NATIONAL TECHTEAM INC /DE/, 10-Q, 1998-11-13

NATIONAL TECHTEAM INC /DE/
10-Q, 1998-11-13
COMPUTER PROGRAMMING, DATA PROCESSING, ETC.

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<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

10-Q

|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: September 30, 1998

|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___ to ___

Commission file number 0-16284

NATIONAL TECHTEAM, INC.
(Name of issuer in its charter)

DELAWARE 38-2774613
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

835 Mason Street, Suite 200, Dearborn, MI 48124
(Address of principal executive offices)(Zip Code)

Registrant's telephone number, including area code: (313) 277-2277

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.

|X| Yes |_| No

The number of shares of the registrant's only class of common stock
outstanding at November 13, 1998 was 13,645,524.

THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION
27A OF THE SERCURITIES EXCHANGE ACT OF 1934, AS AMENDED. ACTUAL RESULTS COULD
DIFFER FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF
CERTAIN FACTORS DESCRIBED HEREIN INCLUDING THOSE SET FORTH UNDER "FACTORS
AFFECTING FUTURE RESULTS" UNDER "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND ELSEWHERE IN, OR
INCORPORATED BY REFERENCE INTO, THIS REPORT.

1
<PAGE> 2

NATIONAL TECHTEAM, INC.

FORM 10-Q

INDEX

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------- -----------
PAGE
INDEX NUMBER
------------------------------------------------------------------------------------------------------- -----------
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1.

Consolidated Statements of Operations 3
Three and Nine Months Ended
September 30, 1998 and 1997

Consolidated Statements of Financial Position 4 - 5
September 30, 1998 and December 31, 1997

Consolidated Statements of Cash Flows 6
Nine Months Ended
September 30, 1998 and 1997

Notes to the Consolidated Financial Statements - September 30, 1998 (Unaudited) 7 - 9

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations 10 - 21

PART II - OTHER INFORMATION

Item 1. Legal Proceedings 22

Item 6. Exhibits and Reports on Form 8-K 22

Signatures 23
------------------------------------------------------------------------------------------------------- -----------
</TABLE>

2
<PAGE> 3
PART 1 -- FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

NATIONAL TECHTEAM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

- -----------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
- ------------------------------------------------------ ------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
REVENUES
Corporate Services
Corporate help desk/call center services...... $ 8,336,782 $ 6,134,470 $ 21,206,744 $ 18,244,428
Technical staffing............................ 6,083,630 6,492,563 19,536,675 18,178,027
Systems integration........................... 4,892,311 3,640,404 10,299,186 8,678,516
Training programs............................. 1,676,301 1,800,585 5,297,376 5,104,623
------------- -------------- ------------- -------------
Total Corporate Services......................... 20,989,024 18,068,022 56,339,981 50,205,594
OEM Call Center Services......................... 5,610,708 1,951,416 18,911,709 7,823,634
TechTeam Capital Group........................... 4,706,812 -- 10,178,115 --
------------- -------------- ------------- -------------
TOTAL REVENUES....................................... 31,306,544 20,019,438 85,429,805 58,029,228
COST OF SERVICES DELIVERED........................... 26,301,063 19,162,897 71,096,460 51,541,028
------------- -------------- ------------- -------------
GROSS PROFIT......................................... 5,005,481 856,541 14,333,345 6,488,200
------------- -------------- ------------- -------------
OTHER EXPENSES
Selling, general and administrative.............. 3,518,262 3,494,613 10,911,743 11,215,685
Interest expense................................. 379,814 -- 1,168,171 70,492
------------- -------------- ------------- -------------
TOTAL OTHER EXPENSES................................. 3,898,076 3,494,613 12,079,914 11,286,177
------------- -------------- ------------- -------------
INCOME/(LOSS) BEFORE INTEREST INCOME................. 1,107,405 (2,638,072) 2,253,431 (4,797,977)
INTEREST INCOME...................................... 522,760 764,580 1,505,811 2,259,925
------------- -------------- ------------- -------------
INCOME/(LOSS) BEFORE TAX PROVISIONS.................. 1,630,165 (1,873,492) 3,759,242 (2,538,052)
TAX PROVISIONS ...................................... 629,600 (672,264) 1,784,600 (746,074)
------------- -------------- ------------- -------------
NET INCOME/(LOSS).................................... $ 1,000,565 $ (1,201,228) $ 1,974,642 $ (1,791,978)
============= ============== ============= =============
BASIC EARNINGS PER SHARE............................. $ 0.07 $ (0.08) $ 0.13 $ (0.12)
============= ============== ============= =============
DILUTED EARNINGS PER SHARE........................... $ 0.07 $ (0.08) $ 0.13 $ (0.12)
============= ============== ============= =============

WEIGHTED AVERAGE NUMBER OF COMMON
SHARES AND COMMON SHARE EQUIVALENTS
OUTSTANDING......................................
Basic............................................ 14,233,234 15,887,531 15,134,620 16,053,730
Net effect of dilutive stock options -- based
on the treasury stock method using average
market price.................................. 73,871 -- 138,229 --
------------- -------------- ------------- -------------
Diluted.......................................... 14,307,105 15,887,531 15,272,849 16,053,730
============= ============== ============= =============
</TABLE>

See accompanying notes.

3
<PAGE> 4

NATIONAL TECHTEAM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(UNAUDITED)

- ---------------------------------------------------------------------------------------------------------------------------
ASSETS SEPTEMBER 30,1998 DECEMBER 31,1997
- ----------------------------------------------------------------------- ------------------- ---------------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents.......................................... $ 18,264,550 $ 24,927,348
Securities available-for-sale...................................... 10,094,595 39,094,615
Accounts receivable (less allowances of $637,701 at
September 30, 1998 and $787,175 at December 31, 1997)........... 33,336,076 26,479,816
Refundable income tax.............................................. -- 2,466,777
Equipment leased to others-short term.............................. 11,321,420 --
Net investment in direct finance leases............................ 6,192,396 --
Net investment in residuals........................................ 977,238 --
Inventories........................................................ 1,019,060 218,622
Prepaid expenses and other......................................... 1,920,301 2,781,777
Deferred income tax................................................ 2,593,532 338,532
--------------- -----------------
85,719,168 96,307,487
--------------- -----------------

PROPERTY, EQUIPMENT AND PURCHASED SOFTWARE
Office furniture and equipment..................................... 20,337,754 18,428,968
Purchased software................................................. 5,771,825 2,997,919
Leasehold improvements............................................. 2,075,064 1,600,133
Transportation equipment........................................... 333,274 297,154
--------------- -----------------
28,517,917 23,324,174
Less -- Accumulated depreciation and amortization................... 14,757,950 9,599,982
--------------- -----------------
13,759,967 13,724,192
--------------- -----------------

OTHER ASSETS
Equipment leased to others-long term............................... 6,289,258 --
Intangible Lease Asset............................................. 7,033,616 --
Intangibles (less accumulated amortization of $3,915,439 at
September 30, 1998 and $3,035,071 at December 31, 1997)......... 9,025,899 7,324,064
Advance to TechTeam Capital Group, Inc............................. -- 604,002
Deferred income tax................................................ 1,689,334 1,689,334
Other.............................................................. 2,347,520 1,639,582
--------------- -----------------
26,385,627 11,256,982
--------------- -----------------
TOTAL ASSETS........................................................... $ 125,864,762 $ 121,288,661
=============== =================
</TABLE>

See accompanying notes.

