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

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 Q No £

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BUTLER INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular information in thousands, except per share amounts)

1.       BASIS OF PRESENTATION:

The accompanying unaudited condensed consolidated financial statements of Butler International, Inc. and subsidiaries (the "Company") have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission for interim financial information.  Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America ("U.S. GAAP") for complete financial statements.  In the opinion of management, all adjustments consisting of normal recurring adjustments and accruals, as well as accounting changes (see Note 4) considered necessary for a fair presentation have been reflected in these condensed consolidated financial statements.  On May 30, 2003, the Company sold its United Kingdom based staffing operations ("UK Operations").  See Note 9, Discontinued Operations.  The UK Operations were part of the Company's Technical Group reporting segment.  The UK Operations are accounted for as a discontinued operation under U.S. GAAP and therefore, the UK Operations' results of operations and cash flows have been removed from the Company's results of continuing operations and cash flows for all periods presented.  Operating results for the quarter are not necessarily indicative of the results that may be expected for the year ending December 31, 2003 due to seasonal and other factors.  In order to maintain consistency and comparability between periods presented, certain prior period amounts have been reclassified to conform to the current period presentation.  These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statement and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2002.

2.       DESCRIPTION OF BUSINESS AND SEGMENT INFORMATION:

The Company provides outsourcing, project management and technical staff augmentation services in technical, information technology, and telecommunications disciplines including:  engineering design support primarily used for aerospace, defense and heavy equipment manufacturing, software quality assurance testing, software applications development and implementation, enterprise network design and implementation, and telecommunications network systems implementation. The Company also provides fleet maintenance and repair services to major ground fleet-holders nationwide.  These services are provided through three ISO 9002 certified business segments: Technical Group, Information Technology Solutions, and Telecommunications Service.

The Company discloses segment information in accordance with Statements of Financial Accounting Standards ("SFAS") No. 131, "Disclosure About Segments of an Enterprise and Related Information," which requires companies to report selected segment information on a quarterly basis and to report certain entity-wide disclosures about products and services, major customers and material countries in which the entity holds assets and reports revenues.  The operating segments reported below are the segments of the Company for which operating results are evaluated regularly by management in deciding how to allocate resources and in assessing performance.  The accounting policies of the business segments are the same as those described in the summary of significant accounting policies in Note 3.  Intersegment sales are not significant.  The operating results for the Technology Solutions segment includes a goodwill impairment charge of approximately $12.3 million for the nine-month periods ended September 30, 2003 (see Note 3).

Management reviews the Company's assets on a consolidated basis, as it is not meaningful to allocate assets to the various segments.  The Company evaluates segment performance based on revenues and operating profits.  The Company does not allocate income taxes or charges determined to be non-recurring in nature, such as restructuring and legal settlement charges.  Unallocated amounts of operating loss consist of certain shared general and administrative services, some of which may be considered corporate in nature.

The Company primarily operates in the United States.  Operations include the results of the India subsidiary.  Sales from India operations were approximately $271,000 and $732,000 for the three-month and nine-month periods ended September 30, 2003, respectively and $263,000 and $562,000 for the three-month and nine-month periods ended September 30, 2002, respectively.  It generated operating profits of approximately $156,000 and $393,000 for the three-month and nine-month periods ended September 30, 2003, respectively, compared to operating profits of approximately $162,000 and $295,000 for the three-month and nine-month periods ended September 30, 2002, respectively.

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BUTLER INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular information in thousands, except per share amounts)

Net sales and operating income/(loss) from its continuing operations by segment were:

	For the Three-Month				For the Nine-Month
	Period Ended September 30,				Period Ended September 30,
	2003		2002		2003		2002
Net Sales:
Technical Group	$        31,398		$        30,565		$        89,493		$        94,519
Telecom Services	15,812		20,959		45,693		70,813
Technology Solutions	6,221		7,497		18,894		25,181
Unallocated amount	264		380		812		1,619
	$        53,695		$        59,401		$      154,892		$      192,132
Operating Income/(Loss):
Technical Group	$          2,940		$          2,831		$          7,695		$          8,571
Telecom Services	798		1,399		2,131		4,340
Technology Solutions	709		798		(10,623)		2,465
Restructuring and other charges	(8)		(2,868)		(2,408)		(3,895)
Legal settlements and related costs	-		-		(2,908)		-
Unallocated amounts	(3,566)		(5,289)		(11,904)		(15,971)
Consolidated Total	$             873		$        (3,129)		$      (18,017)		$        (4,490)

3.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Goodwill

Goodwill represents costs in excess of fair values assigned to the underlying net assets of acquired companies.  Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets" and as a result, goodwill is no longer being amortized but tested for impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired.   An impairment charge is recognized when the implied fair value of a reporting unit, including goodwill, is less than its carrying amount.  On June 30, 2003, the Company performed its annual goodwill impairment test.  The Company determined the implied fair value of each of its reporting units using a discounted cash flow analysis and compared such values to the respective reporting units' carrying amounts.  This evaluation indicated that goodwill recorded in the Technology Solutions segment was impaired.  The primary factor resulting in the impairment charge was the continuing difficult economic environment in the information technology sector.  Accordingly, the Company recognized a non-cash charge of approximately $12.3 million, (approximately $7.9 million, net of tax).

