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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.
20549



FORM 10-Q



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



For the quarterly period ended March 31, 2003



OR



| ̈ |  | 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 1-7348



DYNAMICS RESEARCH CORPORATION

(Exact Name of
Registrant as Specified in Its Charter)



|Massachusetts                                                 |  | 04-2211809                         
|------------------------------------------------------------- |  | -----------------------------------
|(State or other Jurisdiction ofIncorporation or Organization) |  | (I.R.S. EmployerIdentification No.)
|                                                             
|60 Frontage RoadAndover, Massachusetts                        |  | 01810-5498                         
|(Address of Principal Executive Offices)                      |  | (Zip Code)                         



Registrants telephone number, including area code (978) 475-9090



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.



YesX        No.



Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).



YesX        No.



As of May 2, 2003, the number of shares outstanding of the Registrants Common Stock, $.10 par value, was 8,287,553 shares.



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DYNAMICS RESEARCH CORPORATION



For the quarter ended March 31, 2003



|                                                                                              |  | Page Number
|--------------------------------------------------------------------------------------------- |  | -----------
|Part I. Financial Information                                                                 |  |            
|                                                                                             
|Item 1. Financial Statements (unaudited)                                                      |  |            
|                                                                                             
|Consolidated Balance SheetsMarch 31, 2003 and December 31, 2002                              |  | 3          
|                                                                                             
|Consolidated Statements of OperationsThree Months Ended March 31, 2003 and March 31, 2002    |  | 4          
|                                                                                             
|Consolidated Statements of Cash FlowsThree Months Ended March 31, 2003 and March 31, 2002    |  | 5          
|                                                                                             
|Notes to Unaudited Consolidated Financial Statements                                          |  | 6          
|                                                                                             
|Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 15         
|                                                                                             
|Item 3. Quantitative and Qualitative Disclosures about Market Risk                            |  | 22         
|                                                                                             
|Item 4. Controls and Procedures                                                               |  | 23         
|                                                                                             
|Part II. Other Information                                                                    |  |            
|                                                                                             
|Item 1. Legal Proceedings                                                                     |  | 24         
|                                                                                             
|Item 6. Exhibits and Reports on Form 8-K                                                      |  | 25         
|                                                                                             
|Signatures                                                                                    |  | 26         



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DYNAMICS
RESEARCH CORPORATION



Consolidated Balance Sheets (unaudited)

(in thousands of dollars, except share and per share
data)



|                                                                |  | March 31,    2003 |         |   | December 31, 2002 |  
|--------------------------------------------------------------- |  | ----------------- | ------- | - | ----------------- | -
|Assets                                                          |  |                   |         |   |                   |  
|Current assets                                                  |  |                   |         |   |                   |  
|Cash and cash equivalents                                       |  | $                 | 2,243   |   |                   | $
|Receivables, net of allowances of $356 in 2003 and $373 in 2002 |  |                   | 28,631  |   |                   |  
|Unbilled expenditures and fees on contracts in process          |  |                   | 28,082  |   |                   |  
|Prepaid expenses and other current assets                       |  |                   | 2,637   |   |                   |  
|Discontinued operations                                         |  |                   | 3,159   |   |                   |  
|                                                                |  |                   |         |   |                   |  
|Total current assets                                            |  |                   | 64,752  |   |                   |  
|Noncurrent assets                                               |  |                   |         |   |                   |  
|Net property, plant and equipment                               |  |                   | 15,628  |   |                   |  
|Deferred income taxes                                           |  |                   | 1,357   |   |                   |  
|Goodwill and intangibles, net of amortization                   |  |                   | 29,888  |   |                   |  
|Other noncurrent assets                                         |  |                   | 1,320   |   |                   |  
|Discontinued operations                                         |  |                   | 291     |   |                   |  
|                                                                |  |                   |         |   |                   |  
|Total noncurrent assets                                         |  |                   | 48,484  |   |                   |  
|                                                                |  |                   |         |   |                   |  
|Total assets                                                    |  | $                 | 113,236 |   |                   | $
|                                                                |  |                   |         |   |                   |  
|                                                               
|Liabilities and stockholders equity                            |  |                   |         |   |                   |  
|Current liabilities                                             |  |                   |         |   |                   |  
|Current portion of long-term debt                               |  | $                 | 500     |   |                   | $
|Notes payable and revolver                                      |  |                   | 14,000  |   |                   |  
|Current deferred income taxes                                   |  |                   | 6,253   |   |                   |  
|Accounts payable                                                |  |                   | 11,478  |   |                   |  
|Accrued payroll and employee benefits                           |  |                   | 13,055  |   |                   |  
|Other accrued expenses                                          |  |                   | 3,677   |   |                   |  
|Discontinued operations                                         |  |                   | 1,984   |   |                   |  
|                                                                |  |                   |         |   |                   |  
|Total current liabilities                                       |  |                   | 50,947  |   |                   |  
|                                                               
|Long-term liabilities                                           |  |                   |         |   |                   |  
|Long-term debt, less current portion                            |  |                   | 8,125   |   |                   |  
|Accrued pension liability                                       |  |                   | 11,778  |   |                   |  
|Other long-term liabilities                                     |  |                   | 1,030   |   |                   |  
|                                                                |  |                   |         |   |                   |  
|Total long-term liabilities                                     |  |                   | 20,933  |   |                   |  
|                                                               
|Commitment and Contingencies                                    |  |                   |         |   |                   |  
|                                                               
|Stockholders Equity                                            |  |                   |         |   |                   |  
|Preferred stock, par value, $.10 per share                      |  |                   |         |   |                   |  
|5,000,000 shares authorized, none issued                        |  |                   |        |   |                   |  
|Common stock, par value, $.10 per share:                        |  |                   |         |   |                   |  
|Authorized30,000,000 shares                                    |  |                   |         |   |                   |  
|Issued9,622,130 shares in 2003 and 9,543,606 in 2002           |  |                   | 962     |   |                   |  
|Treasury stock1,379,426 shares in 2003 and 2002                |  |                   | (138    | ) |                   |  
|Capital in excess of par value                                  |  |                   | 34,499  |   |                   |  
|Unearned compensation                                           |  |                   | (974    | ) |                   |  
|Accumulated other comprehensive loss                            |  |                   | (6,881  | ) |                   |  
|Retained earnings                                               |  |                   | 13,888  |   |                   |  
|                                                                |  |                   |         |   |                   |  
|Total stockholders equity                                      |  |                   | 41,356  |   |                   |  
|                                                                |  |                   |         |   |                   |  
|Total liabilities and stockholders equity                      |  | $                 | 113,236 |   |                   | $
|                                                                |  |                   |         |   |                   |  



The
accompanying notes are an integral part of these unaudited consolidated financial statements.



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DYNAMICS RESEARCH CORPORATION



Consolidated Statements of Operations (unaudited)

(in thousands of dollars, except share and per
share data)