4
<PAGE> 5

NATIONAL TECHTEAM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(UNAUDITED)

- ---------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY SEPTEMBER 30,1998 DECEMBER 31,1997
- ---------------------------------------------------------------------- ----------------- ----------------
<S> <C> <C>
CURRENT LIABILITIES

Accounts payable................................................... $ 3,821,174 $ 3,707,985
Accrued payroll, related taxes and withholdings.................... 3,650,651 4,350,863
Deferred income tax................................................ 102,480 466,880
Deferred revenues and unapplied receipts........................... 2,375,494 1,353,398
Accrued expenses and taxes......................................... 997,684 533,391
Other.............................................................. 431,112 147,036
--------------- ----------------
11,378,595 10,559,553
--------------- ----------------

LONG-TERM LIABILITIES
Long-term debt..................................................... 17,773,587 --
Deferred Foundation Platform license fees.......................... 495,844 813,205
Deferred income tax................................................ 3,543,532 195,941
Other long-term liabilities........................................ -- 119,765
--------------- ----------------
21,812,963 1,128,911
--------------- ----------------

SHAREHOLDERS' EQUITY
Preferred stock, par value $.01
Authorized -- 5,000,000 shares
None issued
Common stock, par value $.01
Authorized -- 45,000,000 shares
Issued:
16,677,800 shares at September 30, 1998...................... 166,778
16,037,700 shares at December 31, 1997....................... 160,377
Additional paid-in capital......................................... 110,990,781 105,586,223
Retained earnings.................................................. 6,483,660 4,509,019
Other.............................................................. (59,607) (84,652)
--------------- ----------------
Total.............................................................. 117,581,612 110,170,967
Less -- Treasury stock (2,728,256 shares at September 30, 1998
and 124,474 shares at December 31, 1997)........................ 24,908,408 570,770
--------------- ----------------
Total shareholders' equity......................................... 92,673,204 109,600,197
--------------- ----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............................. $ 125,864,762 $ 121,288,661
=============== ================

</TABLE>

See accompanying notes.

5
<PAGE> 6

NATIONAL TECHTEAM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

-------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------

1998 1997
-------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income/(loss)................................................ $ 1,974,642 $ (1,791,978)
Adjustments to reconcile net income/(loss) to net cash
provided by/(used in) operating activities:
Depreciation and amortization.............................. 5,250,145 5,070,966
Provision for uncollectible accounts receivable............ (149,474) 359,238
Provision for deferred income taxes........................ 353,191 (1,263,808)
Deferred Foundation Platform license fees.................. (317,361) 3,246,139
Long-term accounts receivable from customer................ -- (2,063,013)
Treasury stock contributed to 401(k) plan.................. 336,799 110,196
Unrealized gain/(loss) on investments...................... (969) (74,326)
Minority interest in net loss of subsidiary................
Changes in current assets and liabilities:
Accounts receivable.................................... (4,919,613) 2,230,954
Equipment leased to others............................. (3,945,738) --
Inventories............................................ 60,880 (68,818)
Prepaid expenses....................................... 1,720,725 --
Advance to vendors..................................... -- (1,569,944)
Other current assets................................... -- (711,625)
Accounts payable....................................... (9,530,835) (1,072,251)
Accrued payroll, related taxes and withholdings........ (700,212) (502,027)
Federal income tax..................................... 2,216,777 (532,552)
Deferred revenues and unapplied receipts............... 958,468 578,863
Accrued expenses and taxes............................. (44,509) (271,942)
Other current liabilities.............................. (189,325) (141,072)
-------------- -------------
Net cash provided by/(used in) operating activities........ (6,926,409) 1,533,000
-------------- -------------
INVESTING ACTIVITIES
Purchases of property, equipment and software.................... (3,754,552) (6,143,951)
Development of training manuals.................................. -- (306,667)
Proceeds from sales of securities available-for-sale............. 29,000,020 (7,695,454)
Cash paid in conjunction with purchase of WebCentric,
net of cash acquired.......................................... -- (1,645,086)
Loss from sales of property, equipment and software and other
assets........................................................ -- (29,024)
Other ........................................................... (618,820) (12,611)
-------------- -------------
Net cash provided by/(used in) by investing activities........ 24,626,648 (15,832,793)
-------------- -------------
FINANCING ACTIVITIES
Purchase of Company stock........................................ (25,000,251) -
Proceeds from issuance of common stock........................... 384,430 937,930
Payments on long-term borrowings................................. -- (172,704)
Other............................................................ 252,784 (430,396)
-------------- -------------
Net cash provided by/(used in) financing activities........... (24,363,037) 334,830
-------------- -------------
Increase/(decrease) in cash and cash equivalents.............. (6,662,798) (13,964,963)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.................... 24,927,348 46,812,397
-------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.......................... $18,264,550 $ 32,847,434
============== =============
</TABLE>

See accompanying notes.

6
<PAGE> 7

NATIONAL TECHTEAM, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - SEPTEMBER 30, 1998
(UNAUDITED)

The Annual Report of the Company on Form 10-K for the year ended December 31,
1997 ("The 1997 Form 10-K") contains additional information and should be read
in conjunction with this report.

The consolidated financial statements included herein have been prepared by
National TechTeam, Inc. ("TechTeam" or "Company") without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in the financial
statements prepared in accordance with generally accepted accounting principles
have been omitted pursuant to such rules and regulations.

The information provided in this report reflects all adjustments consisting of
normal recurring accruals which are, in the opinion of management, necessary to
present fairly the results of operations for these periods. The results of
operations for these periods are not necessarily indicative of the results
expected for the full year.

NOTE A -- EARNINGS PER SHARE

Earnings per share is computed using the weighted average number of common
shares and common share equivalents outstanding. Common share equivalents
consist of stock options and are calculated using the treasury stock method.

