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UNITED STATES

FORM 10-K

x   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

FOR THE FISCAL YEAR ENDED APRIL 30, 2004

OR

o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

Commission file number 0-8141

Securities registered pursuant to Section 12(b) of the Act: None

Common Stock ($.10 par value per share)

     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 þ     No o

      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.     o

      Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).     Yes o     No þ

      As of November 1, 2003 (the most recently completed fiscal second quarter), the aggregate market value of the voting stock held by non-affiliates of the registrant, computed by reference to the average high and low prices on such date as reported by the Nasdaq National Market System was approximately $35,802,000.

      As of July 19, 2004 there were outstanding 13,466,346 shares of the registrant’s common stock, par value $.10 per share, its only class of equity securities.

DOCUMENTS INCORPORATED BY REFERENCE

      Portions of the registrant’s definitive proxy statement to be filed within 120 days after the end of the fiscal year covered by this report are incorporated by reference into Part III hereof.

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PART I

      Norstan, Inc. (Norstan, the Company, we, us, or our) is a full-service communications solutions and services company delivering voice and data technologies and services, and remanufactured equipment to corporate end-users and public sector companies. Norstan offers a full range of technologies for customer contact solutions and converged solutions, including applications such as messaging, conferencing and enterprise mobility. Additionally, we provide a host of communications services including ProtectNet® Life Cycle services, project management, implementation, field delivery, voice and data network monitoring, and managed and professional services.

      Norstan operates principally through its subsidiaries: Norstan Communications, Inc., Norstan Canada, Ltd., Vibes Technologies, Inc. and Norstan Financial Services, Inc. Headquartered in Minnetonka, Minnesota, we have sales and services locations in the United States and Canada. Norstan’s common stock is listed on the NASDAQ stock market under the symbol NRRD.

      Our mission is to improve the way our customers communicate. We offer a broad array of technology platforms, software solutions and on-going system maintenance services. Currently, we work with approximately 2,400 key customers, and have serviced approximately 12,000 sites over the past two years. We draw customers from a variety of industry groups, including the following:

      We have established strategic relationships with market leading communications manufacturers that enable our ability to offer best-in-class, custom-tailored solutions to our customers. Norstan maintains 25 sales and service locations and 5 distribution centers in the United States and Canada. We serve numerous customer sites across a broad range of industries and focus our marketing efforts on middle-market and Fortune 2000 companies with complex technology and communications requirements. We believe our service capabilities will enable Norstan to capture a greater portion of each customer’s communication budgets in the future, as well as, provide other growth opportunities through multi-channel marketing.

      To address the complex communications requirements of our customers, Norstan provides a broad range of products and services through two interrelated business segments: Communications Solutions and Services and Resale Services, which respectively accounted for 86.6% and 13.4% of Norstan’s fiscal 2004 revenues. Communications Solutions and Services provide solutions and services focused on enterprise and public sector customers in the U.S. and Canada, including hardware and software applications that support voice and data communications and customer contact solutions. Resale Services provides refurbished voice and data products to the secondary market.

      In February 2004, we announced a reorganization of our Communications Solutions and Services business segment, which is comprised primarily of our Solutions and Services and Corporate Customer Services business units. Also included in this business segment are Norstan Convergence Development Group (Norstan CDG) and our Financial Services business units.

	•	Solutions and Services. Solutions and Services, the largest business within this segment, concentrates customer acquisition and retention efforts in two geographically focused business units. Each business unit is managed by a senior vice president with sales, operational, project management,

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		financial performance and services delivery responsibilities that are aligned with specific solutions for customers in defined geographic markets.
	•	Corporate Customer Services. We have realigned several of our sales support and services functions to form our Corporate Customer Services organization. This organization focuses on providing support to the Solutions and Services team and meeting customer needs for products, service programs, engineering and professional services, product marketing, remote support, procurement and logistics.

