SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

_________________

FORM 10-K

ANNUAL REPORT
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2002

Commission File No. 0-27042

ALPHANET SOLUTIONS, INC.

(Exact Name of Registrant as Specified in Its Charter)

7 Ridgedale Avenue, Cedar Knolls, New Jersey 07927

_________________

(Address of Principal Executive Office, including Zip Code)

(973) 267-0088

_________________

(Registrant’s telephone number
including area code)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

Common Stock, $.01 par value

(Title of Class)

     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes          X                            No.                

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

     Indicate by check mark whether registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange act of 1934).      Yes                                      No.          X      

     The aggregate market value of the registrant's common stock held by non-affiliates of the registrant, computed by reference to the price at which the common stock was last sold, or the average bid and asked price of such common stock, as of the last business day of the registrant's most recently completed second fiscal quarter, is $6,335,752.

     At February 28, 2003, 6,388,188 shares of the registrant's common stock were outstanding.

TABLE OF CONTENTS

PART I

Item 1.     Business.

General

        AlphaNet Solutions, Inc. is an information technology (IT) professional services firm providing a range of outsourced solutions in two major IT practice areas: IT Operations and Learning Solutions. IT Operations includes: AlphaNet Technology and Outsourcing Solutions^SM, which delivers IT projects and services around networks, servers, desktops, storage, and information security; and AlphaNet Service Desk Solutions^SM, which delivers services such as monitoring, management, hosting, and helpdesk support for a wide variety of applications. AlphaNet Learning Solutions^SM offers advanced technical training and management development training through custom training programs, classroom instruction, and certification programs. Together, these solutions help our clients reduce costs and create value by leveraging our IT expertise rather than developing their own in-house capabilities.

        Our company was incorporated in the State of New Jersey in 1984 under the name AlphaTronics Associates, Inc. In December 1995, we changed our name to AlphaNet Solutions, Inc. The address of our principal executive offices is 7 Ridgedale Avenue, Cedar Knolls, New Jersey 07927, and our telephone number is (973) 267-0088.

        Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished to the Securities and Exchange Commission are available free of charge on our Internet website, www.alphanetsolutions.com, under “Investor Info”, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission.

        “AlphaNet Solutions,” “AlphaNet Technology and Outsourcing Solutions,” “AlphaNet Service Desk Solutions,” “AlphaNet Learning Solutions,” “FlexiMon,” and our logo are marks of our company. All other trade names, trademarks or service marks appearing in this Annual Report on Form 10-K are the property of their respective owners and are not the property of our company.

Forward Looking Statements

        Certain statements are included in this Annual Report on Form 10-K which are not historical and are “forward-looking” within the meaning of The Private Securities Litigation Reform Act of 1995 and may be identified by such terms as “continuing,” “plan,” “goal,” “expect,” “believe,” “may,” “will,” and “intend” or similar terms. These forward-looking statements may include, without limitation, statements regarding possible future growth in the IT markets, the status of the trends favoring outsourcing of management information systems (MIS) functions by large and mid-sized companies, the anticipated growth and higher margins in the professional services component of our business, the timing of the development and implementation of our company’s new service offerings and the utilization of such services by our customers, and trends in future operating performance. Such forward-looking statements are subject to risks and uncertainties, including, without limitation:

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        These risks and uncertainties could cause actual results to differ materially from results expressed or implied by forward-looking statements contained in the document. These forward-looking statements speak only as of the date of this document.

Industry Background

        Information Technology (IT) has become increasingly critical to business success. The rapidly changing IT landscape requires organizations to implement, utilize, and maintain systems offering varied levels of reliability, scalability, availability, and manageability. The following client and industry trends are influencing the current direction of IT:

Client Trends:

IT Operations

        Our IT Operations practice is comprised of AlphaNet Technology and Outsourcing Solutions and AlphaNet Service Desk Solutions.

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AlphaNet Technology and Outsourcing Solutions^SM

        AlphaNet Technology and Outsourcing Solutions delivers IT operations services around networks, servers, desktops, security, and storage. These services are delivered via selective outsourcing agreements or on a project basis. We provide a broad range of professional services, including:

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Learning Solutions

AlphaNet Learning Solutions^SM

        Our AlphaNet Learning Solutions practice is comprised of advanced technical training and management development programs. Courses are offered by arrangement at clients’ facilities, via the Internet, or at our three Learning Centers, located in Princeton, Metro Park, and Cedar Knolls, New Jersey. Our Learning Centers are Prometric Authorized Testing Centers, which provide independent testing services for industry certifications.

Advanced Technical Training

        We are authorized and certified by Microsoft, Novell, and Citrix, to offer training classes related to these vendors’ respective technologies. Training classes are utilized by a variety of customers, including network administrators, MIS executives, professional and administrative end-users, as well as our own employees. Many of the courses offered provide attendees with the knowledge to earn specific professional certifications.

Management Development Programs

        We offer management development programs that help participants develop general management skills. Instruction includes courses in project management, communication effectiveness, teambuilding, sales effectiveness, leadership, risk management, and change management. Attendees at these courses primarily include mid- and upper-level managers.

        Our advanced technical training and management development programs are largely attended by private enterprise professionals from mid-and upper-management. We have increased our offerings of private custom corporate classes, which allows us to tailor training specifically to meet the needs of our clients. At the same time, we have decreased our schedule of programs available to the public in response to a constriction in demand for public training classes as a result of the general economic downturn.

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        We are a leading education affiliate of Boston University, authorized to offer technical, critical skills, and management development programs, including project management training for certification as a project management professional, under Boston University’s continuing education group.

        We are a member of United Training, a national consortium of Microsoft-certified technical education centers offering technology training courses. Through participation in United Training’s National Training Partnership Program, our clients are able to attend training classes at pre-qualified partners’ locations throughout the United States. We offer training at our New Jersey facilities both to our clients and to clients of other members of the United Training consortium.

        AlphaNet Learning Solutions revenue is derived primarily from fees charged to corporate clients for employee training.

        The Learning Solutions practice provides an ancillary benefit to our company by reducing our cost to train our technical workforce while providing us with highly skilled consultants.

Product Sales

        Beginning in 1999, we began to exit from the product and product integration business, which consisted of reselling computer and computer-related products, as well as performing product integration work consisting of custom configuration of computer equipment. In 2002, we completed our exit of this business, and expect that our future business operations will consist of our IT Operations and Learning Solutions practices described above.

Sales and Marketing

        We currently focus our sales and marketing efforts on two target markets: (i) Fortune 1000 companies; and (ii) other large and mid-sized customers. Sales and marketing initiatives were conducted with 19 employees as of December 31, 2002. Our direct sales and support personnel provide account penetration and management, enhanced communications and long-term relationship-building with our existing and potential customers. We focus our sales and marketing efforts primarily in the New York, New Jersey and Philadelphia metropolitan areas. Given the concentration of major corporations in these regions and the trend toward outsourcing of IT services, we do not currently anticipate expanding the geographic scope of our sales efforts.

        Each salesperson’s compensation is commission-based. Sales leads are derived from individual business contacts and customer referrals from strategic partners, as well as available industry research and reports. We also secure leads through internal telemarketing efforts, an outside telemarketing agency, and via subscription to a lead referral program.

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        Our sales efforts are intended to focus on the business drivers of our clients’ technology initiatives. We utilize our experienced senior network engineers and business consultants with our direct sales personnel as part of our team approach to sales. Our sales personnel also participate in training programs designed by manufacturers to introduce their new and upgraded products and provide industry information and sales technique instruction. We believe we maintain a competitive advantage by continually educating our sales force on the latest business and technology sales techniques and through the involvement of high-level business and technical personnel in the sales process.

Customers

Our major customers in 2002 included:

        During 2002, Kraft Foods, Goldman Sachs & Co., Aventis Pharmaceuticals, and MTA New York City Transit accounted for 17%, 12%, 12%, and 10%, respectively, of net sales. During 2001, Goldman Sachs & Co., Kraft Foods, FleetBoston Financial and PSE&G accounted for 15%, 13%, 13% and 11% respectively, of net sales. No other customer accounted for more than 10% of our net sales during the year ended December 31, 2002. Sales to our top ten customers totaled approximately 76%, 76%, and 73% of net sales for the years ended December 31, 2002, December 31, 2001, and December 31, 2000, respectively.