|                                                                                       |  | Three Months Ended March 31, 2003 |           |   | Three Months Ended March 31, 2002 |  
|-------------------------------------------------------------------------------------- |  | --------------------------------- | --------- | - | --------------------------------- | -
|Contract revenue                                                                       |  | $                                 | 56,929    |   |                                   | $
|Product sales                                                                          |  |                                   | 1,677     |   |                                   |  
|                                                                                       |  |                                   |           |   |                                   |  
|Total revenue                                                                          |  |                                   | 58,606    |   |                                   |  
|Cost of contract revenue                                                               |  |                                   | 48,152    |   |                                   |  
|Cost of product sales                                                                  |  |                                   | 1,253     |   |                                   |  
|Selling, engineering and administrative expenses                                       |  |                                   | 5,781     |   |                                   |  
|Amortization of intangible assets                                                      |  |                                   | 455       |   |                                   |  
|                                                                                       |  |                                   |           |   |                                   |  
|Total operating costs and expenses                                                     |  |                                   | 55,641    |   |                                   |  
|Operating income                                                                       |  |                                   | 2,965     |   |                                   |  
|Other income                                                                           |  |                                   | 42        |   |                                   |  
|Interest expense, net                                                                  |  |                                   | (277      | ) |                                   |  
|                                                                                       |  |                                   |           |   |                                   |  
|Income from continuing operations before provision for income taxes                    |  |                                   | 2,730     |   |                                   |  
|Provision for income taxes                                                             |  |                                   | 1,098     |   |                                   |  
|                                                                                       |  |                                   |           |   |                                   |  
|Income from continuing operations                                                      |  |                                   | 1,632     |   |                                   |  
|Loss from discontinued operations, net of tax benefit of $240 in 2003 and $137 in
2002 |  |                                   | (357      | ) |                                   |  
|Loss on disposal of discontinued operations, net of tax benefit of $157 in
2003        |  |                                   | (233      | ) |                                   |  
|                                                                                       |  |                                   |           |   |                                   |  
|Net income                                                                             |  | $                                 | 1,042     |   |                                   | $
|                                                                                       |  |                                   |           |   |                                   |  
|NET INCOME PER COMMON SHARE                                                            |  |                                   |           |   |                                   |  
|Per common sharebasic                                                                 |  |                                   |           |   |                                   |  
|Income from continuing operations                                                      |  | $                                 | 0.20      |   |                                   | $
|Loss from discontinued operations                                                      |  |                                   | (0.04     | ) |                                   |  
|Loss on disposal of discontinued operations                                            |  |                                   | (0.03     | ) |                                   |  
|                                                                                       |  |                                   |           |   |                                   |  
|Net income                                                                             |  | $                                 | 0.13      |   |                                   | $
|                                                                                       |  |                                   |           |   |                                   |  
|Per common sharediluted                                                               |  |                                   |           |   |                                   |  
|Income from continuing operations                                                      |  | $                                 | 0.19      |   |                                   | $
|Loss from discontinued operations                                                      |  |                                   | (0.04     | ) |                                   |  
|Loss on disposal of discontinued operations                                            |  |                                   | (0.03     | ) |                                   |  
|                                                                                       |  |                                   |           |   |                                   |  
|Net income                                                                             |  | $                                 | 0.12      |   |                                   | $
|                                                                                       |  |                                   |           |   |                                   |  
|Weighted average shares outstanding                                                    |  |                                   |           |   |                                   |  
|Weighted average shares outstandingbasic                                              |  |                                   | 8,116,515 |   |                                   |  
|Dilutive effect of options                                                             |  |                                   | 529,402   |   |                                   |  
|                                                                                       |  |                                   |           |   |                                   |  
|Weighted average shares outstandingdiluted                                            |  |                                   | 8,645,917 |   |                                   |  
|                                                                                       |  |                                   |           |   |                                   |  



The
accompanying notes are an integral part of these unaudited consolidated financial statements.



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DYNAMICS RESEARCH CORPORATION



Consolidated Statements of Cash Flows (unaudited)

(in thousands of dollars)



|                                                                               |  | Three Months Ended March 31, 2003 |        |   | Three Months Ended March 31, 2002 |  
|------------------------------------------------------------------------------ |  | --------------------------------- | ------ | - | --------------------------------- | -
|Operating activities:                                                          |  |                                   |        |   |                                   |  
|Net income                                                                     |  | $                                 | 1,042  |   |                                   | $
|Loss from discontinued operations                                              |  |                                   | (357   | ) |                                   |  
|Loss on disposal of discontinued operations                                    |  |                                   | (233   | ) |                                   |  
|                                                                               |  |                                   |        |   |                                   |  
|Income from continuing operations                                              |  |                                   | 1,632  |   |                                   |  
|Adjustments to reconcile net cash provided by (used for) operating
activities: |  |                                   |        |   |                                   |  
|Depreciation                                                                   |  |                                   | 800    |   |                                   |  
|Noncash interest expense (income)                                              |  |                                   | 37     |   |                                   |  
|Investment income from equity interest                                         |  |                                   | (3     | ) |                                   |  
|Stock compensation expense                                                     |  |                                   | 49     |   |                                   |  
|Tax benefit from stock options exercised                                       |  |                                   |       |   |                                   |  
|Amortization of intangible assets                                              |  |                                   | 455    |   |                                   |  
|Deferred income taxes provision                                                |  |                                   | (69    | ) |                                   |  
|Change in operating assets and liabilities                                     |  |                                   |        |   |                                   |  
|Accounts receivable                                                            |  |                                   | 1,188  |   |                                   |  
|Unbilled expenditures and fees on contracts in process                         |  |                                   | (1,468 | ) |                                   |  
|Prepaid expenses and other current assets                                      |  |                                   | (910   | ) |                                   |  
|Accounts payable                                                               |  |                                   | (856   | ) |                                   |  
|Accrued payroll and employee benefits                                          |  |                                   | 1,157  |   |                                   |  
|Other accrued expenses                                                         |  |                                   | (471   | ) |                                   |  
|                                                                               |  |                                   |        |   |                                   |  
|Net cash provided by continuing operations                                     |  |                                   | 1,541  |   |                                   |  
|Net cash provided by discontinued operations                                   |  |                                   | 851    |   |                                   |  
|                                                                               |  |                                   |        |   |                                   |  
|Net cash provided by operating activities                                      |  |                                   | 2,392  |   |                                   |  
|Investing activities:                                                          |  |                                   |        |   |                                   |  
|Additions to property, plant and equipment                                     |  |                                   | (833   | ) |                                   |  
|Increase in other assets                                                       |  |                                   | (79    | ) |                                   |  
|                                                                               |  |                                   |        |   |                                   |  
|Net cash used for continuing operations                                        |  |                                   | (912   | ) |                                   |  
|Net cash used for discontinued operations                                      |  |                                   |       |   |                                   |  
|                                                                               |  |                                   |        |   |                                   |  
|Net cash used for investing activities                                         |  |                                   | (912   | ) |                                   |  
|Financing activities:                                                          |  |                                   |        |   |                                   |  
|Net repayments under revolving credit agreement                                |  |                                   | (644   | ) |                                   |  
|Principal payment under mortgage agreement                                     |  |                                   | (125   | ) |                                   |  
|Proceeds from the exercise of stock options and issuance of common stock       |  |                                   | 456    |   |                                   |  
|                                                                               |  |                                   |        |   |                                   |  
|Net cash provided by (used for) financing activities                           |  |                                   | (313   | ) |                                   |  
|Net increase in cash and cash equivalents                                      |  |                                   | 1,167  |   |                                   |  
|Cash and cash equivalents at the beginning of year                             |  |                                   | 1,076  |   |                                   |  
|                                                                               |  |                                   |        |   |                                   |  
|Cash and cash equivalents at the end of period                                 |  | $                                 | 2,243  |   |                                   | $
|                                                                               |  |                                   |        |   |                                   |  
|Supplemental information                                                       |  |                                   |        |   |                                   |  
|Cash paid for interest                                                         |  | $                                 | 248    |   |                                   | $
|Cash paid for income taxes                                                     |  |                                   | 461    |   |                                   |  



The
accompanying notes are an integral part of these unaudited consolidated financial statements.



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DYNAMICS RESEARCH CORPORATION



Notes to Unaudited Consolidated Financial Statements



Note 1. Basis of Presentation



Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the company
and its wholly owned subsidiaries. All material intercompany transactions and balances have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform to current period presentation.



On October 18, 2002, the company announced that it was actively pursuing the
divestiture of the Encoder Division, a manufactured products business, (previously reported as a segment) due to continued weakness in the manufacturing sector. In accordance with Statement of Financial Accounting Standard (SFAS) No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets, the consolidated financial statements of the company have been restated to reflect the discontinuation of the Encoder Division (see Note 2).



Certain information in footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted in the United States has been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. The company believes that the
disclosures are adequate to make the information presented not misleading. The financial information is unaudited, but reflects all normal adjustments which are, in the opinion of the management, necessary to fairly present the results of operations
and financial position. The financial statements should be read in conjunction with the financial statements in the companys Annual Report on Form 10-K for the year ended December 31, 2002. The results of the three-month period ended March 31,
2003 may not be indicative of the results that may be expected for the fiscal year ended December 31, 2003.



Inventories

Inventories are stated at the lower of cost (first-in, first-out) or
market, and consist of materials, labor and overhead. There are no amounts in inventories relating to contracts having production cycles longer than one year. Work-in-process, raw materials and subassemblies were $46,000 at March 31, 2003 and
$58,000 at December 31, 2002.



Property, Plant and
Equipment

Property, plant and equipment are stated at cost. Plant and equipment are depreciated principally on a straight-line basis
over their estimated useful lives. Useful lives for equipment range from three to eight years. The corporate office building has a useful life of 31 years. Leasehold improvements are amortized over the shorter of the remaining term of the lease or
the life of the related asset.



