** **

**UNITED STATES**

** **

**SECURITIESAND EXCHANGE COMMISSION**

** **

**WASHINGTON,D.C. 20549 - 0001**

** **

** **

**FORM 10-Q**

** **

**(Mark One)**

** **

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

** **

**FORTHE QUARTER ENDED JUNE 30, 2002**

** **

**or**

** **

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

** **

**COMMISSIONFILE NUMBER 000-30271**

** **

**PECSOLUTIONS, INC.**

**(EXACTNAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)**

** **

| **DELAWARE**                                                        | **54-1339972**                           |
|---------------------------------------------------------------------|------------------------------------------|
| **(State or other jurisdiction of  incorporation or organization)** | **(I.R.S. Employer Identification No.)** |
|                                                                |                                     |
|                                                                |                                     |
| **12750  FAIR LAKES CIRCLE, FAIRFAX, VA**                           | **22033**                                |
| **(Address of principal executive offices)**                        | **(Zip Code)**                           |

** **

** **

**Registrant'stelephone number, including area code:**(703) 679-4900

** **

**Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to the filingrequirements for the past 90 days. Yes**ý No o

** **

**As ofAugust 14, 2002, 26,463,982 of the registrant's Common Stock, par value $.01per share, were outstanding.**

** **

** **

----

** **

**PECSOLUTIONS, INC.**

**QUARTERLYREPORT ON FORM 10-Q FOR THE SIX MONTHS ENDED JUNE 30, 2002**

** **

**TABLEOF CONTENTS**

** **
|                                                                                               |
|----------------------------------------------------------------------------------------------------|
| **PART I.  FINANCIAL INFORMATION**                                                            |
| **Item 1. Financial Statements:**                                                                  |
| **Consolidated Balance Sheets - June 30, 2002 and December 31, 2001**                              |
| **Consolidated Statements of Income - Three  and six months ended June 30, 2002 and 2001**         |
| **Consolidated Statements of Cash Flows --  Six months ended June 30, 2002 and 2001**              |
| **Notes to Consolidated Financial Statements**                                                     |
| **Item 2. Management's Discussion and  Analysis of Financial Condition and Results of Operations** |
| **Item 3. Qualitative and Quantitative  Disclosure about Market Risk**                             |
| **PART II. OTHER INFORMATION**                                                                     |
| **Items 1 -- 6**                                                                                   |
| **Signatures**                                                                                     |

** **

**2**

----

 

**PART I: FINANCIALINFORMATION**

** **

**ITEM 1: FINANCIALSTATEMENTS**

** **

**PECSOLUTIONS, INC.**

**CONSOLIDATED BALANCESHEETS**

**(DOLLARSIN THOUSANDS)**

** **
|                                                                                                                                     |   | **AS OF  JUNE 30,  2002** |        | **AS OF  DEC. 31,  2001** |       |
|------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------|-------------|---------------------------|------------|
|                                                                                                                                     |   | **(UNAUDITED)**           |        |                      | ** ** |
| **ASSETS**                                                                                                                               |   |                      | ** **  |                      | ** ** |
| **Current assets:**                                                                                                                      |   |                      | ** **  |                      | ** ** |
| **Cash and cash equivalents**                                                                                                            |   | **$**                     | **34,240**  | ** **                | **$**      | **30,436** | ** ** |
| **Short-term investments**                                                                                                               |   | **19,523**                | ** **  | **31,105**                | ** ** |
| **Accounts receivable, net**                                                                                                             |   | **42,895**                | ** **  | **36,423**                | ** ** |
| **Other current assets**                                                                                                                 |   | **3,204**                 | ** **  | **4,134**                 | ** ** |
| **Total current assets**                                                                                                                 |   | **99,862**                | ** **  | **102,098**               | ** ** |
|                                                                                                                                     |   |                      | ** **  |                      | ** ** |
| **Property and equipment, net**                                                                                                          |   | **17,815**                | ** **  | **6,497**                 | ** ** |
| **Investments**                                                                                                                          |   | **21,147**                | ** **  | **13,762**                | ** ** |
| **Goodwill**                                                                                                                             |   | **14,113**                | ** **  | **12,565**                | ** ** |
| **Intangibles, net**                                                                                                                     |   | **6,938**                 | ** **  | **2,969**                 | ** ** |
| **Other assets**                                                                                                                         |   | **3,675**                 | ** **  | **3,817**                 | ** ** |
| **Total assets**                                                                                                                         |   | **$**                     | **163,550** | ** **                | **$**      | **141,708** | ** ** |
|                                                                                                                                     |   |                      | ** **  |                      | ** ** |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                           |   |                      | ** **  |                      | ** ** |
|                                                                                                                                     |   |                      | ** **  |                      | ** ** |
| **Current liabilities:**                                                                                                                 |   |                      | ** **  |                      | ** ** |
| **Accounts payable and accrued expenses**                                                                                                |   | **$**                     | **6,873**   | ** **                | **$**      | **4,020** | ** ** |
| **Advance payments on contracts**                                                                                                        |   | **1,211**                 | ** **  | **1,290**                 | ** ** |
| **Retirement plan contribution payable**                                                                                                 |   | **1,141**                 | ** **  | **—**                | ** ** |
| **Accrued payroll**                                                                                                                      |   | **4,061**                 | ** **  | **7,018**                 | ** ** |
| **Accrued vacation**                                                                                                                     |   | **2,988**                 | ** **  | **2,185**                 | ** ** |
| **Other current liabilities**                                                                                                            |   | **2,800**                 | ** **  | **3,958**                 | ** ** |
| **Total current liabilities**                                                                                                            |   | **19,074**                | ** **  | **18,471**                | ** ** |
|                                                                                                                                     |   |                      | ** **  |                      | ** ** |
| **Long-term liabilities:**                                                                                                               |   |                      | ** **  |                      | ** ** |
| **Supplemental retirement program liability**                                                                                            |   | **990**                   | ** **  | **949**                   | ** ** |
| **Deferred rent payable**                                                                                                                |   | **1,118**                 | ** **  | **923**                   | ** ** |
| **Long-term lease obligation**                                                                                                           |   | **13,939**                | ** **  | **2,883**                 | ** ** |
| **Other long-term liabilities**                                                                                                          |   | **32**                    | ** **  | **54**                    | ** ** |
| **Total long-term liabilities**                                                                                                          |   | **16,079**                | ** **  | **4,809**                 | ** ** |
| **Total liabilities**                                                                                                                    |   | **35,153**                | ** **  | **23,280**                | ** ** |
| **Commitments and contingencies**                                                                                                        |   |                      | ** **  |                      | ** ** |
|                                                                                                                                     |   |                      | ** **  |                      | ** ** |
| **Stockholders’ equity:**                                                                                                           |   |                      | ** **  |                      | ** ** |
| **Undesignated capital stock, 10,000,000  shares authorized**                                                                            |   | **—**                | ** **  | **—**                | ** ** |
| **Common stock, $0.01 par value, 75,000,000  shares authorized, 26,292,064 and 26,109,649 shares issued and outstanding,  respectively** |   | **263**                   | ** **  | **261**                   | ** ** |
| **Additional paid-in capital**                                                                                                           |   | **85,164**                | ** **  | **83,582**                | ** ** |
| **Retained earnings**                                                                                                                    |   | **43,311**                | ** **  | **34,585**                | ** ** |
| **Accumulated other comprehensive income  (loss)**                                                                                       |   | **(341**                  | **)**       | **—**                | ** ** |
| **Total stockholders’ equity**                                                                                                      |   | **128,397**               | ** **  | **118,428**               | ** ** |
| **Total liabilities and stockholders’ equity**                                                                                      |   | **$**                     | **163,550** | ** **                | **$**      | **141,708** | ** ** |