      Norstan CDG develops packaged and customized applications that help accelerate and enhance the migration strategies for the increasing number of customers embracing Internet Protocol (IP) telephony. Norstan CDG develop and deploys applications compatible with Cisco Systems’ IP solutions. This business delivers its solutions and services exclusively through reseller partners via the Norstan CDG IPT Alliance Partner Program.

      Effective April 30, 2004, Financial Services was incorporated into the Communications Solutions and Services business segment. As a result of our strategic decision in fiscal 2002 to no longer offer financing directly to our customers, revenues for this business continue to decline as we completely wind down its operations. This fact, coupled with our restructuring efforts in fiscal 2004, make it no longer necessary to provide these results as a separate business segment.

      Norstan’s Channels Development business unit, specializing in technology implementation and support services for network providers, manufacturers, integrators and resellers, has been integrated into the Solutions and Services business, expanding the sales and services support offered to current channel partners. At this time, Norstan is not actively pursuing new channel partner relationships.

      Norstan’s Resale Services segment is comprised of two businesses:

	•	Norstan Resale Services Group. Norstan Resale Services Group, a business unit of Norstan Communications, Inc., offers customers refurbished telephony equipment, as well as, new video conferencing systems, components, desktop products, accessories and services. Such products and services were previously offered through Siemens Resale Services group prior to Siemens’ election in July 2004 to end its alliance with Norstan in the used equipment business.
	•	Vibes Technologies, Inc. Vibes Technologies, Inc., a wholly owned subsidiary of Norstan Communications, Inc., is a leader in telecom and data equipment remanufacture and repair, specializing in top-line key systems, phones, data and other components.

      In March 2003, Norstan purchased from NetCom Systems, Inc. certain assets, including intellectual property, relating to NetCom’s voice over IP telephony applications software operations. This unit, renamed the Norstan Convergence Development Group, is involved in the development of applications that increase the effectiveness and productivity of IP communications systems. The acquisition consideration totaled $3.0 million, consisting of a cash payment of $1.1 million at closing and $1.1 million 120 days after the closing, and guaranteed payments aggregating $800,000 deliverable over the next two years. The purchase agreement provides that Norstan may pay NetCom Systems contingent consideration of up to $3.0 million based on the amount of new software license fees received by Norstan during the two-year period following the closing of the purchase transaction. At our discretion, up to 50% of any contingent consideration may be paid in shares of Norstan’s common stock. We hired certain key NetCom personnel associated with NetCom’s development of IP telephony applications software. In fiscal 2003, we recorded $2.6 million for intangible assets relating to proprietary technology and $400,000 in goodwill relating to the $3.0 million acquisition consideration. Results of Norstan CDG are included in our Communications Solutions and Services business segment.

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      In July 2002, we completed the sale of our Network Services business to NetWolves Corporation for $7.5 million, including $3.75 million in cash and a promissory note for $3.75 million. During the fourth quarter of fiscal 2003, we received $2.9 million in cash and other non-monetary assets in early settlement of this note. Management concluded that Network Services lacked synergies with our strategic focus.

      There is a transformation happening within the enterprise market — a slow but steady migration from traditional private-branch exchange (PBX) networks to IP telephony. Voice over IP (VoIP) technology has improved in quality causing enterprises to evaluate the strategic benefits of IP solutions and the return on investments (ROI) associated with a migration as they purchase or upgrade their communications infrastructure. Network convergence has become widely accepted. The Internet is now a strategic method to deliver applications and services. IP communications is no longer a tactical decision for the enterprise — it is a strategic investment with a real ROI.