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Property, plant and equipment
stated at cost :



|                                               |  | March 31, 2003            |        | December 31, 2002
|---------------------------------------------- |  | ------------------------- | ------ | -----------------
|                                               |  | (in thousands of dollars)
|Land                                           |  | $                         | 1,126  |                  
|Building                                       |  |                           | 9,109  |                  
|Machinery and equipment                        |  |                           | 33,651 |                  
|Leasehold improvements                         |  |                           | 2,396  |                  
|                                               |  |                           |        |                  
|Total property, plant and equipment            |  |                           | 46,282 |                  
|Less accumulated depreciation and amortization |  |                           | 30,654 |                  
|                                               |  |                           |        |                  
|Net property, plant and equipment              |  | $                         | 15,628 |                  
|                                               |  |                           |        |                  



Stock-Based
Compensation

The company accounts for stock option plans under APB Opinion No. 25, Accounting for Stock Issued to Employees, and related
Interpretations. The following table illustrates the effect of net income per common share if the company had applied the fair value based method of SFAS No. 123, Accounting for Stock-Based Compensation, to all outstanding and unvested
awards in each period to record expense for stock option compensation.



|For the three months ended March 31,                                                                                                |  | 2003                                             |       |   | 2002 |  
|----------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------ | ----- | - | ---- | -
|                                                                                                                                    |  | (in thousands of dollars,
except per share data) |      
|Net income, as reported                                                                                                             |  | $                                                | 1,042 |   |      | $
|Deduct: Total stock-based employee compensation determined under fair-value-based method
for all awards, net of related tax effects |  |                                                  | (992  | ) |      |  
|                                                                                                                                    |  |                                                  |       |   |      |  
|Pro forma net income                                                                                                                |  | $                                                | 50    |   |      | $
|                                                                                                                                    |  |                                                  |       |   |      |  
|Income per share:                                                                                                                   |  |                                                  |       |   |      |  
|Basic, as reported                                                                                                                  |  | $                                                | 0.13  |   |      | $
|Basic, pro forma                                                                                                                    |  |                                                  | 0.01  |   |      |  
|Diluted, as reported                                                                                                                |  |                                                  | 0.12  |   |      |  
|Diluted, pro forma                                                                                                                  |  |                                                  | 0.01  |   |      |  



The weighted average
fair value of options granted was $8.33 in the first quarter of 2003 and $13.27 in the first quarter of 2002. The fair value of each option for the companys plans is estimated on the date of the grant using the Black-Scholes option pricing
model, with the following weighted average assumptions.



|For the three months ended March 31, |  | 2003  |   |  | 2002  |  
|------------------------------------ |  | ----- | - |  | ----- | -
|Expected volatility                  |  | 55.72 | % |  | 67.47 | %
|Dividend yield                       |  |      |   |  |      |  
|Risk-free interest rate              |  | 4.02  | % |  | 5.06  | %
|Expected life in years               |  | 8.06  |   |  | 7.90  |  



New Accounting
Pronouncements

In April 2002, the Financial Accounting Standards Board (the FASB) issued SFAS No. 145, Rescission of FASB
Statements Nos. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections. It rescinds SFAS No. 4, Reporting Gains and Losses from Extinguishment of Debt, SFAS No. 44, Accounting for Intangible Assets of Motor
Carriers and SFAS No. 64, Extinguishment of Debt Made to Satisfy Sinking-Fund Requirements.



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SFAS No. 145 also amends SFAS No. 13, Accounting for Leases, to eliminate the inconsistency in the
required accounting for sale-leaseback transactions. SFAS No. 145 also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings or describe their applicability under changed conditions. The new rule
is effective for the company beginning January 1, 2003. The adoption of SFAS No.145 did not have a material impact on the companys financial position or results of operations.



In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No.
146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to the exit or disposal plan. The new rule is effective for the company beginning January 1, 2003.
The adoption of SFAS No. 146 did not have a material impact on the companys financial position or results of operations.



In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure-An Amendment of SFAS No. 123.
SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair-value-based method of accounting for stock-based employee compensation. Also, this
Statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in interim financial statements in addition to the annual disclosures about the effect the fair value method would have had on reported results. The
transition and annual disclosure requirements of SFAS No. 148 are effective for fiscal years ending after December 15, 2002. The interim disclosure requirements are effective for interim periods beginning after December 15, 2002. As permitted by
SFAS No. 148, the company continues to apply the disclosure alternative adopted under SFAS No. 123 to account for its stock option grants to employees, under which compensation expense is not typically recognized.



In November 2002, the FASB issued FASB Interpretation No. (FIN)
45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an Interpretation of SFAS No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34. FIN No. 45
clarifies requirements relating to the guarantors accounting for, and disclosure of, the issuance of certain types of guarantees. FIN No. 45 requires that upon issuance of a guarantee, companies recognize a liability for the fair value of the
obligation it assumes under that guarantee. The company adopted the annual disclosure provisions of FIN No. 45 in the year ended December 31, 2002. The company adopted the provisions for initial recognition and measurement and the interim
disclosures during the first quarter of 2003. The adoption of FIN No. 45 did not have a material effect on the consolidated financial statements.



Income (Loss) Per Common Share

Basic
income (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. For years in which there is net income, diluted income per share is determined by using the
weighted average number of common and dilutive common equivalent shares outstanding during the period unless the effect is antidilutive.



Due to their antidilutive effect, 100,260 and 1,000 stock options were excluded from the calculation of diluted income per share in the first quarter of
2003 and 2002, respectively.



Note 2. Discontinued
Operations

On October 18, 2002, the company announced that it was actively pursuing the divestiture of the Encoder Division. Effective
in the fourth quarter of 2002, and in accordance with SFAS No. 144, the



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Encoder Division has been reflected as discontinued operations for all periods presented in the
companys financial statements. Accordingly, the revenue, costs, expenses, assets, liabilities and cash flows of the Encoder Division have been reported separately in the Consolidated Statements of Operations, Consolidated Balance Sheets and
Consolidated Statements of Cash Flows for all periods presented. The results of discontinued operations do not reflect any interest expense or any allocation of corporate general and administrative expense.



Loss from discontinued operations for the first quarter of 2003 was $0.4
million or $0.04 per diluted share, compared with $0.2 million, or $0.02 per diluted share for the first three months of 2002.



Current assets of discontinued operations consist of the following:



|                                          |  | March 31, 2003            |       | December 31, 2002
|----------------------------------------- |  | ------------------------- | ----- | -----------------
|                                          |  | (in thousands of dollars)
|Receivables, net of allowances            |  | $                         | 1,044 |                  
|Inventory, net                            |  |                           | 2,110 |                  
|Prepaid expenses and other current assets |  |                           | 5     |                  
|                                          |  |                           |       |                  
|Total current assets                      |  | $                         | 3,159 |                  
|                                          |  |                           |       |                  



Noncurrent assets of
discontinued operations consist of net property, plant and equipment and was $0.3 million at both March 31, 2003 and December 31, 2002.



Current liabilities of discontinued operations consist of the following:



|                                      |  | March 31, 2003            |       | December 31, 2002
|------------------------------------- |  | ------------------------- | ----- | -----------------
|                                      |  | (in thousands of dollars)
|Accounts payable                      |  | $                         | 187   |                  
|Accrued payroll and employee benefits |  |                           | 96    |                  
|Estimated loss on disposal            |  |                           | 1,053 |                  
|Other accrued expenses                |  |                           | 648   |                  
|                                      |  |                           |       |                  
|Total liabilities                     |  | $                         | 1,984 |                  
|                                      |  |                           |       |                  



On May 2, 2003, the
company completed the sale of its Encoder Division assets and certain liabilities to GSI Lumonics in Billerica, Massachusetts for $3.3 million in cash subject to adjustment. As a result, an impairment charge of $1.1 million before taxes was recorded
as a loss on disposal of discontinued operations in the first quarter of 2003, reflecting $0.3 million of professional fees and $0.8 million of other costs to exit the business.



Loss on disposal of discontinued operations also includes royalty income. The company recognized royalty income associated
with the companys 1999 sale of its discontinued Telecommunications Fraud Control business on a cash basis and reported no income in the first quarter



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of 2002. In the first quarter of 2003, the company received the final royalty payment associated with this
transaction of $0.7 million, and included $0.4 million, net of tax, in loss on disposal of discontinued operations for the first quarter of 2003.



Note 3. Debt

At December 31, 2002, the
company had $12.4 million in notes payable associated with the purchase of Andrulis Corporation (ANDRULIS). The $12.4 million in notes payable had an interest rate of 4.0% and a maturity date of January 2, 2003. In January 2003, the
notes payable associated with the purchase of ANDRULIS were paid in full with proceeds from the companys revolving credit agreement.