NOTE B -- REVENUES FROM MAJOR CLIENTS

Revenues from clients for which revenues exceeded 5% of total revenues for any
of the periods presented are summarized as follows:

- ----------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------------------------
1998 1997
------------------------------- ------------------------------------
AMOUNT PERCENT OF TOTAL AMOUNT PERCENT OF TOTAL
------------- ---------------- ------------ ----------------
<S> <C> <C> <C> <C>
Chrysler Corporation................ $ 7,846,791 25.0% $ 3,195,757 15.6%
GE TechTeam, L.P.................... 5,610,708 17.9 -- --
Ford Motor Company.................. 5,033,486 16.1 4,098,940 20.0
Wayne County, MI.................... 2,137,783 6.8 1,764,766 8.9
International provider of
shipping services.............. 1,856,985 6.0 1,392,297 6.8
Hewlett-Packard Company............. -- -- 4,017,014 19.6

<CAPTION>
- ----------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------------------------
1998 1997
-------------------------- -----------------------------------------
AMOUNT PERCENT OF TOTAL AMOUNT PERCENT OF TOTAL
------------- ---------------- ------------ ----------------
<S> <C> <C> <C> <C>
Chrysler Corporation................ $ 20,538,920 24.0% $ 7,654,360 13.6%
GE TechTeam, L.P.................... 17,194,015 20.1 -- --
Ford Motor Company.................. 12,431,423 14.6 11,736,779 20.9
International provider of
shipping services.............. 5,099,491 6.0 4,195,413 7.5
Hewlett-Packard Company............. 4,300,178 5.1 13,984,470 24.8
Wayne County, MI.................... 3,401,964 4.0 3,427,416 5.9
</TABLE>

7
<PAGE> 8

NATIONAL TECHTEAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - SEPTEMBER 30, 1998 (continued)
(UNAUDITED)

NOTE C -- LEGAL PROCEEDINGS

Commencing in August 1997, four putative class action complaints were filed
against the Company and two of its officers in the United States District Court
for the Eastern District of Michigan. On April 13, 1998, a Consolidated Class
Action Complaint, consolidating the claims asserted in those cases was filed.
Plaintiffs purport to represent a class of persons who purchased shares of the
Company's common stock between September 27, 1996 and November 14, 1997. The
Complaint alleges that the Company and the individual defendants engaged in a
scheme to artificially inflate the price of the Company's common stock by
improperly accelerating the recognition of revenue from the licensing of the
Company's proprietary software. Plaintiffs assert claims against all defendants
for alleged violations of Section 10(b) of the Securities Exchange Act of 1934
and Rule 10b-5 promulgated thereunder, as well as claims against the individual
defendants for alleged "controlling person" liability under Section 20(a) of the
Securities Exchange Act. The Company and the individual defendants believe that
they have meritorious defenses to plaintiffs' claims, and they have filed a
motion to dismiss the complaint. However, because of the early stage of this
litigation, it is impossible to predict the outcome of the litigation or a range
of possible recovery, if any, by the plaintiffs. Accordingly, no provision for
any such liability or the costs of defense has been made in the accompanying
financial statements. The Company believes that these costs will be covered, at
least in part, by insurance.

In addition, the Company is the subject of a related investigation initiated on
September 9, 1997 by the United States Securities and Exchange Commission
("SEC"). The SEC has stated that the purpose of the investigation is to
determine whether the Company may have violated certain provisions of the
Securities Act of 1933 and the Securities Exchange Act of 1934 in connection
with its recognition of revenue from the licensing of its proprietary software.
This investigation is ongoing and the outcome cannot be predicted at this time,
although the Company believes it has complied fully with all applicable
provisions of the federal securities laws.

The Company is subject to various other legal proceedings and claims, either
asserted or unasserted, which arise in the ordinary course of business. While
the outcome of these claims cannot be predicted with certainty, management does
not believe that the outcome of any of these legal matters will have a material
adverse effect on the Company's consolidated results of operations or
consolidated financial position.

NOTE D -- RECENT PRONOUNCEMENTS OF THE FINANCIAL ACCOUNTING STANDARDS BOARD

In June 1997, the Financial Accounting Standards Board issued Statement No. 131,
"Disclosures About Segments of an Enterprise and Related Information." This
statement established standards for reporting financial and descriptive
information about operating segments. Under Statement No. 131, information
pertaining to the Company's operating segments will be reported on the basis
that is used internally for evaluating segment performance and making resource
allocation determinations. The Company intends to provide financial and
descriptive information about its reportable operating segments to conform to
the requirements in its annual financial statements for 1998 and quarterly
thereafter.

NOTE E -- STOCK REPURCHASES

In February 1998, the Company announced a stock repurchase program to purchase
up to 1,500,000 shares of common stock during the period ending August 15, 1998,
unless extended. The Company repurchased 1,500,000 shares under this program for
$14,863,799 by September 30, 1998.

In May 1998, the Company announced a second stock repurchase program to purchase
up to an additional 1,000,000 shares of common stock during the period ending
November 26, 1998, unless extended. The Company repurchased 1,000,000 shares
under this program for $9,075,000 by September 30, 1998.

In August 1998, the Company announced a third stock repurchase program to
purchase up to an additional 2,000,000 shares of common stock during the period
ending August 26, 1999, unless extended. By September 30, 1998, the Company had
repurchased 155,100 shares for $1,061,452.

8
<PAGE> 9

NATIONAL TECHTEAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - SEPTEMBER 30, 1998 (continued)
(UNAUDITED)

NOTE F -- COMPREHENSIVE INCOME

As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income. Statement 130 establishes new
rules for the reporting and display of comprehensive income and its components.
Statement 130 requires unrealized gains or losses on the Company's
available-for-sale securities and foreign currency translation adjustments,
which prior to adoption were reported as a separate component of shareholders'
equity, to be included in other comprehensive income.

Comprehensive income, net of related estimated tax, amounted to $1,026,043
and ($1,200,031) for the quarters ended September 30, 1998 and 1997, and
$1,999,687 and ($1,753,715) for the nine months ended September 30,
1998 and 1997, respectively.

NOTE G -- ACQUISITION OF TECHTEAM CAPITAL GROUP, INC.

In January 1998, TechTeam acquired all of the capital stock of Capricorn Capital
Group, Inc. (now TechTeam Capital Group, Inc.) in exchange for a base
consideration consisting of 350,000 unrestricted and 150,000 restricted shares
of TechTeam common stock plus a contingent payment based upon TechTeam Capital
Group, Inc.'s earnings performance in the three-year period following the
acquisition. The base consideration was valued at $4,875,000. The transaction
has been accounted for as a purchase. The accompanying September 30, 1998
balance sheet reflects a preliminary allocation of the purchase price. Goodwill
resulting from the transaction is being amortized using the straight-line method
over a period of 10 years.

Unaudited pro forma results of operations for the quarter and nine month period
ended September 30, 1997, assuming the transaction took place on January 1, 1997
are as follows:

PERIODS ENDED SEPTEMBER 30, 1997
THREE MONTHS NINE MONTHS
------------- -------------
<S> <C> <C>
Net revenues........................ $ 24,165,803 $ 71,706,010
Gross profit........................ 1,933,812 10,370,711
Net loss............................ (2,268,573) (2,438,643)
Net income per common share......... (0.15) (0.16)
</TABLE>

The pro forma results are not necessarily indicative of the actual results if
the transactions had been in effect for the entire period presented. In
addition, they are not intended to be a projection of future results and do not
reflect, among other things, any synergies that might have been achieved from
combined operations.