      Demand for communications products and services are showing signs of modest improvement. Gartner Dataquest, a market research firm specializing in telecommunications market information, estimated in 2003, IP lines on both pure IP-PBX and IP-enabled systems composed approximately 14% of all premises switching equipment (PSE) line shipments, up from 9% the previous year. Within the IP market sector, 55% of lines ship on pure IP-PBX systems, while the remaining 45% ship on IP-enabled platforms. IP uptake remains highest in North America, while 20% of all PSE line shipments were IP in 2003. Within four years, Gartner expects IP line shipments to have overtaken traditional lines on premises switching systems. In 2007, Gartner Dataquest predicts 51% of all PSE lines will be IP, most of the rest will be traditional lines on IP-enabled systems, and a very small percentage will be traditional lines on PBX/key telephone systems.

      According to industry research firm InfoTech, the forecast for revenue from converged IP telephony infrastructure applications and services for the U.S. enterprise segment is expected to exceed $10.0 billion in 2007, up from $1.9 billion in 2003. Additionally, revenue from converged applications on enterprise IP telephony systems is expected to reach $3.0 billion in 2007, up from $0.4 billion in 2003.

      As the economy shows signs of recovery, and as the enterprise segment continues its dependence on technology-based solutions, information technology (IT) spending is expected to increase. Gartner believes that the market for IP telephony products and information technology services has reached an inflection point as investments are being made to upgrade or replace voice and data equipment purchased prior to the significant spending made in preparation of the Y2K changeover that occurred over four years ago. In previous years, these purchasing decisions had been delayed due to slow development and acceptance of new IP technology, and economic conditions, among other factors. In sum, we believe that the current mix of technological advances, economic conditions and enterprise dependence on technology-based solutions will create demand for new complex, business applications and upgrades in 2004 and beyond.

      While customers continue to rely heavily on technology to reduce transaction costs by increasing operational efficiencies, the bias toward software-centric solutions in lieu of hardware continues. Notwithstanding macroeconomic conditions, growth continues to occur in areas such as customer contact solutions, computer telephony integration, unified media and convergence solutions (IP telephony).

      Current financial pressures are also making it increasingly difficult for communications equipment manufacturers to support a direct distribution model. Moreover, most independent distribution channels lack an adequate geographic footprint, infrastructure, processes, and resources to effectively fulfill manufacturers’ need to deploy complex high-end technology solutions. These factors have resulted in the need to perform systems integration and support services through third-party providers. In addition, a key competency being driven by the market is the ability to effectively integrate disparate technology platforms into enterprise-wide applications solutions. As a third-party provider, Norstan believes we are well positioned to take advantage of this market opportunity.

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      While the recent economic outlook has been positive and overall levels of business capital spending in certain market segments, specifically information technology and telecommunications services industries, are showing signs of improvement, a lag in near-term spending continues to negatively affect our business performance. However, we believe that as the economy further strengthens and capital spending improves, customers will invest in communications systems and infrastructure.

      In fiscal 2003 and the first half of fiscal 2004, Norstan’s strategy was one of gaining market share through geographic expansion into tier one markets. We broadened our presence into cities such as New York, Los Angeles, Dallas, Chicago and San Francisco. Our recent financial performance and financial constraints have resulted in our need to re-evaluate our investments in certain of these and other cities, such as Atlanta, Detroit and Philadelphia. Our strategic focus has now changed from one of broader geographic coverage, to one of increasing share by creating deeper coverage in specific markets with specific technologies. We will be more selective in our pursuit of new customers, markets, products and services. This change in strategic focus may result in lower revenues but higher profitability in fiscal 2005 than in fiscal 2004.

      In fiscal 2001, our relationships with Nortel Networks and Cisco Systems expanded our geographic reach and are providing new revenue opportunities. With the addition of these new technology partners, we have been experiencing pricing pressure and a change in our product mix, which in part, has contributed to decreased product gross margins that negatively affected our financial performance. We believe that the restructuring undertaken in fiscal 2004 of our Communications Solutions and Services business segment and increased emphasis on project management capabilities will help reduce the negative affect on gross margins in the future.