Stock-based Compensation

The Company accounts for employee stock options using the intrinsic value method in accordance with using Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations.  The Company has recognized no compensation expense related to employee stock options for any year shown, since options are always granted at a price equal to the market price on the day of grant. 

SFAS No. 123,"Accounting for Stock Issued to Employees," encourages a fair value based method of accounting for employee stock options and similar equity instruments, which generally would result in the recording of additional compensation expense in the Company's financial statements.  The Statement also allows the Company to continue to account for stock-based employee compensation using the intrinsic value for equity instruments The Company has adopted the disclosure-only provision of SFAS No. 123.  SFAS No. 123, "Accounting for Stock-Based Compensation", requires that the Company provide pro forma information regarding net earnings and net earnings per common share as if compensation cost for the Company's stock option programs had been determined in accordance with the fair value method prescribed therein.  The Company also adopted the disclosure portion of SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure" requiring quarterly SFAS No. 123 pro forma disclosure. 

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BUTLER INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular information in thousands, except per share amounts)

During the nine-month period ended September 30, 2003, a total of 126,000 stock options were issued to the Company's non-employee directors through the 2002 Stock Incentive Plan.  The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:

	2003		2002
Risk-free interest rate	3.98%		5.26%
Expected life	6.9 years		6.9 years
Expected volitility	103.02%		87.52%

Had compensation cost for the stock options issued been determined based on the fair value at the grant date, consistent with provisions of SFAS No. 123, the Company's net income/(loss) and earnings/(loss) per share would have been changed to the pro forma amounts indicated below:

	For the Three-Month				For the Nine-Month
	Period Ended September 30,				Period Ended September 30,
	2003		2002		2003		2002
Net income/(loss):
As reported	$             619		$        (2,743)		$      (14,074)		$      (17,530)
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects	(49)		(123)		(217)		(356)
Pro forma	$             570		$        (2,866)		$      (14,291)		$      (17,886)
Earnings/(loss) per share of common stock:
Basic:
As reported	$            0.05		$           (0.28)		$          (1.41)		$          (1.79)
Pro forma	$            0.05		$          (0.29)		$          (1.43)		$          (1.82)
Assuming dilution:
As reported	$            0.05		$           (0.28)		$          (1.41)		$          (1.79)
Pro forma	$            0.05		$          (0.30)		$          (1.43)		$          (1.83)

Earnings Per Share

As required by SFAS No. 128, "Earnings per Share", the Company presents both basic and diluted earnings per common share amounts.  Basic earnings per common share is calculated by dividing net income applicable to common stockholders by the weighted average number of common shares outstanding during the period.  Earnings per common share assuming dilution reflects the maximum potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock and would then share in the net income of the Company.  Common equivalent shares are excluded from the computation in periods in which they have an anti-dilutive effect.  Accordingly, 1,588,685 common equivalent shares have been excluded from the calculations of diluted loss per share for the three-month period ended September 30, 2002.  Additionally, 1,650,779 and 1,813,086 common equivalent shares have been excluded from the calculations of diluted loss per share for the nine-month periods ended September 30, 2003 and 2002, respectively. The Company uses the treasury stock method to calculate the impact of outstanding stock options and warrants.  Stock options and warrants for which the exercise price exceeds the average market price over the period have an anti-dilutive effect on earnings per common share and, accordingly, are excluded from the calculation.  For the three-month and nine-month periods ended September 30, 2003, there were options and warrants totaling 1,509,208, respectively, where the exercise price was greater than the average market price of the common shares and, therefore, were excluded from the computation of diluted loss per share.  For the three-month and nine-month periods ended September 30, 2002, there were options and warrants totaling 1,690,083, where the exercise price was greater than the average market price of the common shares and, therefore, were excluded from the computation of diluted loss per share.

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BUTLER INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular information in thousands, except per share amounts)

The following table represents the computation of basic and diluted earnings per common share from continuing operations:

	For the Three-Month				For the Nine-Month
	Period Ended September 30,				Period Ended September 30,
	2003		2002		2003		2002
Income/(loss) from continuing operations	$           430		$      (2,879)		$    (13,313)		$      (5,471)
Less: Preferred stock dividends	(99)		(98)		&nb