Effective June 28, 2002, the company obtained a $50 million revolving credit agreement (the Revolver), replacing the previous revolver. The
Revolver has a three-year term and is available to the company for general corporate purposes, including strategic acquisitions. The fee on the unused portion of the Revolver ranges from 0.25% to 0.5% depending on the companys most recently
reported leverage ratio and is payable quarterly in arrears. The company has the option to elect on a fixed 30, 60 or 90-day term, an interest rate of LIBOR plus 2.0% to 3.0%, depending on the companys most recently reported leverage ratio, or
the prime rate on any outstanding balance. Interest on the outstanding balance of the Revolver is payable monthly under the prime rate option or at the end of the elected term for the LIBOR rate option. At March 31, 2003, the outstanding balance
under the Revolver was $14.0 million. The weighted average interest rate on the balance outstanding under the Revolver was 3.28% based on $10.0 million borrowed under the 60 day LIBOR option at a rate of 3.28% and $4.0 million borrowed under the 30
day LIBOR option at a rate of 3.27%. At December 31, 2002, the outstanding balance under the Revolver was $2.2 million.



The company has a 10-year mortgage loan (the Mortgage), dated June 12, 2000, as amended and restated on June 28, 2002, on the corporate office
facility in Andover, Massachusetts. The outstanding balance of the Mortgage was $8.6 million at March 31, 2003. The agreement requires quarterly principal payments of $125,000, with a final payment of $5 million in May 2010. Interest on the Mortgage
accrued at the rate of LIBOR plus 2.5% through November 5, 2001. Effective November 6, 2001, the interest rate on the Mortgage was reduced to LIBOR plus 2.0%. The interest rate on the Mortgage under the 90-day LIBOR option, elected at February 12,
2003, was 3.34%, which was effective at March 31, 2003.



The
Revolver and Mortgage agreements, as currently amended, require the company to meet certain financial covenants including maintaining a minimum net worth, cash flow and debt coverage ratios, and limit the companys ability to incur additional
debt, pay dividends, purchase capital assets, sell or dispose of assets, make additional acquisitions or investments, or enter into new leases, among other restrictions. In addition, the loan agreements contain a subjective acceleration clause
allowing the lender to require payment upon the occurrence of a material adverse change.



The company was in compliance with all loan covenants on March 31, 2003.



Note 4. Stock Plans

The company has stock option plans, which are administered by the
Compensation Committee of the Board of Directors (the Committee). The Committee oversees which employees receive options, the number of options granted and the option prices of the shares covered by each stock option grant.



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On January 30, 2001, companys shareholders approved the adoption of the 2000 Employee Stock Purchase
Plan (the ESPP). The ESPP is designed to give eligible employees an opportunity to purchase common stock of the company through accumulated payroll deductions. The purchase price of the stock is equal to 85% of the fair market value of a
share of common stock on the first day or last day of each three-month offering period, whichever is lower. All employees of the company or designated subsidiaries who customarily work at least 20 hours per week and do not own five percent or more
of the companys common stock are eligible to participate in the purchase plan. A total of 800,000 shares have been reserved for issuance under the ESPP of which 574,583 shares remain unissued at March 31, 2003. The program commenced in May
2001. In the first quarter of 2003 and 2002, 40,068 and 27,664 shares, respectively, were issued through the plan.



During the second quarter of 2001, the Board of Directors approved the Executive Long Term Incentive Program (the ELTIP), implemented under
the provisions of the shareholder approved 2000 Incentive Plan. The ELTIP provides incentives to program participants through a combination of stock options and restricted stock grants, which vest fully in seven years. The ELTIP allows for
accelerated vesting based on the companys achievement of specified financial performance goals. During the second quarter of 2001, the company granted under this plan stock options totaling 750,000 shares of common stock at fair market value
and granted 121,000 shares of restricted common stock, of which 3,000 shares were forfeited in 2002, with approximately $1.1 million of compensatory value to be amortized over the seven-year vesting period of the grant. During the first quarter of
2003, the company granted under this plan 23,100 shares of restricted common stock with approximately $0.2 million of compensatory value to be amortized over the two-year vesting period of the grant. In the first three months of 2003 and 2002, the
company recognized approximately $49,000 and $39,000 of compensation expense, respectively, under this plan.



On February 19, 2003, the Board of Directors authorized the grant of 100,000 non-qualified stock options as an inducement for the hiring of a new executive officer. The grant was made on April 7, 2003.
The option price was the fair market value of the common stock at the date of grant. The options will vest one-third on the first anniversary of employment and one-third on each successive anniversary. The options expire 10 years from the date of
grant.



Note 5. Commitments and Contingencies

As a defense contractor, the company is subject to many levels of audit and review from various government agencies, including the Defense
Contract Audit Agency, the Inspector General, the Defense Criminal Investigative Service, the General Accounting Office, the Department of Justice and congressional committees. Both related to and unrelated to its defense industry involvement, the
company is, from time to time, involved in audits, lawsuits, claims, administrative proceedings and investigations. The company accrues for liabilities associated with these activities when it becomes probable that future expenditures will be made
and such expenditures can be reasonably estimated. The companys evaluation of the likelihood of expenditures related to these matters is subject to change in future periods, depending on then current events and circumstances, which could have
material adverse effects on the companys results of operations, financial position and cash flows.



As previously disclosed, on October 26, 2000, two former company employees were indicted for conspiracy to defraud the United States Air Force and pled guilty. The United States Attorneys office
continues to discuss the possibility of civil liability on the part of the company arising from the former employees conspiracy to defraud the United States Air Force of a claimed $10 million dollars, a substantial portion of which has been
recovered. If a suit is brought the company will vigorously defend itself. The company does not have a sufficient basis to determine whether this matter will have a material adverse effect on the companys financial position or results of
operations.



On September 5, 2002, Genesis Tactical Group LLC
(Genesis) asserted a cross-claim against Lockheed Martin Corporation (Lockheed) seeking $50 million in damages and against the company seeking $35 million in damages. These cross-claims arise out of a suit filed on July 30,
2002 by



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Lockheed against Tactical Communications Group LLC, Genesis and the company in the State of New York
Supreme Court, County of Onondaga. The Lockheed suit relates to a contract for services which was sold to Genesis by the company pursuant to an asset purchase agreement in 2001. By the terms of the asset purchase agreement the companys
liability is limited to $300,000, other than for intentional misrepresentation, willful breach or fraud. Lockheed has asserted breach of contract and is seeking damages from and performance of the contract by Genesis and unspecified compensatory
damages from the company. Genesis cross-claims relate to alleged breaches of the contract by Lockheed and for alleged breaches of the asset purchase agreement by the company. The company has asserted claims against Lockheed and Genesis and
believes that the Lockheed and Genesis claims against the company are without merit. The parties have exchanged settlement offers while litigation has been postponed. If the companys settlement offer is accepted, the company would not be
obligated to make any payments. While the company believes that the possibility of a material adverse effect on the companys financial position or results of operations is remote, there can be no assurance as to the outcome.



The company has provided documents in response to a previously disclosed grand
jury subpoena issued on October 15, 2002 by the United States District Court for the District of Massachusetts directing the company to produce specified documents dating back to 1996. The subpoena relates to an investigation, currently focused on
the period from 1996 to 1999, by the Antitrust Division of the Department of Justice into bidding and procurement activities involving the company and several other defense contractors who have received similar subpoenas and may also be subjects of
the investigation. Although the company is cooperating in the investigation, it does not have a sufficient basis to predict the outcome of the investigation. Should the company be found to have violated the antitrust laws, the matter could have a
material adverse effect on the companys financial position and results of operations.



Note 6. Acquisitions and Goodwill

On May 31, 2002, the company completed its
acquisition of HJ Ford Associates, Inc. (HJ Ford) for $9.9 million in net cash, including transaction costs of $0.4 million and exit costs of $0.1 million, in exchange for all of the outstanding voting common stock. HJ Ford helps their
clients manage operational processes and acquisition programs by drawing on their core competencies of systems and information engineering, acquisition logistics and logistics engineering, information technology, enterprise engineering, and
acquisition program support. Pursuant to certain provisions of the purchase agreement, the price was adjusted downward in the third quarter of 2002 by $0.5 million. The company also agreed to compensate the seller $1.3 million, which was accounted
for as additional purchase price for sellers consent to treat the transaction as an asset purchase for tax purposes, under Section 338(h)10 of the Internal Revenue Code. This tax treatment enables the company to take future tax deductions for
the goodwill amortization reported for tax purposes. The total resulting purchase price was $10.7 million. The purchase agreement also requires payment by the company to the sellers of an additional $1.0 million in 2005, subject to the occurrence of
certain events related to contract renewals. Should these events occur, the additional payment would be recorded as additional purchase price.



The Unaudited Consolidated Statements of Operations include the results of HJ Ford beginning May 31, 2002. The company obtained an independent valuation
of the fair value of assets acquired, and allocated $1.8 million of the purchase price to intangible assets related to customer relationships and non-competition agreements with estimated useful lives ranging from two to four years.