** **

**Seenotes to consolidated financial statements.**

** **

**3**

----

 

**PECSOLUTIONS, INC.**

**CONSOLIDATED STATEMENTS OFINCOME**

**(AMOUNTSIN THOUSANDS, EXCEPT PER SHARE DATA)**

** **
|                                                               |   | **THREE  MONTHS ENDED** |       | **SIX MONTHS  ENDED** |       |
|--------------------------------------------------------------------|--------|-------------------------|------------|-----------------------|------------|
|                                                               |   | **JUNE 30,  2002**      |       | **JUNE 30,  2001**    |       | **JUNE 30,  2002** |   | **JUNE 30,  2001** |   |
|                                                               |   | **(UNAUDITED)**         | ** ** |
| **Revenues**                                                       |   | **$**                   | **42,761** | ** **            | **$**      | **27,134** | ** ** | **$** | **80,992** | ** ** | **$** | **49,054** | ** ** |
| **Operating costs and expenses:**                                  |   |                    | ** ** |                  | ** ** |   | ** ** |   | ** ** |
| **Direct costs**                                                   |   | **25,511**              | ** ** | **14,261**            | ** ** | **48,430** | ** ** | **26,058** | ** ** |
| **General and administrative expenses**                            |   | **8,090**               | ** ** | **5,722**             | ** ** | **15,521** | ** ** | **11,090** | ** ** |
| **Sales and marketing expenses**                                   |   | **1,462**               | ** ** | **1,136**             | ** ** | **3,041** | ** ** | **2,032** | ** ** |
| **Goodwill and intangible amortization**                           |   | **213**                 | ** ** | **180**               | ** ** | **381** | ** ** | **360** | ** ** |
| **Total operating costs and expenses**                             |   | **35,276**              | ** ** | **21,299**            | ** ** | **67,373** | ** ** | **39,540** | ** ** |
| **Operating income**                                               |   | **7,485**               | ** ** | **5,835**             | ** ** | **13,619** | ** ** | **9,514** | ** ** |
| **Other income, net**                                              |   | **464**                 | ** ** | **441**               | ** ** | **967** | ** ** | **909** | ** ** |
| **Income before income taxes**                                     |   | **7,949**               | ** ** | **6,276**             | ** ** | **14,586** | ** ** | **10,423** | ** ** |
| **Provision for income taxes**                                     |   | **3,104**               | ** ** | **2,585**             | ** ** | **5,696** | ** ** | **4,294** | ** ** |
| **Net income**                                                     |   | **$**                   | **4,845**  | ** **            | **$**      | **3,691** | ** ** | **$** | **8,890** | ** ** | **$** | **6,129** | ** ** |
| **Earnings per share:**                                            |   |                    | ** ** |                  | ** ** |   | ** ** |   | ** ** |
| **Basic**                                                          |   | **$**                   | **0.18**   | ** **            | **$**      | **0.16** | ** ** | **$** | **0.34** | ** ** | **$** | **0.27** | ** ** |
| **Diluted**                                                        |   | **$**                   | **0.16**   | ** **            | **$**      | **0.14** | ** ** | **$** | **0.30** | ** ** | **$** | **0.24** | ** ** |
| **Weighted average shares used in computing  earnings per share:** |   |                    | ** ** |                  | ** ** |   | ** ** |   | ** ** |
| **Basic**                                                          |   | **26,261**              | ** ** | **22,658**            | ** ** | **26,214** | ** ** | **22,565** | ** ** |
| **Diluted**                                                        |   | **29,787**              | ** ** | **26,386**            | ** ** | **29,847** | ** ** | **26,074** | ** ** |

** **

**Seenotes to consolidated financial statements.**

** **

**4**

----

 

**PECSOLUTIONS, INC.**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(DOLLARSIN THOUSANDS)**

** **
|                                                                                   |   | **SIX MONTHS  ENDING** |       |
|----------------------------------------------------------------------------------------|--------|------------------------|------------|
|                                                                                   |   | **JUNE 30,  2002**     |       | **JUNE 30,  2001** |   |
|                                                                                   |   | **(UNAUDITED)**        | ** ** |
| **Cash flows from operating activities:**                                              |   |                   | ** ** |   | ** ** |
| **Net income**                                                                         |   | **$**                  | **8,890**  | ** ** | **$** | **6,129** | ** ** |
| **Adjustments to reconcile net income to net  cash provided by operating activities:** |   |                   | ** ** |   | ** ** |
| **Depreciation and amortization**                                                      |   | **643**                | ** ** | **527** | ** ** |
| **Amortization of goodwill**                                                           |   | **—**             | ** ** | **360** | ** ** |
| **Amortization of intangibles**                                                        |   | **381**                | ** ** | **—** | ** ** |
| **Deferred rent payable**                                                              |   | **195**                | ** ** | **229** | ** ** |
| **Deferred income taxes**                                                              |   | **(241**               | **)**      | **(137** | **)** |
| **Loss from investment in building**                                                   |   | **49**                 | ** ** | **—** | ** ** |
| **Changes in operating assets and  liabilities:**                                      |   |                   | ** ** |   | ** ** |
| **Accounts receivable, net**                                                           |   | **(6,472**             | **)**      | **(12,421** | **)** |
| **Other current assets**                                                               |   | **1,062**              | ** ** | **(62** | **)** |
| **Other assets**                                                                       |   | **72**                 | ** ** | **(32** | **)** |
| **Accounts payable and accrued expenses**                                              |   | **2,853**              | ** ** | **378** | ** ** |
| **Advance payments on contracts**                                                      |   | **(78**                | **)**      | **(231** | **)** |
| **Retirement plan contribution payable**                                               |   | **1,141**              | ** ** | **565** | ** ** |
| **Accrued payroll**                                                                    |   | **(2,957**             | **)**      | **428** | ** ** |
| **Accrued vacation**                                                                   |   | **803**                | ** ** | **502** | ** ** |
| **Other current liabilities**                                                          |   | **(1,158**             | **)**      | **976** | ** ** |
| **Supplemental retirement program liability**                                          |   | **41**                 | ** ** | **109** | ** ** |
| **Other long-term liabilities**                                                        |   | **—**             | ** ** | **(10** | **)** |
| **Net cash provided (used) by operating  activities**                                  |   | **5,224**              | ** ** | **(2,690** | **)** |
| **Cash flows from investing activities:**                                              |   |                   | ** ** |   | ** ** |
| **Purchases of property and equipment**                                                |   | **(908**               | **)**      | **(520** | **)** |
| **Net sales of short-term investments**                                                |   | **11,397**             | ** ** | **637** | ** ** |
| **Investment in affiliate**                                                            |   | **—**             | ** ** | **(1,500** | **)** |
| **Purchase of assets**                                                                 |   | **(5,852**             | **)**      | **—** | ** ** |
| **Capitalized software**                                                               |   | **(14**                | **)**      | **(431** | **)** |
| **Purchases of long-term investments**                                                 |   | **(7,437**             | **)**      | **—** | ** ** |
| **Net cash used by investing activities**                                              |   | **(2,814**             | **)**      | **(1,814** | **)** |
| **Cash flows from financing activities:**                                              |   |                   | ** ** |   | ** ** |
| **Proceeds from issuance of common stock**                                             |   | **1,415**              | ** ** | **441** | ** ** |
| **Common stock offering costs**                                                        |   | **—**             | ** ** | **(58** | **)** |
| **Payments on capital lease obligations**                                              |   | **(21**                | **)**      | **—** | ** ** |
| **Net cash provided by financing activities**                                          |   | **1,394**              | ** ** | **383** | ** ** |
| **Net increase (decrease) in cash**                                                    |   | **3,804**              | ** ** | **(4,121** | **)** |
| **Cash and cash equivalents at beginning of  period**                                  |   | **30,436**             | ** ** | **14,655** | ** ** |
| **Cash and cash equivalents at end of period**                                         |   | **$**                  | **34,240** | ** ** | **$** | **10,534** | ** ** |
| **Income taxes paid**                                                                  |   | **$**                  | **4,678**  | ** ** | **$** | **3,820** | ** ** |
| **Interest paid**                                                                      |   | **$**                  | **6**      | ** ** | **$** | **2** | ** ** |