        In December 1997, we entered into a four-year, $20.4 million contract with New York City Transit, an agency of the Metropolitan Transportation Authority of the State of New York (the “MTA”) to project manage, furnish and install local and wide-area computer network components throughout the MTA’s over 200 locations, including subway stations, electrical power substations and a diverse group of train car maintenance facilities. The aggregate amount of this contract was subsequently increased to $20.6 million. See “Management’s Discussion and Analysis of Results of Operations and Financial Condition.” On March 31, 2003, we entered into a settlement agreement with the MTA pursuant to which we agreed to dismiss our appeal in consideration of the MTA’s agreement that: (i) the MTA Contract was completed as of January 31, 2003, subject to warranty claims; (ii) in the event the MTA were to request services, such services will be subject to change order authorizations and negotiated pricing; (iii) we will be paid amounts remaining due under the MTA Contract subject to review and processing by the MTA and satisfactory completion of our warranty obligation, and (iv) liquidated damages due to project delays is $300,000.

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        A significant reduction in our clients’ use of our services could have a material adverse effect on our results of operations. There can be no assurance that our largest customers will continue to use our services, or that use of our services by such customers will continue at their previous levels. Our service contracts generally are terminable upon relatively short notice. There can be no assurance that our service customers will continue to enter into service contracts with us or that existing contracts will not be terminated.

        During 2002, 51% of our business was derived from four clients: Kraft Foods, Goldman Sachs & Co., Aventis Pharmaceuticals and MTA New York City Transit. With the exception of warranty and change-order work, our contract with MTA New York City Transit was concluded effective January 31, 2003. The loss of the business associated with one or more of these clients other than MTA New York City Transit could have a material adverse impact on our business.

Suppliers

        From time to time we retain the services of technical consultants/contractors, either individually or through employment agencies, to help staff our client engagements. As of December 31, 2002, we were using the services of approximately 23 such contractors.

Competition

        The markets for our IT Operations and Learning Solutions services are intensely competitive. We believe that the principal competitive factors in the market include breadth of offerings, price, customer service, technical expertise, the availability of skilled technical personnel, adherence to industry standards, financial stability and reputation. Our competitors include specialty consulting and other IT service providers, established computer product manufacturers, and systems integrators. Many of our current and potential competitors have longer operating histories and financial, sales, marketing, technical and other resources substantially greater than ours. As a result, our competitors may be able to adapt more quickly to changes in customer needs or to devote greater resources to the sale of professional services in our areas of expertise. Such competitors could also attempt to increase their presence in our markets by forming strategic alliances with other competitors or customers of our company, offer new or improved services to our customers, or increase their efforts to gain and retain market share through competitive pricing. As the market for IT services has matured, price competition has intensified and is likely to continue to do so. This has resulted in continued industry-wide downward pricing pressure. Such competition in IT professional services has adversely affected, and may adversely affect, our gross profits, margins and results of operations in the future. We believe there are low barriers to entry into these markets, which enable new competitors to offer competing products and services. The general economic downturn experienced by the IT industry has led to an increase in the availability of seasoned professionals with substantial experience at lower wages and salaries than ever before, thus lowering the barriers to entry into our service market. There can be no assurance that we will be able to continue to compete successfully with existing or new competitors.

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        We believe that we compete effectively by providing expert professional services. We have been a proven resource in the IT industry for over 19 years, have sufficient financial resources, and a significant number of trained and certified engineers and consultants. We also believe that we distinguish ourselves from our competition on the basis of our technical expertise, competitive pricing, direct sales strategy and customer-service orientation. Based on the level of our recurring business with many of our large customers, we believe that we compare favorably to many of our competitors with respect to the principal competitive factors set forth above. There can be no assurance that we will be able to continue to maintain these attributes.

Employees

        As of December 31, 2002, we employed 190 full-time employees, of whom 139 were technical personnel, 19 were engaged in sales and marketing, and 32 were engaged in finance, administrations, and management. As of December 31, 2001, we employed 257 full-time employees, of whom 182 were technical personnel, 22 were engaged in sales and marketing, and 53 were engaged in finance, administration and management. The total number of technical personnel declined from 182 in 2001 to 139 in 2002. We implemented reductions-in-force throughout 2002 due to lower-than-expected demand for technical services.

        None of our employees are represented by a collective bargaining agreement. Substantially all employees have executed an invention assignment and confidentiality agreement. We require that all new employees execute such an agreement as a condition of employment. While there is strong competition for experienced sales and marketing personnel and qualified technical professionals, we believe that we have been successful in attracting and retaining skilled and experienced personnel. We consider our relations with our employees to be good.

        Our success depends in part on our ability to attract, hire, train and retain qualified managerial, technical and sales personnel, particularly for high-end network services. There can be no assurance that we will be successful in attracting and retaining the technical personnel necessary to conduct and expand our operations successfully. Our ability to continue to expand and broaden the service component of our business and improve our results of operations could be materially adversely affected if we are unable to attract, hire, train and retain qualified technical personnel.

Item 2.   Properties.

        We currently lease or sublease all of our facilities. We lease our headquarters in Cedar Knolls, New Jersey, totaling approximately 38,000 square feet of office space. We are currently consolidating and attempting to sublet a portion of our Cedar Knolls facility. There can be no assurance that we will be successful in our efforts to sublease this space. The current lease expires in September 2003 and contains renewal options for two additional five-year terms. In November 2002, we informed the landlord that we do not intend to renew this lease for an additional five-year term and are currently engaged in discussions with the landlord concerning a possible lease extension of shorter duration and a reduction in space. We will continue to evaluate our space needs as our business requirements warrant.

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        We leased additional office space in Cedar Knolls, New Jersey, totaling 4,699 square feet, which we had sublet pursuant to a sublease agreement which expired in November 2002. We did not renew the lease. We lease office space for a Learning Center in Iselin, New Jersey, consisting of 6,710 square feet, which expires in June 2003, and in Princeton, New Jersey, consisting of 1,542 square feet, which expires in December 2003. Other leased office space includes a 3,360-square-foot storage center located in East Hanover, New Jersey. We believe our headquarters, sales offices, Learning Center, and Support Center are adequate to support our current level of operations.

Item 3.   Legal Proceedings.

        In connection with our ongoing disputes with the MTA concerning a contract entered into with the MTA in December 1997, we filed certain legal proceedings as further discussed in Item 7 of this Report.

        On March 4, 2003, we reached settlements in principle with plaintiffs in a lawsuit previously filed by a current and two former employees in New Jersey Superior Court, Bergen County (Law Division) against us and certain of our current and former employees alleging employment-related claims. The parties are currently engaged in the negotiation of definitive settlement agreements. The plaintiffs were seeking compensatory and punitive damages, attorneys’ fees and costs of suit. The litigation was in the early stages of discovery when the settlements in principle were reached through court-ordered mediation. The settlements are covered by insurance.

        We have no knowledge of any other material litigation to which we are a party or to which any of our property is subject.

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

        No matter was submitted to a vote of the security holders during the fourth quarter of the fiscal year ended December 31, 2002.

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PART II

Item 5.   Market for the Company’s Common Equity and Related Shareholder Matters.

        Our common stock is traded on the Nasdaq National Market under the symbol “ALPH.” The following table sets forth, for the periods indicated, the high and low sales prices per share of common stock as reported by the Nasdaq National Market.

        The prices shown above represent quotations among securities dealers, do not include retail markups, markdowns or commissions and may not represent actual transactions.

        On February 28, 2003, the closing sale price for our common stock on the Nasdaq National Market was $1.30 per share. As of February 28, 2003, the approximate number of holders of record of our common stock was 284 and the approximate number of beneficial holders of our common stock was 2,030.

        Since going public in 1996, we have not paid any dividends.  

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Item 6.   Selected Financial Data.

        The selected consolidated financial data presented below has been derived from our consolidated financial statements as audited by PricewaterhouseCoopers LLP, independent accountants. Consolidated balance sheets at December 31, 2002 and 2001 and the related consolidated statements of operations, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2002 and notes thereto appear elsewhere in this Report. The selected financial data for the years ended December 31, 1999 and 1998 has been derived from audited financial statements which are not included in this Report.

