a total of 2,000,000 shares
of common stock to grant as options to key employees of which no more than
400,000 can be granted as restricted stock. Options may be granted at exercise
prices which are equal to, less than, or greater than the fair market value of
the Companys stock on the date of grant. Options are granted for a term of
ten years from the date of grant. Options first become exercisable one year
from the date of grant and vest at a rate of 25% per year, with full vesting on
the fourth anniversary date of the grant. Options to purchase 316,000 shares
of the Companys common stock were granted in 2003. At December 31, 2003,
1,519,000 shares were available for future grants. In 2003, the Company issued
75,000 shares of restricted stock at the quoted market price on the date of
grant. The cost of the restricted stock is being amortized over the vesting
period of 4 years. The amortization expense for 2003 was $152,000. The Intergraph Corporation 1997 Stock Option Plan was approved by shareholders
in May 1997. Under
this plan, the Company reserved a total of 5,000,000 shares of common stock to
grant as options to key employees. Options may be granted at exercise prices
which are equal to, less than, or greater than the fair market value of the
Companys stock on the date of grant. Options are granted for a term of ten
years from the date of grant. Options first become exercisable two years from
the date of grant and vest at a rate of 25% per year from that point, with full
vesting on the fifth anniversary date of the




---



##### 



grant. There were no options
granted in 2003, however, options to purchase 20,000, and 245,000 shares of the
Companys common stock were granted in 2002 and 2001, respectively, under this
plan. During 2003, 193,249 shares expired, and at December 31, 2003, there
were no shares available for future grants. The Intergraph Corporation Nonemployee Director Stock Option Plan was approved
by shareholders in May 1998. The Company has reserved a total of 250,000
shares of common stock to grant as options under this plan. The exercise price
of each option granted is the fair market value of the Companys stock on the
date of grant. Options are granted for a term of ten years from the date of
grant. Options first become exercisable one year from the date of grant and
vest at a rate of 33% per year from that point, with full vesting on the third
anniversary date of the grant. Upon approval of this plan, members of the
Board who were not otherwise employed by the Company were granted options to
purchase 3,000 shares of the Companys common stock. Any new non-employee
director is similarly granted an option to purchase 3,000 shares of common
stock upon his or her first election to the Board. At each annual meeting of
shareholders, each non-employee director re-elected to the Board is granted an
option to purchase an additional 1,500 shares of the Companys common stock.
Options to purchase 12,000, 10,500, and 9,000 shares of the Companys common
stock were granted in 2003, 2002, and 2001, respectively, under this plan. At
December 31, 2003, 193,000 shares were available for future grants. Under the 2000 Intergraph Corporation Employee Stock Purchase Plan, 3,000,000
shares of common stock were made available for purchase through a series of
five consecutive annual offerings each June beginning June 1, 2000. In order
to purchase stock, each participant may have up to 10% of his or her pay (not
to exceed $25,000 in any offering period) withheld through payroll deductions.
All full-time employees of the Company are eligible to participate. The
purchase price of each share is 85% of the closing market price of the
Companys common stock on the last pay date of each calendar month. Employees
purchased 79,850, 107,806, and 147,478 shares of stock in 2003, 2002, and 2001,
respectively, under the 2000 and predecessor plans. At December 31, 2003,
2,498,513 shares were available for future purchases. Under the methodology of SFAS No.123, the fair value of the Companys fixed
stock options was estimated at the date of grant using the Black-Scholes option
pricing model. The multiple option approach was used, with assumptions for
expected option life of 1.04 years after vest date in 2003 (1 year in 2002 and
1.09 years in 2001) and 27% expected volatility over the life of the options
issued in 2003 (81% in 2002 and 73% in 2001). In 2003, Intergraph changed the
method of determining the future volatility rate of the Companys common stock.
The Company believes that using the future volatility rate implied in the
trading of options on the Companys common stock, both calls and puts, is a
better indicator of the expected future volatility of the Companys stock price
than using historical
performance of the Companys stock price. The higher volatility rate
assumptions used for 2002 and 2001 were based upon historical performance of
stock options over the prior 8-year period. Dividend yield is excluded from
the calculation since it is the present policy of the Company to retain all
earnings to finance operations. Risk-free rates of return were determined
separately for each of the serial vesting periods of the options and ranged
from .98% to 3.19% in 2003, .92% to 4.47% in 2002, and 3.32% to 4.57% in 2001. The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions, including expected stock price volatility.
Because the Companys employee stock options have characteristics significantly
different from those of traded options, and because the subjectivity of
assumptions can materially affect estimates of fair value, the Company believes
the Black-Scholes model does not necessarily provide a reliable single measure
of the fair value of its employee stock options.




---



##### 



Shares issued under the Companys stock purchase plan were valued at the
difference between the market value of the stock and the discounted purchase
price of the shares on the date of purchase. The date of grant and the date of
purchase coincide for this plan. The weighted average grant date fair values of options granted to employees
under all stock option plans during 2003, 2002, and 2001 were $4.91, $9.62, and
$6.92, respectively. During 2003, options were granted under these plans at
exercise prices equal to the market value of the Companys stock on the date of
grant. Activity in the Companys fixed stock option plans for each year in the
three-year period ended December 31, 2003, is summarized as follows: 2003
    
    2002
    
    2001Weighted Average
    
    
    
    
    
    Weighted Average
    
    
    
    
    
    Weighted AverageShares
    
    Exercise Price
    
    Shares
    
    Exercise Price
    
    Shares
    
    Exercise PriceOutstanding at beginning
of year
    
    
    3,727,385
    
    
    $
    6.72
    
    
    
    4,635,393
    
    
    $
    6.44
    
    
    
    5,453,510
    
    
    $
    6.29Granted at price equal to
market value
    
    
    328,000
    
    
    
    21.48
    
    
    
    120,500
    
    
    
    16.99
    
    
    
    254,000
    
    
    
    11.81Exercised
    
    
    (1,157,114
    )
    
    
    6.25
    
    
    
    (966,946
    )
    
    
    6.82
    
    
    
    (344,555
    )
    
    
    6.85Forfeited
    
    
    (236,249
    )
    
    
    6.35
    
    
    
    (61,562
    )
    
    
    5.68
    
    
    
    (727,562
    )
    
    
    6.85Outstanding at end of year
    
    
    2,662,022
    
    
    $
    8.79
    
    
    
    3,727,385
    
    
    $
    6.72
    
    
    
    4,635,393
    
    
    $
    6.44Exercisable at end of year
    
    
    902,552
    
    
    $
    6.91
    
    
    
    1,192,260
    
    
    $
    6.88
    
    
    
    1,112,337
    
    
    $
    7.88
 Further information relating to stock options outstanding at December 31, 2003,
is as follows: Options Outstanding
    
    Options ExercisableWeighted Average
    
    Weighted
    
    
    
    
    
    WeightedRemaining
    
    Average
    
    
    
    
    
    AverageRange of Exercise Prices
    
    Number
    
    Contractual Life
    
    Exercise Price
    
    Number
    
    Exercise Price$5.313 to $5.813
    
    
    1,822,835
    
    
    6.14 years
    
    $
    5.53
    
    
    
    666,335
    
    
    $
    5.48$5.875 to $9.250
    
    
    96,312
    
    
    
    4.71 years
    
    
    
    7.89
    
    
    
    76,312
    
    
    
    7.76$10.125 to $12.700
    
    
    269,375
    
    
    
    5.85 years
    
    
    
    11.59
    
    
    
    127,625
    
    
    
    11.38$14.000 to $21.600
    
    
    245,500
    
    
    
    8.76 years
    
    
    
    17.34
    
    
    
    32,250
    
    
    
    16.84$21.900 to $21.900
    
    
    150,000
    
    
    
    9.57 years
    
    
    
    21.90
    
    
    
    
    
    
    
    $23.870 to $23.870
    
    
    3,000
    
    
    9.77 years
    
    
    23.87
    
    
    
    
    
    
    
    $24.380 to $24.380
    
    
    75,000
    
    
    
    9.78 years
    
    
    
    24.38
    
    
    
    
    
    
    
    2,662,022
    
    
    
    6.60 years
    
    
    $
    8.79
    
    
    
    902,522
    
    
    $
    6.91
 NOTE 13  EMPLOYEE BENEFIT PLANS The Intergraph Corporation Stock Bonus Plan (Stock Bonus Plan) was
established in 1975 to provide retirement benefits to substantially all U.S.
employees. Effective January 1, 1987, the Company amended the Stock Bonus Plan
to qualify it as an employee stock ownership plan (ESOP). The Company made
contributions to the Stock Bonus Plan in amounts determined at




---



##### 



the discretion
of the Board, and the contributions were funded with Company stock. Amounts
were allocated to the accounts of participants based on compensation. In December 2000, the Board resolved to terminate the Stock Bonus Plan
effective for the plan year ending December 31, 2000, and to amend the
Intergraph Corporation SavingsPlus Plan (SavingsPlus Plan) to permit the
Company to make discretionary profit sharing contributions to it. During 2002,
the Company received a favorable determination letter from the Internal Revenue
Service and a no action letter from the SEC. Upon receipt of both favorable
responses, each Stock Bonus Plan participant was entitled to receive a lump sum
distribution of their account balance (subject to income tax liability and
withholdings) or to rollover the account balance into an Individual Retirement
Account or other qualified plan. The distribution of Stock Bonus Plan assets
commenced on May 16, 2002, for a period of four months, and expired on
September 16, 2002. The lost participants shares and remaining cash were
transferred to a trust fund held by a Trustee effective December 31, 2002. As
of December 31, 2003, there were 1,371 lost participants with account balances
in the Stock Bonus Plan, of which 382 participants owned approximately 29,000
shares of Intergraph common stock. Additional cash balances held in the trust
fund on behalf of lost participants totaled approximately $900,000. In 1990, the Company established the SavingsPlus Plan, an employee savings plan
qualified under Section 401(k) of the Internal Revenue Code, covering
substantially all U.S. employees. As of January 1, 2004, employees may elect
to contribute up to 75% of their compensation to the SavingsPlus Plan, subject
to dollar limitations contained in the Internal Revenue Code, up from the
previous limit of 25%. The Company matches 50% of employee contributions up to
6% of each employees compensation. Cash contributions by the Company to the
SavingsPlus Plan were $3.1 million, $3 million, and $2.6 million, in 2003,
2002, and 2001, respectively. The Company maintains various retirement benefit plans for the employees of its
international subsidiaries, primarily defined contribution plans that cover
substantially all employees. Contributions to the plans are made in cash and
are allocated to the accounts of participants based on compensation. Benefits
are payable based on vesting provisions contained in each plan. The Companys
contributions to these plans totaled approximately $4.1 million, $3.2 million,
and $3 million in 2003, 2002, and 2001, respectively. NOTE 14  SHAREHOLDER RIGHTS PLAN In March 2002, the Board approved an amendment to the Shareholder Rights Plan
and declared a distribution of one common stock purchase right (a Right) for
each share of the Companys common stock outstanding on September 7, 1993.
Each Right entitles the holder to purchase from the Company one common share at
a price of $65, subject to adjustment. The Rights are not exercisable until
the occurrence of certain events related to a person or a group of affiliated
or associated persons acquiring, obtaining the right to acquire, or commencing
a tender offer or exchange offer, the consummation of which would result in
beneficial ownership by such a person or group of 15% or more of the
outstanding common shares of the Company. Rights will also become exercisable
in the event of certain mergers or an asset sale involving more than 50% of the
Companys assets or earnings power. Upon becoming exercisable, each Right will
allow the holder, except the person or group whose action has triggered the
exercisability of the Rights, to either buy securities of Intergraph or
securities of the acquiring company, depending on the form of the transaction,
having a value of twice the exercise price of the Rights. The Rights trade
with the Companys common stock. The Rights are subject to redemption at the
option of the Board at a price of $0.01 per Right until the occurrence of
certain events, and are exchangeable for the Companys common stock at the
discretion of the Board under certain circumstances. The Rights expire on
March 5, 2012.