** **

**Seenotes to consolidated financial statements.**

** **

**5**

----

 

**PECSOLUTIONS, INC.**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**JUNE30, 2002**

**(UNAUDITED)**

**1. Financial Statements**

** **

**Theaccompanying consolidated financial statements, except for the December 31,2001 balance sheet, are unaudited and have been prepared in accordance withaccounting standards generally accepted in the United States for interimfinancial information and the instructions to Form 10-Q and Article 10 ofRegulation S-X. Accordingly, certain information and footnote disclosuresnormally included in financial statements prepared in accordance withaccounting principles generally in the United States have been omitted. In theopinion of management, all adjustments, consisting of normally recurringaccruals, considered necessary for a fair presentation, have been included. Itis suggested that these condensed financial statements be read in conjunctionwith the Company's audited financial statements for the years ended December31, 2000 and 2001 and for each of the three years in the period ended December31, 2001 included on Form 10-K, as filed with the Securities and ExchangeCommission. The results of operations for the six months ended June 30, 2002,are not necessarily indicative of the operating results to be expected for thefull year.**

** **

**2. Accounts Receivable**

** **

**Accountsreceivable consist of the following as of:**

** **
|                                |   | **JUNE 30,  2002**          |       | **DECEMBER  31, 2001** |       |
|-------------------------------------|--------|-----------------------------|------------|------------------------|------------|
|                                |   | **(DOLLARS  IN THOUSANDS)** |       |
| **Billed accounts receivable**      |   | **$**                       | **36,493** | ** **             | **$**      | **33,337** | ** ** |
| **Unbilled accounts receivable**    |   | **7,937**                   | ** ** | **4,701**              | ** ** |
| **Progress payments**               |   | **(1,211**                  | **)**      | **(1,290**             | **)**      |
|                                |   | **43,219**                  | ** ** | **36,748**             | ** ** |
| **Allowance for doubtful accounts** |   | **(324**                    | **)**      | **(325**               | **)**      |
| **Accounts receivable, net**        |   | **$**                       | **42,895** | ** **             | **$**      | **36,423** | ** ** |

** **

**Unbilledaccounts receivable comprise recognized recoverable costs and accrued profitson contracts for which billings had not been presented to clients as of thebalance sheet date. Management anticipates the collection of these amountswithin 90 days of the balance sheet date. Payments to the Company on contractswith agencies and departments of the U.S. Government are subject to adjustmentupon audit by the U.S. Government. All years subsequent to 1997 are subject toU.S. Government audit. Management believes the effect of audit adjustments, ifany, on periods not yet audited, will not have a material effect on thefinancial statements.**

** **

**3. Net Income Per Share**

** **

**Basicand diluted earnings per share for the three months and six months ended June30, 2002 and 2001 were determined as follows:**

** **
|                           |   | **THREE  MONTHS ENDED JUNE 30, 2001**                     |       | **SIX MONTHS  ENDED JUNE 30, 2001** |           |
|--------------------------------|--------|-----------------------------------------------------------|------------|-------------------------------------|----------------|
|                           |   | **(DOLLARS  IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)** |       |
|                           |   | **NET  INCOME**                                           |       | **SHARES**                          |           | **PER SHARE** |   | **NET  INCOME** |   | **SHARES** |   | **PER SHARE** | ** ** |
| **Basic EPS**                  |   | **$**                                                     | **3,691**  | ** **                          | **22,658,042** | ** ** | **$** | **0.16** | ** ** | **$** | **6,129** | ** ** | **22,565,252** | ** ** | **$** | **0.27** | ** ** |
| **Effect of dilutive options** |   | **—**                                                | ** ** | **3,727,965**                       | ** **     | **(0.02** | **)** | **—** | ** ** | **3,509,042** | ** ** | **(0.03** | **)** |
| **Diluted EPS**                |   | **$**                                                     | **3,691**  | ** **                          | **26,386,007** | ** ** | **$** | **0.14** | ** ** | **$** | **6,129** | ** ** | **26,074,294** | ** ** | **$** | **0.24** | ** ** |

** **
|                           |   | **THREE  MONTHS ENDED JUNE 30, 2002**                     |       | **SIX MONTHS  ENDED JUNE 30, 2002** |           |
|--------------------------------|--------|-----------------------------------------------------------|------------|-------------------------------------|----------------|
|                           |   | **(DOLLARS  IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)** |       |
|                           |   | **NET  INCOME**                                           |       | **SHARES**                          |           | **PER SHARE** |   | **NET  INCOME** |   | **SHARES** |   | **PER SHARE** | ** ** |
| **Basic EPS**                  |   | **$**                                                     | **4,845**  | ** **                          | **26,261,322** | ** ** | **$** | **0.18** | ** ** | **$** | **8,890** | ** ** | **26,214,090** | ** ** | **$** | **0.34** |   |
| **Effect of dilutive options** |   | **—**                                                | ** ** | **3,525,761**                       | ** **     | **(0.02** | **)** | **—** | ** ** | **3,632,803** | ** ** | **(0.04** | **)** |
| **Diluted EPS**                |   | **$**                                                     | **4,845**  | ** **                          | **29,787,083** | ** ** | **$** | **0.16** | ** ** | **$** | **8,890** | ** ** | **29,846,893** | ** ** | **$** | **0.30** |   |