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On December 20, 2002, the company completed its acquisition of ANDRULIS for $13.6 million in net cash,
including transaction costs of $1.1 million and exit costs of $0.7 million, and issued three separate promissory notes payable with an aggregate amount of approximately $12.4 million, each of which were due and payable on January 2, 2003, in
exchange for all of the outstanding shares of capital stock. The resulting preliminary purchase price was $26.1 million, which is subject to revision based on the final determination of appraisals and fair values and was funded from cash on-hand and
the companys $50 million revolving credit facility. Headquartered in Washington, D.C., ANDRULIS has approximately 300 employees in Washington, D.C.; San Diego, California; and Norfolk, Virginia. ANDRULIS provides information technology and
engineering solutions to federal government customers in the defense and federal civilian sectors.



The Unaudited Consolidated Statements of Operations include the results of ANDRULIS beginning December 18, 2002, the designated effective date. The company obtained an independent valuation of the fair
value of intangible assets acquired, and allocated $2.6 million of the purchase price to intangible assets related to customer relationships and non-competition agreements with estimated useful lives ranging from two to four years.



The Unaudited Consolidated Balance Sheets reflect this allocation between
goodwill and intangible assets for both acquisitions. The amortization expense related to the intangible assets commenced upon acquisition.



The preliminary purchase prices of the HJ Ford and ANDRULIS acquisitions have been allocated as follows:



|                                                                                  |  | HJ Ford                   |        |   | ANDRULIS |  
|--------------------------------------------------------------------------------- |  | ------------------------- | ------ | - | -------- | -
|                                                                                  |  | (in thousands of dollars) |       
|Working capital, net of cash acquired of $554 for HJ Ford and $1,709 for
ANDRULIS |  | $                         | 3,054  |   |          | $
|Property and equipment                                                            |  |                           | 209    |   |          |  
|Other noncurrent assets                                                           |  |                           | 222    |   |          |  
|Intangible assets                                                                 |  |                           | 1,800  |   |          |  
|Goodwill                                                                          |  |                           | 6,162  |   |          |  
|                                                                                  |  |                           |        |   |          |  
|Total assets, net of cash acquired                                                |  |                           | 11,447 |   |          |  
|                                                                                 
|Other liabilities                                                                 |  |                           |       |   |          |  
|Long-term debt                                                                    |  |                           | (700   | ) |          |  
|                                                                                  |  |                           |        |   |          |  
|Total liabilities                                                                 |  |                           | (700   | ) |          |  
|                                                                                  |  |                           |        |   |          |  
|Purchase price, net of cash acquired                                              |  | $                         | 10,747 |   |          | $
|                                                                                  |  |                           |        |   |          |  



The company paid the
long-term debt of $0.7 million in the second quarter of 2002 and canceled the related loan agreement.



The company acquired, as part of the HJ Ford purchase, a 40% ownership interest in a small disadvantaged business, which is accounted for using the equity method. The company has continuing business
relationships with this business and as of December 31, 2002 had provided it with a line of credit guarantee in the amount of $0.2 million. The small business paid the line of credit in the first quarter of 2003.



The following table represents the companys unaudited pro forma results
of operations for the quarter ended March 31, 2002, as if the HJ Ford and ANDRULIS acquisitions had occurred on January 1, 2002.



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These pro forma results include adjustments for the amortization of intangible assets with finite useful
lives, the elimination of intercompany transactions and adjustments for income tax effects. The table has been prepared for comparative purposes only and does not purport to be indicative of what would have occurred had the acquisition been made at
the beginning of the period noted or of results that may occur in the future.



|For the quarter ended March 31, |  | 2002                                            
|------------------------------- |  | ------------------------------------------------
|                                |  | (in thousands of dollars,
except per share data)
|Net revenue                     |  | $                                               
|Net income                      |  |                                                 
|Net income per sharebasic      |  |                                                 
|Net income per sharediluted    |  |                                                 



Effective January 1,
2002, the company adopted SFAS No. 142, which addresses financial accounting and reporting for acquired goodwill and other intangible assets.



Identifiable intangible assets as of March 31, 2003 are as follows:



|                       |  | Gross Carrying Amount     |        | Accumulated Amortization |  
|---------------------- |  | ------------------------- | ------ | ------------------------ | -
|                       |  | (in thousands of dollars) |       
|Non-compete agreements |  | $                         | 1,740  |                          | $
|Contracts              |  |                           | 2,700  |                          |  
|                       |  |                           |        |                          |  
|                       |  |                           | 4,440  |                          |  
|                      
|Goodwill               |  |                           | 26,277 |                          |  
|                       |  |                           |        |                          |  
|Total                  |  | $                         | 30,717 |                          | $
|                       |  |                           |        |                          |  



The accumulated
amortization expense for all acquired intangible assets was $0.8 million at March 31, 2003.



The estimated amortization expense for the remainder of each of the five succeeding years is as follows:



|(in thousands of dollars): |  |        |  |  |  |  |  |  |  |  |  | 
|-------------------------- |  | ------ |  |  |  |  |  |  |  |  |  | 
|2003                       |  | $1,269 |  |  |  |  |  |  |  |  |  | 
|2004                       |  | 1,520  |  |  |  |  |  |  |  |  |  | 
|2005                       |  | 489    |  |  |  |  |  |  |  |  |  | 
|2006                       |  | 166    |  |  |  |  |  |  |  |  |  | 
|2007                       |  | 167    |  |  |  |  |  |  |  |  |  | 



Note 7. Segment
Information

Identifiable assets by business segment include both assets directly identified with those operations and an allocable share
of jointly used assets.



Summarized financial information by
business segment for the three months ended March 31, 2003 and March 31, 2002 are as follows (in thousands of dollars):



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|                                      |  | Systems and Services |        | Metrigraphics |   | Corporate |  | Total Identifiable Continuing Operations
|------------------------------------- |  | -------------------- | ------ | ------------- | - | --------- |  | ----------------------------------------
|March 31, 2003                        |  |                      |        |               |   |           |  |                                         
|Net sales                             |  | $                    | 56,929 |               | $ | 1,677     |  | $                                       
|Operating income                      |  |                      | 2,823  |               |   | 142       |  |                                         
|Identifiable assets at March 31, 2003 |  |                      | 79,853 |               |   | 2,467     |  |                                         
|                                     
|March 31, 2002                        |  |                      |        |               |   |           |  |                                         
|Net sales                             |  | $                    | 44,771 |               | $ | 2,288     |  | $                                       
|Operating income                      |  |                      | 2,368  |               |   | 514       |  |                                         
|Identifiable assets at March 31, 2002 |  |                      | 47,304 |               |   | 3,238     |  |                                         



Net sales and operating
income (loss) are presented after the elimination of intersegment transactions, which are not material.



During the first quarter of 2003 and 2002, revenue from Department of Defense (DoD) customers represented approximately 77% and 78% of total revenue, respectively. Revenue earned from one significant
DoD contract represented approximately 8% and 12% of total revenue in the first three months of 2003 and 2002, respectively.



Note 8. Subsequent Event

On May 2,
2003, the company completed the sale of its Encoder Division assets and certain liabilities to GSI Lumonics in Billerica, Massachusetts for $3.3 million in cash subject to adjustment. On October 18, 2002, the company announced that it was actively
pursuing the divestiture of the Encoder Division. The Encoder Divisions financial results have been reported as a discontinued operation beginning in the fourth quarter of 2002 (see Note 2).



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations



On April 7, 2003, the company announced that it appointed William C. Hoover, President and Chief Operating Officer. Mr. Hoover has primary responsibility
for the companys operating and business development groups. Mr. Hoover brings more than 20 years experience in managing growth, building shareholder value and leading dynamic organizational change.



Results of Operations



Total revenue increased 24.5% to $58.6 million in the first quarter of 2003
compared with $47.1 million in the first quarter of 2002.



Contract revenue for the Systems and Services Segment increased 27.2% to $56.9 million in the first three months of 2003 compared with $44.8 million in the same period last year. Defense revenues grew 23.4%, or $8.7 million in the
first quarter of 2003 compared with the same quarter last year. Revenue from federal civilian agencies was $9.0 million for the quarter ended March 31, 2003, up from $3.7 million in the same quarter last year. The companys acquisition of HJ
Ford and ANDRULIS added $16.2 million to the first quarter of 2003 revenue for the federal defense and civilian sectors. On a year over year basis, this increase was partially offset by a reduction in subcontractor revenue with the Air Force
Electronic Systems Center of $3.2 million and a reduction in Navy Strategic Systems Guidance work of $1.1 million. Absent these effects, federal revenue grew approximately $2.0 million in the first quarter of 2003 when compared with the same quarter
last year.