        The selected consolidated financial data set forth below should be read in conjunction with, and is qualified in its entirety by our consolidated financial statements, related notes and other financial information included elsewhere in this Annual Report on Form 10-K.

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In 2002, we recorded charges relating to severance paid to professional service employees in the amount of $191,000. In 2001, we recorded charges relating to severance paid to professional service employees in the amount of $342,000.

In 2000, we recorded charges of $4.9 million which included a $4.4 million charge for our estimated cost to complete our contract with the MTA, and $0.5 million associated with unrecoverable vendor charges, and in 2002, we reduced these liabilities by approximately $0.6 million, of which $0.5 million related to a settlement with the New York City Transit Authority and $0.1 million related to vendor charges associated with the discontinuation of our product business.

In 2002, we incurred net charges totaling $0.8 million, consisting of $0.4 million of severance and other compensation payments, $0.1 million relating to the consolidation of our distribution and configuration facility, and $0.6 million in sales recruiting and consulting costs, less $0.3 million relating primarily to a reduction in liabilities due to the discontinuation of our product business. In 2001, we incurred charges totaling $1.6 million, consisting of $1.0 million of severance and other compensation payments, $0.3 million of facility consolidation costs, and $0.3 million in consulting costs. In 2000, charges totaled $1.9 million and included $1.2 million of severance and other special compensation payments, and $0.7 million relating to a provision for uncollectable accounts receivable related to, among other things, various receivables from our telecom business, which was sold in that year. In 1999, we recorded a provision for uncollectible accounts receivable of $1.5 million, relating to one significant customer.

In 2001, we wrote-off our legacy product business goodwill relating to the Lande, Lior, and Omnitech acquisitions.

Reflects a write-off in 1998 of capitalized software and consulting fees associated with our termination of an integrated accounting software program and implementation thereof. In 1999, we were successful in recovering $139,000 of such costs.

In January 2000, we acquired a 30% equity interest (on an as converted basis) in nex-i.com Inc. (“nex-i.com”) for $1.8 million and in May 2000 incurred an additional cost of $416,000 from the issuance of warrants to an advisor in connection with such investment. Our equity interest in nex-i.com was subsequently reduced as a result of an additional financing of nex-i.com in July 2000, in which we did not participate. During 2000, we recognized losses to the extent of our investment based upon our preferred stock funding interest and such losses amounted to approximately $2.2 million. In February 2001, a wholly-owned subsidiary of Eureka Broadband Corporation, a Delaware corporation (“Eureka”), merged with and into nex-i.com, in connection with which merger we received a series of preferred securities of Eureka in exchange for our equity securities of nex-i.com and loaned $382,000 to Eureka. In July 2001, the Preferred Securities and Loan were converted to common stock. We wrote-off the investment of $382,000 in the fourth quarter of 2001 after Eureka’s principal operations were negatively impacted by the events of September 11, 2001.

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In August 2001, certain of our employees joined EDS, L.L.C. in connection with the selection of EDS, L.L.C. as a provider of Help Desk services previously provided by us to one of our customers. We recorded fees received from EDS in connection with its hiring of such employees amounting to approximately $0.4 million; and such fees were recorded as other income. In the third quarter of 2000, we recorded a gain of $370,000 relating to the settlement of litigation related to a receivable.

In 2002, we recognized a total federal income tax benefit of $4.4 million, including a reduction in our federal income tax valuation allowance of $3.3 million.

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

General

        We are an information technology (IT) professional services firm providing a range of outsourced solutions in two major IT practice areas: IT Operations and Learning Solutions. Our IT Operations include: AlphaNet Technology and Outsourcing Solutions^SM, which delivers IT projects and services around networks, servers, desktops, storage, and information security; and AlphaNet Service Desk Solutions^SM, which delivers services such as monitoring, management, hosting, and helpdesk support, via its operations center, for a wide variety of applications. AlphaNet Learning Solutions^SM offers advanced technical training and management development training through custom training programs, classroom instruction, and certification programs. Together, these solutions help our clients reduce costs and create value by leveraging our IT expertise rather than developing their own in-house capabilities.

        Over the past few years, ending in 2002, we have shifted our business model from a product reseller and integration business to a model that focuses on higher-margin professional services. As a result of this shift, our product sales and integration services declined significantly. In 2001, we wrote off goodwill of $1.9 million related to the product business in accordance with the provisions of SFAS 121.

        In 2002, we continued to face reduced manpower requirements due to an industrywide shift in IT spending, including a pronounced slowdown in IT spending, principally resulting from the continued economic downturn. In 2002, we reduced the number of our full-time employees from approximately 250 employees at January 1, 2002 to 190 employees at December 31, 2002 as a result of our reduced revenue stream.

        Many companies reduced their IT expenditures in 2002 due to the continuing economic downturn. This reduction adversely impacted our business, particularly our IT staffing and professional services operations. We have responded to these challenges by eliminating non-core service offerings and focusing on our core competencies in IT operations and learning solutions, with particular emphasis on outsourcing solutions to help meet our clients’ technology and management development needs in a more cost-effective manner. We have also focused on revenue generation by rebuilding our sales force, implementing improved sales management processes and revamping our organizational structure, sales compensation and incentive programs to better align our practice groups and compensation metrics with our goals of revenue growth, client satisfaction and professional staff utilization levels.

        Our cost of sales includes primarily, in the case of product sales, the cost to us of products acquired for resale and, in the case of professional services revenue, salaries and related expenses for billable technical personnel. Our selling, general and administrative costs consist of operating expenses. The most significant operating expense is personnel and related costs. Personnel costs include direct sales, marketing and sales support, executive management, practice executives, and general and administrative personnel costs.

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        During the last three fiscal years, due to increased operational efficiencies, our gross margins earned on professional services revenues increased to 30.8% for 2002 from 28.4% for 2001 and 28.9% for 2000. We believe that our ability to provide a broad range of technical services, coupled with our long-term relationships with large customers, provide us with the potential to grow our professional services business.

        Our net sales, gross profit, operating income and net income and losses have varied substantially from quarter to quarter and are expected to do so in the future. Many factors, some of which are not within our control, have contributed and may in the future contribute to fluctuations in operating results. These factors include:

        Our operating results have been, and we expect that they will continue to be, impacted by changes in technical personnel billing and utilization rates. Many of our costs, particularly costs associated with professional services and revenue, such as administrative support personnel and facilities costs, are primarily fixed costs. Our overall expense levels are based in part on expectations of future revenues.

Critical Accounting Policies and Estimates

        Our company makes certain judgments and estimates in preparing our financial statements. The most significant accounting policies and estimates include revenue recognition policies, and estimates, such as assessing the collectibility of accounts receivable, the realizability of tax assets, MTA contract costs and the carrying value of goodwill. Actual results could differ from those estimates.

Revenue Recognition 

        Professional service revenue is recognized when the applicable services are rendered. We recognize revenue on service contracts on a prorated basis over the life of the contracts. Revenues under our contract with the MTA are recognized on the percentage-of-completion method based on total costs incurred relative to total estimated costs. Fees related to our training programs are recognized over the duration of the applicable training program or when our contractual obligation expires. We recognize sales of products when title and risk of loss pass to the customer, which takes place either when the products are shipped or upon delivery to the customer based upon the sales terms of the respective transactions.

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MTA Contract 

        In December 1997, we entered into a $20.4 million contract with the MTA (the “MTA Contract”) to furnish and install local and wide-area computer network components, including network and telecommunications hardware, software and cabling throughout the MTA’s over 200 locations. The aggregate amount of the MTA Contract was subsequently increased to $20.6 million. We have been the prime contractor on this project with responsibility for project management, systems procurement, and installation. The work provided is in contiguous locations and payment, including a contractually-mandated holdback equal to 5% of total contract value for one year following completion of the contract, is predicated upon achieving specific milestone events. In the event of default, in addition to all other remedies at law, the MTA reserved the right to terminate our services and complete the MTA Contract itself at our cost. In the event of our unexcused delay, under terms of the contract, we may be obligated to pay, as liquidated damages, the sum of $100 to $200 per day, per site. The MTA Contract is a fixed unit price contract, and the quantities are approximate, for which the MTA has expressly reserved the right, for each item, to direct the amount of equipment and related installation be increased, decreased, or omitted entirely on 30 days notice. The MTA has the right to suspend the work on 10 days notice for up to 90 days and/or terminate the contract, at any time, on notice, paying only for the work performed to the date of termination. The project is subject to the prevailing wage rate and classification for telecommunications workers, as determined by the New York City Comptroller’s office, over which we have no control, and which is generally adjusted in June of each year.