      Our Solutions and Services business focuses sales and operations in specific geographic markets. Within these geographies, communications solutions are offered where Norstan has an established customer base and expertise in services delivery in the areas of converged solutions, customer contact solutions, infrastructure and ProtectNet® Life Cycle services. Within this organization is a dedicated sales team focused on serving our installed customer base. Approximately 50% of our revenue is annuity in nature derived from the on-going services we provide these customers.

      Our Resale Services segment expects increased volume from the re-sale of refurbished telecommunications and data equipment and industry consolidation. Vibes Technologies, Inc. is uniquely positioned to take advantage of these trends with its e-commerce web site. The combination of this web-based approach and Norstan’s knowledge of the secondary market is expected to provide the basis for growth in this business segment. Our Norstan Resale Services Group offers refurbished communications products and services from a variety of manufacturers to the secondary market.

      We are focusing on several initiatives to better position our business to be successful in fiscal 2005:

	•	Improving company profitability — There are opportunities in many areas of our business to improve Norstan’s profitability, such as improving gross margins for our installation and services, decreasing the cost of customer acquisition, and reducing general and administrative overhead.
	•	Retaining our existing customers — We have built a substantial installed customer base consisting of Fortune 2000 and middle-market companies. We will continue to increase our resources committed to maintaining these relationships, offering our customers additional solutions and services that further improve their communications systems and their ability to run their businesses more efficiently.

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	•	Delivering advanced business applications — A significant differentiator for Norstan is our capability to provide customers with advanced business applications and services to support them. We are delivering advanced business applications and strategic solutions, complementing these applications with knowledge, professional services and support upon which Norstan has built its reputation for over 30 years.
	•	Developing Resale Services — We will continue to develop our Resale Services businesses by adding additional voice and data products and accessories that will augment our existing offerings.
	•	Developing new business selectively — Competition within the areas of convergence and applications is fierce and the technology is complex. We will concentrate our new business development in geographic areas where opportunities, skills and resources exist, and on sales and services yielding the highest returns.

      Norstan provides customers with a broad range of communication solutions and services. Our capabilities include the design, development and implementation and ongoing support of communications solutions in a variety of customer environments. These products and services are delivered through two business segments: Communications Solutions and Services and Resale Services.

      Within its core Communications Solutions and Services segment are two interrelated business units:

	Solutions and Services — Provides best-in-class communications technologies and services focused on Fortune 2000 and middle-market enterprise customers in the U.S. and Canada. Product and service offerings are focused within four primary areas:

	Norstan Convergence Development Group — Specializes in the development of IP telephony applications to enhance and accelerate the enterprise customer’s convergence migration strategy.

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      Norstan’s Resale Services segment provides refurbished voice and data products to end users. This segment is comprised of two business units:

	Norstan Resale Services Group — Offers customers refurbished telephony equipment, as well as, new video conferencing systems, components, desktop products, accessories and services from ClearOne, Kentrox, Plantronics, Polycom, Siemens and SpectraLink. Prior to the expiration of Siemens’ alliance with Norstan in the resale business in July 2004, we managed the acquisition, marketing, refurbishment and resale of Siemens certified used telephony equipment. Effective August 1, 2004, we will buy and sell used Siemens equipment to refurbish and offer to the secondary market, primarily in the U.S. and Canada.
	Vibes Technologies, Inc. — A leader in telecom and data equipment remanufacture and repair, specializing in top-line key systems, phones, data and other components, providing customers legendary customer service and expertise in systems manufactured by Aspect Communications, Avaya, Cisco Systems, Executone, Nortel Networks, Plantronics, Polycom and SpectraLink.

      Norstan focuses its marketing efforts on middle-market and Fortune 2000 companies with complex communication requirements. No single customer accounted for more than five percent of Norstan’s total revenue during any of the last three fiscal years. A sample of our current customers includes:

      Our relationships and/or experience with a wide range of leading communications technology manufacturers enable us to deliver the appropriate solution to each of our customers. These include:

      In addition, we distribute communication products that fit specific segments of the marketplace. These include hybrid switching systems, personal computer-based voice processing and video conferencing systems, as well as data communication products.