** **

**6**

----

** **

**4.**Acquisitions

** **

**On June 14, 2002,the Company acquired the contracts and employees of Vector Research, Inc.(“Vector”) for $5.7**

**million cash plus the assumption of $0.1million in accrued liabilities.  Vectorwas a provider of technology development and engineering services to thefederal government.  The purchase pricehas been allocated as follows, goodwill of $1.5 million and intangiblesconsisting of customer contracts and relationships of $4.3 million.  Intangibles are being amortized over 4years.  The fair value of the assetsacquired has been based on preliminary estimates and may be revised at a laterdate, based upon the completion of valuation studies.  The operating results of Vector have been included in theconsolidated results of the Company from the date of acquisition.**

** **

**5.**Goodwill and Intangible Assets

** **

**In June 2001, theFinancial Accounting Standards Board issued Statement of Financial AccountingStandards (SFAS) No. 141, *BusinessCombinations*and No. 142, *Goodwilland Other Intangible Assets*. SFAS No. 141 requires all business combinations initiated after June 30,2001 to be accounted for using the purchase method.  Under SFAS No. 142, goodwill and intangible assets withindefinite lives will no longer be amortized but are reviewed annually (or morefrequently if impairment indicators arise) for impairment. Separable intangibleassets that are not deemed to have indefinite lives will continue to beamortized over their useful lives but with no maximum life.  The Company has adopted the provisions ofSFAS No. 142 effective January 1, 2002.**

** **

**Upon the adoptionof FAS 142, the Company discontinued the amortization of goodwill.  The following table presents areconciliation of net income and earnings per share adjusted for the exclusionof goodwill:**

** **
|                                    |   | **Three Months Ended**                                    |       | **Six Months Ended** |       |
|-----------------------------------------|--------|-----------------------------------------------------------|------------|----------------------|------------|
|                                    |   | **(Dollars in thousands,  except for per share amounts)** |       |
|                                    |   | **June 30, 2002**                                         |       | **June 30, 2001**    |       | **June 30, 2002** |   | **June 30, 2001** | ** ** |
| **Reported net income**                 |   | **$**                                                     | **4,845**  | ** **           | **$**      | **3,691** | ** ** | **$** | **8,890** | ** ** | **$** | **6,129** | ** ** |
| **Add:  Goodwill amortization**    |   | **—**                                                | ** ** | **180**              | ** ** | **—** | ** ** | **360** | ** ** |
| **Adjusted net income**                 |   | **$**                                                     | **4,845**  | ** **           | **$**      | **3,871** | ** ** | **$** | **8,890** | ** ** | **$** | **6,489** | ** ** |
|                                    |   |                                                      | ** ** |                 | ** ** |   | ** ** |   | ** ** |
| **Reported basic earnings per share**   |   | **$**                                                     | **0.18**   | ** **           | **$**      | **0.16** | ** ** | **$** | **0.34** | ** ** | **$** | **0.27** | ** ** |
| **Add:  Goodwill amortization**    |   | **—**                                                | ** ** | **0.01**             | ** ** | **—** | ** ** | **0.02** | ** ** |
| **Adjusted basic earnings per share**   |   | **$**                                                     | **0.18**   | ** **           | **$**      | **0.17** | ** ** | **$** | **0.34** | ** ** | **$** | **0.29** | ** ** |
|                                    |   |                                                      | ** ** |                 | ** ** |   | ** ** |   | ** ** |
| **Reported diluted earnings per share** |   | **$**                                                     | **0.16**   | ** **           | **$**      | **0.14** | ** ** | **$** | **0.30** | ** ** | **$** | **0.24** | ** ** |
| **Add:  Goodwill amortization**    |   | **—**                                                | ** ** | **0.01**             | ** ** | **—** | ** ** | **0.01** | ** ** |
| **Adjusted diluted earnings per share** |   | **$**                                                     | **0.16**   | ** **           | **$**      | **0.15** | ** ** | **$** | **0.30** | ** ** | **$** | **0.25** | ** ** |

** **

**The Company onlyhas one reporting unit.  Nonamortizableintangible assets at June 30, 2002, consist only of goodwill of$14,113,000.  The Company’s amortizableintangible assets include customer contracts and related relationships.  The gross carrying amount of the customerrelationships at June 30, 2002 was $7,375,000 with accumulated amortization of$437,443.  Goodwill increased by$1,452,000 during the quarter ended June 30, 2002 as it related to the assetpurchase of Vector.  In accordance withthe provisions of SFAS No. 142, the Company performed the appropriate transitionalimpairment tests related to its stated goodwill and determined that there is notransitional impairment loss.  Also inaccordance with the provisions of SFAS No. 142, the Company reassessed theuseful lives of all intangible assets and determined that no adjustments werenecessary.**

** **

**Amortization expense for the three and sixmonths ended June 30, 2002 was $213,000 and $381,000, respectively.  Intangibles are amortized on a straight linebasis.  Estimated amortization expensefor each of the five succeeding calendar years based on the intangible assetsas of June 30, 2002 is as follows:**

** **

| **Year ending  December 31,** |   | **Amount**                  |       |
|-------------------------------|--------|-----------------------------|------------|
|                          |   | **(dollars in  thousands)** |       |
| **2002**                      |   | **$**                       | **880**    | ** ** |
| **2003**                      |   | **1,760**                   | ** ** |
| **2004**                      |   | **1,760**                   | ** ** |
| **2005**                      |   | **1,760**                   | ** ** |
| **2006**                      |   | **778**                     | ** ** |
|                               |        |                             |            |  |

** **

**7**

----

** **

**ITEM 2. MANAGEMENT'SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

** **

**OVERVIEW**

** **

**PECSolutions is a professional services firm specializing in high-end solutionsthat help government organizations capitalize on the Internet and otheradvanced technologies. We migrate paper-intensive procedures to web-enabledprocesses using eGovernment solutions that help our clients enhance theirproductivity and improve the services they offer to the public. As a total solutionsprovider, we address the full technology lifecycle, including formulatingtechnology strategies, creating business solutions, performing long-termoperational management and continuing enhancement of the solution.**

** **

**Wederive substantially all of our revenues from fees for consulting services. Wegenerate these fees from various types of contracts, including time andmaterials contracts, fixed-price contracts and cost-reimbursable contracts.During the three months and six months ended June 30, 2002, revenues from thesecontract types were approximately 61%, 20% and 19%, and 60%, 20% and 20%respectively, of total revenues. We typically issue invoices monthly to manageoutstanding accounts receivable balances. We recognize revenues on time andmaterials contracts as the services are provided. We recognize revenues onfixed-price contracts using the percentage of completion method as services areperformed over the life of the contract, based on the costs we incur inrelation to the total estimated costs. We recognize and make provisions for anyanticipated contract losses at the time we know and can estimate them.Fixed-price contracts are attractive to clients and, while subject to increasedrisks, provide opportunities for increased margins. We recognize revenues oncost-reimbursable contracts as services are provided. These revenues are equalto the costs incurred in  providingthese services plus a proportionate amount of the fee earned. We havehistorically recovered all of our costs on cost-reimbursable contracts, whichmeans we have lower risk and our margins are lower on these contracts.**

** **

**Ourhistorical revenue growth is attributable to various factors, including anincrease in the size and number of projects for existing and new clients.Existing clients from the previous year generated approximately 93% and 95% ofour revenues in the three months and six months ended June 30, 2002. As of June30, 2002, we had 1,293 personnel.**