        We performed services and supplied products to the MTA since the inception of the MTA Contract. The work performed at MTA sites has required greater than the originally estimated labor and other costs to complete. In May 1999, we submitted a formal request to the MTA for equitable adjustment in the amount of approximately $1.5 million and for a time extension. This request was supplemented with a further submission in October 1999. In January 2000, the Project Manager for the MTA Contract denied our request, thereby triggering our right under the contract to appeal the Project Manager’s denial to the MTA’s Dispute Resolution Office (the “DRO”). We filed a Notice of Appeal with the DRO in February 2000, and pursuant to the DRO’s request, filed further written submissions and participated in an arbitral session with the DRO subsequent thereto. In November 2000, the DRO rendered a written decision denying in full our Request for Equitable Adjustment and Time Extension. Pursuant to the terms of the MTA Contract, in March 2001, we appealed the DRO’s denial of our Request to the New York Supreme Court (the “Court”). On April 22, 2002, the Court rendered it decision on our appeal, denying all of our claims for review of the determination made by the DRO. On May 31, 2002, we filed an appeal of this decision with the New York Supreme Court, Appellate Division. In February 2003 we perfected this appeal through the filing of brief with the New York Supreme Court, Appellate Division.

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        On March 31, 2003, we entered into a settlement agreement with the MTA, pursuant to which we agreed to dismiss our appeal in consideration of the MTA’s agreement that: (i) the MTA Contract was completed as of January 31, 2003, subject to warranty claims; (ii) in the event the MTA were to request services, such services will be subject to change order authorizations and negotiated pricing; (iii) we will be paid amounts remaining due under the MTA Contract subject to review and processing by the MTA and satisfactory completion of our warranty obligation; and (iv) liquidated damages due to project delays is $300,000.

        On July 19, 2000, the MTA advised us of a determination by the Bureau of Labor Law (the “Bureau”) of the New York City Comptroller’s office, communicated to the MTA by letter from the Bureau dated June 22, 2000, that, as of July 1, 2000, the labor classification for all low voltage cabling carrying voice, data, video, or any combination thereof, is electrician. The Bureau’s determination is based on a New York State Supreme Court Appellate Division decision dated May 18, 2000. The workers we currently and historically used to perform cabling work have been classified as telecommunication workers. We believe it is probable that the Bureau’s determination will apply to our cabling activities under the contract, thereby likely requiring the reclassification of its telecommunications workers as electricians retroactive to July 1, 2000. Since the prevailing wage for electricians is substantially higher than that for telecommunications workers, we expect to incur materially increased labor costs as a result of the Bureau’s determination. On October 16, 2000, the MTA Project Manager denied our request for a change order to compensate us for the increased costs we expect to incur in connection with the reclassification of certain of our telecommunications workers as electricians. On January 19, 2001, we initiated a “dispute” within the meaning of the applicable federal regulations governing the MTA Contract by filing a complaint with the United States Department of Labor (the “Department of Labor”). In its complaint, we requested that the Department of Labor adjudicate this dispute and either issue a determination affirming that the prevailing wage rate for telecommunications workers, as originally specified by the MTA, is the applicable rate for this project, or directing the MTA to compensate us for the change in wage classification made during the performance of the contract in violation of federal regulations. By letter dated March 12, 2001, the Department of Labor advised us that, without knowing which, if any, federal wage decision was included in the MTA Contract, it is unable to make a determination that any violation of federal labor law has occurred.

        On February 12, 2002, we were informally advised by the Department of Labor that the Department has concluded that no federal wage determinations were included or required to be included in the MTA Contract because the project has insufficient federal funding to trigger the federal wage regulations. The Department of Labor asserts that our claim is not one which is governed by federal regulation or one over which the Department is willing to exercise jurisdiction.

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        On April 23, 2002, we received a letter from the Department of Labor dated April 9, 2002 stating that the Department does not have jurisdiction over the dispute because it was advised by the New York City Comptroller’s office that no federal funds were provided for the MTA Contract. We have been advised that there are legitimate grounds on which the Department of Labor’s position, as well as the above-referenced wage reclassification may be challenged. In March 2003, we met with the Comptroller’s office to discuss this matter and are currently evaluating an appropriate course of action. There can be no assurance we will be successful, either in whole or in part, in our efforts.

        Based upon the settlement of the MTA contract disputes and our current estimate for our warranty obligation and the labor wage rate matter discussed above, we reduced our MTA contract-related reserves by $500,000 in the fourth quarter of 2002.

Goodwill 

        In September 2001, we acquired certain of the assets of the ICM Education Division of Computer Horizons Corp. for $510,950 in cash. The acquisition was accounted for as a purchase and was included in our Results of Operations in the period ended September 30, 2001. In accordance with this purchase agreement, we made a post-closing adjustment and recorded additional goodwill of $135,000 in connection with the acquisition in the third quarter of 2002.

        In accordance with the provisions of Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” we evaluated the recoverability of the goodwill associated with this acquisition. We used publicly available information to estimate the fair value of this business, as well as estimated the future discounted cash flows of this business. Based upon this review, we concluded that no impairment loss existed at December 31, 2002. The most critical element of this estimate relates to our ability to sustain sufficient revenues associated with this business. The market for training services is highly competitive, and we are investing our resources to enhance the business prospects of this operation. If these investments are not successful, or other factors cause a reduction in training revenues, or increase in costs associated with this business, a future impairment loss may be recognized.

Income Taxes

        The Company has provided a valuation allowance against its deferred tax assets due to the uncertainty of their realization. At such time as it is determined that it is more likely than not that the deferred tax assets are realizable, the valuation allowance will be reduced. The reduction in the valuation allowance could have a material positive affect on our net results in the period in which such determination is made. In addition, our effective tax rate would likely increase significantly in periods subsequent to the initial reversal of the valuation allowance.

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Accounts Receivable

        The Company regularly reviews the collectibility of accounts receivable due from clients. It makes estimates of expected realization of these assets. There can be no assurance that additional charges will not be required as a result of future reviews.

Results of Operations 

        The following table sets forth, for the periods indicated, certain financial data as a percentage of net sales, and the percentage change in the dollar amount of such data compared to the prior year:

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Comparison of Years Ended December 31, 2002 and 2001

        Net Sales:  Net sales decreased by $26.0 million to $25.9 million for the 12 months ended December 31, 2002, from $51.9 million for the 12 months ended December 31, 2001. The decrease of $26.0 was primarily due to a reduction in product sales of $12.8 million and a reduction in professional service revenues of $13.2 million. The decline in product sales is attributable to our decision to exit the product business due to the low margins associated with that business. The downturn in technology spending has adversely impacted our professional service revenues. Increased competition, including from such firms as Siemens, EDS, and IBM Global Services, as well as smaller, local and regional firms, has resulted in significant reductions in the services we provide to certain of our key customers. We have been unable to secure sufficient new projects to offset this decline and, accordingly, our professional service revenues have declined. Revenue under the MTA contract (consisting of both product and services) amounted to approximately $2.6 million and $3.7 million for the years ended December 31, 2002 and 2001, respectively.

