##### Table of Contents



SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-Q

(Mark One)

|  |  |                                                                                        
|- |  | ---------------------------------------------------------------------------------------
|þ |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|  |  |                                                                                        
|  |  | For the quarterly period ended September 30, 2001                                      

OR

|  |  |                                                                                         
|- |  | ----------------------------------------------------------------------------------------
|o |  | 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:    000-24193

|                                                      
|------------------------------------------------------
|Atlantic Data Services, Inc.                          
|                                                      
|(Exact Name of Registrant as Specified in its Charter)

|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|Massachusetts                                                  |  | 04-2696393                             
|                                                               |  |                                        
|(State or Other Jurisdiction of
Incorporation or Organization) |  | (I.R.S. Employer
Identification Number)

|                                                   
|---------------------------------------------------
|One Batterymarch Park                              
|Quincy, Massachusetts 02169                        
|                                                   
|(Address of Principal Executive Offices) (Zip Code)

|                                                    
|----------------------------------------------------
|(617) 770 - 3333                                    
|                                                    
|(Registrants Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes  þ No  o

As of November 9, 2001, there were 13,032,685 shares of the Registrants Common
Stock, $.01 par value per share, outstanding.





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TABLE OF CONTENTS



|                                                                                              |                                                      |  |  |  |  |  |  | 
|--------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  |  | 
|PART I  FINANCIAL INFORMATION                                                               
|ITEM 1: FINANCIAL STATEMENTS                                                                 
|                                                                                              | Condensed Consolidated Balance Sheets               
|                                                                                              | Condensed Consolidated Statements of Operations     
|                                                                                              | Condensed Consolidated Statements of Cash Flows     
|                                                                                              | Notes to Condensed Consolidated Financial Statements
|ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           
|PART II  OTHER INFORMATION                                                                  
|ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS                                            
|ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURES                                                                                   
|EXHIBIT INDEX                                                                                



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##### Table of Contents



ATLANTIC DATA SERVICES, INC.

TABLE OF CONTENTS

|                                                                                              |                                                                                                                            |  |      |   | 
|--------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------- |  | ---- | - | 
|                                                                                              |                                                                                                                            |  | Page
|                                                                                              |                                                                                                                            |  |     
|PART I  FINANCIAL INFORMATION                                                                |                                                                                                                            |  |      |  
|                                                                                              |                                                                                                                            | 
|ITEM 1: Financial Statements                                                                  |                                                                                                                            |  |      |  
|                                                                                              |                                                                                                                            | 
|                                                                                              | Condensed Consolidated Balance Sheets as of
September 30, 2001 (Unaudited) and March 31, 2001                              |  |      | 3 | 
|                                                                                              |                                                                                                                            | 
|                                                                                              | Condensed Consolidated Statements of Operations
for the Three and Six Months Ended September 30,
2001 and 2000 (Unaudited) |  |      | 4 | 
|                                                                                              |                                                                                                                            | 
|                                                                                              | Condensed Consolidated Statements of Cash Flows
for the Six Months Ended September 30, 2001 and
2000 (Unaudited)           |  |      | 5 | 
|                                                                                              |                                                                                                                            | 
|                                                                                              | Notes to Condensed Consolidated Financial
Statements                                                                       |  |      | 6 | 
|                                                                                              |                                                                                                                            | 
|ITEM 2: Managements Discussion and Analysis of Financial
Condition and Results of Operations |                                                                                                                            |  | 11   |  
|                                                                                              |                                                                                                                            | 
|ITEM 3: Quantitative and Qualitative Disclosures about
Market Risk                            |                                                                                                                            |  | 16   |  
|                                                                                              |                                                                                                                            | 
|PART II  OTHER INFORMATION                                                                   |                                                                                                                            |  |      |  
|                                                                                              |                                                                                                                            | 
|ITEM 2: Changes in Securities and Use of Proceeds                                             |                                                                                                                            |  | 17   |  
|                                                                                              |                                                                                                                            | 
|ITEM 4: Submission of Matters to Vote of Security Holders                                     |                                                                                                                            |  | 17   |  
|                                                                                              |                                                                                                                            | 
|ITEM 6: Exhibits and Reports on Form 8-K                                                      |                                                                                                                            |  | 18   |  
|                                                                                              |                                                                                                                            | 
|SIGNATURES                                                                                    |                                                                                                                            |  | 19   |  
|                                                                                              |                                                                                                                            | 
|EXHIBIT INDEX                                                                                 |                                                                                                                            |  | 20   |  

2



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##### Table of Contents









PART I

ITEM 1: FINANCIAL STATEMENTS




ATLANTIC DATA SERVICES, INC.