** **

**In thethree months and six months ended June 30, 2002, we derived approximately 30%and 32% respectively, of our revenues through relationships with primecontractors, who contract directly with the end-client and subcontract with us.In most of these engagements, we retain full responsibility for the end-clientrelationship and direct and manage the activities of our contract staff.**

** **

**Ourmost significant expense is direct costs, which consist primarily of projectpersonnel salaries and benefits, and direct expenses incurred to completeprojects. Our direct costs as a percentage of revenues are also related to theutilization rate of our consulting personnel. We manage utilization byfrequently monitoring project requirements and timetables. The number ofconsulting personnel assigned to a project will vary according to the size,complexity, duration and demands of the project.**

** **

**Generaland administrative expenses consist primarily of costs associated with ourexecutive management, finance and administrative groups, human resources,unassigned consulting personnel, personnel training, occupancy costs,depreciation and amortization, travel and all other branch and corporate costs.**

** **

**Salesand marketing expenses include the costs of sales and marketing personnel andcosts associated with marketing and bidding on future projects.**

** **

**Otherincome consists primarily of interest income earned on our cash, cashequivalents and marketable securities.**

** **

**8**

----

 

**Results of Operations**

** **

**Thefollowing table sets forth certain financial data as a percentage of revenuesfor the periods indicated.**

** **
|                                         |   | **THREE  MONTHS ENDED**     |       | **SIX MONTHS  ENDED** |       |
|----------------------------------------------|--------|-----------------------------|------------|-----------------------|------------|
|                                         |   | **JUNE 30,  2002**          |       | **JUNE 30,  2001**    |       | **JUNE 30,  2002** |   | **JUNE 30,  2001** |   |
|                                         |   | **(DOLLARS  IN THOUSANDS)** | ** ** |
| **Statement of Income:**                     |   |                        | ** ** |                  | ** ** |   | ** ** |   | ** ** |
| **Revenues**                                 |   | **$**                       | **42,761** | ** **            | **$**      | **27,134** | ** ** | **$** | **80,992** | ** ** | **$** | **49,054** | ** ** |
| **Direct costs**                             |   | **25,511**                  | ** ** | **14,261**            | ** ** | **48,430** | ** ** | **26,058** | ** ** |
| **Gross profit (a)**                         |   | **17,250**                  | ** ** | **12,873**            | ** ** | **32,562** | ** ** | **22,996** | ** ** |
| **Other operating costs and expenses:**      |   |                        | ** ** |                  | ** ** |   | ** ** |   | ** ** |
| **General and administrative expenses**      |   | **8,090**                   | ** ** | **5,722**             | ** ** | **15,521** | ** ** | **11,090** | ** ** |
| **Sales and marketing expenses**             |   | **1.462**                   | ** ** | **1,136**             | ** ** | **3,041** | ** ** | **2,032** | ** ** |
| **Goodwill and intangible amortization**     |   | **213**                     | ** ** | **180**               | ** ** | **381** | ** ** | **360** | ** ** |
| **Total other operating costs and expenses** |   | **9,765**                   | ** ** | **7,038**             | ** ** | **18,943** | ** ** | **13,482** | ** ** |
| **Operating income**                         |   | **7,485**                   | ** ** | **5,835**             | ** ** | **13,619** | ** ** | **9,514** | ** ** |
| **Other income, net**                        |   | **464**                     | ** ** | **441**               | ** ** | **967** | ** ** | **909** | ** ** |
| **Income before income taxes**               |   | **7,949**                   | ** ** | **6,276**             | ** ** | **14,586** | ** ** | **10,423** | ** ** |
| **Provision for income taxes**               |   | **3,104**                   | ** ** | **2,585**             | ** ** | **5,696** | ** ** | **4,294** | ** ** |
| **Net income**                               |   | **$**                       | **4,845**  | ** **            | **$**      | **3,691** | ** ** | **$** | **8,890** | ** ** | **$** | **6,129** | ** ** |
| **As a Percentage of Revenues:**             |   |                        | ** ** |                  | ** ** |   | ** ** |   | ** ** |
|                                         |   |                        | ** ** |                  | ** ** |   | ** ** |   | ** ** |
| **Revenues**                                 |   | **100.0**                   | **%**      | **100.0**             | **%**      | **100.0** | **%** | **100.0** | **%** |
| **Direct costs**                             |   | **59.7**                    | ** ** | **52.6**              | ** ** | **59.8** | ** ** | **53.1** | ** ** |
| **Gross profit (a)**                         |   | **40.3**                    | ** ** | **47.4**              | ** ** | **40.2** | ** ** | **46.9** | ** ** |
| **Other operating costs and expenses:**      |   |                        | ** ** |                  | ** ** |   | ** ** |   | ** ** |
| **General and administrative expenses**      |   | **18.9**                    | ** ** | **21.1**              | ** ** | **19.2** | ** ** | **22.6** | ** ** |
| **Sales and marketing expenses**             |   | **3.4**                     | ** ** | **4.2**               | ** ** | **3.7** | ** ** | **4.2** | ** ** |
| **Goodwill and intangible amortization**     |   | **0.5**                     | ** ** | **0.6**               | ** ** | **0.5** | ** ** | **0.7** | ** ** |
|                                         |   |                        | ** ** |                  | ** ** |   | ** ** |   | ** ** |
| **Total other operating costs and expenses** |   | **22.8**                    | ** ** | **25.9**              | ** ** | **23.4** | ** ** | **27.5** | ** ** |
| **Operating income**                         |   | **17.5**                    | ** ** | **21.5**              | ** ** | **16.8** | ** ** | **19.4** | ** ** |
| **Other income, net**                        |   | **1.1**                     | ** ** | **1.6**               | ** ** | **1.2** | ** ** | **1.8** | ** ** |
| **Income before income taxes**               |   | **18.6**                    | ** ** | **23.1**              | ** ** | **18.0** | ** ** | **21.2** | ** ** |
| **Provision for income taxes**               |   | **7.3**                     | ** ** | **9.5**               | ** ** | **7.0** | ** ** | **8.7** | ** ** |
| **Net income**                               |   | **11.3**                    | **%**      | **13.6**              | **%**      | **11.0** | **%** | **12.5** | **%** |

** **

----

**(a)  Gross profit represents revenues less direct costs, which consistprimarily of project personnel salaries and benefits and direct expensesincurred to complete projects.**

** **

**RESULTS OF OPERATIONS FORTHE THREE MONTHS ENDED JUNE 30, 2002 COMPARED WITH THE THREE MONTHS ENDED JUNE30, 2001**

** **

**REVENUES.For the three months ended June 30, 2002, our total revenues increased by57.6%, or $15.6 million over the same period last year. The increase inrevenues primarily reflects an increase in the volume of services to existingclients and services to new clients. Services to new clients representapproximately 7% of revenues.**