         Gross profit: Gross profit decreased by $4.4 million to $7.8 million for the 12 months ended December 31, 2002, from $12.2 million for the 12 months ended December 31, 2001. In 2002, gross profit was favorably impacted from adjustments in the aggregate amount of $569,000 associated with the settlement of contract disputes with the MTA which resulted in a reduction of recorded contract liabilities of $500,000, and a reduction of liabilities of $69,000 related to vendor charges due to the discontinuation of our product business. This decrease was attributable to the decline in both product sales and professional service revenue during the 12 months ended December 31, 2002. Gross profit increased by 6.9% to 30.3% in the 12 months ended December 31, 2002, up from 23.4% in the 12 months ended December 31, 2001. The gross profit percentage on product sales, without the benefit of the vendor liability adjustment, decreased by 5.2% to 6.9% in the 12 months ended December 31, 2002, down from 12.1% in the 12 months ended December 31, 2001. Professional service gross profits, without the benefit of the MTA contract liability adjustment, increased by 2.4% to 30.8% in the 12 months ended December 31, 2002, up from 28.4% in the 12 months ended December 31, 2001, as a result of increased operational efficiencies. As a result of the reduction in professional service revenues, we reduced our billable staff and incurred $191,000 of severance compensation costs during the 12 months ended December 31, 2002, as compared to $342,000 of severance compensation during the 12 months ended December 31, 2001.

        Selling, general and administrative expenses: Selling, general, and administrative expenses decreased by $4.8 million to $11.7 million in the 12 months ended December 31, 2002, down from $16.5 million in the 12 months ended December 31, 2001. Selling, general, and administrative expenses in the 12 months ended December 31, 2002 included $353,000 of severance costs, $625,000 relating to business consulting and sales recruiting costs, $65,000 relating to the closure of our product distribution and configuration facility, and a reduction of expenses of $301,000 relating primarily to a reduction in liabilities due to the discontinuation of our product business. Selling, general, and administrative expenses in the 12 months ended December 31, 2001 included $953,000 of severance costs, $284,000 relating to business consulting and sales recruiting costs, $355,000 of facility consolidation costs.

        Other income and expenses, net: Other income and expenses consisted of interest income of $357,000 and $10,000 in miscellaneous income in the year ended December 31, 2002. Other income consisted of interest income of $743,000 in the year ended December 31, 2001 and $417,000 in fees received from the transfer of certain employees to EDS, L.L.C. offset by our write-off of our investment in Eureka Broadband Corporation of $382,000 after its principal operations were negatively impacted by the events of September 11, 2001.

        Provision for income taxes: In the year ended December 31, 2002, we recorded net federal income tax benefits of $4.4 million, including a reduction of the federal income tax valuation allowance of $3.3 million. We were able to recognize this benefit as a result of changes enacted to the Internal Revenue Code in the first quarter of 2002. We received $1.8 million of this benefit from the Internal Revenue Service in September 2002, and expect to receive the remaining $2.6 million in the third quarter of 2003. In the year ended December 31, 2001, we recorded a $2.2 million tax benefit, and income tax valuation allowance of $2.2 million.

Comparison of Years Ended December 31, 2001 and 2000

        Net sales: Net sales in the year ended December 31, 2001 of $51.9 million decreased 42.5%, or $38.4 million, from net sales of $90.3 million in the year ended December 31, 2000. We had been continuing to focus on migration to a professional services company. As a result, revenue from sales of products as a percentage of overall revenues had declined from 48.7% in 2000 to 30.4% in 2001, while professional services revenues as a percentage of overall revenues had increased from 51.3 % in 2000 to 69.6% in 2001. Professional services revenue in 2001 of $36.1 million decreased 22.2%, or $10.3 million, from $46.4 million in the prior year. Product sales in 2001 of $15.8 million decreased 64.1%, or $28.2 million, from $44.0 million in the prior year. Our primary sales effort had been directed at selling professional services, and product sales were offered on a select basis as a supplement to the professional services offerings. Revenue under the MTA Contract (consisting of both product and services) amounted to approximately $3.7 million and $5.3 million for the years ended December 31, 2001 and 2000, respectively.

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        Gross profit: Gross profit in the year ended December 31, 2001 of $12.2 million decreased 0.8%, or $0.1 million, from gross profit of $12.3 million in the year ended December 31, 2000, increasing as a percentage of revenues to 23.4% in 2001 from 13.6% in 2000. The increase in the gross profit percentage was attributable to selective product sales with higher margins, an increase in professional service margins and nonrecurring other charges of $4.9 million in 2000. Gross profit from professional services activities in 2001 of $10.3 million decreased 23.1%, or $3.1 million, from $13.4 million in 2000 and decreased as a percentage of services and support revenues to 28.4% in 2001 from 28.9% in 2000. We recorded $0.3 million of severance in 2001. Gross profit from product sales in 2001 of $1.9 million decreased 50.0%, or $1.9 million, from $3.8 million in 2000, while increasing as a percentage of product sales to 12.1% in 2001 from 8.5% in 2000.

        Selling, general and administrative expenses: Selling, general and administrative expenses in the year ended December 31, 2001 of $16.5 million decreased 31.3%, or $7.5 million, from $24.0 million in the year ended December 31, 2000. In 2001, we recorded charges totaling $1.6 million, which included $1.0 million of severance and other special compensation payments, $0.3 of facility consolidation costs and $0.3 million in consulting costs. In 2000, we recorded charges totaling $1.9 million, consisting of $1.2 million of severance and other special compensation payments, and $0.7 million relating to a provision for uncollectible accounts receivable related to, among other things, various receivables for our telecom business, divested during 2000. 

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        Goodwill write-off: In the fourth quarter of 2001, we wrote off our product business goodwill of $1,874,000.

        Other income, net: Other income consisted of interest income of $743,000 in the year ended December 31, 2001, and $417,000 in fees received from the transfer of certain employees to EDS, L.L.C., offset by our write-off of our investment in Eureka Broadband Corporation of $382,000. In 2000, other income consisted of interest income of $1.1 million and $370,000 associated with the settlement of litigation. Interest income decreased from 2000 as a result of lower interest rates.

        Eureka Broadband Corporation: In February 2001, a wholly-owned subsidiary of Eureka Broadband Corporation, merged with and into nex-i.com, in connection with which we received a series of preferred securities of Eureka Broadband Corporation in exchange for our equity securities of nex-i.com and loaned $382,000 to Eureka. The preferred securities and loan were converted to common stock of Eureka Broadband Corporation in July 2001. In the fourth quarter, we wrote off the investment we held in the common stock in the amount of $382,000.

        Provision for income taxes: In the year ended December 31, 2001, we recorded a $2,248,000 tax benefit, and income tax valuation allowance of $2,248,000. The provision for income taxes in the year ended December 31, 2000 was $474,000 reflecting income tax benefits of $4,979,000 reduced by a valuation allowance of $5,453,000.

Risk Factors: 

        We offer professional services in our IT Operations and Learning Solutions practices. Services revenue is recognized as such services are performed. Most of our services are billed on a time-and-materials basis. Our advanced technical training and management development training services are fee-based on a per-course basis. Generally, our service arrangements with our customers may be terminated by such customers with limited advance notice and without significant penalty. The most significant cost relating to the services component of our business is personnel costs which consist of salaries, benefits, payroll-related expenses and training and recruiting costs. Thus, the financial performance of our service business is based primarily upon billing margins (billable hourly rates less the cost to us of such service personnel on an hourly basis) and utilization rates (billable hours divided by paid hours).

        Our business has been significantly impacted by the multi-year downturn in spending for information technology professional services. This downturn, coupled with increased competition from other IT professional services providers and the increased supply of competent IT professionals available to our customers, has resulted in significant reductions in the services we provide to customers. For these reasons, in 2002 our professional service revenues have continued to decline and there can be no assurance that these negative trends will not persist.

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        Portions of our service revenue are derived from fixed-fee projects, under which we assume greater financial risk if we fail to accurately estimate the costs of projects. We assume greater risk on fixed-fee projects than on time-and-material projects. If a miscalculation for resources or time occurs on fixed-fee projects, the costs of completing these projects may exceed the price, which could result in a loss on the project and a decrease in net income. We recognize revenue from fixed-fee projects based on our estimate of the percentage of each project completed in a reporting period.

        Our common stock is quoted on the Nasdaq National Market System. There has been substantial volatility in the market price of our common stock. The trading price of our common stock has been, and is likely to continue to be, subject to significant fluctuations in response to variations in quarterly operating results, the gain or loss of significant contracts, changes in management, general trends in the industry, recommendations by industry analysts, and other events or factors. In addition, the equity markets in general have experienced extreme price and volume fluctuations which have affected the market price of our common stock, as well as the stock of many technology companies. Often, price fluctuations are unrelated to operating performance of the specific companies whose stock is affected.