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State and local government
revenue was $2.6 million and $4.5 million for the first quarter of 2003 and 2002, respectively, reflecting completion of the Colorado Trails project and curtailment of work in Ohio during 2002.



Product sales for the Metrigraphics Segment decreased 27.7% to $1.7 million in
the first three months of 2003 compared with $2.3 million in the same period of 2002. The decrease in 2003 was due to continued weak economic conditions. The company remains cautious that further economic weakness could adversely affect the
Metrigraphics Division.



Total gross margin was $9.2 million and
$7.0 million in the first quarter of 2003 and 2002, respectively, representing 15.7% and 14.9% of total revenue in the first three months of both 2003 and 2002, respectively.



Gross margin on contract revenue increased 43.6% to $8.8 million in the first three months of 2003 compared with $6.1 million
for the first three months 2002, representing 15.4% and 13.6% of contract revenue in the first quarter of 2003 and 2002, respectively. Gross margin on contract revenue improved primarily due to a decrease in lower margin subcontract work and the
receipt of $0.4 million related to a completed contract with no additional costs.



Gross margin on product sales was $0.4 million and $0.9 million, in the first quarter of 2003 and 2002, respectively, representing 25.3% and 40.2% of product sales in the first three months of 2003 and 2002, respectively.
Continued weak economic conditions impacted gross margin on product sales in the first quarter of 2003 due to a lower revenue base over which to spread fixed costs.



Operating expenses were $5.8 million and $4.1 million for the first three months of 2003 and 2002, respectively. The company
incurred $0.7 million of incremental legal and benefit costs and $0.7 million of expenses in support of acquired operations in the first quarter of 2003 compared to the same quarter last year.



Amortization expense of $0.5 million for the first quarter of 2003 reflects
the amortization of intangible assets associated with the HJ Ford and ANDRULIS acquisitions (see Note 6 of Notes to the unaudited Consolidated Financial Statements).



Total operating income was $3.0 million and $2.9 million for the first three months of 2003 and 2002, respectively. As a
percent of revenue, operating income was 5.1% and 6.1% for the first quarter of 2003 and 2002, respectively. Most of the reduction in operating margin resulted from lower product sales and related profits.



Net interest expense was $0.3 million and $39,000 for the first three months
of 2003 and 2002, respectively, reflecting a higher debt level in 2003 due to the acquisition of ANDRULIS.



Income tax expense for the first quarter of 2003 and 2002 was $1.1 million and $1.2 million, respectively, representing 40.2% and 40.7% of pre-tax income for the first three months of 2003 and 2002,
respectively.



Loss from discontinued operations for the first
quarter of 2003 was $0.4 million, or $0.04 per diluted share, compared with a loss of $0.2 million, or $0.02 per diluted share for the first three months of 2002. The loss for the first quarter of 2003 includes $0.3 million in fees to re-audit 2000
and 2001



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results, necessitated by the companys decision to divest the Encoder Division, combined with the
fact that the prior audits had been performed by Arthur Andersen.



For the first quarter of 2003, loss on disposal of discontinued operations of $0.4 million before taxes includes professional fees and exit cost accruals related to the sale of the Encoder Division totaling $1.1 million. The Encoder
Division was sold on May 2, 2003 for book value (see Note 2 of Notes to the Unaudited Consolidated Financial Statements).



Loss on disposal of discontinued operations also includes royalty income. The company recognized royalty income associated with the companys 1999
sale of its discontinued Telecommunications Fraud Control business on a cash basis and reported no income in the first quarter of 2002. In the first quarter of 2003, the company received a final royalty payment associated with this transaction of
$0.7 million, and included $0.4 million, net of tax, in loss on disposal of discontinued operations for the first quarter of 2003.



At March 31, 2003, the company had 1,910 employees, including 90 employees associated with discontinued operations. At December 31, 2002, the company had
1,858 employees, including 93 employees associated with discontinued operations. The company considers its relationship with its employees to be satisfactory.



The companys funded backlog, excluding discontinued operations, was $119.2 million at March 31, 2003 and $111.1 million at December 31, 2002. The
funded backlog generally is subject to possible termination at the convenience of the contracting counterparty. The company has a number of multi-year contracts with agencies of the United States and state governments on which actual funding
generally occurs on an annual basis. A portion of its funded backlog is based on annual purchase contracts and subject to annual governmental approval or appropriations legislation, and the amount of funded backlog as of any date can be affected by
the timing of order receipts and deliveries.



Liquidity and
Capital Resources



Cash provided by continuing operations for the
first three months of 2003 was $1.5 million, principally from income from continuing operations, increased accrued payroll and employee benefits and decreased accounts receivable, partially offset by increased unbilled expenditures and fees on
contracts in process and decreased accounts payable. Cash provided by continuing operations in the first quarter of 2002 was $3.5 million, primarily resulting from net income, increased accounts payable and decreased unbilled expenditures and fees
on contracts in process, partially offset by decreased accrued payroll and employee benefits and other accrued expenses.



Net cash provided by discontinued operations was $0.9 million and $0.2 million in the first quarter of 2003 and 2002, respectively.



As previously reported, the company was experiencing slow payment from one
commercial customer having an account balance of $0.3 million at March 31, 2003. On March 31, 2003, the company became aware that on March 28, 2003 the customers parent company, located in the Netherlands, announced that a bankruptcy filing in
the United States was being considered. On May 2, 2003, the parent company filed for bankruptcy protection. However, the bankruptcy did not include the United States subsidiary. At May 6, 2003, the customers balance was $0.1 million. Should
the company determine



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that the account or a portion thereof, is uncollectible a provision for the loss will be made in the
period in which this determination is made. In addition, under United States Bankruptcy code, certain amounts collected by the company from the customer may be deemed preference payments, requiring the amounts to be forfeited by the company.



Cash used for investing activities for continuing operations was
$0.9 million and $1.0 million in the first three months of 2003 and 2002, respectively, primarily related to the purchase of plant and equipment.



At December 31, 2002, the company had $12.4 million in notes payable associated with the purchase of ANDRULIS. The $12.4 million in notes payable had an
interest rate of 4.0% and a maturity date of January 2, 2003. In January 2003, the notes payable associated with the purchase of ANDRULIS were paid in full with proceeds from the companys revolving credit agreement.



Effective June 28, 2002, the company obtained a $50 million revolving credit
agreement (the Revolver), replacing the previous revolver. The Revolver has a three-year term and is available to the company for general corporate purposes, including strategic acquisitions. The fee on the unused portion of the Revolver
ranges from 0.25 % to 0.5% depending on the companys most recently reported leverage ratio and is payable quarterly in arrears. The company has the option to elect on a fixed 30, 60 or 90-day term, an interest rate of LIBOR plus 2.0% to 3.0%,
depending on the companys most recently reported leverage ratio, or the prime rate on any outstanding balance. Interest on the outstanding balance of the Revolver is payable monthly under the prime rate option or at the end of the elected term
for the LIBOR rate option. At March 31, 2003, the outstanding balance under the Revolver was $14.0 million. The weighted average interest rate on the balance outstanding under the Revolver was 3.28% based on $10.0 million borrowed under the 60 day
LIBOR option at a rate of 3.28% and $4.0 million borrowed under the 30 day LIBOR option at a rate of 3.27%. At December 31, 2002, the outstanding balance under the Revolver was $2.2 million.



The company has a 10-year mortgage loan (the Mortgage), dated June
12, 2000, as amended and restated on June 28, 2002, on the corporate office facility in Andover, Massachusetts. The outstanding balance of the Mortgage was $8.6 million at March 31, 2003. The agreement requires quarterly principal payments of
$125,000, with a final payment of $5 million in May 2010. Interest on the Mortgage accrued at the rate of LIBOR plus 2.5% through November 5, 2001. Effective November 6, 2001, the interest rate on the Mortgage was reduced to LIBOR plus 2.0%. The
interest rate on the Mortgage under the 90-day LIBOR option, elected at February 12, 2003, was 3.34%, which was effective at March 31. 2003.



The Revolver and Mortgage agreements, as currently amended, require the company to meet certain financial covenants including maintaining a minimum net
worth, cash flow and debt coverage ratios, and limit the companys ability to incur additional debt, pay dividends, purchase capital assets, sell or dispose of assets, make additional acquisitions or investments, or enter into new leases, among
other restrictions. In addition, the loan agreements contain a subjective acceleration clause allowing the lender to require payment upon the occurrence of a material adverse change.



The company was in compliance with all loan covenants on March 31, 2003.



In the first quarter of 2003, the company realized $0.1 million in proceeds
from the exercise of stock options and $0.4 million in proceeds from the issuance of shares under the employee stock purchase



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plan. In the first quarter of 2002, the company realized $0.4 million in proceeds from the exercise of
stock options and $0.4 million in proceeds from the issuance of shares under the employee stock purchase plan.