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      Norstan has been a distributor of Siemens equipment since 1976 and is currently Siemens’ largest distributor in North America. The term of the distribution agreement signed in January 1999, was for five years and has been extended one year, currently through January 2005. Our relationship with Siemens is integral to our business. Any significant disruption of this distribution relationship could have a material adverse impact on our financial condition and results of operations.

      Norstan and Siemens have been parties in a used equipment alliance in which we managed the acquisition, marketing, refurbishment and resale of Siemens certified used telephony equipment, becoming the largest supplier of Siemens and ROLM refurbished equipment. On July 22, 2004, Siemens Information and Communication Networks, Inc., elected to end their alliance with us in the used equipment business effective at the expiration of the current agreement, July 31, 2004. Effective August 1, 2004, we will continue offering customers refurbished Siemens telephony equipment, in addition to new and used audio and video conferencing systems, wireless solutions, call center accessories, components, desktop products, and services through our Norstan Resale Services Group.

      The termination of this resale alliance does not affect our ongoing distribution agreement with Siemens with respect to new equipment.

      Norstan’s product and service offerings are brought to market through three separate but complementary businesses. These businesses use a variety of distribution channels to market and sell the Company’s products and services. These are reflected in our business units as follows:

      This multi-channel distribution model uses the most cost-effective sales channels to bring Norstan’s products and service offerings to market. Each channel is staffed with sales professionals who are highly focused and have a comprehensive understanding of their markets. In addition, these professionals are aligned with specific manufacturer partners.

      Within the Solutions and Services business, our sales professionals have been trained to evaluate each customer’s technology and service needs. The sales process begins by obtaining an understanding of the customer’s business goals and objectives. The sales professional conducts an analysis of the customer’s current and potential future communication and IT systems requirements, as well as service delivery needs. After assessing the customer’s business and communications needs, the sales professional and a Norstan solutions engineer develop a solution to satisfy the customer’s current and anticipated requirements. Norstan’s services delivery team then works with the customer to plan the delivery and implementation of the solution and to identify required training. By planning the precise requirements of each phase of the solution delivery, Norstan’s team of sales, solutions engineering and services delivery specialists are able to minimize service interruption for the customer.

      Norstan also provides an ongoing customer service program designed to meet our customer’s application requirements. These service programs incorporate remote diagnostics, in-field service and support, additional training, and help desk resources from Norstan’s expert customer support team, located in Norstan’s Customer Solution Center, a virtual center comprised of strategically located solution centers across the U.S. and Canada.

      Norstan’s marketing strategy is designed to capture a high percentage of existing customers’ communication and IT budgets and also identify and develop new customer relationships. Additionally, Norstan’s

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      The Norstan Convergence Development Group develops IP telephony applications to enhance customers’ convergence strategy distributed to targeted channel partners through the Norstan CDG IPT Alliance Partner Program. This program enables channel partners of our target manufacturers, such as Cisco Systems, to gain access to convergence applications to offer their client bases. Certification levels are available to accommodate partners who wish to sell, install and provide direct support for Norstan applications, as well as for partners who choose to sell applications but rely on Norstan to install and support their customers.

      Our Resale Services business units offer value-minded customers the highest quality refurbished systems, components, desktop products, new accessories and services available in the U.S. and Canada. Sales are driven through qualified and trained telesales account executives focused on existing customer accounts and strategic prospects. This telesales group works closely with our Solutions and Services business and channel partners. Through the Vibestech.com web site, additional sales and service are available to our customers. Norstan’s Resale Services provides a total life cycle solution for our customers and enables Norstan to maintain these customer relationships for many years.