        Due to our reliance on a small number of key accounts, our revenues are subject to sharp fluctuations which can be difficult to forecast. During 2002, 51% of our business was derived from four clients: Kraft Foods, Goldman Sachs & Co., Aventis Pharmaceuticals and the MTA. Our contract with the MTA was concluded effective January 31, 2003, subject to warranty claims. The loss of the business associated with one or more of these clients other than the existing MTA Contract which was operated at a loss could have a material adverse impact on our business. Due to budgetary constraints, two of the aforementioned clients have delayed until at least the second half of 2003 large-scale deployment projects originally scheduled for the first quarter of 2003, and another key client has been steadily downsizing the outsourced deskside and network support services we have been providing to it. There can be no assurance that our business with these clients will continue at the same levels previously enjoyed by our company or that we will be able to replace any lost revenue with incremental business from other sources.

Recently Issued Accounting Standards

        In June 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (SFAS No. 146), the provisions of which are effective for any exit or disposal activities initiated by us after December 31, 2002. SFAS No. 146 provides guidance on the recognition and measurement of liabilities associated with exit or disposal activities and requires that such liabilities be recognized when incurred. The adoption of the provisions of SFAS No. 146 will impact the measurement and timing of costs associated with any exit and disposal activities initiated after December 31, 2002. SFAS No. 146 is not expected to have a material effect on our results of operation, financial position, or cash flow.

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Liquidity and Capital Resources:  

        Cash and cash equivalents at December 31, 2002 of $22.9 million decreased by 3.8%, or $0.9 million, from $23.8 million at December 31, 2001. Working capital, which is the excess of current assets over current liabilities, at December 31, 2002 was $25.5 million as compared to $23.8 million at December 31, 2001 representing an increase of $1.7 million, or 7.1%. The increase in working capital is primarily attributable to federal income tax benefits recognized in 2002.

        Since its inception, we have funded our operations primarily from cash generated by operations, and the net proceeds from our public offerings. Cash used by operations for the fiscal year ended December 31, 2002 was $0.5 million. As measured in day sales outstanding, our accounts receivable days outstanding decreased from 73 days at December 31, 2001 to 71 days at December 31, 2002. Excluding MTA receivables, days sales outstanding in accounts receivable at December 31, 2002 was 40 days.

        Capital expenditures of $0.1 million, $0.2 million, and $1.1 million during the years ended December 31, 2002, 2001, and 2000, respectively, were primarily for the purchase of computer equipment and upgraded software implementations. We anticipate additional capital expenditures in 2003 to replace equipment in our training business, to purchase equipment for the expansion of our managed service business, and to upgrade our business systems.

        In 2003, we expect we will receive $2.6 million in federal income tax refunds resulting from the recently enacted tax law changes. We received $1.8 million in 2002 from these tax law changes.

        In September 2002, our company’s board of directors authorized the purchase of up to 750,000 of our outstanding common shares. Purchases were to be made from time to time through March 23, 2003, except during certain restricted periods, in open market or privately negotiated transactions. As of December 31, 2002, we had purchased 51,500 shares pursuant to this program at an average price of $1.52. The acquired shares are being held in treasury to be used for general corporate purposes.

        We believe that our available funds, together with existing and anticipated credit facilities, will be adequate to satisfy our current and planned operations for at least the next 12 months.

SELECTED UNAUDITED QUARTERLY RESULTS OF OPERATIONS

        The table on the following page presents certain condensed unaudited quarterly financial information for each of the eight most recent quarters during the period ended December 31, 2002. This information is derived from our unaudited consolidated financial statements that include, in our opinion, all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of results of operations for such periods, when read in conjunction with our audited consolidated financial statements and notes thereto appearing elsewhere in this Annual Report on Form 10-K.

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During the quarter ended December 31, 2002, we recorded additional service revenue of $61,000 due to the expiration of certain contractual liabilities.

During the quarters ended March 31, 2002, June 30, 2002, September 30, 2002, and December 31, 2002, we recorded charges which included $70,000, $54,000, $32,000, and $35,000, respectively, of severance and other special compensation payments. During the quarters ended March 31, 2001, June 30, 2001, September 30, 2001, and December 31, 2001, we recorded charges which included $46,000, $68,000, $33,000, and $195,000, respectively, of severance and other special compensation payments.

For the quarter ended December 31, 2002, we recorded adjustments in the aggregate amount of $569,000 associated with the settlement of contract disputes with the MTA which resulted in a reduction of recorded contract liabilities of $500,000, and $69,000 of liabilities related to vendor charges due to the discontinuation of our product business.

During the quarters ended March 31, 2002, June 30, 2002, September 30, 2002, and December 31, 2002, we recorded charges which included $34,000, $188,000, $121,000, and $10,000, respectively, of severance and other special compensation payments. During the quarters ended June 30, 2002, September 30, 2002, and December 31, 2002, we recorded charges which included $253,000, $315,000, and $57,000, respectively, of sales recruiting and consulting costs. During the quarter ended June 30, 2002, we also recorded charges consisting of $65,000 relating to the closure of our distribution and configuration facility. In the quarter ended December 31, 2002, we recorded a reduction in liabilities in the amount of $301,000 due to the discontinuation of our product business. During the quarters ended March 31, 2001, June 30, 2001, September 30, 2001, and December 31, 2001, we recorded charges which included $128,000, $166,000, $36,000, and $623,000, respectively, of severance and other special compensation payments. During the quarter ended December 31, 2001, we also recorded charges consisting of $355,000 of facility consolidation costs, and $284,000 of consulting costs.

In the quarter ended December 31, 2001, we wrote off our legacy product related business goodwill relating to the Lande, Lior, and OmniTech acquisitions in the amount of $1,874,000.

In the quarter ended September 30, 2001, certain employees joined EDS, L.L.C. in connection with the selection of EDS, L.L.C. as a provider of Help Desk services which we previously provided to one of our customers. We recognized other income of $417,000 in connection with the transfer of these employees.

In each of the quarters in 2002, we recorded federal income tax benefits as a result of changes enacted to the Federal Income Tax laws in the first quarter of 2002. We recorded a total of $4.4 million of benefits, of which $3.3 million related to a reduction in our valuation allowance.

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Item 7A.   Quantitative and Qualitative Disclosure About Market Risk

        Not applicable.  

Item 8. Financial Statements and Supplementary Data.

        Reference is made to Item 15(a)(1) and (2) and to page F-1 for a list of financial statements and supplementary data required to be filed pursuant to this Item 8.

        Reference is made to Item 7 “Management’s Discussion and Analysis of Results of Operations and Financial Condition – Selected Unaudited Quarterly Results of Operations” on pages 25-28 for selected unaudited quarterly financial data.

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

         Not applicable.

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PART III

Item 10.   Directors and Executive Officers of the Registrant.

STAN GANG

        Stan Gang, 68, founded our company and is currently the Chairman of the Board. From 1984 through June 1999, and again from March 2001 to December 2001, Mr. Gang served as our Chairman of the Board and Chief Executive Officer. Effective December 1, 2001, Mr. Gang retired as our Chief Executive Officer. From June 1999 to March 2001, Mr. Gang was our Chairman of the Board. Mr. Gang has 40 years of experience in the computer sales and services industry. Prior to forming our company, Mr. Gang was employed in various management capacities by IBM Corporation, MAI Equipment Corporation and Memorex Telex. Mr. Gang has been a director of our company since 1984. Mr. Gang is the father of Michael Gang, a director of our company.

MICHAEL GANG

        Michael Gang, 36, joined our company in April 1989 and has served as a National Account Manager/Sector Director since that time. From September 1995 through October 1997, Mr. Gang also served as our Secretary. Mr. Gang has been a director of our company since September 1995. Mr. Gang is the son of Stan Gang, a director of our company.