---



##### 



In connection with the March 2002 amendment of the Rights Agreement, the Board
appointed a committee of directors to serve as the Rights Agreement Review
Committee. The principal responsibility of the committee is to review the
Rights Agreement, when, and as, the committee deems appropriate; provided that
the first review shall occur not later than three years from the date of the
amended Rights Agreement and subsequent reviews shall occur not later than
three years from the date of the most recent review. On January 28, 2004, the
Board appointed the Corporate Governance Committee to serve as and assume the
duties of the Rights Agreement Review Committee. NOTE 15  SEGMENT INFORMATION The Companys current operations are divided into four business segments along
with a Corporate oversight function. The four core business segments are PPO,
IMGS, ISG, and IPS. The Companys reportable segments are strategic business
units that are organized by the types of products sold and the specific markets
served. Each is discussed in further detail below. PPO supplies integrated lifecycle software solutions for the design,
construction, and operation of process and power plants, offshore rigs, and
ships. This division offers applications that span
shipbuilding, plant design and visualization, materials procurement and
management, plant operations, and engineering information management. IMGS is a geospatial solutions provider for the following markets: local,
regional, federal, and national governments; transportation; utilities;
communications; commercial remote sensing and photogrammetry; and military and
intelligence. In October 2002, Intergraph purchased the remaining 40% minority
interest in Z/I Imaging. At the completion of the transaction, Z/I Imaging
became an Intergraph wholly owned subsidiary and was combined with IMGS. In
addition, the former Utilities and Communications business was also combined
into IMGS. ISG provides professional services, specially developed software and hardware,
and commercial off-the-shelf products to federal, state, and local governments,
and to commercial customers. IPS develops computer graphics-based systems designed for public safety
agencies, commercial fleet operations, campus, military base, and airport
security. IPS systems are complete, integrated solutions for command and
control, deployment, tracking, information gathering, analysis, and records
management. The Corporate segment includes revenues and costs for Teranetix (a provider of
commercial repair and logistics services), international hardware maintenance,
and general Corporate functions. Operating expenses for Corporate consist of
oversight costs associated with the offices of Chief Executive Officer, Chief
Financial Officer, Treasurer, Strategic Planning, General Counsel, the Board of
Directors, internal and external audit, other costs that are directly the
result of Intergraph being a publicly held company, and residual costs of
exiting the hardware business, including management of warranty reserves and a
repair depot. The Company evaluates the performance of its business segments based on revenue
and income (loss) from operations. The accounting policies of the reportable
segments are consistent across segments and are the same as those used in
preparation of the consolidated financial statements of the Company as
described in Note 1. Sales between the business segments are accounted for
under a transfer pricing policy. Transfer prices approximate prices that would
be charged for the same or similar products and services to unrelated buyers.




---



##### 



The following table sets forth revenues and operating income (loss) by business
segment for the years ended December 31, 2003, 2002, and 2001, together with
supplementary information related to depreciation and amortization expense
attributable to the business segments. The information in the table for 2002
and 2001 has been reclassified to provide comparability with the current-year
presentation. Year Ended December 31,
    
    2003
    
    2002
    
    2001(in thousands)
    
    (Restated)Revenues:PPO:Unaffiliated customers
    
    $
    129,401
    
    
    $
    120,321
    
    
    $
    110,915Intersegment revenues
    
    
    2,158
    
    
    
    3,763
    
    
    
    5,563131,559
    
    
    
    124,084
    
    
    
    116,478IMGS:Unaffiliated customers
    
    
    203,843
    
    
    
    187,140
    
    
    
    211,268Intersegment revenues
    
    
    6,114
    
    
    
    7,932
    
    
    
    11,436209,957
    
    
    
    195,072
    
    
    
    222,704ISG:Unaffiliated customers
    
    
    119,178
    
    
    
    122,375
    
    
    
    127,492Intersegment revenues
    
    
    1,752
    
    
    
    4,614
    
    
    
    6,646120,930
    
    
    
    126,989
    
    
    
    134,138IPS:Unaffiliated customers
    
    
    63,489
    
    
    
    61,147
    
    
    
    60,928Intersegment revenues
    
    
    3,661
    
    
    
    2,447
    
    
    
    1867,150
    
    
    
    63,594
    
    
    
    60,946Corporate:Unaffiliated customers
    
    
    10,092
    
    
    
    10,094
    
    
    
    21,458Intersegment revenues
    
    
    2,652
    
    
    
    3,046
    
    
    
    12,34312,744
    
    
    
    13,140
    
    
    
    33,801542,340
    
    
    
    522,879
    
    
    
    568,067Eliminations
    
    
    (16,337
    )
    
    
    (21,802
    )
    
    
    (36,006
    )Total Revenues
    
    $
    526,003
    
    
    $
    501,077
    
    
    $
    532,061Operating income (loss):PPO
    
    $
    14,787
    
    
    $
    18,979
    
    
    $
    6,799IMGS
    
    
    3,848
    
    
    
    (2,052
    )
    
    
    6,085ISG
    
    
    8,080
    
    
    
    5,946
    
    
    
    10,004IPS
    
    
    14,377
    
    
    
    14,583
    
    
    
    8,232Corporate
    
    
    (27,724
    )
    
    
    (23,304
    )
    
    
    (19,027
    )Eliminations
    
    
    
    
    
    
    279
    
    
    
    Total
    
    $
    13,368
    
    
    $
    14,431
    
    
    $
    12,093Depreciation and amortization expense:PPO
    
    $
    11,406
    
    
    $
    10,247
    
    
    $
    8,179IMGS
    
    
    7,951
    
    
    
    5,711
    
    
    
    3,343ISG
    
    
    1,429
    
    
    
    1,018
    
    
    
    1,323IPS
    
    
    1,245
    
    
    
    3,230
    
    
    
    5,092Corporate
    
    
    3,678
    
    
    
    5,006
    
    
    
    8,287Total depreciation and amortization expense
    
    $
    25,709
    
    
    $
    25,212
    
    
    $
    26,224




---



##### 



Significant profit and loss items that were not allocated to the segments and
not included in the segment analyses above include net intellectual property
income of $5.8 million in 2003 and $434.5 million in 2002, and net intellectual
property expense of $4 million in 2001; gains on sales of assets of $3.4
million, $17.2 million, and $11.2 million in 2003, 2002, and 2001,
respectively; and interest income of $6.6 million, $6.9 million, and $7.4
million in 2003, 2002, and 2001, respectively. The Company does not evaluate performance or allocate resources based on
assets. Revenues from the U.S. government were $137.1 million in 2003, $136.9 million
in 2002, and $143 million in 2001, representing approximately 26%, 27%, and 27%
of total revenue in 2003, 2002, and 2001, respectively. The majority of these
revenues are attributed to the ISG business segment. The
U.S. government was the only customer accounting for more than 15% of
consolidated revenue in each year of the three-year period ended December 31,
2003. International markets, particularly Europe and Asia, are important to each of
the Companys business segments, except for ISG. The Companys operations are
subject to and may be adversely affected by a variety of risks inherent in
doing business internationally, such as government policies or restrictions,
worldwide political conditions, currency exchange fluctuations, and other
factors. Following is a summary of third-party revenues and long-lived assets
by principal geographic area. For purposes of this presentation, revenues are
attributed to geographic areas based on customer location. Long-lived assets
include property, plant, and equipment; capitalized software development costs;
investments in affiliates; and other non-current assets. Assets have been
allocated to geographic areas based on their physical location. Revenues
    
    Long-lived Assets, Net2003(in thousands)
    
    (Restated)
    
    2002
    
    2001
    
    2003
    
    2002
    
    2001United States
    
    $
    276,712
    
    
    $
    285,881
    
    
    $
    281,734
    
    
    $
    85,552
    
    
    $
    97,112
    
    
    $
    115,920Europe
    
    
    160,616
    
    
    
    128,640
    
    
    
    146,406
    
    
    
    12,365
    
    
    
    18,161
    
    
    
    10,291Asia Pacific
    
    
    46,529
    
    
    
    49,843
    
    
    
    49,243
    
    
    
    1,675
    
    
    
    1,511
    
    
    
    3,067Other International
    
    
    42,146
    
    
    
    36,713
    
    
    
    54,678
    
    
    
    3,026
    
    
    
    1,453
    
    
    
    2,239Total
    
    $
    526,003
    
    
    $
    501,077
    
    
    $
    532,061
    
    
    $
    102,618
    
    
    $
    118,237
    
    
    $
    131,517
 NOTE 16  RELATED PARTY TRANSACTIONS BSI:The Company owns a 32% equity position in BSI, the developer and owner of
MicroStation, a software product for which the Company is a nonexclusive
distributor. Under the Companys distributor agreement with BSI, the Company
purchases MicroStation products for resale to third parties. The Companys
purchases from BSI were approximately $1.5 million in 2003, $1.9 million in
2002, and $1.3 million in 2001. At December 31, 2003, 2002, and 2001, the
Company had amounts payable to BSI of approximately $622,000, $660,000, and
$560,000, respectively. The Companys sales to BSI were approximately $157,000
in 2003, $531,000 in 2002, and $1.1 million in 2001. Outstanding trade
receivables from BSI were $582,000, $1.1 million, and $407,000, respectively at
December 31, 2003, 2002, and 2001. As a result of the Companys sale of its
MicroStation-based civil engineering, plotting, and raster conversion software
product lines to BSI in 2000, the Company recorded a long-term note receivable
as partial consideration. The balance of this note receivable was




---



##### 



$8.1 million
at December 31, 2003, and $9.7 million at December 31, 2002. This non-trade
receivable is included in Other current assets in the Companys consolidated
balance sheets. See further discussion of BSI transactions in Note 17. 3Dlabs and Creative:In July 2000, the Company sold the Intense3D graphics
accelerator division to 3Dlabs for equity ownership interest of approximately
19.7% in 3Dlabs. Under its agreement with 3Dlabs, the Company served as
intermediary between 3Dlabs and SCI, a wholly-owned subsidiary of SCI Systems,
Inc., the Companys contract manufacturer, for manufacturing performed by SCI
for 3Dlabs. The Company earned no margin on the inventory purchased from SCI
and sold to 3Dlabs, and recorded no associated revenues or cost of revenues in
its results of operations. Gross billings to 3Dlabs during 2001 totaled $17.8
million. At December 31, 2001, the Companys receivables from 3Dlabs for
inventory purchased on its behalf totaled $1.5 million. In 2001, this
obligation to serve as intermediary expired. Since the date of the expired
agreement, the Company provided services to 3Dlabs, including repair, test, and
inventory hub services at a profit. In March 2002, Creative acquired 3Dlabs,
and the Company retained a 3% ownership interest in Creative. In July 2002,
the Company sold part of its investment in Creative. For 2002, the Companys
sales to 3Dlabs totaled $229,000, purchases from 3Dlabs totaled $407,000, and
an outstanding trade receivable totaled $57,000. In July 2003, the Company
sold its remaining investment in Creative. For 2003, the Companys sales to
3Dlabs, a division of Creative, totaled $207,000, and an outstanding trade
receivable totaled $17,000. See further discussion of 3Dlabs and Creative in
Note 17. Atheeb:In 2001, the Company sold Intergraph Middle East, Ltd. (IMEL), and
its Saudi Arabian operations to the distributorship of Atheeb, retaining a 20%
ownership interest. Purchases from Atheeb totaled $444,000 for 2003 and
$138,000 for 2002. There were no purchases for 2001. Total payables to Atheeb
at December 31, 2003, and 2002 were $284,000 and $138,000, respectively. Sales
to Atheeb totaled $2.5 million for 2003, $2.4 million for 2002, and $383,000
for 2001. Related trade receivables from Atheeb at December 31, 2003, 2002,
and 2001, were $1.5 million, $1.1 million, and $345,000, respectively. NOTE 17  ACQUISITIONS AND DIVESTITURES 3Dlabs and Creative:On July 21, 2000 (but effective July 1, 2000), the
Company sold the Intense3D graphics accelerator division to 3Dlabs, a supplier
of integrated hardware and software graphics accelerator solutions for
workstations and design professionals. As initial consideration for the
acquired assets, 3Dlabs issued 3,588,060 of its common shares to the Company,
subject to a registration rights agreement and a three-year irrevocable proxy
granted to 3Dlabs, with an aggregate market value of approximately $13.2
million on the date of closing. Approximately fifteen percent of these shares
were placed in escrow to cover any potential claims against the Company by
3Dlabs. In December 2000, the Company recorded a receivable of $8.6 million
for additional consideration due from 3Dlabs, as a result of an earn-out
provision in the agreement. The Company considered this amount to be the
minimum earn-out due from 3Dlabs and, as such, recorded a gain of approximately
$15.7 million in its 2000 results of operations based on the initial proceeds
from the sale and this estimated minimum earn-out. On March 31, 2001, the Company recorded an additional $581,000 gain as a result
of the final calculation and settlement of the earn-out provisions. This gain
is included in Gains on sales of assets
in the 2001 consolidated statements of income and cash flows. The total
earn-out of $10 million was paid to the Company in the form of 7,591,285 shares
of 3Dlabs stock (valued at $10 million) increasing Intergraphs ownership to
approximately 37%. These shares had a three-year irrevocable proxy that
prevented the Company from having any voting rights; therefore, this investment
was not accounted for using the