      Norstan believes providing exceptional customer service is a critical element in our ability to compete effectively in the communication marketplace. We have invested in new technology designed to resolve a substantial portion of our customer’s support and service issues quickly and remotely. Norstan coordinates its customer service response through our Customer Solutions Center, a virtual center comprised of strategically located centers in Minneapolis and Cleveland with smaller centers focused on specific customer sets in Los Angeles and Montreal. In fiscal 2004, these centers handled more than 350,000 customer calls with approximately 65% of the service-related calls addressed remotely. For calls requiring immediate on-site service and support, Norstan maintains a force of highly trained service technicians, design engineers and customer support representatives that can respond to the client’s physical location.

      Norstan has approximately 130 employees in its four remote diagnostics and dispatch centers devoted primarily to providing customer service, and more than 260 service technicians in the field. With Norstan’s remote problem resolution capability and our staff of highly trained technicians, we are able to promptly resolve customer support requests and service needs. Norstan’s commitment to customer service is evidenced by a fiscal 2004 survey of Norstan’s communication customers that found an overall satisfaction rating of 97%. This survey was administered by an independent third party.

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      Headquartered in Minnetonka, Minnesota, Norstan currently supports its customers with sales, service and/or distribution centers located in 28 cities within the United States and Canada:

      As of April 30, 2004, Norstan had 1,090 employees, including 990 in the U.S. and 100 in Canada. Norstan’s employee population consists of 192 in sales and marketing, 628 in operations, service and installation, 237 administrative and professional personnel and 33 consultants. Of these employees, 78 are covered by collective bargaining agreements. We believe relations with our employees are good and we have not experienced any work stoppages.

      Our marketing strategy is designed to capture a larger portion of existing customers’ communication and IT budgets and to identify and develop new customer relationships. Norstan also competes with its customers’ internal resources for those who may maintain their own equipment, particularly when these resources represent a fixed cost to the customer. Such competition may impose additional pricing pressures on Norstan. Subject to this competitive environment, Norstan competes on the basis of the depth and breadth of services and products we offer; our ability to integrate IT and communication systems as the underlying technologies continue to converge; our reputation for providing superior customer service; and, the number and strength of our customer relationships.

      Norstan also competes in its markets with Avaya Communications, NextiraOne, a division of Platinum Equities, and Regional Bell Operating Companies, such as SBC Communications, and telcos such as Verizon Communications. In addition, we may compete with regionally located service providers.

      Following the termination of the alliance with Siemens in the resale business, Norstan Resale Services Group will now compete directly with Siemens in this market.

      Norstan relies upon a combination of nondisclosure and other contractual arrangements with certain key employees and business partners, and trade secret, copyright and trademark laws and intellectual property laws to protect our proprietary rights and the proprietary rights of third parties from whom we license intellectual property. We enter into confidentiality agreements with certain employees and business partners and limit the distribution of proprietary information.

      With the sale of Norstan Network Services in July 2002, we are no longer subject to government regulations that have a material effect on our operations.

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      As of April 30, 2004, Norstan had signed contracts for telecommunications products and professional services aggregating approximately $19.2 million, substantially all of which are expected to be fulfilled by the end of fiscal 2005. As of April 30, 2003, Norstan had signed contracts aggregating approximately $20.2 million, substantially all of which were fulfilled by the end of fiscal 2004. The usual time period between the execution of a contract and the completion of the installation is three to twelve months, depending on the size and complexity of the system.

      We conduct our operations in leased facilities. Our executive offices are located in Minnetonka, Minnesota, where we occupy approximately 129,000 square feet of office space. We also have locations in Brecksville, Ohio, and Phoenix, Arizona, where we occupy approximately 42,750 and 22,440 square feet of office space, respectively. In addition, Norstan occupies sales and service offices in 16 other cities within the United States. In Canada, Norstan occupies approximately 30,700 square feet of office space in Toronto, Ontario, which serves as our Canadian headquarters. Norstan also occupies sales and service offices in three other cities within the Canadian provinces of Alberta, Quebec and British Columbia. We believe that the above-mentioned facilities are adequate and suitable for our current needs.