** **

**DIRECTCOSTS. For the three months ended June 30, 2002, direct costs increased by78.9%, or $11.3 million, over the same period last year. The increase was dueprimarily to an increase in project personnel to 1,165 as of June 30, 2002 ascompared to 742 as of June 30, 2001. Direct costs increased as a percentage ofrevenues for the period ended June 30, 2002, to 59.7% as compared to 52.6% inthe same period last year, due to normal fluctuations in labor and other directcosts and the impact of the Troy acquisition.**

** **

**9**

----

 

**GROSSPROFIT. Gross profit increased by 34.0% to $17.3 million in the three monthsended June 30, 2002 from $12.9 million in the three months ended June 30, 2001.Gross profit as a percentage of revenues decreased to 40.3% in the three monthsended June 30, 2002 from 47.4% in the three months ended June 30, 2001, asdirect costs grew at a faster rate than revenues due to normal fluctuations inlabor and other direct costs and the impact of the Troy acquisition.**

** **

**GENERALAND ADMINISTRATIVE EXPENSES. General and administrative expenses increased41.4% to $8.1 million in the three months ended June 30, 2002 from $5.7 millionin the three months ended June 30, 2001. Facility costs increased in thecurrent quarter over last year due to the opening of new offices in Fairfax,Virginia. Our total general and administrative headcount increased to 128employees as of June 30, 2002 compared to 90 employees as of June 30, 2001,consistent with our plans.**

** **

**SALESAND MARKETING. Sales and marketing expenses increased 28.7% to $1.5 million inthe three months ended June 30, 2002 from $1.1 million in the three monthsended June 30, 2001. This increase was due to an increase in our marketingefforts.**

** **

**AMORTIZATIONOF GOODWILL. As a result of the adoption of FAS 142, effective January 1, 2002,we incurred no goodwill amortization expense in the three months ended June 30,2002.  In the three months ended June30, 2001, we incurred $180 of amortization expense related to the $3.6 millionof goodwill we recorded in connection with the acquisition of Viking.**

** **

**AMORTIZATIONOF INTANGIBLES.  For the three monthsended June 30, 2002, we incurred $213 thousand of amortization of expenserelated to the $3.0 million of intangibles we recorded in connection with thevalue of contracts and customer relationships acquired in the November 2001acquisition of Troy, and $4.4 million of intangibles in connection with thevalue of contracts and customer relationships acquired in the June 2002acquisition of Vector.  There were nointangibles at June 30, 2001, and therefore, no amortization.**

** **

**OPERATINGINCOME. Operating income increased 28.3% to $7.5 million in the three monthsended June 30, 2002 from $5.8 million in the three months ended June 30, 2001.This increase was due primarily to increased revenues.**

** **

**RESULTS OF OPERATIONS FORTHE SIX MONTHS ENDED JUNE 30, 2002 COMPARED WITH THE SIX MONTHS ENDED JUNE 30,2001**

** **

**REVENUES.For the six months ended June 30, 2002, our total revenues increased by 65.1%,or $31.9 million over the same period last year. The increase in revenuesprimarily reflects an increase in the volume of services to existing clientsand services to new clients. Services to new clients represent approximately 5%of revenues.**

** **

**DIRECTCOSTS. For the six months ended June 30, 2002, direct costs increased by 85.9%,or $22.4 million, over the same period last year. The increase was dueprimarily to an increase in project personnel to 1,165 as of June 30, 2002 ascompared to 742 as of June 30, 2001. Direct costs increased as a percentage ofrevenues for the period ended June 30, 2002, to 59.8% as compared to 53.1% inthe same period last year, due to normal fluctuations in labor and other directcosts and the impact of the Troy acquisition.**

** **

**GROSSPROFIT. Gross profit increased by 41.6% to $32.6 million in the six monthsended June 30, 2002 from $23.0 million in the six months ended June 30, 2001.Gross profit as a percentage of revenues decreased to 40.2% in the six monthsended June 30, 2002 from 46.9% in the six months ended June 30, 2001, as directcosts grew at a faster rate than revenues due to normal fluctuations in laborand other direct costs and the impact of the Troy acquisition.**

** **

**GENERALAND ADMINISTRATIVE EXPENSES. General and administrative expenses increased40.0% to $15.5 million in the six months ended June 30, 2002 from $11.1 millionin the six months ended June 30, 2001. Facility costs increased in the currentperiod over last year due to the opening of new offices in Fairfax, Virginia.Our total general and administrative headcount increased to 128 employees as ofJune 30, 2002 compared to 90 employees as of June 30, 2001, consistent with ourplans.**

** **

**10**

----

 

**SALESAND MARKETING. Sales and marketing expenses increased 49.7% to $3.0 million inthe six months ended June 30, 2002 from $2.0 million in the six months endedJune 30, 2001. This increase was due to an increase in our marketing efforts.**

** **

**AMORTIZATIONOF GOODWILL. As a result of the adoption of FAS 142, effective January 1, 2002,we incurred no goodwill amortization expense in the six months ended June 30,2002.  In the six months ended June 30,2001, we incurred $360 thousand of amortization expense related to the $3.6million of goodwill we recorded in connection with the acquisition of Viking.**

** **

**AMORTIZATIONOF INTANGIBLES.  For the six monthsended June 30, 2002, we incurred $381 thousand of amortization of expense relatedto the $3.0 million of intangibles we recorded in connection with the value ofcontracts and customer relationships acquired in the November 2001 acquisitionof Troy, and $4.4 million of intangibles in connection with the value ofcontracts and customer relationships acquired in the June 2002 acquisition ofVector.  There were no intangibles atJune 30, 2001, and therefore, no amortization.**

** **

**OPERATINGINCOME. Operating income increased 43.2% to $13.6 million in the six monthsended June 30, 2002 from $9.5 million in the six months ended June 30, 2001.This increase was due primarily to increased revenues.**

** **

**Ourrevenues and operating results may be subject to significant variation fromquarter to quarter depending on a number of factors, including the progress ofcontracts, revenues earned on contracts, the number of billable days in aquarter, the timing of the pass-through of other direct costs, the commencementand completion of contracts during any particular quarter, the schedule of thegovernment agencies for awarding contracts, the term of each contract that wehave been awarded and general economic conditions. Because a significantportion of our expenses, such as personnel and facilities costs, are fixed inthe short term, successful contract performance and variation in the volume ofactivity as well as in the number of contracts commenced or completed duringany quarter may cause significant variations in operating results from quarterto quarter.**

** **

**Thefederal government's fiscal year ends September 30. If a budget for the nextfiscal year has not been approved by that date, our clients may have to suspendengagements that we are working on until a budget has been approved. Suchsuspensions may cause us to realize lower revenues in the fourth quarter of theyear. Further, a change in Presidential administrations and in seniorgovernment officials may affect the rate at which the federal governmentpurchases technology, although we have not seen an impact with the 2001 change  in administration.**

** **

**As aresult of the factors above, period to period comparisons of our revenues andoperating results may not be meaningful. You should not rely on thesecomparisons as indicators of future performance as no assurances can be giventhat quarterly results will not fluctuate, causing a material adverse effect onour operating results and financial condition.**

** **

**Liquidityand Capital Resources**

** **

**Priorto the IPO and follow-on offering, we funded our operations primarily throughcash generated from operations and the sale of common stock to employees. Netcash provided by operating activities was $5.2 million for the six months endedJune 30, 2002. Cash provided by operating activities was primarily from netincome, adjusted for working capital changes, which were principally decreasesin accounts receivable.**