---



##### 



equity method. As a result of the final
earn-out settlement, all contingencies and related transitional services
associated with the sale of Intense3D were satisfied. In March 2002, the shares in escrow were released and valued at approximately
$2 million. On March 11, 2002, 3Dlabs signed a definitive agreement with
Creative to be acquired for $3.60 per share, with two-thirds to be converted
into Creative stock and one-third in cash. In the second quarter of 2002, the
Companys 3Dlabs stock was sold to Creative for 2,291,765 shares of Creative
stock (valued at $26.8 million) and $13.4 million in cash. In third quarter
2002, 788,655 of these shares were sold for $7.9 million, and a loss of $1.3
million was recorded. These amounts are reflected as Net proceeds from sales
of assets in the 2002 consolidated statement of cash flow. At December 31,
2002, the remaining 1,503,110 shares represented a 2% ownership in Creative
with a market value of $10.6 million. Until December 2002, the Company
maintained its investment in Creative at market value, with any unrealized
holding gains or losses recorded as a component of Accumulated other
comprehensive income (loss) in the consolidated balance sheets. In December
2002, this impairment in value was determined to be other than temporary and
a write-down in the carrying value of the stock of approximately $7 million was
recognized in the 2002 consolidated statements of income and cash flows. In July 2003, the Company sold its remaining investment in Creative for $12.4
million proceeds. The amount received is shown as Net proceeds from sales of
assets in the 2003 consolidated statement of cash flow. The resulting gain of
$1.8 million is reflected in Gains on sales of assets in the 2003
consolidated statements of income and cash flows. Z/I Imaging:On October 17, 2002, but effective October 1, 2002, the Company
purchased the remaining 40% ownership interest of Z/I Imaging (formerly a
60%-owned and consolidated subsidiary of the Company) from Zeiss. The Company
transferred certain reconnaissance camera assets and paid $6 million, net, in
cash. The film-based commercial mapping cameras and the newly introduced
Digital Mapping Camera remain a part of Z/I Imaging. MARIAN:In January 2001, the Company acquired the MARIAN materials management
business unit from debis Systemhaus Industry GmbH of Germany for a purchase
price consisting of 1.5 million euros paid at closing and additional payments
due March 1, 2002, and 2003, to be calculated as 15% of the annual revenues
earned by the Company from the sale of MARIAN products in 2001 and 2002. The
Companys payment at closing approximated $1.8 million and is included in
Business acquisitions, net of cash acquired in the Companys 2001
consolidated statement of cash flows. Additional payments as noted above were
$793,000 and $460,000, for 2003 and 2002, respectively, and are also included
in Business acquisitions, net of cash acquired in the Companys 2003 and 2002
consolidated statements of cash flows. The Company accounted for the
acquisition as a purchase of the intangible assets (amortized over a useful
life of two years) and software rights (of which the intangible assets are
amortized over a useful life of four years and the maintenance contract is
amortized over a useful life of three years). The unamortized balance,
approximately $1.1 million at December 2003, and $1.9 million at December 31,
2002, is included in Other assets, net in the Companys consolidated balance
sheets. The accounts and results of operations of MARIAN are combined with
PPO. Middle East:In first quarter 2001, the Company announced its intention to
sell its Middle East operations and convert them into distributorships. In
April 2001, the Company closed the sales of its operations in Turkey and
Kuwait. Effective July 2001, the Company closed the sale of its Saudi Arabian
operation and recorded a $680,000 gain. The Company also completed the sale of
IMEL, based in Dubai, United Arab Emirates, in second quarter 2002. This sale
was effective October 2001, and an impairment reserve of $150,000 was recorded
in third quarter 2001 in anticipation of the loss on the IMEL sale. The gain
on Saudi Arabia, net of the IMEL impairment reserve, is included in Gains on
sales of assets in the 2001




---



##### 



consolidated statements of income and cash flows.
Upon completion of the IMEL sale, the Company no longer has any subsidiaries in
the region and does business through distributors. The Company has retained
responsibility for some of the Middle East contracts in effect at the date of
the sale. None of the Middle East operations were material to the Company, and
the Company believes the sale of these operations will not have a material
impact on the Companys consolidated operating results or cash flows. Singapore:On November 30, 2000, the Company sold its Singapore subsidiary for
approximately $2.7 million, primarily in the form of a long-term note
receivable. Originally, the consideration became due in varying installments
beginning June 30, 2001, and ending December 31, 2004. Payments were received
in 2003, 2002, and 2001 for $650,000, $800,000, and $200,000, respectively, and
are included in Net proceeds from sales of assets in the Companys
consolidated statements of cash flows. In November 2003, the payment schedule
was amended to extend payment terms through September 2005. At December 31,
2003, and 2002, the balances on the notes in the consolidated balance sheets
include approximately $644,000 and $671,000, respectively, in Other current
assets and $340,000 and $842,000, respectively, in Other assets, net. The
Company will continue to sell products into Singapore and related territories
through a distributor arrangement with the purchaser. IDS:In March 2003, the IMGS business segment sold its aeronautical IP assets
to Ingegneria Dei Sistemi S.p.a. in Rome, Italy for a purchase price of $1.3
million, in the form of a short-term note receivable, with payments initially
due through October 2003. A resulting gain of $1.1 million is included in the
Companys 2003 consolidated statements of income and cash flow. Total payments
of $1.1 million are included in the 2003 consolidated statement of cash flow as
Net proceeds from sales of assets. The final payment owed was received in
January 2004. BSI:On December 27, 2000, the Company sold its MicroStation-based civil
engineering, plotting, and raster conversion software product lines to BSI for
initial proceeds of approximately $24.6 million, consisting of $13.6 million in
cash and an $11 million note due in quarterly installments through December
2003. In the first quarter of 2001, the Company reported an additional gain
from the BSI transaction of approximately $4.2 million as the initial
consideration for the sale, and the Companys note receivable from BSI was
increased based upon a revised calculation of transferred and renewed
maintenance revenues for the products sold to BSI, as provided for in the
original sale agreement. The agreement also provided for additional purchase
price consideration based on renewals through December 1, 2001, of maintenance
contracts related to the product lines. The Company recorded this additional
purchase price consideration of $5.9 million in December 2001. The additional
purchase price consideration resulted in gains of approximately $10.1 million,
included in Gains on sales of assets in the 2001 consolidated statements of
income and cash flows. These gains also resulted in an increase in the note of
$10.1 million in the year 2001. The balance of the note receivable at December
31, 2003, and 2002, was $8.1 million and $9.7 million, respectively. This
non-trade receivable is included in Other current assets in the consolidated
balance sheets. Payments from BSI totaled $2.4 million, $9.2 million, and $5.1
million for 2003, 2002, and 2001, and are included in Net proceeds from sales
of assets in the respective consolidated statements of cash flows. See Note
16 for a discussion of the Companys related party transactions with BSI. In December 2002, the Company filed a declaratory judgment action against BSI,
and BSI subsequently filed complaints against Intergraph in regard to this
transaction. See Managements Discussion and Analysis of Financial Condition
and Results of Operations (MD&A) for a discussion of this litigation.




---



##### 



NOTE 18  LITIGATION AND OTHER RISKS AND UNCERTAINTIES The Company continues to pursue its patent litigation and licensing efforts.
These matters are subject to known and unknown risks and uncertainties.
Adverse developments with respect to these matters could materially adversely
affect the Companys financial condition, results of operations, or prospects.
See the information appearing under the heading Cautionary Note Regarding
Forward-Looking Statements in MD&A for further discussion of these risks and
uncertainties. Intel Litigation:As further described in the Companys Annual Report on Form
10-K for the year ended December 31, 2001, the Company has had ongoing
litigation with Intel Corporation (Intel) since 1997. In April 2002, the
Company and Intel reached an agreement during the course of court-ordered
mediation that settled the Alabama litigation involving the Companys Clipper
memory management patents (Clipper patents). Under the terms of the April
2002 settlement agreement, Intel paid $300 million to the Company in May 2002,
the lawsuit pending in Alabama was dismissed, the companies signed a highly
restricted cross-license agreement, and the Company assigned certain unrelated
patents to Intel. The April 2002 settlement agreement does not require the
Company to take any future actions or make any future payments, and
specifically reserves the Companys right to enforce its Clipper patents
against computer system companies, including customers of Intel. The
settlement also addressed damages for the then pending patent infringement suit
in Texas. The Texas trial was held in July 2002 with final closing arguments in August
2002. On October 10, 2002, the Texas District Court (the District Court)
ruled that Intergraphs parallel instruction computing (PIC) patents were
valid, enforceable, and infringed by Intels Itanium and Itanium 2 products.
The District Court also ruled that the Company was entitled to an injunction on
the sale, manufacture, and use of Intels Itanium and Itanium 2 processors. On
October 30, 2002, the District Court entered a Final Judgment and Permanent
Injunction against Intel. Based on the findings of the District Court and the
terms of the April 2002 settlement agreement, Intel paid $150 million to the
Company in November 2002. Intel also appealed the District Courts findings to
the U.S. Court of Appeals for the Federal Circuit (the Federal Circuit). The parties appellate argument occurred before a three-judge panel of the
Federal Circuit on December 1, 2003. On February 11, 2004, the Federal Circuit
vacated the District Courts decision and remanded the case back to the
District Court for further findings. The Federal Circuit ruled that the
District Court erred in its construction of the patent claim term pipeline
identifier. In summary, the Federal Circuit concluded that a pipeline
identifier must identify the specificprocessing pipeline  not just a type
of processing pipeline  to which a computer instruction will be routed. The Company believes that the $150 million payment received in November 2002 is
non-refundable and that its efforts to protect its intellectual property are
consistent with the terms of the April 2002 settlement agreement. The Company
intends to pursue its infringement claims against Intel and its rights under
the April 2002 settlement agreement. On February 23, 2004, the Company filed a
motion requesting the District Court to set a case management conference.
Thereafter, the District Court set a case management conference for March 17,
2004. The Company recorded the $300 million settlement and the $150 million award
(net of applicable legal fees and other associated litigation costs) as
Intellectual property income (expense), net in the other income (expense)
section of the 2002 consolidated statement of income. Original Equipment Manufacturers (OEM) Litigation:In 1997, the Company
placed a number of computer system vendors on notice that it believed their
products infringed the Clipper system patents. The Company continued to offer
to




---



##### 



negotiate a patent license with these system vendors, but such discussions
were suspended as a result of the Companys litigation against Intel. The
Companys lawsuit against Intel was filed in 1997 and settled in April 2002;
however, the Intel settlement agreement did not include licenses for Intels
customers (the system vendors who combined an Intel processor with certain
other non-Intel components). Rather, the Intel settlement agreement expressly
excludes any license regarding the system vendors sale of infringing computer
systems and specifically records the Companys intention to seek payment for
patent licenses from the system vendors. On December 16, 2002, the Company
filed a patent infringement action against Dell Inc.(Dell), Gateway
Inc., and Hewlett-Packard Co. (HP) (including the former Compaq
Computer Corporation) in the U.S. District Court for the Eastern District
of Texas (OEM case) claiming that products from these computer vendors
infringe three Clipper system patents owned by the Company (U.S. Patent Numbers
4,899,275, 4,933,835, and 5,091,846). These patents relate to computer system
memory management technology. The OEM case seeks unspecified damages for past infringement (including
enhanced damages), a statutory patent injunction, prejudgment interest, costs,
and attorneys fees. The Company delayed serving the defendants with the
lawsuit and engaged each defendant in licensing discussions. These licensing
discussions were not successful, and the defendants were served on April 1,
2003. The case has been set for trial on August 2, 2004. On May 28, 2003, HP filed a patent countersuit against the Company in the
Northern District of California. HP also asked the Texas District Court to
transfer the OEM case to the Northern District of California for consolidation
with HPs countersuit. The Texas court denied HPs motion to transfer the
Texas OEM case to California. HPs countersuit did not specify any accused
infringing products or resulting damages, and was initially dismissed as
legally defective. HP has since filed a corrected amended complaint asserting
four separate patents against a variety of Intergraph products, including
SmartPlant® 3D, IntelliShip, SmartPlant®, SmartSketch, I/Mobile TC, and
IntelliWhere. The Company filed a motion to have HPs California countersuit
transferred to the Northern District of Alabama, which was subsequently denied.
The Company has also filed third-party complaints against Microsoft
Corporation, BSI, and Graphic Technologies Inc., adding them as co-defendants
to the HP patent assertions. The Company has not determined what impact, if
any, HPs countersuit may have on the Companys operations and cash flows. The
Company will vigorously defend against HPs countersuit. HP has also filed an amended answer and counterclaim in the OEM case, which
alleges that Intergraphs patent assertions are a violation of the Sherman
Antitrust Act. The Company has filed a
motion to dismiss HPs antitrust counterclaims as a matter of law. The
District Court has not yet ruled on Intergraphs motion to dismiss. The
Company believes HPs antitrust counterclaim to be without merit, and will
vigorously defend the same. On June 21, 2003, Dell filed a counterclaim against Intel, adding them as a
party to the OEM case. Intel filed a general denial to Dells counterclaim.
Dell also filed a motion to have its Intel implied license defense tried
separately from the infringement case. Dells motion to bifurcate was
subsequently denied. On January 28, 2004, Dell filed a motion for summary judgment alleging that the
Companys Clipper patents system claims were prohibited by patent exhaustion,
as a result of the Companys settlement agreement with Intel. Subsequently, on
February 26, 2004, Gateway filed a similar motion for summary judgment on the
principle of patent exhaustion. The principle of patent exhaustion
prohibits a patent holder from receiving a double recovery for the use of an
invention. Dells and Gateways motions allege that the Company fully
recovered from Intel for their respective use of the Clipper system patents.
The District Court has not ruled on Dells or Gateways motion, and the Company
will vigorously defend against said motions.