Commitments and Contingencies



The company has change of control agreements with certain employees of the company providing them with benefits if their employment with the company is terminated, other than for cause or their disability or death, or if they resign
for good reason within a certain period of time from the date of any change of control of the company.



On December 26, 2002, the company entered into an installment payment agreement in connection with the acquisition of its enterprise business system software. The company made the first payment on
January 26, 2003 and the second and last payment is due on January 26, 2004. The company recorded the liability using an imputed interest rate of 3.38%, which was its effective borrowing rate at December 31, 2002. The obligation is reflected in the
table below as a purchase commitment.



Contractual obligations at
March 31, 2003 were as follows:



|                              |  | Payments due by period   
|----------------------------- |  | -------------------------
|                              |  | Less than 1 year         
|                              |  | (in thousands of dollars)
|Revolver                      |  | $                        
|Long-term debt                |  |                          
|Operating leases              |  |                          
|Purchase commitments          |  |                          
|                              |  |                          
|Total contractual obligations |  | $                        
|                              |  |                          



In April 2003, the
company entered into an 8-year lease agreement for office space in Vienna, Virginia for a total commitment of $10.4 million.



As a defense contractor, the company is subject to many levels of audit and review from various government agencies, including the Defense Contract Audit
Agency, the Inspector General, the Defense Criminal Investigative Service, the General Accounting Office, the Department of Justice and congressional committees. Both related to and unrelated to its defense industry involvement, the company is, from
time to time, involved in audits, lawsuits, claims, administrative proceedings and investigations. The company accrues for liabilities associated with these activities when it becomes probable that future expenditures will be made and such
expenditures can be reasonably estimated. The companys evaluation of the likelihood of expenditures related to these matters is subject to change in future periods, depending on then current events and circumstances, which could have material
adverse effects on the companys results of operations, financial position and cash flows.



As previously disclosed, on October 26, 2000, two former company employees were indicted for conspiracy to defraud the United States Air Force and pled guilty. The United States Attorneys office
continues to discuss the possibility of civil liability on the part of the company arising from the former employees conspiracy to defraud the United States Air Force of a claimed $10 million dollars, a substantial portion of which has been
recovered. If a suit is brought the company will vigorously defend itself. The company does not have a sufficient basis to determine whether this matter will have a material adverse effect on the companys financial position or results of
operations.



On September 5, 2002, Genesis Tactical Group LLC
(Genesis) asserted a cross-claim against Lockheed Martin Corporation (Lockheed) seeking $50 million in damages and against the company seeking $35 million in damages. These cross-claims arise out of a suit filed on July 30,
2002 by Lockheed against Tactical Communications Group LLC, Genesis and the company in the State of New York Supreme Court, County of Onondaga. The Lockheed suit relates to a contract for services which was sold to Genesis by the company pursuant to
an asset purchase agreement in 2001. By the terms of the asset purchase agreement the companys liability is limited to $300,000, other than for intentional misrepresentation, willful breach or fraud. Lockheed has asserted breach of contract
and



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is seeking damages from and performance of the contract by Genesis and unspecified compensatory damages from the company. Genesis
cross-claims relate to alleged breaches of the contract by Lockheed and for alleged breaches of the asset purchase agreement by the company. The company has asserted claims against Lockheed and Genesis and believes that the Lockheed and Genesis
claims against the company are without merit. The parties have exchanged settlement offers while litigation has been postponed. If the companys settlement offer is accepted, the company would not be obligated to make any payments. While the
company believes that the possibility of a material adverse effect on the companys financial position or results of operations is remote, there can be no assurance as to the outcome.



The company has provided documents in response to a previously disclosed grand jury subpoena issued on October 15, 2002 by
the United States District Court for the District of Massachusetts directing the company to produce specified documents dating back to 1996. The subpoena relates to an investigation, currently focused on the period from 1996 to 1999, by the
Antitrust Division of the Department of Justice into bidding and procurement activities involving the company and several other defense contractors who have received similar subpoenas and may also be subjects of the investigation. Although the
company is cooperating in the investigation, it does not have a sufficient basis to predict the outcome of the investigation. Should the company be found to have violated the antitrust laws, the matter could have a material adverse effect on the
companys financial position and results of operations.



The
companys prospective results of operations, cash flows and financial condition are subject to certain trends, events and uncertainties, including demands for capital to support growth, economic conditions, government payment practices and
contractual matters. The companys capital expenditures, excluding business acquisitions, are expected to be in the range of $6 million to $8 million in 2003, primarily for enterprise business systems and facilities infrastructure consolidation
and improvements.



The companys need for, cost of, and
access to funds are dependent on future operating results, the companys growth and acquisition activity, as well as conditions external to the company. In 2002, the company increased the capacity of its revolving credit facility from $20
million to $50 million to enable pursuit of the companys acquisition strategy. In 2003, the company will continue to consider acquisition opportunities, which align with its strategic objectives, along with the possibility of utilizing the
credit facility as a source of financing.



Critical Accounting
Policies



Use of
Estimates

The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Estimates and assumptions also affect the amount of revenue and expenses during the reported period. Actual results could differ
from those estimates. Management must make use of estimates in the areas discussed below.



Revenue Recognition

The companys systems and services business provides its services under time and
materials, cost reimbursable and fixed-price contracts including service type contracts.



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For time and materials
contracts, revenue reflects the number of direct labor hours expended in the performance of a contract multiplied by the contract billing rate, as well as reimbursement of other billable direct costs. The risk inherent in time and materials
contracts is that actual costs differ materially from negotiated billing rates in the contract, which directly affects operating income.



For cost reimbursable contracts, revenue is recognized as costs are incurred and include a proportionate amount of the fee earned. Cost reimbursable
contracts specify the contract fee in dollars or as a percentage of estimated costs. The primary risk on a cost reimbursable contract is that a government audit of direct and indirect costs could result in the disallowance of certain costs, which
would directly impact revenue and margin on the contract. Historically, such audits have had no material impact on the companys revenue and operating income.



Under fixed-price contracts, other than service-type contracts, revenue is recognized under the percentage of completion
method, on the basis of costs incurred in relation to estimated total costs to complete the contract. Under service-type contracts, costs incurred are not indicative of progression toward completion of the contract. Revenue from service-type fixed
price contracts is recognized ratably over the contract period or by other appropriate output methods to measure service provided, and contract costs are expensed as incurred. The risk to the company on a fixed-price contract is that if actual costs
exceed the estimated costs to complete the contract, then profit is eroded or losses are incurred.



For all types of contracts, the company recognizes anticipated contract losses as soon as they become known and estimable. Out-of-pocket expenses that are reimbursable by the customer are included in
contract revenue and cost of contract revenue.



Unbilled
expenditures and fees on contracts in process are the amounts of recoverable contract revenue that have not been billed at the balance sheet date. Most of the companys unbilled expenditures and fees relate to revenue that is billed in the
month after services are performed. In certain instances, billing is deferred in compliance with contract terms, such as milestone billing arrangements and withholdings. Costs related to United States Government contracts, including applicable
indirect costs, are subject to audit by the government. Revenue from such contracts has been recorded at amounts expected to be realized upon final settlement.



Valuation Allowances

The company
provides for potential losses against specifically identified accounts receivable and unbilled expenditures and fees on contracts in process based on the companys expectation of a customers inability to pay. These reserves are based upon
specific identification of potential uncollectible accounts. In addition, payment to the company for performance on United States Government contracts are subject to audit by the Defense Contract Audit Agency. The company provides an estimated
reserve for adjustments resulting from rate negotiations and audit findings. The company routinely provides for these items when they are identified and can be reasonably estimated. Due to the diversity of contracts with the United States
Government, it is not probable that the company will incur a material loss.



Intangible and Other Long-lived Assets

The company uses assumptions in establishing the carrying value, fair value
and estimated lives of intangible and other long-lived assets. Long-lived assets are reviewed for impairment whenever events



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or changes in circumstances indicate that the asset carrying value may not be recoverable. Recoverability
is measured by a comparison of the assets continuing ability to generate positive income from operations and positive cash flow in future periods compared to the carrying value of the asset. If assets are considered to be impaired, the
impairment is recognized in the period of identification and is measured as the amount by which the carrying value of the asset exceeds the fair value of the asset.



The useful lives and related amortization of intangible assets are based on their estimated residual value in proportion to
the economic benefit consumed. The useful lives and related depreciation of other long-lived assets are based on the companys estimate of the period over which the asset will generate revenue or otherwise be used by the company.