9
<PAGE> 10

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

This Management's Discussion and Analysis of Financial Condition and Results of
Operations contains trend analysis and a number of forward-looking statements.
These statements are based on current expectations and actual results may differ
materially. Among the factors that could cause actual results to vary are those
described in the subsection of this Item 7 entitled "Factors Affecting Future
Results."

RESULTS OF OPERATIONS

OVERVIEW

The Company originally commenced operations as a value added reseller of
computer hardware and software that also provided training for its computer
products. During the late 1980's the Company added IT staffing and systems
integration services as a complement to its existing training business. In 1993,
as a result of the Company's growing expertise in providing IT staffing of
on-site help desks, TechTeam entered the call center industry. Today, the
Company's IT outsourcing services cover a broad range of IT, including planning,
design, implementation and support. Although the Company's services are
complementary, TechTeam has divided its service offerings into three divisions,
Corporate Services (corporate help desk/call center services, technical
staffing, systems integration and training programs), OEM Call Center Services,
and TechTeam Capital Group. Revenues from all service offerings are recognized
as services are performed.

Corporate help desk/call center services consist of telephone support for
corporate users of computer hardware, software products and services. TechTeam
provides these services from both its own call centers and at client sites
through on-site help desks to support end-user applications. Corporate help
desk/call center services are billed on a fee per call, fee per time spent on
calls or per agent basis, each as negotiated with clients. The Company licenses
clients to use its Foundation Platform, a software product developed by the
Company's wholly-owned subsidiary, WebCentric Communications, Inc. Revenues from
these licenses are recognized either: (1) on a usage basis, when the licenses
are granted in connection with on-going services; (2) as the expenses of the
transaction are recognized in those instances where the license was granted in
connection with a contemporaneous purchase; or (3) as lump sum fees when the
client acquires the rights to use and is allowed access to the Foundation
Platform without any on-going service obligation by the Company. Technical
staffing includes a variety of technical services, selected programming and
consulting services. Systems integration consists of database design, computer
product sales and networking services. Contracts for technical staffing and
systems integration are generally negotiated on an hourly rate basis or are
priced on a project basis. Training programs consist of instructor-led,
computer-based training for word processing, spreadsheets, graphics, databases,
desktop publishing, operating systems, and systems administration for NetWare,
JAVA, NT, Windows, OS/2, UNIX and mainframe operating systems. For training
programs, clients pay a fee per student trained or a fee for classes offered, in
some cases with an advance payment for the cost of the necessary training
materials.

OEM Call Center Services consist of national and international telephone support
for the end-user customers of TechTeam's clients. Through the end of the First
Quarter 1998, TechTeam provided OEM Call Center Services which were billed on a
fee per call, fee per time spent on calls or per agent basis, each as negotiated
with clients. Commencing in the Fourth Quarter 1997, TechTeam also provided OEM
Call Center Services on a per agent basis to a joint venture formed with General
Electric Appliances Division ("GEA"). Effective March 31, 1998, the OEM Call
Center business conducted directly by TechTeam was terminated as a result of: 1)
The scheduled expiration of the two largest of the Company's contracts with
Hewlett-Packard; and 2) The sale to GEA of the remaining unexpired contracts
with Hewlett-Packard and a contract with 3Com Corporation. The Company's
decision to sell these OEM call center contracts was consistent with its
strategic direction to concentrate on corporate help desk solutions. As a
result, commencing in the Second Quarter 1998, revenues consist of billings to
the GE TechTeam joint venture and revenues recognized from the sale of the
contracts to GEA in March 1998.

10
<PAGE> 11

TechTeam Capital Group includes services offered by Capricorn Capital Group,
Inc. (now TechTeam Capital Group, Inc.) and its affiliate, Capricorn Integrated
Technologies Group ("CITG"). Since 1980, TechTeam Capital Group, Inc. has been
providing financing for high technology and capital equipment in the United
States. CITG provides all major brands of computers, peripherals, and components
for the corporate environment, as well as custom configurations, installation,
component level repair, monitor repair, and remarketing services.

Cost of services delivered consists of direct personnel compensation, statutory
and other benefits associated with such personnel, facility and computer
equipment costs, and other direct costs associated with providing services to
clients. Selling, general and administrative costs consist of sales, marketing
and administrative personnel compensation, statutory and other benefits
associated with such personnel, facility and equipment costs and other indirect
costs associated with the sales, marketing and administrative functions of the
Company.

The following table sets forth the percentage relationship to revenues of
certain items in the Company's Consolidated Statements of Operations:

- ------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES
Corporate Services
Corporate help desk/call center services...... 26.6% 30.6% 24.8% 31.4%
Technical staffing............................ 19.4 32.4 22.9 31.3
Systems integration........................... 15.6 18.2 12.1 15.0
Training programs............................. 5.4 9.0 6.2 8.8
-------- -------- -------- -------
Total Corporate Services......................... 67.0 90.2 66.0 86.5
OEM Call Center Services......................... 18.0 9.8 22.2 13.5
TechTeam Capital Group........................... 15.0 -- 11.8 --
-------- -------- -------- -------
TOTAL REVENUES....................................... 100.0 100.0 100.0 100.0
COST OF SERVICES DELIVERED........................... 84.0 95.7 83.2 88.8
-------- -------- -------- -------
GROSS PROFIT......................................... 16.0 4.3 16.8 11.2
-------- -------- -------- -------
OTHER EXPENSES
Selling, general and administrative.............. 11.3 17.5 12.8 19.3
Interest expense................................. 1.2 -- 1.4 0.1
-------- -------- -------- -------
TOTAL OTHER EXPENSES................................. 12.5 17.5 14.2 19.4
-------- -------- -------- -------
INCOME/(LOSS) BEFORE INTEREST INCOME................. 3.5 (13.2) 2.6 (8.3)
INTEREST INCOME...................................... 1.7 3.8 1.8 3.9
-------- -------- -------- -------
INCOME/(LOSS) BEFORE TAX PROVISIONS.................. 5.2 (9.4) 4.4 (4.4)
TAX PROVISIONS....................................... 2.0 (3.4) 2.1 1.3
-------- -------- -------- -------
NET INCOME/(LOSS).................................... 3.2% (6.0)% 2.3% 3.1%
======== ======== ======== =======
</TABLE>

Between 1994 and 1997, TechTeam's revenues increased at a compound annual rate
of 33.4%. The Company believes that its growth has benefited from the trend
among large corporations to outsource much of their information technology needs
and TechTeam's ability to provide integrated services that address a broad range
of those needs. The Company believes that the outsourcing trend will continue
and will provide continuing opportunities for all of its service lines. TechTeam
further believes that its service offerings are influenced substantially by its
clients' desires to focus on their core businesses and to leave information
technology needs to the Company for which information technology is its core
business. TechTeam's training programs have encountered cyclical enrollment
trends, influenced by the timing and extent to which clients are upgrading
desktop software.