** **

**Netcash used by investing activities was $2.8 million for the six months endedJune 30, 2002. During the six months ended June 30, 2002, we purchased $0.9million of property and equipment. We had $11.4 million of net sales ofshort-term investments, $7.4 million of net purchases of long-term investmentsand invested $5.9 million in the assets of Vector.**

** **

**Netcash provided by financing activities was $1.4 million from the sale of commonstock to employees upon the exercise of their stock options or stock purchaseplan for the six months ended June 30, 2002.**

** **

**11**

----

 

**Weexpect to retain future earnings, if any, for use in the operation andexpansion of our business and do not anticipate paying any cash dividends inthe foreseeable future. We believe that our current cash position is adequatefor our short-term and long-term working capital and capital expenditure needs.**

** **

**Wemaintain a $6.0 million line of credit with Bank of America, bearing interestat the LIBOR Rate plus 250 basis points per annum, which expires on April 30,2003. As of June 30, 2002, we had no borrowings outstanding under the line ofcredit. As of June 30, 2002, we had outstanding $2.99 million in letters ofcredit in lieu of rent deposits.**

** **

**Undersome of our fixed-price contracts, we receive advance payments for work to beperformed in future months. If we do not perform the work, the unearned portionof these advances will be returned to our clients. At June 30, 2002, ouraccounts receivable turnover rate, net of advance payments on contracts, wasapproximately four times a year.**

** **

**We have invested $3.0 million in anaffiliated company, which is building our new office building in Fairfax,Virginia.  We are required to make anadditional $1.5 million investment at the time of occupancy of thefacility.  We have a 48% minorityinterest in this company and are not obligated to guarantee the non-recoursemortgage obligation, nor are we involved in the management of the constructionof the building or the management of the owner-lessor.  In accordance with Emerging Issues TaskForce Issue No. 97-10 *The Effect of LesseeInvolvement in Asset Construction*, the Company is considered to bethe owner of the property (for accounting purposes).  Accordingly, the Company recorded construction costs incurred todate of $13.9 million as construction-in-process with an offsetting long-termlease obligation as of June 30, 2002. It is anticipated that the total construction-in-process costs will beapproximately $25 to $30 million at the completion of construction, which isexpected to be December 1, 2002.**

** **

**Recent Accounting Pronouncements**

** **

**None**

** **

**12**

----

 

**SPECIALNOTE REGARDING FORWARD LOOKING STATEMENTS**

** **

**Thematters discussed in this Form 10-Q include forward-looking statements thatinvolve risks or uncertainties. While forward-looking statements are sometimespresented with numerical specificity, they are based on various assumptionsmade by management regarding future circumstances over many of which we havelittle or no control. Forward-looking statements may be identified by wordsincluding “anticipate,” “believe,” “estimate,” “expect” and similarexpressions. We caution readers that forward-looking statements, includingwithout limitation, those relating to our future business prospects, revenues,working capital, liquidity, and income, are subject to certain risks anduncertainties that would cause actual results to differ materially from thoseindicated in the Forward-Looking Statements. Factors that could cause actualresults to differ from Forward-Looking Statements include the concentration ofour revenues from government clients, risks involved in contracting with thegovernment, difficulties we may have in attracting, retaining and managingprofessional and administrative staff, fluctuations in quarterly results, risksrelated to acquisitions, risks related to competition and our ability tocontinue to win and perform efficiently on contracts, and other risks andfactors identified from time to time in our reports filed with the SEC,including those identified under the section entitled “Risk Factors” in ourRegistration Statement on Form 10-K (SEC File No. 000-30271) as amended whichhereby is incorporated by reference. Should one or more of these risks oruncertainties materialize, or should underlying assumptions prove incorrect,actual results may vary materially from those anticipated, estimated orprojected.**

** **

**ITEM3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK**

** **

**Weinvest our cash in a variety of financial instruments, including U.S. Treasuryand Agency obligations, money market instruments of domestic and foreignissuers denominated in U.S. dollars of commercial paper, bankers' acceptances,certificates of deposit, euro-dollar time deposits and variable rate issues,corporate note and bonds, asset-backed securities, repurchase agreements,municipal notes and bonds and auction rate preferred securities.**

** **

**Investmentsin both fixed and floating rate interest earning instruments carry a degree ofinterest rate risk. Fixed securities may have their fair market value adverselyimpacted because of a rise in interest rates, while floating rare securitiesmay produce less income than expected if interest rates fall. Due in part tothese factors, the Company's future investment income may fall short ofexpectations because of changes in interest rates or the Company may sufferlosses in principal if forced to sell securities which have seen a decline inmarket value because of changes in interest rates.**

** **

**Ourinvestments are made in accordance with an investment policy approved by theBoard of Directors. Under this policy, no investment securities can havematurities exceeding one year and the average duration of the portfolio can notexceed six months.**

** **

**13**

----

 

**PART II -- OTHERINFORMATION**

** **

**ITEM1. LEGAL PROCEEDINGS**

** **

**None**

** **

**ITEM 2. CHANGES INSECURITIES AND USE OF PROCEEDS**

** **

**InApril 2000, we commenced and completed a firm commitment underwritten initialpublic offering of 3,000,000 shares of our common stock at a price of $9.50 pershare. The shares were registered with the Securities and Exchange Commissionpursuant to a registration statement on Form S-1 (No. 333-95331), which wasdeclared effective on April 19, 2000. The public offering was underwritten by asyndicate of underwriters led by Donaldson, Lufkin & Jenrette SecuritiesCorporation; Chase Securities Inc.; Legg Mason Wood Walker, Incorporated; andDLJDIRECT Inc. as their representatives. After deducting underwriting discountsand commissions of approximately $2 million and expenses of approximately $0.9million, we received net proceeds of $25.6 million.**

** **

**The primary purposes of this offering were tocreate a public market for our common stock, to improve the incentive mechanismfor our professionals through stock options, to obtain additional equitycapital and to facilitate future access to public markets. We have used the netproceeds from this offering for general corporate purposes, including workingcapital. We have also used a portion of the net proceeds to acquire threebusinesses that are complementary to ours, and may use the remaining proceedsfor this purpose.**

 

**On August 28, 2000, we acquired all of theoutstanding capital stock of Viking for $2 million cash plus the assumption ofdebt in a business combination accounted for as a purchase. Viking is aprovider of integrated software and advanced technology solutions for state andlocal law enforcement, fire and emergency medical service agencies. On November20, 2001, we acquired all of the outstanding capital stock of Troy for $15.3million cash plus common stock valued at $3.0 million (103,065 shares).  Troy derives revenue from systemdevelopment, networking, engineering, integration services, and informationsystems security and its primary customer is the federal government.  On June 14, 2002, we acquired the assets ofVector Security, Inc, which consisted of their contracts with federalgovernment agencies, for $5.7 million cash. Vector provided technology development and engineering services to thefederal government.**