Goodwill

The company assesses goodwill for impairment at the segment level at least once per year by applying a fair value test. Goodwill could be impaired due to market declines, reduced expected future cash
flows, or other factors or events. Should the fair value of goodwill, as determined by the company at any measurement date, fall below its carrying value, a charge for impairment of goodwill would occur in that period.



Business Combinations

During 2002, the company acquired two companies, HJ Ford and ANDRULIS. All assets and liabilities acquired have been recorded at their fair values at the
date of the acquisition and the results of operations are included in the consolidated financial statements from the date of acquisition. The company has determined the fair value of all assets acquired and liabilities assumed. The company has
utilized an independent valuation specialist to determine the fair value of intangible assets acquired in order to allocate a portion of the purchase price related to intangible assets.



Pensions

Accounting and reporting for the companys pension plan requires the use of assumptions, including but not limited to, discount rate, rate of compensation increases and expected return on assets. If these assumptions materially
differ from actual results, the companys obligations under the pension plan could also materially differ, requiring the company to record an additional pension liability.



Forward-Looking Information

Safe harbor statements under the Private Securities Litigation Reform Act of 1995: Some statements contained or implied in this quarterly report which are not historical fact such as financial forecasts, contain forward-looking
information. These statements may be identified by forward-looking words such as expect, look, believe, anticipate, may, will and other forward-looking terminology. Such
statements are subject to risks and uncertainties that could cause actual results to differ materially, including uncertainties regarding contractual requirements, actions by customers and actual costs to complete; federal budget matters; government
contracting risks, competitive market conditions; customer requirements, schedules and related funding; technological change; uncertainty of future financing; overall economic factors; ability to successfully complete and integrate acquisitions and
other matters. These factors are discussed in more detail in the companys Annual Report on Form 10-K for the year ended December 31, 2002. The company assumes no obligation to update any forward-looking information.



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Item 3. Quantitative And Qualitative Disclosures About Market Risk

The company is subject to interest rate risk
associated with our Mortgage and Revolver where interest payments are tied to either the LIBOR or prime rate. At any time a sharp rise in interest rates could have an adverse effect on net interest expense as reported in the Consolidated Statements
of Operations. A one full percentage point increase in the interest rate on the balance of the Mortgage and Revolver at March 31, 2003 would result in a $0.2 million increase in interest expense per year. The company does not currently hedge these
interest rate exposures.



The company presently has minimal
exposure to market interest rates with regards to investments. At March 31, 2003, the company had investments of $0.9 million, which consisted primarily of money market accounts.



The company has no significant exposure to foreign currency fluctuations. Foreign sales, which are nominal, are primarily
denominated in United States dollars.



Item 4. Controls And Procedures

Based on their evaluation as of a date within 90 days of the filing of this Form 10-Q,
the companys Chief Executive Officer and Chief Financial Officer have concluded that the companys disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that the company files
or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and forms. There have been no significant changes in the
companys internal controls or in other factors that could significantly affect those controls subsequent to the date of their evaluation.



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PART II. OTHER INFORMATION



Item 1. Legal Proceedings

As a defense contractor, the company is subject to many levels of audit and review from
various government agencies, including the Defense Contract Audit Agency, the Inspector General, the Defense Criminal Investigative Service, the General Accounting Office, the Department of Justice and congressional committees. Both related to and
unrelated to its defense industry involvement, the company is, from time to time, involved in audits, lawsuits, claims, administrative proceedings and investigations. The company accrues for liabilities associated with these activities when it
becomes probable that future expenditures will be made and such expenditures can be reasonably estimated. The companys evaluation of the likelihood of expenditures related to these matters is subject to change in future periods, depending on
then current events and circumstances, which could have material adverse effects on the companys results of operations, financial position and cash flows.



As previously disclosed, on October 26, 2000, two former company employees were indicted for conspiracy to defraud the United
States Air Force and pled guilty. The United States Attorneys office continues to discuss the possibility of civil liability on the part of the company arising from the former employees conspiracy to defraud the United States Air Force
of a claimed $10 million dollars, a substantial portion of which has been recovered. If a suit is brought the company will vigorously defend itself. The company does not have a sufficient basis to determine whether this matter will have a material
adverse effect on the companys financial position or results of operations.



On September 5, 2002, Genesis Tactical Group LLC (Genesis) asserted a cross-claim against Lockheed Martin Corporation (Lockheed) seeking $50 million in damages and against the company seeking $35
million in damages. These cross-claims arise out of a suit filed on July 30, 2002 by Lockheed against Tactical Communications Group LLC, Genesis and the company in the State of New York Supreme Court, County of Onondaga. The Lockheed suit relates to
a contract for services which was sold to Genesis by the company pursuant to an asset purchase agreement in 2001. By the terms of the asset purchase agreement the companys liability is limited to $300,000, other than for intentional
misrepresentation, willful breach or fraud. Lockheed has asserted breach of contract and is seeking damages from and performance of the contract by Genesis and unspecified compensatory damages from the company. Genesis cross-claims relate to
alleged breaches of the contract by Lockheed and for alleged breaches of the asset purchase agreement by the company. The company has asserted claims against Lockheed and Genesis and believes that the Lockheed and Genesis claims against the company
are without merit. The parties have exchanged settlement offers while litigation has been postponed. If the companys settlement offer is accepted, the company would not be obligated to make any payments. While the company believes that the
possibility of a material adverse effect on the companys financial position or results of operations is remote, there can be no assurance as to the outcome.



The company has provided documents in response to a previously disclosed grand jury subpoena issued on October 15, 2002 by
the United States District Court for the District of Massachusetts directing the company to produce specified documents dating back to 1996. The subpoena relates to an investigation, currently focused on the period from 1996 to 1999, by the
Antitrust Division of the Department of Justice into bidding and procurement activities involving the company and several other defense contractors who have received similar subpoenas and may also be subjects of the investigation. Although the
company is cooperating in the investigation, it does not have a sufficient basis to predict the outcome of the investigation. Should the company be found to have



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violated the antitrust laws, the matter could have a material adverse effect on the companys
financial position and results of operations.



Item 6. Exhibits and Reports on Form 8-K



(a) The following Exhibits are filed herewith:



|            
|------------
|Exhibit 10.1
|            
|Exhibit 99.1
|            
|Exhibit 99.2



*Identifies management
contracts and compensatory plans or arrangements.



(b) Reports on
Form 8-K



| | (1) |  | On January 6, 2003, the company filed a Form 8-K under Item 2, Acquisition or Disposal of Assets, reporting the purchase of Andrulis Corporation.
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------



| | (2) |  | On March 5, 2003, the company filed an amendment on Form 8-K/A to the January 6, 2003 Form 8-K to include as exhibits under Item 7, Financial Statements, Pro
Forma Financial Information and Exhibits, audited financial statements of Andrulis Corporation for the fiscal years ended September 30, 2002 and 2001 and unaudited pro forma financial statements of DRC relating to the Andrulis Corporation
acquisition.
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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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.



|                   |  |  |  | DYNAMICS RESEARCH CORPORATION (Registrant)
|------------------ |  |  |  | ------------------------------------------
|                  
|Date: May 12, 2003 |  |  |  | By:                                       
|                   |  |  |  |                                           
|                  
|                   |  |  |  |                                           
|                  
|                   |  |  |  |                                           
|                   |  |  |  |                                           



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Certifications



I, James P. Regan, certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of Dynamics Research Corporation;
|-- |  | ------------------------------------------------------------------------------------



|2. |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3. |  | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a. |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b. |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report
(the Evaluation Date); and
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c. |  | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation
Date;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



|5. |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee
of registrants board of directors (or persons performing the equivalent function):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a. |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize
and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b. |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



|6. |  | The registrants other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Date: May 12, 2003

By:

/s/    JAMES P.
REGANJames P. ReganChairman and Chief Executive Officer




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I, David Keleher, certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of Dynamics Research Corporation;
|-- |  | ------------------------------------------------------------------------------------



|2. |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3. |  | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a. |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b. |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report
(the Evaluation Date); and
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c. |  | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation
Date;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



|5. |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee
of registrants board of directors (or persons performing the equivalent function):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a. |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize
and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b. |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



|6. |  | The registrants other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Date: May 12, 2003



By:

/s/    DAVID
KELEHERDavid KeleherVice President and Chief Financial Officer




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EXHIBIT INDEX



|Exhibit Number |  | Exhibit Name                                                                                                            |  | Location      
|-------------- |  | ----------------------------------------------------------------------------------------------------------------------- |  | --------------
|              
|10.1           |  | William Hoover Non-Qualified Stock Option Agreement                                                                     |  | Filed herewith
|              
|99.1           |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. |  | Filed herewith
|              
|99.2           |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. |  | Filed herewith



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