11
<PAGE> 12

TechTeam's business is based on client relationships with major corporations.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Factors Affecting Future Results -- Impact of Business with Major
Clients."

COMPARATIVE PERFORMANCE -- THIRD QUARTER 1998 VERSUS 1997

TechTeam earned a net income of $1,000,565 or $0.07 per share, for the Third
Quarter 1998 as compared to a net loss of ($1,201,228), or ($0.08) per share,
for the Third Quarter 1997.

REVENUES

TechTeam's total revenues increased by $11,287,106 in 1998 to $31,306,544, a 56%
increase over revenues in 1997. Changes in revenues resulted from the following:

Corporate Services

Corporate help desk/call center services
Revenues from Corporate help desk/call center services increased by
$2,202,312 in 1998. This was a 36% increase over Corporate help desk/call
center services revenues in 1997. This increase was due to new business
with new and existing customers.

Technical staffing
Revenues from technical staffing decreased by $408,933 in 1998. This was
a 6% decrease over technical staffing revenues in 1997. This decrease was
due to decreased client demand for TechTeam's computer services personnel
at selected accounts.

Systems integration
Revenues from systems integration increased by $1,251,907 in 1998. This
was a 34% increase from systems integration revenues in 1997. This
increase was due to increased hardware sales and related services.

Training programs
Revenues from training programs decreased by $124,284 in 1998. This was a
6.9% decrease from training revenues in 1997. This decrease was due to
decreased enrollments in the Company's training programs.

OEM Call Center Services
Revenues from OEM Call Center Services increased by $3,659,292 in 1998. This was
a 188% increase over OEM Call Center Services revenues in 1997. The increase was
primarily driven by revenues for services provided to the Company's joint
venture with GEA which aggregated $4,902,485 for the Third Quarter 1998. On
March 31, 1998, the Company sold its OEM call center contracts, consisting of
its remaining unexpired contracts with Hewlett-Packard Corporation and a
contract with 3Com Corporation, to GEA for $1.4 million. GEA then contributed
those contracts to the GE TechTeam joint venture for an agreed value of $1.4
million and an agreement that GEA shall receive all of the joint venture's
earnings until GEA has recovered the $1.4 million. TechTeam is recognizing the
gain related to this sale as the joint venture records earnings on the
contracts. Such earnings amounted to $409,993 for the Third Quarter 1998.

TechTeam Capital Group
In January 1998, TechTeam acquired TechTeam Capital Group, Inc. The revenues
since acquisition are reported in this category.

12
<PAGE> 13

COST OF SERVICES DELIVERED

The cost of services delivered increased by $7,138,166 in 1998. This was a 37%
increase over the cost of services delivered in 1997. The increase was due
principally to compensation costs for an increased number of technical
personnel, statutory and other benefits associated with such personnel, facility
and computer equipment costs, and other direct costs associated with providing
an increased volume of services to clients. These costs were 84.0% and 95.7% of
revenues in 1998 and 1997, respectively. The decrease was due primarily to costs
incurred in 1997 for the start-up of new projects that did not recur in 1998.

SELLING, GENERAL AND ADMINISTRATIVE

Selling, general and administrative expenses increased by $23,648 in 1998. This
was a 0.6% increase from selling, general and administrative expenses in 1997.
These expenses were 11.3% of revenues in 1998 compared with 17.5% of revenues in
1997. This decrease was due primarily to growth in revenues without a
corresponding expansion of TechTeam's administrative infrastructure.

INTEREST EXPENSE

In January 1998, TechTeam acquired TechTeam Capital Group, Inc. which finances
its leasing activities through use of various forms of long-term and short-term
debt. The interest costs of this debt are reported in this category.

INTEREST INCOME

Commencing in October 1996, TechTeam began earning significant amounts of
interest income on cash generated by the 1996 public stock offering. For 1998,
interest income was $522,760 compared to $764,580 in 1997. The decline in
interest income between 1997 and 1998 results from increased use of cash for
operations and repurchase of Company's shares. (See Liquidity and Capital
Resources.)

TAX PROVISIONS

TechTeam recognized $622,400 of Federal income tax in 1998, resulting in an
effective tax rate of 38.4% compared to an effective tax rate of 44.4% for 1997.
The 1998 and 1997 effective tax rates differ due to changing amounts of
permanent book/tax differences, primarily goodwill and tax-exempt interest. The
Michigan single business tax and state income taxes in 1998 were $7,200 with an
effective tax rate of 0.4% compared to an effective rate of (3.3)% in 1997.
These taxes are tied more closely to factors other than pre-tax income which
inflate the effective tax rate when income is lower, or negative as in 1997.

COMPARATIVE PERFORMANCE -- FIRST NINE MONTHS 1998 VERSUS 1997

TechTeam earned a net income of $1,974,642 or $0.13 per share, for the First
Nine Months 1998 as compared to a net loss of ($1,791,977), or ($0.12) per
share, for the First Nine Months 1997.

REVENUES

TechTeam's total revenues increased by $27,400,576 in 1998 to $85,429,805, a 48%
increase over revenues in 1997. Changes in revenues resulted from the following:

Corporate Services

Corporate help desk/call center services

Revenues from Corporate help desk/call center services increased by
$2,962,315 in 1998. This was a 16% increase over Corporate help desk/call
center services revenues in 1997. This increase was due to new business
with both existing and new customers.

13
<PAGE> 14

Technical staffing

Revenues from technical staffing increased by $1,358,648 in 1998. This
was a 7% increase over technical staffing revenues in 1997. This increase
was due to continued client demand for TechTeam's computer services
personnel at major accounts.

Systems integration

Revenues from systems integration increased by $1,620,670 in 1998. This
was a 19% increase over systems integration revenues in 1997. This
increase was due to increased hardware sales and related services.

Training programs

Revenues from training programs increased by $192,753 in 1998. This was a
4% increase over training revenues in 1997. This increase was due to
increased enrollments in the Company's training programs.

OEM Call Center Services

Revenues from OEM Call Center Services increased by $11,088,075 in 1998. This
was a 142% increase over OEM Call Center Services revenues in 1997. The increase
was primarily driven by revenues for services provided to the Company's joint
venture with GEA which aggregated $15,041,835 for the first nine months of 1998,
offset by reduced revenues related to the contracts discussed below. On March
31, 1998, the Company sold its OEM call center contracts, consisting of its
remaining unexpired contracts with Hewlett-Packard Corporation and a contract
with 3Com Corporation, to GEA for $1.4 million. GEA then contributed those
contracts to the GE TechTeam joint venture for an agreed value of $1.4 million
and an agreement that GEA shall receive all of the joint venture's earnings
until GEA has recovered the $1.4 million. First Quarter 1998 earnings reflected
no amounts related to this sale. TechTeam is recognizing the gain related to
this sale as the joint venture records earnings on the contracts. Such earnings
amounted to $769,591 for the first nine months of 1998.