** **

**Management will have broad discretion in theallocation of the remaining net proceeds from the sale of stock.  We have no current plans, agreements orcommitments for, and are not currently engaged in any negotiations with respectto, any such transaction. Pending their use, the proceeds of this offering havebeen invested in short-term, investment grade, interest-bearing securities.**

** **

**ITEM 3. DEFAULTS UPONSENIOR SECURITIES**

** **

**None**

** **

**ITEM 4. SUBMISSION OFMATTERS TO VOTE OF SECURITY HOLDERS**

** **

**(a)  The Company held its Annual Meeting ofStockholders on May 22, 2002**

**(the“Annual Meeting”).**

** **

**(b)  n/a**

** **

**(c)  The following matters were voted upon at theAnnual Meeting:**

** **

**(i)  To elect three directors to serve until the2005 annual meeting of stockholders, and until their successors are elected andduly qualified, with 99.5% of the Common Stock present and voting at themeeting voting for Dr. Harbitter, Mr. Lloyd and Ms. Owlett as follows:**

** **

**14**

----

** **
| **NOMINEE**            |   | **FOR**        |       | **AGAINST OR  WITHHELD** |       |
|------------------------|--------|----------------|------------|--------------------------|------------|
| **Alan  H. Harbitter** |   | **24,522,450** |       | **114,442**              |       |
| **Stuart R. Lloyd**    |   | **24,522,450** | ** ** | **114,442**              | ** ** |
| **Sharon M. Owlett**   |   | **24,522,450** | ** ** | **114,442**              | ** ** |

** **

**(ii) Toratify the appointment of PricewaterhouseCoopers LLP as our independentauditors for the year ended December 31, 2002 was ratified by 99.5% of theshares of Common Stock present and voting at the meeting. (Votes for:24,519,487; votes against or withheld: 112,227; abstain: 4,963; brokernon-votes: 0).**

** **

**ITEM 5. OTHER INFORMATION**

** **

**None**

** **

**15**

----

 

**ITEM 6 (A) EXHIBITS**

** **
| **EXHIBIT  NUMBER** |   | **EXHIBIT  DESCRIPTION**                                                                                     |
|---------------------|--------|--------------------------------------------------------------------------------------------------------------|
|                |   |                                                                                                         |
|                |   |                                                                                                         |
| **3.1***            |   | **Certificate of Incorporation**                                                                             |
|                |   |                                                                                                         |
| **3.2***            |   | **By-Laws**                                                                                                  |
|                |   |                                                                                                         |
| **10.1***           |   | **Office Lease Agreement  between Building IV Associates L.P. and the Registrant**                           |
|                |   |                                                                                                         |
| **10.2***           |   | **Amendment No. 1 to Office  Lease Agreement between  Building IV  Associates L.P. and the Registrant** |
|                |   |                                                                                                         |
| **10.3***           |   | **Office Lease Agreement  between Building V Associates L.P. and the Registrant**                            |
|                |   |                                                                                                         |
| **10.4***           |   | **Employment Agreement between  the Registrant and David C. Karlgaard, dated January 1, 2000**               |
|                |   |                                                                                                         |
| **10.5***           |   | **Employment Agreement between  the Registrant and Paul G. Rice, dated January 1, 2000**                     |
|                |   |                                                                                                         |
| **10.6***           |   | **Employment Agreement between  the Registrant and Alan H. Harbitter, dated January 1, 2000**                |
|                |   |                                                                                                         |
| **10.7***           |   | **Employment Agreement between  the Registrant and Stuart R. Lloyd, dated December 31, 1998**                |
|                |   |                                                                                                         |
| **10.8***           |   | **2000 Stock Incentive Plan**                                                                                |
|                |   |                                                                                                         |
| **10.9***           |   | **1995 Nonqualified Stock  Option**                                                                          |
|                |   |                                                                                                         |
| **10.10***          |   | **1987 Stock Option Agreement,  as amended**                                                                 |
|                |   |                                                                                                         |
| **10.11***          |   | **Nonqualified Executive  Supplemental Retirement Program Agreement dated December 1998**                    |
|                |   |                                                                                                         |
| **10.12***          |   | **2000 Employee Stock Option  Plan**                                                                         |
|                |   |                                                                                                         |
| **10.13***          |   | **Amended and Restated Loan  Agreement between the Registrant and NationsBank, N.A.**                        |
|                |   |                                                                                                         |
| **10.14****         |   | **Amendment No. 2 to Office  Lease Agreement between Building IV Associates L.P. and PEC Solutions, Inc.**   |
|                |   |                                                                                                         |
| **10.15****         |   | **Amendment No. 3 to Office  Lease Agreement between BuildingIV Associates L.P. and PEC Solutions, Inc.**    |
|                |   |                                                                                                         |
| **10.16****         |   | **Office Lease Agreement  between Building VI L.C. and PEC Solutions, Inc.**                                 |
|                |   |                                                                                                         |
| **10.17*****        |   | **First Amendment to Lease  Agreement between Building VI L.C.   and PEC Solutions, Inc.**              |
|                |   |                                                                                                         |

** **

**16**

----

 
| **10.18***** |   | **Second Amendment to Lease  Agreement between Building VI L.C. and PEC Solutions, Inc.**               |
|--------------|--------|---------------------------------------------------------------------------------------------------------|
|         |   |                                                                                                    |
| **10.19***** |   | **Operating Agreement between  Building VI Investment L.C. And PEC Solutions, Inc.**                    |
|         |   |                                                                                                    |
| **10.20***** |   | **First Amendment to Operating  Agreement between Building VI Investment L.C. and PEC Solutions, Inc.** |
|         |   |                                                                                                    |
| **10.21***** |   | **Bank of America Financing and  Security Agreement**                                                   |
|         |   |                                                                                                    |
| **10.22***** |   | **Bank of America Promissory  Note**                                                                    |
|         |   |                                                                                                    |
| **10.23***** |   | **Bank of America Revolving  Note**                                                                     |
|         |   |                                                                                                    |
| **21.1****** |   | **Subsidiaries of PEC  Solutions, Inc.**                                                                |

** **

----

*****                             Incorporated herein by reference to theCompany's Registration Statement on Form S-1, No. 333-95331.

** **

******                      Incorporated herein by reference to the Company's AnnualReport on Form 10K/A filed on April 19, 2001.

** **

*******               Incorporated herein by reference to the Company’s QuarterlyReport on Form 10-Q for the quarter ended June 30, 2001, filed August 13, 2001.

** **

********        Incorporated herein by reference to the Company’s AnnualReport on Form 10-K filed on March 29, 2002. 

** **

**(b)  None**

** **

**17**

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**SIGNATURES**

** **

**PURSUANTTO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HASDULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED THEREUNTODULY AUTHORIZED.**

** **

** **
|                      | **BY: /s/ STUART R. LLOYD**         |
|---------------------------|-------------------------------------|
| **DATE: AUGUST 14, 2002** | **STUART R. LLOYD**                 |
|                      | **CHIEF FINANCIAL OFFICER, SENIOR** |
|                      | **VICE PRESIDENT AND DIRECTOR**     |
|                      | **(PRINCIPAL FINANCIAL AND**        |
|                      | **ACCOUNTING OFFICER)**             |

** **

**18**

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