---



##### 



On February 11, 2004, Intel filed a motion for partial summary judgment
requesting the Court to determine whether computer systems including an Intel
motherboard, chipset, and processor, were excluded from suit pursuant to
Section 4.21 of the parties settlement agreement. The Company has responded
to Intels motion. The District Court has not ruled on Intels motion. Texas Instruments Litigation:On January 30, 2003, the Company filed a patent
infringement action against Texas Instruments Incorporated (TI) in the U.S.
District Court for the Eastern District of Texas (TI case). The TI case
pertained to the Companys PIC patents, United States Patent Numbers 5,560,028,
5,794,003, and 6,360,313 B1, and states that such patents are infringed by TIs
family of Digital Signal Processors marketed under the name TMS320C6000.
These devices are used as high-performance embedded controllers in consumer
products. Their applications include audio and video encoders and decoders,
broadband solutions, optical networking, telephony, voice processing, and
wireless communications. TI subsequently asserted counterclaim patents in two
separate legal actions. In September 2003, the Company and TI settled their
respective patent disputes. As a result of this settlement, the parties
dismissed all claims and suits against each other, and TI agreed to take a
license to three Intergraph patents, which define key aspects of parallel
instruction computing (PIC). The license established a royalty rate to be
paid by TI for the use of Intergraphs PIC technology in its TMS320C6000
family of processors. Pursuant to the terms of the license, TI elected to
prepay the royalty as a one-time, $18 million lump sum payment, which the
Company received in fourth quarter 2003. Advanced Micro Devices Litigation:On January 15, 2004, Advanced Micro Devices
(AMD) filed a Declaratory Judgment Act (DJA) patent action against the
Company in the Northern District of California. AMD asserted that the
Companys family of Clipper patents (U.S. Patent Nos. 4,860,192, 4,884,197,
4,899,275, 4,933,835 and 5,091,846) are either invalid, or not infringed by
AMDs microprocessor products. The Company had previously engaged in patent
licensing discussions with
AMD without success. AMDs complaint alleges that a subpoena received from the
Companys OEM case led them to believe that they were going to be sued and that
the DJA was filed in response. No monetary damages are being sought by AMD. BSI Litigation:In December 2002, the Company filed a declaratory judgment
action against BSI in Madison County, Alabama. The action requests the Court
to interpret the parties asset purchase agreement and promissory note, and
require BSI to specifically perform the repayment of the same. The asset
purchase agreement and note were executed in conjunction with the sale of the
Companys civil, plotting, and raster software product lines to BSI in 2000.
BSI subsequently filed an initial action against the Company in Philadelphia,
Pennsylvania, and thereafter filed a second action in Delaware alleging that
the Company breached certain terms of the asset purchase agreement. BSIs
Pennsylvania action was dismissed in March 2003, and BSIs Delaware action has
effectively been stayed pending the Alabama action. In response, BSI has now
asserted certain counterclaims against the Company in the pending Alabama
action. These counterclaims are substantially the same as those claims
asserted in its Delaware action. As with its prior actions, BSI did not
specify an amount of damages in its Alabama counterclaims. The Company intends
to vigorously pursue its claims against BSI and defend the claims asserted by
BSI. The case is currently set for trial on April 12, 2004. Other Litigation:The Company has other ongoing litigation, none of which is
considered to represent a material contingency for the Company at this time;
however, any unanticipated adverse developments in any of these proceedings
could materially adversely affect the Companys results of operations,
financial condition, or cash flows.




---



##### 



Other Risks and Uncertainties:The Company owns and maintains a number of
registered patents and registered and unregistered copyrights, trademarks, and
service marks. The patents and copyrights held by the Company are the
principal means by which the Company preserves and protects the intellectual
property rights embodied in the Companys products. Similarly, trademark
rights held by the Company are used to preserve and protect the reputation of
the Companys registered and unregistered trademarks. The ultimate impact of
these initiatives is subject to known and unknown risks and uncertainties. See
Cautionary Note Regarding Forward-Looking Statements. As industry standards proliferate, there is a possibility that the patents of
others may become a significant factor in the Companys business. Computer
software technology is increasingly being protected by patents, and many
companies, including the Company, are developing patent positions for software
innovations. It is unknown at the present time whether various patented
software technology will be made generally available under licenses, or whether
specific innovations will be held by their inventors and not made available to
others. In many cases, it may be possible to employ software techniques that
avoid the patents of others, but the possibility exists that some features
needed to compete successfully in a particular segment of the software market
may be unavailable or may require an unacceptably high cost via royalty
arrangements. Patented software techniques that become de facto industry
standards are among those that may raise costs or may prevent the Company from
competing successfully in particular markets. An inability to protect the Companys copyrights, trademarks, and patents, or
to obtain current technical information or any required patent rights of others
through licensing or purchase, all of which are important to success in the
markets in which the Company competes, could significantly reduce the Companys
revenues and adversely affect its results of operations. The Company has IP that is used in a variety of industries, including
computers, consumer electronics, telecommunications, and electronics design.
The Company defends the value of its IP portfolio through licensing and
litigation. The Company remains actively engaged in licensing discussions, as
well as patent litigation with several companies.




---



##### 



NOTE 19  SUMMARY OF QUARTERLY INFORMATION  UNAUDITED Quarter Ended
    
    Mar. 31
    
    Jun. 30
    
    Sep. 30
    
    Dec. 31(in thousands except per share
amounts)
    
    
    
    
    
    
    
    
    
    
    
    
    
    (Restated)Year ended December 31, 2003:Revenues
    
    $
    120,553
    
    
    $
    127,347
    
    
    $
    133,583
    
    
    $
    144,520Gross profit
    
    
    56,601
    
    
    
    61,585
    
    
    
    65,969
    
    
    
    67,791Restructuring charges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,952Income from operations
    
    
    4,235
    
    
    
    2,859
    
    
    
    5,485
    
    
    
    789Intellectual property income (expense), net
    
    
    5,330
    
    
    
    (4,335
    )
    
    
    11,594
    
    
    
    (6,805
    )Gains (losses) on sales of assets
    
    
    1,220
    
    
    
    (65
    )
    
    
    1,796
    
    
    
    470Net income
    
    
    8,115
    
    
    
    794
    
    
    
    12,934
    
    
    
    445Net income per share:Basic
    
    $
    0.18
    
    
    $
    0.02
    
    
    $
    0.28
    
    
    $
    0.01Diluted
    
    $
    0.17
    
    
    $
    0.02
    
    
    $
    0.27
    
    
    $
    0.01Weighted average shares outstanding:Basic
    
    
    46,200
    
    
    
    46,275
    
    
    
    46,190
    
    
    
    43,553Diluted
    
    
    48,408
    
    
    
    48,404
    
    
    
    48,135
    
    
    
    45,382Year ended December 31, 2002:Revenues
    
    $
    123,096
    
    
    $
    122,570
    
    
    $
    133,416
    
    
    $
    121,995Gross profit
    
    
    55,820
    
    
    
    58,843
    
    
    
    59,967
    
    
    
    59,210Restructuring charges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,106Income from operations
    
    
    5,073
    
    
    
    2,918
    
    
    
    3,261
    
    
    
    3,179Intellectual property income (expense), net
    
    
    (3,154
    )
    
    
    293,320
    
    
    
    (1,215
    )
    
    
    145,520Gains (losses) on sales of assets
    
    
    1,530
    
    
    
    17,015
    
    
    
    (1,331
    )
    
    
    Net income
    
    
    4,378
    
    
    
    280,587
    
    
    
    2,673
    
    
    
    90,114Net income per share:Basic
    
    $
    0.09
    
    
    $
    5.67
    
    
    $
    0.06
    
    
    $
    1.95Diluted
    
    $
    0.08
    
    
    $
    5.37
    
    
    $
    0.05
    
    
    $
    1.85Weighted average shares outstanding:Basic
    
    
    49,954
    
    
    
    49,506
    
    
    
    46,311
    
    
    
    46,245Diluted
    
    
    52,503
    
    
    
    52,204
    
    
    
    48,754
    
    
    
    48,653
 For complete descriptions of the net gains (losses) on sales of assets and
restructuring charges included in the Companys results of operations, see
Notes 10, 16 and 17 and Gains on Sales of Assets and Restructuring Charges
included in MD&A.




---



##### 



NOTE 20  RESTATEMENT OF FINANCIAL STATEMENTS: Subsequent to filing the Form 10-K for the year ended December 31, 2003,
management determined that it was appropriate to restate the Companys
financial statements for the year ended December 31, 2003 to defer previously
recorded revenues to subsequent periods. The Early Adopter Program (EAP) was a limited release of SmartPlant 3D
Version 4. PPMs internal accounting staff determined that the accounting for
the Early Adopter Program should be reviewed after becoming aware that certain
maintenance obligations and a specified upgrade to SmartPlant 3D Version 5 were
included in the program. Paragraph 10 of SOP 97-2 allows for the establishment of vender specific
objective evidence (VSOE) of fair value on new products based on managements
established price, that once established, will not change before the separate
introduction of the product into the marketplace. VSOE of the fair value of the
specified upgrade has to be established or the Company would be required to
defer all revenue on customer orders that included a purchase of SP3D Version 4
under the EAP until the SP3D Version 5 upgrade is delivered. In the case of
the EAP, management never intended to sell separately an upgrade to SP3D
Version 5. The Company concluded that VSOE of the fair value of the
upgrade could not be established according
to paragraph 12 of SOP 98-9 without establishing this requisite intent to sell
upgrades separately. As a result of this conclusion, net sales decreased by $1.3 million in the year
ended December 31, 2003, with a corresponding increase in billings in excess of
sales. The Company also deferred the recognition of related direct incremental
expenses until the related revenue is recognized. The Company also revised its
provision for income taxes for the effect of these matters. The accompanying consolidated financial statements have been restated from the
amounts previously reported. A summary of the significant effects of the
restatement is as follows: 2003(in thousands except per share
amounts)
    
    As Reported
    
    RestatedConsolidated Statement of Operations Data:Revenue
    
    $
    527,262
    
    
    $
    526,003Gross profit
    
    
    253,185
    
    
    
    251,946Operating income
    
    
    14,552
    
    
    
    13,368Net income
    
    
    23,207
    
    
    
    22,288Net income per shareBasic
    
    $
    0.51
    
    
    $
    0.49Diluted
    
    $
    0.49
    
    
    $
    0.47
 2003(in thousands)
    
    As Reported
    
    RestatedConsolidated Balance Sheet DataAccrued compensation
    
    $
    38,781
    
    
    $
    38,726Other accrued expenses
    
    
    36,949
    
    
    
    36,929Billings in excess of sales
    
    
    48,711
    
    
    
    49,970Income taxes payable
    
    
    27,177
    
    
    
    26,912Retained earnings
    
    
    609,227
    
    
    