TechTeam Capital Group

In January 1998, TechTeam acquired TechTeam Capital Group, Inc. The revenues
since acquisition are reported in this category.

COST OF SERVICES DELIVERED

The cost of services delivered increased by $19,555,431 in 1998. This was a 38%
increase over the cost of services delivered in 1997. The increase was due
principally to compensation costs for an increased number of technical
personnel, statutory and other benefits associated with such personnel, facility
and computer equipment costs, and other direct costs associated with providing
an increased volume of services to clients. These costs were 83.2% and 88.8% of
revenues in 1998 and 1997, respectively. The decrease was due primarily to costs
incurred in 1997 for the start up of new business that did not reoccur in 1998.

SELLING, GENERAL AND ADMINISTRATIVE

Selling, general and administrative expenses decreased by $303,942 in 1998. This
was a 2.7% decrease from selling, general and administrative expenses in 1997.
The decrease was due principally to costs incurred in 1997 related to the
purchase of Compuflex Systems, Inc. which did not recur in 1998. These expenses
were 12.7% of revenues in 1998 compared with 19.3% of revenues in 1997. This
decrease was due primarily to growth in revenues without a corresponding
expansion of TechTeam's administrative infrastructure.

INTEREST EXPENSE

14
<PAGE> 15

INTEREST INCOME

Commencing in October 1996, TechTeam began earning significant amounts of
interest income on cash generated by the 1996 public stock offering. For 1998,
interest income was $1,505,811 compared to $2,259,925 in 1997. The decline in
interest income between 1997 and 1998 results from use of cash for operations
and repurchase of Company's shares. (See Liquidity and Capital Resources.)

TAX PROVISIONS

TechTeam recognized $1,233,500 of Federal income tax in 1998, resulting in an
effective tax rate of 38.9% compared to an effective tax rate of 41.6% for 1997.
The 1998 and 1997 effective tax rates differ due to changing amounts of
permanent book/tax differences, primarily goodwill and tax-exempt interest. The
Michigan single business tax and state income taxes in 1998 were $529,100, with
an effective tax rate of 14.1% compared to an effective rate of (18.8)% in 1997.
These taxes are tied more closely to factors other than pre-tax income which
inflate the effective tax rate when income is lower, or negative as in 1997.

15
<PAGE> 16

LIQUIDITY AND CAPITAL RESOURCES

Over the three year period commencing January 1, 1995, the Company's business
has been financed by cash provided by operations, shares issued throughout the
period under stock option plans and $77,851,500 from a public offering in 1996.
Indicators of the Company's financial strength are summarized below:

- ---------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30,1998 DECEMBER 31, 1997
------------------ -----------------
<S> <C> <C>
Working capital........................................................ $ 74,340,573 $ 85,747,934
Current ratio.......................................................... 7.5 9.1
Debt as a percentage of total capitalization........................... 15.1% 0.1%
Shareholders' equity................................................... $ 92,673,219 $ 109,600,197
</TABLE>

The Company's working capital was $74,340,573 at September 30, 1998; the
decrease primarily resulting from the repurchase of Company common stock - see
below. A decrease of 13.3% from December 31, 1997. Available cash will be used
for general corporate purposes, including domestic and international call center
expansion, capital expenditures, working capital, acquisitions and stock
repurchases under the Company's stock repurchase program.

Early in 1998, TechTeam acquired TechTeam Capital Group, Inc. Currently, the
Company has no arrangements or understandings with respect to any material
acquisitions, although it continually monitors acquisition opportunities.

As a result of the acquisition of TechTeam Capital Group, debt aggregating
$17,773,587 at September 30, 1998 is now included in the consolidated financial
statements. TechTeam Capital Group finances its leasing activities through use
of various forms of long-term and short-term debt. Prior to this acquisition
TechTeam had no significant debt outstanding.

In February 1998, the Board of Directors of the Company authorized a stock
repurchase program. The program provided for the open market and other purchase
of up to 1,500,000 shares of the Company's stock. The Company repurchased
1,500,000 shares under this program for $14,863,799 by September 30, 1998.

In May 1998, the Board of Directors of the Company authorized another stock
repurchase program. The program provided for the open market and other purchase
of up to an additional 1,000,000 shares of the Company's stock. The Company
repurchased 1,000,000 shares under this program for $9,075,000 by September 30,
1998.

TechTeam has line-of-credit agreements with NBD Bank and Chase Manhattan Bank
which provide for short-term borrowings of up to $25,000,000 and $310,000,
respectively; both lines-of-credit are unsecured. NBD Bank borrowings are at the
prime rate and Chase Manhattan Bank borrowings are at prime plus 1.5%. There
were no borrowings under these lines at September 30, 1998.

YEAR 2000 DISCLOSURE

TechTeam is substantially complete in determining the extent to which its
software systems and hardware system are Year 2000 compliant. TechTeam will
complete this facet of its Year 2000 compliance program by year end 1998.
TechTeam has found it necessary to replace its accounting system to achieve Year
2000 compliance. The new system will be operational before year end 1998.

TechTeam has completed a survey of all its major internal system vendors to
determine the extent of their products Year 2000 readiness and has on file a
letter confirming compliance. TechTeam continues to make progress on its Year
2000 compliance program relative to hardware, vendors, and customers, and
expects these initiatives to be complete and fully Year 2000 compliant by First
Quarter 1999. However, due to TechTeam's dependence on vendors, including
telecommunications vendors, their failure to assure Year 2000 compliance could
have an adverse effect on TechTeam's ability to deliver its services.

The cost of Year 2000 initiatives is not expected to be material to TechTeam's
operations or financial position.

16
<PAGE> 17

FACTORS AFFECTING FUTURE RESULTS

RESTATEMENT OF FINANCIAL STATEMENTS:

In November 1997, the Company announced that it was restating its results of
operations for the fourth quarter of 1996 and for the first two quarters of
1997, reflecting significant reductions in reported revenues and earnings and
resulting in reporting a net loss in each of the first two quarters of 1997 and
a significant reduction in net income for 1996. The cumulative effect of the
restatement negatively impacts the Company's December 31, 1997 financial
condition. See Notes to the Consolidated Financial Statements -- Note A,
Restatement of Previously Issued Financial Statements in The 1997 Form 10-K. In
addition, the Company's restated First Quarter and Second Quarter 1997 revenues
and operating results were not favorable when compared to the same 1996
quarters. The Company believes that there may continue to be negative impact on
the Company from the restatement.