Condensed Consolidated Balance Sheets
(in thousands, except per share data)

|                                           |                                                                                                                                                                                                                 |   |                            |        |               |        |           |        |   |        | 
|------------------------------------------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | -------------------------- | ------ | ------------- | ------ | --------- | ------ | - | ------ | 
|                                           |                                                                                                                                                                                                                 |   |                            |        | September 30, |        | March 31,
|                                           |                                                                                                                                                                                                                 |   |                            |        | 2001          |        | 2001     
|                                           |                                                                                                                                                                                                                 |   |                            |        |               |        |          
|                                           |                                                                                                                                                                                                                 |   |                            |        | (Unaudited)   |        |           |        |  
|Assets                                     |                                                                                                                                                                                                                 |   |                            |        |               |        |           |       
|Current assets:                            |                                                                                                                                                                                                                 |   |                            |        |               |        |           |       
|                                           | Cash and cash equivalents                                                                                                                                                                                       |   | $                          | 31,516 |               |        | $         | 36,655 |  
|                                           | Accounts receivable, net of allowances for
doubtful accounts of $450 at September 30, 2001
and $375 at March 31, 2001                                                                                           |   |                            | 3,048  |               |        |           | 3,090  |  
|                                           | Prepaid expenses                                                                                                                                                                                                |   |                            | 190    |               |        |           | 243    |  
|                                           | Deferred taxes                                                                                                                                                                                                  |   |                            |       |               |        |           | 464    |  
|                                           |                                                                                                                                                                                                                 |   |                            |        |               |        |           |       
|                                           |                                                                                                                                                                                                                 |   | Total current assets       |        |               | 34,754 |           |        |   | 40,452 | 
|Long-term investment                       |                                                                                                                                                                                                                 |   |                           |        |               |        | 3,000     |       
|Property and equipment, net                |                                                                                                                                                                                                                 |   | 862                        |        |               |        | 629       |       
|Acquired intangible assets, net            |                                                                                                                                                                                                                 |   | 1,008                      |        |               |        |          |       
|Goodwill                                   |                                                                                                                                                                                                                 |   | 1,291                      |        |               |        |          |       
|Other assets                               |                                                                                                                                                                                                                 |   | 329                        |        |               |        | 536       |       
|                                           |                                                                                                                                                                                                                 |   |                            |        |               |        |           |       
|Total assets                               |                                                                                                                                                                                                                 | $ | 38,244                     |        |               | $      | 44,617    |       
|                                           |                                                                                                                                                                                                                 |   |                            |        |               |        |           |       
|Liabilities and stockholders equity       |                                                                                                                                                                                                                 |   |                            |        |               |        |           |       
|Current liabilities:                       |                                                                                                                                                                                                                 |   |                            |        |               |        |           |       
|                                           | Accounts payable                                                                                                                                                                                                |   | $                          | 604    |               |        | $         | 538    |  
|                                           | Accrued expenses and other liabilities                                                                                                                                                                          |   |                            | 2,064  |               |        |           | 2,828  |  
|                                           | Billings in excess of costs and estimated earnings                                                                                                                                                              |   |                            | 123    |               |        |           | 86     |  
|                                           |                                                                                                                                                                                                                 |   |                            |        |               |        |           |       
|                                           |                                                                                                                                                                                                                 |   | Total current liabilities  |        |               | 2,791  |           |        |   | 3,452  | 
|                                           |                                                                                                                                                                                                                 |   |                            |        |               |        |           |       
|Commitments                                |                                                                                                                                                                                                                 |   |                            |        |               |        |           |       
|Stockholders equity:                      |                                                                                                                                                                                                                 |   |                            |        |               |        |           |       
|                                           | Preferred stock, $.01 par value, 1,000,000 authorized, no shares
issued or outstanding                                                                                                                          |   |                            |       |               |        |           |       |  
|                                           | Common stock, $.01 par value, 60,000,000 shares authorized,
13,144,685 shares issued and 13,032,685 outstanding at September 30, 2001 and 13,135,126 shares issued and
13,023,126 outstanding at March 31, 2001 |   |                            | 131    |               |        |           | 131    |  
|                                           | Additional paid-in capital                                                                                                                                                                                      |   |                            | 27,554 |               |        |           | 26,900 |  
|                                           | Retained earnings                                                                                                                                                                                               |   |                            | 7,793  |               |        |           | 14,159 |  
|                                           | Treasury stock (112,000 shares carried at cost)                                                                                                                                                                 |   |                            | (25    | )             |        |           | (25    | )
|                                           |                                                                                                                                                                                                                 |   |                            |        |               |        |           |       
|                                           |                                                                                                                                                                                                                 |   | Total stockholders equity |        |               | 35,453 |           |        |   | 41,165 | 
|                                           |                                                                                                                                                                                                                 |   |                            |        |               |        |           |       
|Total liabilities and stockholders equity |                                                                                                                                                                                                                 | $ | 38,244                     |        |               | $      | 44,617    |       
|                                           |                                                                                                                                                                                                                 |   |                            |        |               |        |           |       