IRA COHEN

        Ira Cohen, 51, has served as a director since May 1999. Since 1988, Mr. Cohen has served as a Managing Director of Updata Capital, Inc., an investment banking firm focused on mergers and acquisitions in the information technology industry. Mr. Cohen founded Updata Software, Inc. and, from 1986 to 1988, served as that company’s Chief Financial Officer. Mr. Cohen is also a director of Datastream Systems, Inc. Mr. Cohen holds a Bachelor of Science degree in Accounting from the City University of New York and is a registered Certified Public Accountant in New York and New Jersey. Mr. Cohen is a principal of Fallen Angel Equity Fund, L.P.

THOMAS F. DORAZIO

        Thomas F. Dorazio, 45, has served as a director of our company since May 1999. Since March 2003, Mr. Dorazio has been Vice President, Operations of SOURCECORP, a provider of business process outsourcing solutions. Previously, from 1995 until February 2003, Mr. Dorazio was Vice President of Information Services for the New York State Electric and Gas Corporation and, from 1998 until February 2003, Mr. Dorazio was Chairman of the Board of Energy East Telecommunications, Inc., a wholly-owned subsidiary of Energy East Corporation. Mr. Dorazio serves on the Advisory Board of the Syracuse University Center for Business Information Technologies.

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DOREEN A. WRIGHT

        Doreen A. Wright, 46, has served as a director of our company since March 2001. Ms. Wright has served as Senior Vice President, Chief Information Officer of Campbell Soup Company since 2001. Prior thereto, from 1999 to 2001, Ms. Wright was the Executive Vice President and Chief Information Officer of Nabisco, Inc. From 1995 to 1998, Ms. Wright was Senior Vice President, Operations & Systems of Prudential Investments, a division of the Prudential Insurance Company of America. Ms. Wright currently serves on the Board of Overseers for the Annenberg Center at the University of Pennsylvania.

BERNARD M. GOLDSMITH

Bernard M. Goldsmith, 58, has served as a director of our company since July 2002. Mr. Goldsmith has served as a Managing Director of Updata Capital, Inc., an investment banking firm focused on mergers and acquisitions in the information technology industry, since 1986. Mr. Goldsmith is also a director of Dendrite International, Inc. Mr. Goldsmith is a principal of Fallen Angel Equity Fund, L.P.

RICHARD G. ERICKSON

        Richard G. Erickson, 41, joined our company in March 2002 as Chief Executive Officer in a consulting capacity through New England Associates, LLC, a professional services turnaround consultancy of which he is president. Mr. Erickson also serves as our President through New England Associates, LLC. Previously (since November 2001), Mr. Erickson was Senior Vice President, Operations of Scient, Inc., an e-business consulting firm, and held the same position with iXL Enterprises, Inc. prior to the 2001 merger of Scient and iXL. From 1998 to 2000, Mr. Erickson was Managing Director, Tri-State Region, of Aztec Technology Partners, a network and e-infrastructure consulting services firm. From 1988 to 1998, Mr. Erickson was a principal and President of Digital Network Associates, a network integration services company.

WILLIAM S. MEDVE

        William S. Medve, 43, joined our company in April 2000 as Senior Vice President, Chief Financial Officer and Treasurer. In March 2001, he was named an Executive Vice President. From 1997 to 2000, Mr. Medve was Senior Vice President, Finance of Microwarehouse, Inc. Prior thereto, from 1994 to 1997, he was Chief Financial Officer of various business units of The Walt Disney Co., and from 1983 to 1994 was with PricewaterhouseCoopers LLP. Mr. Medve is a registered Certified Public Accountant in New Jersey.

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JACK P. ADLER

        Jack P. Adler, 49, joined our company in March 1999 as Senior Vice President, Secretary and General Counsel. In March 2001, Mr. Adler was named an Executive Vice President. From 1997 to 1999, Mr. Adler was Senior Vice President, Secretary and General Counsel of EA Engineering, Science and Technology, Inc. Previously, from 1983 to 1996, Mr. Adler was in-house counsel for several corporations in the telecommunications, computer, and environmental industries.

MARK PERLSTEIN

        Mark Perlstein, 38, joined our company in September 2002 as Executive Vice President, Sales and Operations. Prior thereto (since April 2002), Mr. Perlstein was a consultant to our company. Previously (since 2001), Mr. Perlstein provided revenue-generation and turnaround consulting services in the technology and services markets. From 1998 to 2001, Mr. Perlstein was a sales and operations executive with Aztec Technology Partners, a network and e-infrastructure consulting services firm. From 1997-1998, Mr. Perlstein was Vice President of Sales of Digital Network Associates, a network integration services company.

Committees of the Directors

        The members of the Audit and Compensation Committees of the Board of Directors are Messrs. Cohen and Dorazio and Ms. Wright. Mr. Cohen is Chair of the Audit Committee; Mr. Dorazio is Chair of the Compensation Committee. The members of the Nominating Committee are Messrs. Goldsmith, Cohen, Dorazio and Ms. Wright. Mr. Goldsmith is Chair of the Nominating Committee.

Section 16(a) Beneficial Ownership Reporting Compliance

        Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), requires our directors, executive officers, and shareholders who beneficially own more than 10% of any class of our equity securities (“Reporting Persons”) to file initial reports of ownership and reports of changes in ownership with respect to our equity securities with the Securities and Exchange Commission (the “SEC”). All Reporting Persons are required by SEC regulation to furnish us with copies of all reports that such Reporting Persons file with the SEC pursuant to Section 16(a).

        Based solely upon a review of these filings, we believe that the required filings by the Reporting Persons were timely made, except that in August 2002, W. Medve and J. Adler, each an officer of our company, reported on a Form 4 receipt of a grant of stock options in August 2001 not previously reported on a Form 4 or Form 5, but which had been reflected in our Form 10-K for the year ended December 31, 2001.

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Item 11.   Executive Compensation.

        Summary Compensation Table. The following table sets forth compensation information for all individuals serving as our Chief Executive Officer or acting in a similar capacity during the last completed fiscal year and our other most highly compensated executive officers, who were serving as our executive officers at the end of the last fiscal year.

Mr. Gang retired as our Chief Executive Officer effective December 1, 2001 and payments in 2002 related to his Severance Agreement with our company.

Mr. Erickson has been serving as Chief Executive Officer of our company since March 2002 in a consulting capacity through New England Associates, LLC, a turnaround consultancy of which he is president.

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Mr. Medve joined our company in April 2000 as Senior Vice President, Chief Financial Officer and Treasurer.

Mr. Adler joined our company in March 1999 as Senior Vice President, Secretary and General Counsel.  

Mr. Tinebra joined our company in March 2001 as President and Chief Operating Officer. He was separated from AlphaNet Solutions in May 2002.  

Mr. Perlstein joined our company in September 2002 as Executive Vice President, Sales and Operations; prior thereto (since April 2002), Mr. Perlstein served as a consultant to our company. Salary amount includes amounts paid to Mr. Perlstein as a consultant.

The costs of certain benefits are not included because they did not exceed the lesser of $50,000 or 10% of the total annual salary and bonus as reported above.

Represents 401(k) contributions made by our company on behalf of each named executive officer.

This table includes only executive officers. For compensation of Michael Gang, see Item 13.  

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STOCK OPTION GRANTS IN 2002

        The following table sets forth information regarding stock options granted during the fiscal year ended December 31, 2002 pursuant to our 1995 Stock Plan to each of the named executive officers.

Represents the difference between (i) the market value of the common stock for which the option may be exercised, assuming that the market value of the common stock on the date of grant appreciates in value to the end of the ten-year option term at rates of 5% and 10% per annum, respectively, and (ii) the exercise price of the option.

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        Option Exercises and Year-End Option Holdings. The following table sets forth information regarding option exercises during the fiscal year ended December 31, 2002 as well as fiscal 2002 year-end option holdings for each named executive officer.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES

Based on a year-end fair market value of the underlying securities equal to $1.38 per share at December 31, 2002.

Compensation of Directors

        Our non-employee directors currently receive compensation of $1,500 per meeting for each meeting attended, other than brief telephonic meetings. Each of the non-employee directors who serve on the Audit, Compensation and Nominating Committees of the Board of Directors also receives a $500 fee per meeting attended for each committee meeting held on a day or days other than the day of a regularly-scheduled Board of Directors meeting. We also provide reimbursement to directors for reasonable and necessary expenses incurred in connection with attendance at meetings of the Board of Directors and its Committees.