      In April 2004, Norstan received a commitment adjustment letter from the Universal Services Administrative Company (USAC), which oversees the Federal Communications Commission’s Schools and Libraries Program of the Universal Service Fund, also called the “E-rate program.” Funding commitments under the E-rate program provide for discounts on eligible services such as telecommunications services, internet access, network equipment and wiring of instructional buildings and classrooms to connect to the Internet. The letter informed Norstan that USAC had undertaken an audit of the Navajo Preparatory School (Navajo Prep) project for funding year 2001, in which Norstan had installed specific equipment and service for which we received approximately $2.2 million. The audit report concluded that Navajo Prep had not complied with key requirements of the E-rate program and, consistent with E-rate policies, USAC is seeking recovery of the full amount disbursed to Norstan on behalf of Navajo Prep. On June 1, 2004, Norstan filed an appeal with USAC and is continuing its investigation of the Navajo Prep project. While we will continue to defend and appeal USAC’s decision, Norstan may be required to repay all or a portion of the $2.2 million. Accordingly, we established a reserve of $2.2 million in the fourth quarter of fiscal 2004.

      In February 2002, Norstan was awarded $7.2 million resulting from a claim before the American Arbitration Association against the former owner of PRIMA Consulting (PRIMA) which claims arose out of our September 1997 acquisition of PRIMA. Subsequently, we reached a settlement with the former owner, Mr. Michael Vadini. The settlement provides that Norstan receive $3.0 million in cash, a promissory note issued by Mr. Vadini for $1.0 million to be paid in monthly installments beginning in June 2002, and certain real properties. As a result of the settlement, we recorded a $3.0 million pre-tax gain in the fourth quarter of fiscal 2002, based on the amount of cash received. We recorded a full reserve against the real property and the promissory note and will record any future gains on the sale of the real properties and collection of the promissory note as amounts are assured of realization. In December 2002, after receiving the first six $83,333 monthly installment payments, we agreed to accept a lump sum payment of $470,000 in settlement of the remaining monthly installments which totaled approximately $500,000 at that time. We recorded a gain, net of tax, of approximately $591,000 through discontinued operations relating to payments received on the promissory note during fiscal 2003. In addition, in May 2003, one of the real properties was sold and a pre-tax gain of approximately $253,000 was recorded through discontinued operations in the first quarter of fiscal 2004. In addition, in January 2004, a second real property was sold and a pre-tax gain of approximately $341,000 was recorded through discontinued operations in the third quarter of fiscal 2004.

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      We are involved in other legal actions in the ordinary course of our business. Although the outcome of any such legal actions cannot be predicted, in the opinion of management there are no other legal proceedings pending against or involving Norstan for which the outcome is likely to have a material adverse effect upon our business, operating results or financial condition.

      Norstan did not submit any matters to a vote of security holders during the last quarter of the fiscal year covered by this report.

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PART II

      Our common stock is traded on the National Over-the-Counter market and is listed on the national market system of the National Association of Securities Dealers’ Automated Quotations system (NASDAQ) under the symbol NRRD. The following table sets forth the high and low sale prices for our common stock as reported by NASDAQ for each quarterly period during the two most recent fiscal years:

      As of July 19, 2004, there were 3,640 holders of record of Norstan’s common stock.

      Norstan has not recently declared or paid any cash dividends on our common stock and does not intend to pay cash dividends on our common stock in the foreseeable future. We currently expect to retain earnings to finance the operations and the expansion of our business. In addition, our current long-term credit agreement prohibits the payment of cash dividends without the prior written consent of our lender thereunder.

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      The selected consolidated financial data set forth below as of and for each of the fiscal years in the five-year period ended April 30, 2004, have been derived from our consolidated financial statements, which have been audited by Deloitte & Touche LLP, an independent registered public accounting firm. The selected consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the notes thereto included elsewhere in this report.