    608,308




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##### 



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Shareholders
Intergraph Corporation We have audited the accompanying consolidated balance sheets of Intergraph
Corporation and subsidiaries as of December 31, 2003 and 2002, and the related
consolidated statements of income, shareholders equity, and cash flows for
each of the three years in the period ended December 31, 2003. These financial
statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Intergraph
Corporation and subsidiaries at December 31, 2003 and 2002, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2003, in conformity with U.S.
generally accepted accounting principles. As discussed in Note 20 to the accompanying consolidated financial statements,
the Company restated its consolidated financial statements for the year ended
December 31, 2003. /s/ Ernst & Young LLP Birmingham, Alabama
November 4, 2004




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##### 



DIVIDEND POLICY The Company has never declared or paid a cash dividend on its common stock. It
is the present policy of the Companys Board not to declare or pay cash
dividends on its common stock. PRICE RANGE OF COMMON STOCK Since April 1981, Intergraph common stock has traded on The NASDAQ Stock
Market® (NASDAQ) under the symbol INGR. As of January 31, 2004, there were
36,154,019 shares of common stock outstanding, held by 5,012 shareholders of
record. The following table sets forth, for the periods indicated, the high
and low sale prices of the Companys common stock as reported on NASDAQ. 2003
    
    2002Period
    
    High
    
    Low
    
    High
    
    LowFirst Quarter
    
    $
    18.79
    
    
    $
    16.41
    
    
    $
    17.95
    
    
    $
    13.41Second Quarter
    
    
    23.25
    
    
    
    17.30
    
    
    
    19.73
    
    
    
    12.98Third Quarter
    
    
    24.83
    
    
    
    20.87
    
    
    
    18.45
    
    
    
    13.91Fourth Quarter
    
    
    26.77
    
    
    
    23.07
    
    
    
    20.00
    
    
    
    16.21
 TRANSFER
AGENT AND REGISTRAR
    
    INDEPENDENT
AUDITORSComputershare Investor Services, LLC
    
    Ernst & Young LLP2 North LaSalle Street
    
    1901 Sixth Avenue NorthChicago, IL 60602
    
    Suite 1900 AmSouth/Harbert Plaza(312) 588-4991
    
    Birmingham, AL 35203
 FORM 10-K/A A copy of the Companys Form 10-K/A filed with the SEC is available without
charge upon written request to: Investor Relations, Intergraph Corporation
IW2003, Huntsville, AL 35894-0001, Phone (256) 730-2184. ANNUAL MEETING The annual meeting of Intergraph Corporation will be held May 13, 2004, at 5 pm
CST on the Corporate campus in Huntsville, Alabama.




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##### 



INTERGRAPH CORPORATION AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This report contains forward-looking statements (all statements other than
those made solely with respect to historical fact) within the meaning of the
Private Securities Litigation Reform Act of 1995 including, but not limited to,
the business outlook of Intergraph Corporation (the Company or Intergraph),
projections about revenue, operating income levels, margins, and market
conditions and their anticipated impact on the Company and its vertical
business segments; expectations regarding Intergraphs various ongoing
litigation proceedings; expectations regarding future results and cash flows;
information regarding the development, timing of introduction, and performance
of new products; and any statements of the plans, strategies, and objectives of
management for future operations. These forward-looking statements are subject
to known and unknown risks and uncertainties (some of which are beyond the
Companys control) that could cause actual results to differ materially and
adversely from those anticipated in the forward-looking statements. Factors
that could cause or contribute to such differences include, but are not limited
to, potential adverse outcomes in our ongoing efforts to protect our
intellectual property, (including, with respect to the Companys efforts to
prove Intel Corporation (Intel) infringed the Companys parallel instruction
computing patents in the trial court and in any resulting appeal, retain
amounts previously paid to the Company, pursue the specified appeal damages,
or otherwise enforce the April 2002 settlement agreement with Intel in light of
the February 2004 appellate court decision, the Companys claims against
certain original equipment manufacturers, including Dell Inc., Gateway Inc.
and Hewlett-Packard Co., and other ongoing and potential litigation and patent
enforcement efforts), potential adverse outcomes in our efforts to improve our
operating performance (including uncertainties with respect to the timing and
magnitude of any expected improvements); the ability of the Company to obtain
required product certifications and timely deliver SP3D Version 5; material
changes with respect to our business, litigation prospects, or the securities
markets (including the market for Intergraph common stock); risks associated
with doing business internationally (including foreign currency fluctuations);
worldwide political and economic conditions and changes; the ability to attract
or retain key personnel; increased competition; rapid technological change;
unanticipated changes in customer requirements; the ability, timing, and costs
associated with the Companys effects to enforce and protect Intergraphs
intellectual property rights; the ability to access the technology necessary to
compete in the markets served; risks associated with various ongoing litigation
proceedings; and other risks detailed in our press releases or in our annual,
quarterly, or other filings with the Securities and Exchange Commission. OVERVIEW Intergraph is a pioneer of computer graphics software and services in the
commercial and government sectors. Founded in 1969, the Company has delivered
numerous innovations in interactive graphics solutions. Today, Intergraphs
core mission is to enable businesses and governments to make better and faster
operational decisions, and through software and services, help its customers
organize vast amounts of complex data into understandable visual
representations. Intergraphs technology enables our customers to create
intelligent maps, manage assets and infrastructure, build and operate better
plants and ships, and dispatch emergency services to those in need.




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##### 



Over the past six years, the Company has taken significant measures to reduce
its losses and return to profitability, including extensive reductions in its
workforce and the sale of several non-core business units and assets. In
fourth quarter 1999, the Company exited the personal computer and generic
server businesses, and in third quarter 2000 it exited the development and
design of most of its remaining hardware products. These actions allowed the
Company to return to profitability in 2001. The Company was profitable again
in 2002 and 2003. While profitable, income from operations as a percentage of
revenues was less than 3% in each of these years. Most of the Companys income
before taxes in the last three years originated from $436.2 million
intellectual property income, $31.9 million gains on sales of non-core assets,
and $20.9 million interest income. The Company carries no debt and has
repurchased 16.3 million shares of its common stock for approximately $378
million over the last three years. Mr. Taylor, the Companys former Chief Executive Officer (CEO), announced
plans to retire in late 2002 and the Companys Board of Directors (Board)
conducted a search for a new CEO. In July 2003, the Board hired a new CEO from
outside Intergraph to lead the Company forward. Since July, the Company has
introduced new vision, mission and culture statements, changed its capital
structure by repurchasing 10.9 million shares of the Companys common stock for
approximately $283.2 million, added a new independent director, formed a
Corporate Governance Committee comprised solely of independent directors, and
adopted new Corporate governance guidelines. Management is focused on improving the Companys operating margins. The
overall strategic goal in the next two to three years is the expansion of
operating margin percentages (income from operations divided by revenue) to be
more in line with our peers. While primarily focused on operating margins,
management also monitors revenue, gross margins, and operating expenses for
each business unit and the Company as a whole. The Company anticipates low
revenue growth for 2004. The Company believes any improvement in income from
operations for 2004 will primarily be due to expense reductions as a result of
the recent restructuring initiatives and anticipated slight improvements in
gross margins. In addition, management is evaluating each of the Companys
businesses to determine the size of the markets served, growth prospects for
each market, potential strategies to grow each business, and the risks versus
available risk-adjusted returns of each of the businesses. This initial review
should be completed in 2004. Fluctuations of the U.S. dollar in international markets had a significant
impact on the Companys results of operations in 2003. The Company estimates
that the weakening of the U.S. dollar in the Companys international markets,
primarily in Europe, positively impacted revenue by approximately 5.5%,
negatively impacted operating expenses by approximately 4.9%, and improved the
Companys operating results by approximately $0.16 per share (diluted) in
comparison to 2002. A strengthening U.S. dollar could materially adversely
affect the Companys future results of operations. The Companys business segments offer software solutions to satisfy
engineering, design, modeling, analysis, mapping, and information technology
needs. The Companys business segments also offer related professional
services to satisfy these needs. Products and services are sold through
industry-focused direct and indirect channels worldwide, with the United States
and Europe representing approximately 83% of total revenues for 2003. In addition, the Company has intellectual property that resulted from its
hardware design and manufacturing operations that the Company exited in 2000.
The intellectual property is used in a variety of industries, including
computers, consumer




---



##### 



electronics, telecommunications, and electronics design.
The Company defends the value of its intellectual property (IP) portfolio
through licensing and litigation. The Company remains actively engaged in
licensing discussions, as well as patent litigation with several companies. The Companys current operations are divided into four business segments along
with a Corporate oversight function (Corporate). The Companys business
segments are Intergraph Process, Power & Offshore (PPO); Intergraph Mapping
and Geospatial Solutions (IMGS); Intergraph Solutions Group (ISG); and
Intergraph Public Safety, Inc. (IPS). RESULTS OF OPERATIONS The following financial data sets forth the results of operations of the
Company for each year in the three-year period ended December 31, 2003. 2003
    
    2002
    
    2001(in thousands)
    
    (Restated)Revenues
    
    $
    526,003
    
    
    $
    501,077
    
    
    $
    532,061Cost of revenues
    
    
    274,057
    
    
    
    267,237
    
    
    
    298,735Gross profit
    
    
    251,946
    
    
    
    233,840
    
    
    
    233,326Operating expenses
    
    
    234,626
    
    
    
    217,303
    
    
    
    221,617Restructuring charges (credits)
    
    
    3,952
    
    
    
    2,106
    
    
    
    (384
    )Income from operations
    
    
    13,368
    
    
    
    14,431
    
    
    
    12,093Intellectual property income (expense), net
    
    
    5,784
    
    
    
    434,471
    
    
    
    (4,006
    )Gains on sales of assets
    
    
    3,421
    
    
    
    17,214
    
    
    
    11,243Interest income
    
    
    6,588
    
    
    
    6,886
    
    
    
    7,427Other income (expense), net
    
    
    (2,128
    )
    
    
    (3,830
    )
    
    
    2,161Income before income taxes and minority interest
    
    
    27,033
    
    
    
    469,172
    
    
    
    28,918Income tax expense
    
    
    (4,745
    )
    
    
    (91,135
    )
    
    
    (8,500
    )Income before minority interest
    
    
    22,288
    
    
    
    378,037
    
    
    
    20,418Minority interest
    
    
    
    
    
    
    (285
    )
    
    
    (476
    )Net income
    
    $
    22,288
    
    
    $
    377,752
    
    
    $
    19,942
 Revenues Total revenue for 2003 was $526.0 million, up 5% from 2002 after declining 6%
in 2002 from 2001. The increase in 2003 revenues is primarily the result of a
weaker U.S. dollar against the currencies of the Companys foreign
subsidiaries. Exclusive of the currency impact, revenue levels were flat with
2002 levels. The 2002 decline is attributable to weak




---



##### 



economic conditions worldwide, the 2001 sale of the Companys Middle East
operations, and a significant reduction in hardware maintenance revenue,
partially offset by increased software maintenance revenues. Total U.S. revenues, including sales to the federal government, were $276.7
million in 2003, down 3% from the 2002 level of $285.9 million. Revenues in
the U.S. for 2002 were flat with the 2001 level. European sales were up 25% in
2003, after declining 12% in 2002. The increase in sales in Europe is
primarily due to the weakening U.S. dollar against European currencies. Sales
in Asia were down 7% for 2003, primarily due to the completion in 2002 of a
large services contract in Australia, and up for 2002 from 2001 levels by 1%,
as a result of new contracts in Australia. Revenue in 2003 for other
international subsidiaries ($42.1 million) increased 15% due to progress on a
large project in the Caribbean. In 2002, other international revenue ($36.7
million) declined 33%, due mainly to the 2001 sale of the Companys Middle East
operations. Total revenue from the U.S. government was approximately $137.1 million in
2003, $136.9 million in 2002, and $143 million in 2001, representing
approximately 26% of total revenue in 2003, and 27% of revenue in 2002 and
2001. The majority of these revenues are attributed to the ISG business
segment. The Company sells to the U.S. government under long-term contractual
arrangements, primarily indefinite delivery, indefinite quantity, and
cost-based contracts, and through sales of commercial products not covered by
long-term contracts. Approximately 83% of the Companys 2003 federal
government revenue was earned under long-term contracts. The Company believes
its relationship with the federal government to be good. While it is
anticipated that these contracts will remain in effect through their stated
expiration, the contracts are subject to termination at the election of the
government. Any loss of a significant government contract would have an
adverse impact on the results of operations of ISG and the Company as a whole. The Company reports revenues in three categories, consisting of systems,
maintenance, and services revenues. The following discussions detail each of
these revenue categories. Systems:Systems revenue, consisting primarily of revenues earned from product
sales, projects, and fixed-term and perpetual software license and lease
agreements, was $296.9 million for 2003, up 3% from 2002 levels of $287.9
million, after declining 4% from 2001 to 2002. The increase for 2003 is
primarily due to the weakening U.S. dollar and an increase in revenue in the
IPS business segment, offset by declines in revenue in the IMGS business
segment for the completion of several task orders on a large U.S. government
contract and in the ISG business segment as contracts completed in 2002 were
replaced with new contracts which are categorized as services revenues in 2003.
The 2002 decrease is primarily due to weak economic conditions worldwide and
continuing order weakness in the Companys Z/I Imaging Corporation (Z/I
Imaging) business and in the Utilities and Communications sectors of IMGS. Maintenance:Maintenance revenue, consisting primarily of revenues from
support services, including telephone support, software program fixes, and
rights to product upgrades and enhancements, increased 8% in 2003, after
declining 3% from 2001 to 2002. The improvement in 2003 maintenance revenues
is primarily the result of the weakening U.S. dollar and an increase in
software maintenance revenues, offset by declines in hardware maintenance
revenues. The Companys hardware maintenance business has declined
approximately 28% ($5.7 million) for 2003 and 47% ($18 million) for 2002, as a
result of the Companys exit from the hardware business in 2000.