See accompanying Notes to Condensed Consolidated Financial Statements.

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ATLANTIC DATA SERVICES, INC.

Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(Unaudited)

|                                                      |                            |                          |        |                    |        |                  |        |       |       |      |        |       |        |   |        |       |       | 
|----------------------------------------------------- | -------------------------- | ------------------------ | ------ | ------------------ | ------ | ---------------- | ------ | ----- | ----- | ---- | ------ | ----- | ------ | - | ------ | ----- | ----- | 
|                                                      |                            |                          |        | Three Months Ended |        | Six Months Ended
|                                                      |                            |                          |        | September 30,      |        | September 30,   
|                                                      |                            |                          |        |                    |        |                 
|                                                      |                            |                          |        | 2001               |        | 2000             |        | 2001  |       | 2000
|                                                      |                            |                          |        |                    |        |                  |        |       |       |     
|Revenues                                              |                            | $                        | 5,172  |                    |        | $                | 10,467 |       |       | $    | 9,726  |       |        | $ | 19,995 |      
|Cost of revenues                                      |                            |                          | 3,550  |                    |        |                  | 6,783  |       |       |      | 7,308  |       |        |   | 13,476 |      
|                                                      |                            |                          |        |                    |        |                  |        |       |       |      |        |       |        |   |        |      
|Gross profit                                          |                            |                          | 1,622  |                    |        |                  | 3,684  |       |       |      | 2,418  |       |        |   | 6,519  |      
|                                                      |                            |                          |        |                    |        |                  |        |       |       |      |        |       |        |   |        |      
|Operating expenses:                                   |                            |                          |        |                    |        |                  |        |       |       |      |        |       |        |   |        |      
|                                                      | Sales and marketing        |                          |        | 887                |        |                  |        | 1,294 |       |      |        | 1,885 |        |   |        | 2,299 |      
|                                                      | General and administrative |                          |        | 1,677              |        |                  |        | 1,796 |       |      |        | 3,259 |        |   |        | 3,622 |      
|                                                      | Restructuring expense      |                          |        |                   |        |                  |        |      |       |      |        | 925   |        |   |        |      |      
|                                                      |                            |                          |        |                    |        |                  |        |       |       |      |        |       |        |   |        |      
|                                                      |                            | Total operating expenses |        |                    | 2,564  |                  |        |       | 3,090 |      |        |       | 6,069  |   |        |       | 5,921 | 
|                                                      |                            |                          |        |                    |        |                  |        |       |       |      |        |       |        |   |        |      
|Income (loss) from operations                         |                            |                          | (942   | )                  |        |                  | 594    |       |       |      | (3,651 | )     |        |   | 598    |      
|Interest income, net                                  |                            |                          | 299    |                    |        |                  | 571    |       |       |      | 671    |       |        |   | 1,107  |      
|Write-down of investment                              |                            |                          | (3,000 | )                  |        |                  |       |       |       |      | (3,000 | )     |        |   |       |      
|                                                      |                            |                          |        |                    |        |                  |        |       |       |      |        |       |        |   |        |      
|Income (loss) before provision for income taxes       |                            |                          | (3,643 | )                  |        |                  | 1,165  |       |       |      | (5,980 | )     |        |   | 1,705  |      
|Provision for income taxes                            |                            |                          |       |                    |        |                  | 544    |       |       |      | 386    |       |        |   | 794    |      
|                                                      |                            |                          |        |                    |        |                  |        |       |       |      |        |       |        |   |        |      
|                                                      |                            | Net income (loss)        |        | $                  | (3,643 | )                |        | $     | 621   |      |        | $     | (6,366 | ) |        | $     | 911   | 
|                                                      |                            |                          |        |                    |        |                  |        |       |       |      |        |       |        |   |        |      
|Basic earnings (loss) per share                       |                            | $                        | (0.28  | )                  |        | $                | 0.05   |       |       | $    | (0.49  | )     |        | $ | 0.07   |      
|                                                      |                            |                          |        |                    |        |                  |        |       |       |      |        |       |        |   |        |      
|Diluted earnings (loss) per share                     |                            | $                        | (0.28  | )                  |        | $                | 0.05   |       |       | $    | (0.49  | )     |        | $ | 0.07   |      
|                                                      |                            |                          |        |                    |        |                  |        |       |       |      |        |       |        |   |        |      
|Shares used in computing earnings per share (basic)   |                            |                          | 13,023 |                    |        |                  | 12,987 |       |       |      | 13,023 |       |        |   | 12,986 |      
|                                                      |                            |                          |        |                    |        |                  |        |       |       |      |        |       |        |   |        |      
|Shares used in computing earnings per share (diluted) |                            |                          | 13,023 |                    |        |                  | 13,228 |       |       |      | 13,023 |       |        |   | 13,231 |      
|                                                      |                            |                          |        |                    |        |                  |        |       |       |      |        |       |        |   |        |      