        Pursuant to the AlphaNet Solutions, Inc. 1995 Non-Employee Director Stock Option Plan, non-employee directors also receive fully-vested options to purchase 5,000 shares of common stock upon the date first elected a director and additional fully-vested options to purchase 5,000 shares of common stock upon the date of each re-election at an annual meeting of shareholders. We made our most recent annual grant of options to non-employee directors on July 31, 2002.

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        Directors who are employees of our company are eligible to participate in our 1995 Stock Plan.

Employment Contracts, Termination of Employment and Change-of-Control Arrangements 

        Effective March 15, 2002, we entered into a letter agreement with Richard G. Erickson, which was amended effective February 14, 2003, pursuant to which we retained Mr. Erickson as Chief Executive Officer through New England Associates, LLC, a professional services turnaround consultancy of which Mr. Erickson is president. Mr. Erickson also serves as President. Pursuant to the terms of the letter agreement, as amended, setting forth the terms of his engagement, Mr. Erickson has been retained through June 30, 2003, which we may extend through December 31, 2003, at $35,000 per month. In February 2003, we paid all amounts due by us to Mr. Erickson which remained unpaid as of February 14, 2003, aggregating $100,000.

        On or before June 30, 2003 (or such later date to which we extend Mr. Erickson’s consulting engagement with us), at the sole discretion of our Board of Directors, we may convert Mr. Erickson’s consulting engagement with us into an 18-month mutually agreed upon employment agreement generally in accordance with the provisions of our March 15, 2002 letter agreement with Mr. Erickson, as amended, except that under such an employment agreement, we would not be required to grant to Mr. Erickson any additional options to purchase shares of our common stock.

        In connection with our March 15, 2002 letter agreement with Mr. Erickson, we granted to Mr. Erickson non-qualified fully-vested options to purchase 25,000 shares of our common stock as of the closing price of our common stock on such date. In connection with the amendment to the March 15, 2002 letter agreement, on February 7, 2003, we granted to Mr. Erickson non-qualified options to purchase 275,000 shares of our common stock as of the closing price of our common stock on such date. Twenty-five percent of these options vested immediately upon grant, and the balance vest in equal annual installments over the ensuing three years.

        In the event that we do not enter into a mutually acceptable employment agreement with Mr. Erickson on or before June 30, 2003 (or such later date to which we extend Mr. Erickson’s consulting engagement), or Mr. Erickson’s consulting engagement with us terminates for any reason other than Mr. Erickson’s voluntary termination before June 30, 2003 (or such later date to which we extend Mr. Erickson’s consulting engagement) or because of certain acts or omissions by Mr. Erickson constituting cause for our termination of Mr. Erickson’s consulting engagement with us (as described in our March 15, 2002 letter agreement with Mr. Erickson, as amended), then:

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        In the event Mr. Erickson’s consulting engagement with us is terminated because he voluntarily terminates his engagement with us before June 30, 2003 (or such later date to which we extend Mr. Erickson’s consulting engagement) or Mr. Erickson’s consulting engagement with us is terminated by us because of certain acts or omissions by Mr. Erickson constituting cause for such termination (as described in our March 15, 2002 letter agreement with Mr. Erickson, as amended), then:

    Mr. Erickson’s consulting engagement provides that in the event that Mr. Erickson’s engagement has not been terminated prior to a “Change-of-Control” (as described below), upon a “Change-of-Control,” 100% of the 275,000 options granted to Mr. Erickson on February 7, 2003 will vest, and such options, and the 25,000 options that we granted to Mr. Erickson in connection with our March 15, 2002 letter agreement with Mr. Erickson, will be exercisable thereafter for one year (except as otherwise provided in our March 15, 2002 letter agreement with Mr. Erickson, as amended).

        Under our Change-of-Control agreement with Mr. Erickson, a “Change-of-Control” is deemed to occur upon the occurrence of any of the following events:

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        Effective April 12, 2002, Vincent Tinebra entered into a Severance and Release Agreement providing for Mr. Tinebra’s resignation as our President and Chief Operating Officer. Pursuant to the agreement, Mr. Tinebra served in a consulting capacity with us from April 12, 2002 through May 10, 2002 in accordance with the agreement during this period and for an additional 26 weeks thereafter, we continued to pay his base salary and certain other benefits. In connection with Mr. Tinebra’s resignation, the president title was assumed by Mr. Erickson and the position of chief operating officer was eliminated.

        On July 18, 2002, we entered into an Agreement and Mutual Releases with Stan Gang, Chairman of the Board, relating to Mr. Gang’s retirement as our Chief Executive Officer effective December 1, 2001. Pursuant to the Agreement with Mr. Gang we have agreed to pay Mr. Gang $375,000 (less standard withholdings and authorized deductions). This payment will be payable as follows: (i) an aggregate of $373,200 is payable in equal installments in accordance with our regular payroll cycle, during the period from March 1, 2002 through August 31, 2003; and (ii) an aggregate of $1,800 is to be paid to Mr. Gang in equal installments on March 1, 2004, August 1, 2004 and March 1, 2005.

        Effective September 3, 2002, we entered into Change-of-Control Agreements with William S. Medve, Executive Vice President, Chief Financial Officer and Treasurer, and with Jack P. Adler, Executive Vice President, Secretary and General Counsel, and effective September 9, 2002, we entered into a Change-of-Control Agreement with Mark Perlstein, Executive Vice President, Sales and Operations. Pursuant to these Change-of Control Agreements upon a “Change-of-Control” (as described below) that results in either involuntary termination of employment with us or the voluntary resignation of the executive due to a reduction in salary or benefits, these executives are entitled to (i) a lump sum payment equal to one year of salary and benefits, and (ii) a lump sum payment equal to the executive’s pro rata performance bonus for the then-current fiscal year (computed as of the effective date of the Change-of-Control).

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        Under our Change-of-Control agreements with each of Messrs. Medve, Adler, and Perlstein, a “Change-of-Control” is deemed to occur upon the occurrence of any of the following events:

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        Effective September 3, 2002, we entered into a Severance Agreement with William S. Medve, Executive Vice President, Chief Financial Officer and Treasurer, and effective September 9, 2002, we entered into Severance Agreements with each of Jack P. Adler, Executive Vice President, Secretary, and General Counsel, and Mark Perlstein, Executive Vice President, Sales and Operations. These Severance Agreements apply in the event that employment of any of the executives is terminated involuntarily by us at any time for reasons other than for “Cause” (as defined in the Severance Agreements), or by the employee for “Good Reason” (as defined in the Severance Agreements). The Severance Agreements provide for (i) the continuation of payment of the executive’s current base salary for a period of one year after the date of termination, and (ii) an immediate payment on the date of termination of a lump sum equal to the executive’s pro rata performance bonus for the then-current fiscal year.

Compensation Committee Interlocks and Insider Participation

        Our Compensation Committee is comprised of Thomas F. Dorazio (Chairperson), Ira Cohen, and Doreen A. Wright. Currently, except as disclosed below, there are no Compensation Committee interlocks between our company and any other entities involving our company’s executive officers and directors who serve as executive officers of such entities.

        Ira Cohen, a director and member of our Audit, Compensation and Nominating Committees, and Bernard M. Goldsmith, a director and member of our Nominating Committee, are Managing Directors of Updata Capital, Inc. (“Updata Capital”), an investment advisory firm. In October 2000, our Board of Directors authorized the execution of an engagement letter with Updata Capital, pursuant to which Updata Capital was engaged on an exclusive basis as a financial advisor to assist our management and Board of Directors in examining strategic alternatives to maximize shareholder value. The engagement, which was terminable by either party on thirty days’ prior notice, provided for the payment of a “success” fee to Updata Capital of the aggregate consideration paid in certain transactions. The engagement letter also contained customary expense reimbursement and indemnification provisions. We terminated the engagement effective July 2001. From time to time thereafter, we renewed this arrangement with Updata Capital to act in a similar capacity. No amounts were paid by us to Updata Capital in 2002 in connection with the engagement.

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