---



##### 



Services:Services revenue, consisting primarily of revenues from
implementation and consulting services, increased 7% in 2003, after decreasing
13% from 2001 to 2002. The 2003 increase is primarily the result of the
weakening U.S. dollar and the effect of a large U.S. government project that
began mid-2003 in the ISG business segment, offset by the completion in late
2002 of a large services contract in Australia. The 2002 decline is
attributable to weak economic conditions worldwide, especially in the Utilities
and Communications sectors of IMGS, and the completion of the large services
contract in Australia. Gross Margin The Companys total gross margin percentage on revenue was 48% in 2003,
compared to 47% in 2002 and 44% in 2001. For 2003, the improvement in margin
is primarily due to the weakening of the U.S. dollar against foreign
currencies. Exclusive of the 2003 impact of the weakening dollar, total margin
percentage would have been 47%. Systems:Margin on systems revenue was 49% in 2003, 2002, and 2001. In
general, the Company believes its systems margins are improved by higher
software content in the product mix, a weaker U.S. dollar in international
markets, and less discounting. Also, systems margins are lowered by price
competition, a higher services and third party content in the product mix, a
stronger U.S. dollar in international markets, and a higher mix of federal
government sales, which generally produce lower margins than commercial sales. Maintenance:Margin on maintenance revenue was 63% in 2003, 55% in 2002, and
47% in 2001. The continuing improvement in margins over the past two years is
partially the result of an increase in new software maintenance contracts and
fewer hardware maintenance contracts that produce lower margins than software
maintenance contracts. Maintenance margins in all business units improved from
2002 to 2003. Although revenues declined in 2002 due to the expected decline
in the Companys legacy hardware business, costs decreased at a higher rate
primarily from headcount reductions as ISG continued to align maintenance
expenses with revenue levels. Services:Margin on services revenue for 2003 was 25%, a decline from 2002
margin of 29% and flat with 2001 margin of 25%. The decline in margin for 2003
included lower margin sales, particularly in the ISG business segment. More
effective cost controls and better overall utilization of resources in
the PPO business segment, as well as completion of a large services contract in
Australia during 2002 positively impacted margins in 2002. Significant
fluctuations in services revenues and margins from period to period are not
unusual and can be caused by new or completed large orders, delayed progress on
existing projects, and employee utilization rates. Operating Expenses (exclusive of restructuring charges) Operating expenses (exclusive of restructuring charges) increased 8% from 2002
to 2003 and were relatively flat from 2001 to 2002. The weaker U.S. dollar
resulted in an estimated increase in reported operating expenses of $11.4
million in 2003. Total operating expenses increased only 3% ($6 million) from
2002 to 2003, exclusive of this unfavorable currency impact.




---



##### 



Product Development Expense:Product development expense increased 16% in 2003
after declining 6% from 2001 to 2002. The 2003 increase was due to continuing
research and development investments in several new product offerings in the
PPO and IPS business units, including the development of the new SmartPlant® 3D
and IntelliShip products which were released to customers in 2003. The weaker
U.S. dollar resulted in an estimated increase in reported product development
expenses of $820,000 in 2003. The 2002 decrease was primarily due to higher
capitalization of development costs offset by some increased expenses from new
product development initiatives. The Company capitalizes certain development costs incurred after the
technological feasibility of new software products has been established and
amortizes those costs against the revenues generated by those products. Though
the Company regularly reviews its capitalized development costs to ensure
recognition of any decline in value, it is possible that, for any given
product, revenues will not materialize in amounts anticipated due to industry
conditions that include price and performance competition, or that product
lives will be reduced due to shorter product cycles. Should these events
occur, the carrying amount of capitalized development costs would be reduced,
producing adverse effects on the Companys systems margin and results of
operations (see Note 1 of Notes to Consolidated Financial Statements). The Company currently has many ongoing projects relating to development of new
products and enhancement of existing products. The ultimate timing and impact
of certain of these projects on the Companys results of operations and
financial condition cannot be accurately predicted. Some of the Companys
significant products, several of which were released during 2003, include
software for engineering information management, intelligent piping and
instrumentation diagrams, 3D visualization, enterprise information access and
reports, and 2D CAD; and new technology for the earth-imaging industry,
including new digital products for photogrammetry, airborne reconnaissance,
aerial mapping, and image distribution. For the significant products released
during 2003, costs incurred over the past six years totaled $75.1 million. The
Company will continue to enhance the
functionality of these and other products to meet the challenges of industries
characterized by intense competition and rapidly changing technologies. Sales and Marketing Expense:Sales and marketing expense increased 5% from
2002 to 2003 and increased only slightly from 2001 to 2002. The 2003 increase
occurred primarily in the PPO and IPS business units due to the weakening of
the U.S. dollar against international currencies. Excluding the estimated $7.2
million unfavorable currency impact, sales and marketing expense decreased 3%
from 2002 to 2003. The 2002 increase was due to the weakening of the U.S.
dollar against international currencies and increased sales and marketing
activity, primarily in PPO. These increases were partially offset by reduced
spending in IMGS as a result of combining the Utilities and Communications and
Z/I Imaging businesses with the IMGS business unit in late 2002. General and Administrative Expense:General and administrative expense for
2003 increased 6% from the 2002 level and was flat from 2001 to 2002. The
increase from 2002 to 2003 was primarily the result of the estimated $3.4
million unfavorable currency impact and higher legal expenses associated with
the Bentley Systems, Inc. (BSI) litigation and other general Corporate legal
matters.




---



##### 



Restructuring Charges In 2003, the Company recorded $4 million in restructuring charges in an effort
to realign costs with revenues in the Corporate and IMGS business segments. In
2002, the Company recorded $2.1 million in restructuring charges as a result of
combining the Utilities & Communications business with the IMGS division. In
2001, the Company reversed severance liabilities of $384,000 for its 2000
restructuring plan. For a complete description of these charges, see Note 10
of Notes to Consolidated Financial Statements for details of the Companys
restructuring activities. In first quarter 2004, the Company expects to record $1.2 million in
restructuring charges as a result of realignment of costs in relation to
revenues in the PPO business segment. The Company does not anticipate any
further restructuring charges to be recorded during 2004 as long as the Company
remains on its 2004 plan. Non-operating Income and Expense Intellectual Property:Intellectual property income (expense), net in the
consolidated statements of income consists of income resulting from settlements
and licensing of the Companys intellectual property, net of legal fees and
other expenses associated with maintaining and defending the Companys
intellectual property. Income and expenses associated with the intellectual
property division, including related legal expenses, are classified and
reported in this section of the consolidated statements of income in order to
more clearly show the operating results of the Companys business units. In third quarter 2003, the Company recorded $18 million in income from its
settlement of all patent disputes with Texas Instruments Incorporated (TI).
In first quarter 2003, the Company recorded income of $10 million due to a
balancing payment from International Business Machines Corporation (IBM) for
future royalties in a full cross-licensing agreement that also resolved all
outstanding patent infringement claims between IBM and the Company. For the
twelve months ended December 31, 2003, $22.2 million in legal fees and other
related expenses associated with protecting and licensing the Companys
intellectual property were netted against this income. In second quarter 2002, Intergraph and Intel settled a patent infringement
lawsuit filed in Alabama Federal Court in 1997 for $300 million, which the
Company received in May 2002. In fourth quarter 2002, the U.S. District Court
for the Eastern District of Texas ruled in favor of the Company in a related
patent infringement case, resulting in an additional $150 million payment from
Intel, which was received in November 2002. For the twelve months ended
December 31, 2002, $15.6 million in legal fees and other related expenses
associated with protecting and licensing the Companys intellectual property
were netted against this income. In 2001, the Company recorded $4 million in legal fees and other related
expenses associated with protecting and licensing the Companys intellectual
property. See Note 18 of Notes to Consolidated Financial Statements for
further discussion on these transactions. Gains on Sales of Assets:Gains on sales of assets in the consolidated
statements of income and cash flows consists of the net gains and losses
recognized by the Company on sales of various non-core subsidiaries, divisions,
and product




---



##### 



lines, and gains recorded on real estate sales. See Notes 16 and
17 of Notes to Consolidated Financial Statements for details of the Companys
acquisitions and divestitures during the three-year period ended December 31,
2003. In 2003, IMGS reported a net gain of approximately $1.1 million from the March
2003 sale of its aeronautical intellectual property assets to Ingegneria Dei
Sistemi S.p.a. in Rome, Italy. In July 2003, the Company recognized a gain of
$1.8 million for the sale of its remaining 1.5 million shares of Creative
Technology Ltd. (Creative) stock. In December 2003, the Company also
recognized a gain of $470,000 on the sale of 383 acres of unoccupied land
adjacent to its Huntsville headquarters. In 2002, the Company reported an additional gain of $2 million from the 2000
sale of its Intense3D graphics accelerator division to 3Dlabs Inc., Ltd.
(3Dlabs), as the shares originally placed in escrow were released in March
2002. In May 2002, Creative purchased all of the outstanding shares of 3Dlabs
for $3.60 per share, paying one-third in cash and two-thirds in Creative common
stock. The Company recognized a gain of $17 million on the sale of its 3Dlabs
stock to Creative. In July 2002, Intergraph sold approximately 789,000 shares
of Creative stock for a net loss of $1.3 million. In March 2002, the Company
also sold its subsidiary in Greece, reporting a net loss of $455,000. In 2001, the Company reported an additional gain of approximately $10.1 million
from the 2000 sale of its civil, plotting, and raster product lines to BSI as
part of the initial consideration for the sale, as well as consideration for
transferred and renewed maintenance revenues for the products sold to BSI, as
provided for in the original sale agreement. See Note 18 of Notes to
Consolidated Financial Statements for a discussion of pending litigation with
BSI. Also in 2001, the Company reported an additional gain of $581,000 as a
result of the final calculation and settlement of the earn-out provisions with
3Dlabs. In 2001, the Company sold its Middle East operation and reported a net
gain of $530,000. Interest Income:Interest income was $6.6 million in 2003, $6.9 million in
2002, and $7.4 million in 2001. Interest income decreased in 2003 due to lower
interest rates earned and the reduction in principal balance of the BSI note
from 2002, but was partially offset by an increase in interest income from
short-term investments due to proceeds from IP litigation. Other:Other income (expense), net in the consolidated statements of income
consists primarily of interest expense, foreign exchange gains and losses and
other miscellaneous items of non-operating income and expense. In 2003, this
amount included a $1.4 million net foreign exchange loss,
$608,000 in losses on the disposal of various assets, and interest expense of
$212,000. In 2002, this amount included a $7 million write-down of the
other-than-temporary loss on Creative stock, an additional gain of
approximately $1.1 million on the prior sale and leaseback of a European office
building, gains of $691,000 on the disposal of various assets, a dividend of
$376,000 from Creative, a $277,000 net foreign exchange gain, and interest
expense of $219,000. In 2001, this amount included a $3.8 million payment
received from Micrografx, Inc. for a convertible debenture held by the Company,
interest expense of $1.8 million, $1.7 million for a Mentor Graphics warrant,
and a net foreign exchange loss of $1.5 million. See Impact of Currency
Fluctuations and Currency Risk and Notes 6 and 17 of Notes to Consolidated
Financial Statements.