LITIGATION:

Commencing in August 1997, four putative class action complaints were filed
against the Company and two of its officers in the United States District Court
for the Eastern District of Michigan. On April 13, 1998, a Consolidated Class
Action Complaint, consolidating the claims asserted in those cases was filed.
Plaintiffs purport to represent a class of persons who purchased shares of the
Company's common stock between September 27, 1996 and November 14, 1997. The
Complaint alleges that the Company and the individual defendants engaged in a
scheme to artificially inflate the price of the Company's common stock by
improperly accelerating the recognition of revenue from the licensing of the
Company's proprietary software. Plaintiffs assert claims against all defendants
for alleged violations of Section 10(b) of the Securities Exchange Act of 1934
and Rule 10b-5 promulgated thereunder, as well as claims against the individual
defendants for alleged "controlling person" liability under Section 20(a) of the
Securities Exchange Act. While Management believes that meritorious defenses
exist to plaintiffs' claims and has filed a motion to dismiss the complaint, the
final disposition of this litigation could have material adverse effect on the
Company's financial condition, results of operations and cash flows.

IMPACT OF BUSINESS WITH MAJOR CLIENTS:

Historically, TechTeam has been heavily dependent upon major clients for a
substantial portion of its revenues. Any loss of (or failure to retain a
significant amount of business with) its key clients could have a material
adverse impact on the Company. Until 1996, Ford Motor Company ("Ford") was
TechTeam's largest client. Ford accounted for 33.1%, 22.6% and 21.3% of the
Company's revenue for the years ended December 31, 1995, 1996 and 1997,
respectively. Ford represented significantly higher proportions of TechTeam's
revenues in earlier years. In 1996, Hewlett-Packard became TechTeam's largest
client, representing 26.7% of TechTeam's revenues in that year. In 1997,
Hewlett-Packard accounted for 21.3% of the Company's revenues. In the past
several years, Chrysler Corporation ("Chrysler") has also become a major client,
representing between 5 and 10% of the Company's total revenues. In 1997, the
percentage of total revenues derived from Chrysler increased to 14.6%, and an
international provider of shipping services became a significant client
generating 6.5% of total revenues. Ford, Chrysler, and the international
provider of shipping services are expected to continue to constitute a high
percentage of TechTeam's revenues for the foreseeable future. Effective March
31, 1998, the OEM call center business conducted directly by TechTeam was
terminated as a result of: 1) The scheduled expiration of the two largest of the
Company's contracts with Hewlett-Packard; and 2) The sale to GEA of the
remaining unexpired contracts with Hewlett-Packard and a contract with 3Com
Corporation. The Company's decision to sell these OEM call center contracts was
consistent with its strategic direction to concentrate on corporate help desk
solutions.

17
<PAGE> 18

Management recognizes the need to diversify its client base from both a client
and industry perspective. TechTeam's services are not specific to any single
industry and can be beneficial to most large corporations. TechTeam's technical
staffing and training programs cover most of the popular software applications
and can be customized to improve the productivity of microcomputer users in most
companies.

MANAGEMENT OF GROWTH:

The Company's revenues have grown from $34.3 million in 1994 to $47.1 million in
1995, $72.2 million in 1996, $81.3 million in 1997 and $85.7 million in the
first nine months of 1998. The Company intends to pursue the continued growth of
its business; however, there can be no assurance that such growth will be
achieved. The Company's future operating results will depend in part on
management's ability to manage any future growth and control expenses. An
unexpected decline in revenues without a corresponding and timely reduction in
staffing and other expenses, or a staffing increase that is not accompanied by a
corresponding increase in revenues, could have a material adverse effect on the
Company's operating results.

Although the market in which the Company participates has experienced
significant growth in recent years, continued growth in the industry may be
adversely impacted by, among other things, recessionary pressures or a slowdown
in the rate of technological advances. A slowdown or reversal of industry growth
could impact the Company's ability to grow.

COMPETITION:

The Company faces intense competition in both the call center and corporate
computer services markets. In the call center market, the Company competes with
other call center companies, some of which have substantially greater resources
including more call center locations, greater financial resources, a larger
client base and more name recognition. In the corporate computer services
market, the Company competes with many entities including systems implementation
firms, application software firms, staffing firms, large accounting firms,
facilities management firms and computer consulting firms. Many of these firms
have far greater resources, clients and name recognition than the Company.

The Company also faces significant competition in both markets from its own
clients and potential clients whose internal resources represent a fixed cost to
the client. Such competition may impose additional pricing pressures on the
Company. There can be no assurance that the Company will compete successfully
with its existing competitors or with any new competitors.

CONTRACT RISKS:

The great majority of the Company's contracts are terminable without cause on
short notice, often upon 90 days notice. Other of the Company's contracts expire
on set dates and may not be renewed or replaced. Terminations and non-renewals
of major contracts can have a significant impact upon the Company's revenues and
operating results.

RELIANCE ON KEY EXECUTIVES:

The success of the Company is highly dependent upon the efforts and abilities of
its executive officers, particularly William F. Coyro, Jr., the Company's
founder, Chairman and Chief Executive Officer. Other than Harry A. Lewis,
President and Chief Operating Officer, none of the Company's key executives are
subject to employment contracts, and the Company does not maintain key-man
insurance on its executives. The loss of the services of any of these key
executives for any reason could have a material adverse effect on the Company's
business, operating results and financial condition.

18
<PAGE> 19

ATTRACTION AND RETENTION OF EMPLOYEES:

The Company's business involves the delivery of professional services and is
labor-intensive. The Company's success depends in large part upon its ability to
attract, develop, motivate and retain highly skilled technical employees.
Qualified technical employees are in great demand and are likely to remain a
limited resource for the foreseeable future. There can be no assurance that the
Company will be able to attract and retain sufficient numbers of highly skilled
technical employees in the future. The loss of technical personnel could have a
material adverse effect on the Company's business, operating results and
financial condition, including its ability to secure and complete engagements.

PROJECT RISKS:

Many of the Company's engagements involve projects that are critical to the
operations of its clients' businesses and provide benefits that may be difficult
to quantify. The Company's failure or inability to meet a client's expectations
in the performance of its services could result in a material adverse change to
the client's operations and therefore could give rise to claims against the
Company or damage the Company's reputation, adversely affecting its relationship
with its client, its business, operating results and financial condition.

VARIABILITY OF QUARTERLY OPERATING RESULTS:

Variations in the Company's revenue and operating results occur from time to
time as a result of a number of factors, such as the significance of client
engagements commenced and completed during a quarter, the number of business
days in a quarter and employee hiring and utilization rates. The timing of
revenues is difficult to forecast because the Company's sales cycle can be
relatively long and may depend on factors such as the size and scope of
assignments and general economic conditions. Because a high percentage of the
Company's expenses are relatively fixed, a variation in the number of clients,
assignments or the timing of the initiation or the completion of client
assignments, particularly at or near the end of any quarter, can cause
significant variations in operating results from quarter to quarter and could
result in losses to the Company. In addition, the Company's engagements
generally are terminable by the client without penalty.