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##### 



Income Taxes The Company earned pretax income before minority interest of $27.0 million in
2003, compared to $469.2 million in 2002 and $28.9 million in 2001. Income tax
expense in 2003 was attributable both to taxes on individually profitable
majority-owned subsidiaries and patent litigation income, partially offset by
tax benefits of $4.1 million which resulted from favorable resolutions of audit
issues with the Internal Revenue Service. Income tax expense in 2002 and 2001
resulted from taxes on individually profitable subsidiaries. Income tax
expense in 2002 also resulted from income from IP litigation. The Company must continually assess the likelihood that it will be able to
recover deferred tax assets. If recovery is not likely, the Company must
increase its provision for taxes by recording a valuation allowance against the
deferred tax assets. As of December 31, 2003, the Company believed that all of
the deferred tax assets recorded on its balance sheet would ultimately be
recovered. However, should there be a change in the Companys ability to
recover its deferred tax assets, the tax provision would increase in the period
in which the Company determines that the recovery is not probable. In addition, the calculation of tax liabilities involves dealing with
uncertainties in the application of complex tax regulations from over 30
countries around the world. The Company recognizes liabilities for anticipated
taxes in the U.S. and other tax jurisdictions based on its estimate of whether,
and the extent to which, taxes are and could be due. If the Company ultimately
determines that payment of these amounts is unnecessary, the Company would
reverse the liability and recognize a tax benefit during the period in which it
determines that the liability is no longer necessary. The Company would record
an additional charge in its provision for taxes in the period in which it
determines that the recorded tax liability is less than it expects for the
ultimate assessment. Note 11 of Notes to Consolidated Financial Statements contains a reconciliation
of statutory income tax expense to actual income tax expense for each year in
the three-year period ended December 31, 2003, and includes further details of
the Companys tax position, including net income and tax credit and net
operating loss carryforwards. Results by Business Segment The Companys current operations are divided into four business segments, along
with a Corporate oversight function. The following discussion provides a
comparative analysis of results of operations including restructuring charges
(credits) based on the Companys current business structure. See Note 15 of
Notes to Consolidated Financial Statements for further explanation and details
of the Companys segment reporting. PPO:PPO earned operating income of $14.8 million, $19 million, and $6.8
million, on revenues of $131.6 million, $124.1 million, and $116.5 million, in
2003, 2002, and 2001, respectively. The 6%
increase in revenue in 2003 was due to higher new license and software
maintenance revenue, including a large maintenance contract signed with GRAD (a
consortium of shipbuilders for new shipbuilding applications), strong sales of
new information management products, and continued strong sales of the 2D/3D
design tools. Revenue increased 7% in 2002, compared to 2001, due to
nonrecurring revenue in the shipbuilding business and growth in new products
covering instrumentation design, materials/procurement management, and
information management software. PPOs total gross margin improved from 68% in
2002 to 69% in 2003 and from 61% in




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##### 



2001 to 68% in 2002. The increase in the
2003 gross margin was primarily due to improved maintenance margins as a result
of the large maintenance contract with GRAD, while the increase in the 2002
gross margin was the result of growth in higher margin products, improvements
in services margins, and fewer sales of low-margin hardware and hardware
maintenance. Operating expenses increased 18% in 2003 while 2002 operating
expenses were flat with the 2001 level. The increase in operating expenses for
2003 was due to higher product development expenses for new products, higher
sales and marketing costs resulting from the weakening of the U.S. dollar,
trade shows and customer events, and higher sales compensation costs due to
higher revenue. IMGS:In 2003, IMGS reported operating income of $3.8 million on revenue of
$210 million, compared to a 2002 operating loss of $2.1 million on revenue of
$195.1 million and 2001 operating income of $6.1 million on revenue of $222.7
million. IMGS 2003 increases in revenue and operating income were due to
increased product sales and project sales that include products, services, and
third party content, primarily in Europe and Canada. The 2002 declines in
revenue and operating income were the result of less capital spending in the
utilities; communications; local, state, and federal government; and earth
imaging markets. The 2001 results also included nonrecurring transactions
causing 2002 revenue to appear low in comparison. IMGS total gross margin was
approximately 47% in 2003, 48% in 2002, and 47% in 2001. Operating expenses
for 2003, which included $1.5 million in restructuring charges, were relatively
flat with 2002. Compared to 2001, operating expenses for 2002 were 2% lower,
due to a decrease in headcount and an increase in development costs that
qualified for capitalization offset by $1 million in restructuring charges. ISG:In 2003, ISG earned operating income of $8.1 million on revenue of $120.9
million, compared to 2002 operating income of $5.9 million on revenue of $127
million and 2001 operating income of $10 million on revenue of $134.1 million.
ISGs systems and maintenance revenues continue to be adversely impacted by the
Companys exit from the hardware business in 2000. ISGs total gross margin
was 24% in 2003 and 2002, a slight decrease compared to 25% in 2001. The
decrease from 2001 to 2002 was due to a significant, nonrecurring government
purchase of third-party software with very low margin. Operating expenses
decreased 14% from the 2002 level due to decreases in sales and marketing and
general and administrative expenses as ISG continued to align expenses with
revenue levels and increased 3% from 2001 to 2002 due to higher sales and
marketing expenses associated with expanding into the commercial services
market. IPS:IPS earned operating income of $14.4 million, $14.6 million, and $8.2
million, on revenues of $67.2 million, $63.6 million, and $60.9 million in
2003, 2002, and 2001, respectively. The 2003 increase in revenue was due to
new projects and more maintenance contracts, which offset the loss of revenues
from a large Australian services contract that ended in September 2002. A 2002
decline in revenue from Asia and Canada was offset by higher revenue recognized
on several major projects in the United States and Europe. The operating
income decrease in 2003 was attributable to higher total gross margins that
partially offset an increase in operating expenses and the loss of margin
related to the services contract in Australia. The 2002 increase in operating
income was due to higher revenue with better gross margins, flat operating
expenses, and a one-time sale of software and systems associated with the
completion of a large outsourcing contract in Australia. IPS total gross
margin improved from 49% in 2002 to 52% in 2003 as a result of the completion
of the large Australian services contract in 2002 and improved maintenance
margins. The 2002 margin improvement from 41% in 2001 was also primarily
attributable to the completion of the Australian services contract in 2002.




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Corporate:Corporate incurred operating losses of $27.7 million in 2003, $23.3
million in 2002, and $19 million in 2001, on revenues of $12.7 million, $13.1
million, and $33.8 million, respectively. The decline in total revenues was
due to declining international hardware maintenance as a result of the
Companys exit from the hardware business. The operating losses were mainly
due to continuing costs of exiting the hardware business, including management
of warranty reserves, inventory write-downs, and management of a repair depot.
Operating expenses for 2003 increased 17% from 2002 while 2002 operating
expenses decreased 4% from 2001. The 2003 increase was due to higher legal
expenses associated with the BSI litigation and other general Corporate legal
matters and $1.5 million in additional restructuring costs. The 2002 decrease
was due to the Companys efforts to reduce its Corporate overhead, primarily
through reductions in headcount. Outlook for 2004 The Company expects that the markets in which it competes will continue to be
characterized by intense competition, rapidly changing technologies, and
shorter product cycles. Further improvement in the Companys operating results
will depend on a reduction in operating expenses, improvements in gross
margins, revenue growth, and further market penetration by accurately
anticipating customer requirements and technological trends, and rapidly and
continuously developing and delivering new products and services that are
competitively priced, offer enhanced performance, and meet customers
requirements. In addition, the Company continues to face legal expenses of
unknown duration and amount as it licenses its intellectual property and
otherwise asserts its intellectual property rights. The ultimate impact of
these initiatives is subject to known and unknown risks and uncertainties. See
Cautionary Note Regarding Forward-Looking Statements. Many factors affect financial performance, and past performance is no assurance
of similar future performance, although the Company remains focused on
short-term goals and objectives designed to improve profitability. Litigation and Other Risks and Uncertainties See Note 18 of Notes to Consolidated Financial Statements for a discussion of
the Companys legal proceedings and other risks and uncertainties. LIQUIDITY AND CAPITAL RESOURCES At December 31, 2003, cash and short-term investments totaled $265.8 million
compared to $506 million and $110.8 million at December 31, 2002, and 2001,
respectively. The reduction in cash and short-term investments in 2003 is due
primarily to repurchases of 11.4 million shares of the Companys common stock
for $290.7 million, including 10 million shares via a modified Dutch auction
tender offer completed in December 2003 and $41.2 million of tax payments
(primarily as a result of the Intel settlement and litigation proceeds).
Decreases in the Companys cash during the year were offset by increases in
cash due to $18 million from the proceeds of the TI settlement, $10 million
from the proceeds of the IBM settlement, $12.4 million from the proceeds of the
sale of Creative stock, and $13.9 million from the exercise of stock options
and employee stock purchases. The improvement in cash and short-term
investments in 2002 is due primarily to the receipt of $450 million from the
Intel litigation, $13.4 million from the sale of its 3Dlabs stock, and $7.9
million from




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##### 



the sale of Creative stock. During 2002, the Company spent
approximately $83.6 million to purchase 4.7 million shares of its common stock
under a stock repurchase program. The Company generates cash from operations primarily from net income plus
non-cash charges included in net income and reductions in working capital
requirements. The Company uses cash primarily for capitalized software
development, capital expenditures, and any increases in working capital
requirements. The Company incurred capital expenditures in 2002 and 2003 of
approximately $10 million each year and expects that capital expenditures will
require $10 million to $12 million in 2004, primarily for the purchase of
computer equipment. The Company does not anticipate significant non-operating
events that will require the use of cash, with the exception of the Companys
stock repurchase program. In 2003, the Companys Board authorized an increase
in the funding for the stock repurchase program from $175 million to $250
million (of which $115.7 million has been used as of January 31, 2004). The
Board also extended the termination date for the stock repurchase program from
December 31, 2004, to December 31, 2005, and approved privately negotiated
transactions in addition to open market purchases of the Companys stock. The
Company spent approximately $22 million in 2003 on patent litigation and
enforcement and could spend a similar amount in 2004. See the Companys Annual
Report on Form 10-K for the year ended December 31, 2001, for further
discussion of the Companys stock buyback plan and litigation. At December 31, 2003, the Company had no debt. During 2002, the Company
reduced its debt under various floating rate arrangements to approximately
$169,000. Due to the immaterial amount of debt at December 31, 2002, market
risk of future increases in interest rates was not considered material. In September 2002, in order to reduce the cost of issuing letters of credit,
the Company established a $12.5 million credit line with Wells Fargo Bank to
cover its outstanding letters of credit secured by $15 million of
interest-bearing securities. This credit line was reduced on January 20, 2004,
to $6 million secured by $8.2 million of interest-bearing securities. Under
this arrangement, the Company earns interest on the securities and withdrawal
of securities is allowed, but the Company is required to maintain a level of
securities sufficient to cover total outstanding letters of credit (which
totaled $4.9 million at January 31, 2004). The Companys average collection period for accounts receivable in 2003 was
approximately 72 days, representing a decrease of 15 days from the prior year.
Approximately 73% of the Companys 2003 revenues were derived from
international customers and the U.S. government, both of which traditionally
have longer collection periods. Total U.S. government accounts receivable were
$23.5 million at December 31, 2003 (compared with $26.7 million at December 31,
2002). The Company endeavors to enforce its payment terms with these and other
customers, and grants extended payment terms only in very limited
circumstances.




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##### 



The following is a summary of certain of the Companys obligations and
commitments as of December 31, 2003: Payments due by period(in thousands)
    
    
    
    
    
    Less than
    
    
    
    
    
    
    
    
    
    More thanContractual Obligations
    
    Total
    
    1 year
    
    1-3 years
    
    3-5 years
    
    5 yearsCapital Lease Obligations
    
    $
    150
    
    
    $
    150
    
    
    $
    
    
    
    $
    
    
    
    $
    Operating Lease Obligations
    
    
    51,716
    
    
    
    11,954
    
    
    
    12,249
    
    
    
    4,647
    
    
    
    22,866Other Noncurrent Liabilities
    
    
    548
    
    
    
    
    
    
    
    344
    
    
    
    144
    
    
    
    60Research and Development
Services Agreement
Commitment
    
    
    3,800
    
    
    
    3,800
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    56,214
    
    
    $
    15,904
    
    
    $
    12,593
    
    
    $
    4,791
    
    
    $
    22,926
 The Company believes that the combination of existing cash balances and cash
flow from operations will exceed cash requirements for operations for 2004. FOURTH QUARTER 2003 Revenue in fourth quarter was $144.5 million, an increase of 18.5% from fourth
quarter 2002 revenues of $122 million. Significant factors contributing to the
overall increase in revenues include $7.5 million for a new professional
services contract in the ISG business unit, increased product sales to
international customers for $6.4 million, $4 million from new maintenance
contracts, and an increase in reported revenues due to the weakening of the
U.S. dollar. Cost of revenues increased 22% from fourth quarter 2002 levels.
Gross margin declined from 49% of total revenues in 2002 to 47% in 2003,
resulting from third party material elements of the new professional services
contract mentioned above. Operating expenses (excluding restructuring charges)
increased 17% from the fourth quarter 2002 level. This increase results mainly
from an increase in legal fees, a weakening of the U.S. dollar against European
currencies, and higher product development expenses for new and existing
products. Restructuring charges in fourth quarter 2003 were $4 million, as
compared to $2.1 million in fourth quarter 2002. Operating results for fourth
quarter 2003 included $6.8 million net intellectual property expense and other
non-operating income items netting to $506,000. Fourth quarter 2002 operating
results were impacted by the Intel patent litigation gain of $148.2 million and
by other net expense of $4.5 million, including the $7 million write-down of a
long-term investment. The Company earned net income of $445,000 ($0.01 per
share diluted) for the quarter, compared to net income of $90.1 million ($1.85
per share diluted) in fourth quarter 2002. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In November 2002, the Financial Accounting Standards Board (FASB) issued
Interpretation (FIN) No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others, which is effective for guarantees issued or modified after December 31,
2002. FIN No. 45 elaborates on the existing disclosure requirements for most
guarantees, including loan guarantees such as standby letters of credit. It
also clarifies that at the time a company issues a guarantee, the company must
recognize an initial liability for the fair value, or market value, of the
obligations it assumes under the guarantee and must disclose that information
in its interim and annual financial




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##### 



statements. The provisions related to
recognizing a liability at inception of the guarantee for the fair value of the
guarantors obligations does not apply to product warranties or to guarantees
accounted for as derivatives. The adoption of FIN No. 45 in first quarter 2003
did not have a significant impact on the Companys consolidated operating
results or financial position. The Company has not incurred costs to settle
claims or pay awards under the patent infringement indemnity provisions of some
of our sales agreements with customers; therefore, the Company has recorded no
liabilities for these agreements as of December 31, 2003. In January 2003, FASB issued FIN No. 46, Consolidation of Variable Interest
Entities(revised December 2003), an interpretation of Accounting Research
Bulletin No. 51, Consolidation of Financial Statements, which addresses
consolidation of variable interest entities (VIEs) by business enterprises.
This Statement is required in financial statements of public entities that have
interests in VIEs or potential VIEs commonly referred to as special-purpose
entities for periods ending after December 15, 2003. Application by public
entities (other than small business issuers) for all other types of entities is
required in financial statements for periods ending after March 15, 2004. The
Company is still evaluating the impact, if any, that adoption of FIN No. 46 may
have on its consolidated results of operations or financial position. On April 30, 2003, FASB issued Statement of Financial Accounting Standards
(SFAS) No. 149, Amendment of Statement 133 on Derivative Instruments and
Hedging Activities, in order to provide for more consistent reporting of
contracts as either freestanding derivative instruments subject to SFAS No. 133
in its entirety, or as hybrid instruments with debt host contracts and embedded
derivative features. SFAS No. 149 is effective for contracts entered into or
modified after June 30, 2003, and for hedging relationships designated after
June 30, 2003. The adoption of this statement did not have a significant
impact on the Companys consolidated results of operations or financial
position. On May 15, 2003, FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity, which
establishes standards for classifying and measuring as liabilities certain
freestanding financial instruments that embody obligations of the issuer and
have characteristics of both liabilities and equity. The statement defines an
obligation as a conditional or unconditional duty or responsibility on the
part of the issuer to transfer assets or to issue its equity shares. SFAS No.
150 is effective for all financial instruments created or modified after May
31, 2003, and otherwise effective at the beginning of the first interim period
beginning after June 15,
2003. The adoption of this statement did not have a significant impact on the
Companys consolidated results of operations or financial position. In December 2003, FASB revised SFAS No. 132, Employers Disclosures about
Pensions and Other Postretirement Benefits  an amendment of FASB Statements
No. 87, 88, and 106. This statement revises employers disclosures about
pension plans and other postretirement benefit plans to provide more
information about pension plan assets, obligations, benefit payments,
contributions, and net benefit cost. This Statement retains the disclosures
required by the originally issued SFAS No. 132 and requires further
disclosures, including information describing the types of plan assets,
investment strategy, measurement date(s), plan obligations, cash flows, and
components of net periodic benefit cost recognized during interim periods.
SFAS No. 132 (revised 2003) is effective for financial statements with fiscal
years ending after December 15, 2003, except for disclosure of information
about foreign plans and disclosure of estimated future benefit payments, which
are effective for fiscal years ending after June 15, 2004.




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##### 



CRITICAL ACCOUNTING POLICIES The Companys significant accounting policies are disclosed in Note 1 of Notes
to Consolidated Financial Statements. The preparation of financial statements
in conformity with accounting principles generally accepted in the United
States requires that management use judgments to make estimates and assumptions
that affect the amounts reported in the financial statements. As a result,
there is some risk that reported financial results could have been different
had other methods, assumptions, and estimates been used. The Company believes that of its significant accounting policies, the following
may involve a higher degree of judgment and complexity in preparing its
consolidated financial statements. Revenue Recognition The Company accounts for arrangements that include software in accordance with
American Institute of Certified Public Accountants Statement of Position
(SOP) No. 97-2, Software Revenue Recognition. The application of SOP No. 97-2
requires judgment, including whether a software arrangement includes multiple
elements, and if so, whether vendor-specific objective evidence (VSOE) of
fair value exists for those elements. Changes to the elements in a software
arrangement, the ability to identify VSOE for those elements, the fair value of
the respective elements, and changes to a products estimated life cycle could
materially impact the amount of earned and unearned revenue. For arrangements with multiple elements, the Company allocates revenue to each
element of a transaction based upon its fair value as determined by VSOE. VSOE
of fair value for all elements of an arrangement is based upon the normal
pricing and discounting practices for those products and services when sold
separately. The Company defers revenue for any undelivered elements, and
recognizes revenue when the product is delivered or over the period in which
the service is performed, in accordance with the Companys revenue recognition
policy for such element. If the Company cannot objectively determine the fair
value of any undelivered element included in bundled software and service
arrangements, including implied maintenance and specified upgrades, the Company
defers revenue until all elements are delivered and services have been
performed, or until fair value can objectively be determined for any remaining
undelivered elements. When the fair value of a delivered element has not been
established, the Company uses the residual method to record revenue if the fair
value of all undelivered elements is determinable. Under the residual method,
the fair value of the undelivered elements is deferred and the remaining
portion of the arrangement fee is allocated to the delivered elements and is
recognized as revenue. IMGS, ISG, and IPS derive a significant portion of revenue from contracts
accounted for by the percentage-of-completion method with contractual terms
generally fixed. The Company regularly
reviews its progress on these contracts and reviews the estimated costs of
fulfilling its obligations. If the Company does not accurately estimate the
resources required or the scope of the work to be performed, or does not manage
these contracts properly within the planned periods of time or satisfy its
obligations under the contracts, then future revenue and margins may be
significantly and negatively affected, or losses on existing contracts may need
to be recognized. Any resulting reductions in revenues, margins, or contract
losses could be material to the Companys results of operations.




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##### 



Maintenance and services are provided on both an as needed and long-term basis.
Maintenance and services provided outside a maintenance contract are on an as
requested basis and revenue is recognized as the services are provided.
Revenue for maintenance and services provided on a long-term basis is
recognized ratably over the terms of the contract. Professional services revenues include fee-based implementation and consulting
services. These services are often billed on a time-and-materials basis. The
Company recognizes such professional services revenues as related services are
rendered. The Company evaluates arrangements with governmental entities containing
fiscal funding or termination for convenience provisions, where such
provisions are required by law, to determine the probability of possible
cancellation. If such a determination cannot be made, revenue is recognized
upon the earlier of cash receipt or approval of the applicable funding
provision by the governmental entity. Capitalized Software The Company capitalizes certain product development costs incurred after the
technological feasibility of new software products has been established and
amortizes these costs on a straight-line basis once revenues begin to be
generated by these products. Though the Company regularly reviews its
capitalized development costs to ensure recognition of any decline in value, it
is possible that, for any given product, revenues will not materialize in
amounts anticipated due to industry conditions that include price and
performance competition, or that products will have shorter lives. Should
these events occur, the carrying amount of capitalized development costs would
be reduced, producing adverse effects on the Companys systems margin and
results of operations. The Company routinely assesses projects in process and
associated costs capitalized for any net realizable value concerns. Based on
this assessment, the Company decided to cease further capitalization for
certain projects and increase product development expense by $12.2 million,
$10.5 million, and $8.6 million, in 2003, 2002, and 2001, respectively. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Impact of Currency Fluctuations and Currency Risk International markets, particularly Europe and Asia, are important to the
Company. The Companys operations are subject to and may be adversely affected
by a variety of risks inherent in doing business internationally, such as
government policy restrictions, worldwide political conditions, currency
exchange fluctuations, and other factors. Fluctuations in the value of the U.S. dollar in international markets can have
a significant positive or negative impact on the Companys results of
operations. For 2003, approximately 47% of the Companys revenue was derived
from customers outside the United States, primarily through subsidiary
operations. Most subsidiaries sell to customers and incur and pay operating
expenses in local currencies. These local currency revenues and expenses are
translated into U.S. dollars for reporting purposes. A stronger U.S. dollar
will decrease the level of reported U.S. dollar orders and revenues, decrease
the U.S. dollar gross margin, and decrease reported U.S. dollar operating
expenses of the international subsidiaries. A weaker




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##### 



U.S. dollar will have the
opposite impact. The Company estimates that the weakening of the U.S. dollar
in its international markets improved its results of operations by
approximately $0.15 per share (diluted) in 2003. For 2002, the Company
estimated that the weakening of the U.S. dollar positively impacted its results
of operations by approximately $0.04 per share (diluted), and for 2001, the
strengthening of the U.S. dollar adversely impacted its results of operations
by approximately $0.08 per share (diluted). The Company estimates that the result of a uniform 10% strengthening in the
value of the U.S. dollar relative to the currencies in which the Companys
sales are denominated would result in a decrease in earnings of approximately
$6 million for the year ended December 31, 2003. Likewise, a uniform 10%
weakening in the value of the U.S. dollar would result in increased earnings of
approximately $7 million. This calculation assumes that each exchange rate
would change in the same direction relative to the U.S. dollar. In addition to
the direct effects of changes in exchange rates, exchange rate fluctuations may
also affect the volume of sales and foreign currency sales prices. The
Companys estimation of the effects of changes in foreign currency exchange
rates does not consider potential changes in sales levels or local currency
prices. See Note 15 of Notes to Consolidated Financial Statements for a
summary of the Companys revenues by geographic area. The Company conducts business in all major markets outside the United States,
but the most significant of these operations with respect to currency risk are
located in Europe and Asia. Local currencies are the functional currencies for
the Companys Canadian subsidiaries, a Japanese subsidiary, and all but one of
the Companys European subsidiaries. The U.S. dollar is the functional
currency for all other international subsidiaries. See Note 1 of Notes to
Consolidated Financial
Statements for a description of the Companys policy for managing the currency
risks associated with its international operations. In 2003, the Company recorded a net foreign exchange loss of $1.4 million, as
compared to a net foreign exchange gain of $277,000 in 2002, and a net foreign
exchange loss of $1.5 million in 2001. The Companys exchange loss for 2003
resulted primarily from the unrealized loss on revaluation of euro-denominated
intercompany loans and service fees. The Companys exchange loss for 2001
resulted primarily from the strengthening of the U.S. dollar against the euro,
particularly with respect to euro-denominated intercompany receivables combined
with approximately $715,000 in loss incurred as the result of subsidiary
recapitalizations. At December 31, 2003, the Company had no forward exchange
contracts outstanding. The Company estimates that a uniform 10% strengthening or weakening in the
value of the U.S. dollar relative to the currencies in which such intercompany
receivables and loans are denominated at December 31, 2003, would not result in
a significant loss or improvement in earnings. This calculation assumes that
each exchange rate would change in the same direction relative to the U.S.
dollar. See Notes 1 and 6 of Notes to Consolidated Financial Statements for further
information related to management of currency risk.