VOLATILITY OF STOCK PRICE:

The market price of the Company's stock has fluctuated over a wide range during
the past several years and may continue to do so in the future. The market price
of the common stock could be subject to significant fluctuations in response to
various factors or events, including among other things, the depth and liquidity
of the trading market of the common stock, quarterly variations and actual
anticipated operating results, growth rates, changes in estimates by analysts,
market conditions in the industry in which the Company competes, announcements
by competitors, regulatory actions, litigation including class action litigation
and general economic conditions. In addition, the stock market has from time to
time experienced significant price and volume fluctuations, which have
particularly affected the market prices of the stocks of high technology
companies. As result of the foregoing, the Company's operating results and
prospects from time to time may be below the expectations of public market
analysts and investors. Any such event would likely result in a material adverse
effect on the price of the common stock.

CYCLICALITY:

Certain of the Company's clients and potential clients are in industries, such
as the automobile and financial services industries, that experience cyclical
variations in profitability, which may in turn affect their willingness or
ability to fund systems projects such as those for which the Company may be
engaged. The Company's experience indicates, however, that competitive pressures
in cyclical industries could compel businesses to undertake projects even during
periods of losses or reduced profitability.

19
<PAGE> 20

INTERRUPTION OF TELECOMMUNICATIONS SERVICES:

The Company's operations are dependent on its ability to protect its call
centers against damage from fire, power loss, telecommunications failure or
similar event. The Company has taken precautions to protect itself from events
that could interrupt its operations, including off-site storage of back-up data,
contractual arrangements for back-up facilities with a leading disaster recovery
services company and Halon fire suppression systems in the data centers (which
are designed to extinguish a fire without damaging computer equipment). No
assurance can be given that such precautions will be adequate, and operations
may still be interrupted, even for extended periods. In addition, the on-line
services provided by the Company are dependent on telecommunications links to
the regional Bell operating companies for which the Company currently has no
back-up. Any damage to call centers or any failure of the Company's
telecommunication links that cause interruptions in the Company's operations
could have a material adverse effect on the Company's business, operating
results or financial condition. The Company's property and business interruption
insurance with current limits of $2 million may not be adequate to compensate
the Company for all losses that may occur.

GROWTH THROUGH ACQUISITIONS AND NEW PRODUCTS:

The Company's business strategy includes growth through acquisitions of
businesses and technology sources complementary to the Company's business. The
Company has acquired several significantly smaller companies in the past and
believes that it has been successful in integrating the acquired assets and
businesses into the Company's operations. There can be no assurance, however,
that future acquisitions will be consummated on acceptable terms or that any
acquired assets or business will be successfully integrated into the Company's
operations. Further, acquisitions may involve special risks such as diversion of
management's attention, unanticipated events, legal liabilities and amortization
of intangibles, any of which could have an adverse effect on the Company's
operations and earnings.

RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS:

Certain risks are inherent in the Company's business strategy which includes
plans for the global expansion of its operations. Among other things, the
Company may encounter difficulties in marketing, selling and delivering its
services due to differences in cultures, languages, labor and employment
policies and differing political and social systems. In addition, the Company
may encounter significant effects on its operations and financial condition as a
result of currency fluctuations and differing tax laws.

RAPID TECHNOLOGICAL CHANGES; DEPENDENCE ON NEW SOLUTIONS:

The Company's success will depend in part on its ability to develop IT solutions
that keep pace with continuing changes in IT, evolving industry standards and
changing client preferences. There can be no assurance that the Company will be
successful in adequately addressing these developments on a timely basis or
that, if these developments are addressed, the Company will be successful in the
marketplace. In addition, there can be no assurance that products or
technologies developed by others will not render the Company's services
uncompetitive or obsolete. The Company's failure to address these developments
could have a material adverse effect on the Company's business, operating
results and financial condition.

INTELLECTUAL PROPERTY RIGHTS:

The Company's success is dependent upon certain methodologies it utilizes in
designing, installing and integrating computer software and information systems
and other proprietary intellectual property rights. The Company's business
includes the development of custom software in connection with specific client
engagements. Ownership of such software is generally assigned to the client. The
Company also develops certain foundation and application software products, or
software "tools," which remain the property of the Company.

20
<PAGE> 21

The Company relies upon a combination of nondisclosure, other contractual
arrangements, trade secret, copyright and trademark laws to protect its
proprietary rights and the proprietary rights of third parties from whom the
Company licenses intellectual property. The Company enters into confidentiality
agreements with its employees and limits distribution of proprietary
information. There can be no assurance that the steps taken by the Company in
this regard will be adequate to deter misappropriation of proprietary
information or that the Company will be able to detect unauthorized use and take
appropriate steps to enforce its intellectual property rights.

Although the Company believes that its services do not infringe on the
intellectual property rights of others and that it has all rights necessary to
utilize the intellectual property employed in its business, the Company is
subject to the risk of litigation alleging infringement of third-party
intellectual property rights. Any such claims could require the Company to spend
significant sums in litigation, pay damages, develop non-infringing intellectual
property or acquire licenses of the intellectual property which is the subject
of asserted infringement.

21
<PAGE> 22

PART II -- OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The Company is subject to various other legal proceedings and claims, either
asserted or unasserted, which arise in the ordinary course of business. While
the outcome of these claims cannot be predicted with certainty, management does
not believe that the outcome of any these legal matters will have a material
adverse effect on the Company's consolidated results of operations or
consolidated financial position.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits
27. Financial Data Schedule

(b) Reports on Form 8-K. October 29, 1998 - Third Quarter 1998 Earnings.

ITEMS 2, 3, 4 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED

22
<PAGE> 23

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

National TechTeam, Inc.
-----------------------
(Registrant)

Date: November 13, 1998 By: /s/ William F. Coyro Jr.
------------------------
William F. Coyro Jr.
Chairman of the Board and
Chief Executive Officer

Date: November 13, 1998 By: /s/ Lawrence A. Mills
---------------------
Lawrence A. Mills
Vice President,
Chief Financial Officer and Treasurer

23
<PAGE> 24

INDEX TO EXHIBITS

EX-27 FINANCIAL DATA SCHEDULE

<ARTICLE> 5

<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 18,264,550
<SECURITIES> 10,094,595
<RECEIVABLES> 33,973,777
<ALLOWANCES> 637,701
<INVENTORY> 1,019,060
<CURRENT-ASSETS> 85,719,168
<PP&E> 28,517,917
<DEPRECIATION> 14,757,950
<TOTAL-ASSETS> 125,864,762
<CURRENT-LIABILITIES> 11,378,595
<BONDS> 0
166,778
0
<COMMON> 0
<OTHER-SE> 92,673,204
<TOTAL-LIABILITY-AND-EQUITY> 125,864,762
<SALES> 8,762,511
<TOTAL-REVENUES> 85,429,805
<CGS> 8,762,511
<TOTAL-COSTS> 62,333,949
<OTHER-EXPENSES> 12,079,914
<LOSS-PROVISION> 637,701
<INTEREST-EXPENSE> 1,168,171
<INCOME-PRETAX> 3,759,242
<INCOME-TAX> 1,784,600
<INCOME-CONTINUING> 1,974,642
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,974,642
<EPS-PRIMARY> 0.13
<EPS-DILUTED> 0.13

</TABLE>