See accompanying Notes to Condensed Consolidated Financial Statements.

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ATLANTIC DATA SERVICES, INC.

Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)

|                                                                                     |                                                                  |                                                                 |        |                  |      |      |        |     |        |  
|------------------------------------------------------------------------------------ | ---------------------------------------------------------------- | --------------------------------------------------------------- | ------ | ---------------- | ---- | ---- | ------ | --- | ------ | -
|                                                                                     |                                                                  |                                                                 |        | Six Months Ended
|                                                                                     |                                                                  |                                                                 |        | September 30,   
|                                                                                     |                                                                  |                                                                 |        |                 
|                                                                                     |                                                                  |                                                                 |        | 2001             |      | 2000
|                                                                                     |                                                                  |                                                                 |        |                  |      |     
|Cash flows from operating activities:                                                |                                                                  |                                                                 |        |                  |      |      |        |    
|Net income (loss)                                                                    |                                                                  | $                                                               | (6,366 | )                |      | $    | 911    |    
|Adjustments to reconcile net income (loss) to net cash used in
operating activities: |                                                                  |                                                                 |        |                  |      |      |        |    
|                                                                                     | Depreciation and amortization                                    |                                                                 |        | 282              |      |      |        | 250 |       
|                                                                                     | Write-down of investment                                         |                                                                 |        | 3,000            |      |      |        |    |       
|                                                                                     | Deferred taxes                                                   |                                                                 |        | 464              |      |      |        | 150 |       
|                                                                                     | Provision for bad debts                                          |                                                                 |        | (75              | )    |      |        | 60  |       
|                                                                                     | Change in assets and liabilities (net of effect of
acquisition): |                                                                 |        |                  |      |      |        |     |       
|                                                                                     |                                                                  | Accounts receivable                                             |        |                  | 117  |      |        |     | (1,640 | )
|                                                                                     |                                                                  | Costs and estimated earnings in excess of billings              |        |                  |     |      |        |     | (82    | )
|                                                                                     |                                                                  | Prepaid expenses and other assets                               |        |                  | 270  |      |        |     | (36    | )
|                                                                                     |                                                                  | Accounts payable                                                |        |                  | 66   |      |        |     | 78     |  
|                                                                                     |                                                                  | Accrued expenses and other liabilities                          |        |                  | (939 | )    |        |     | (824   | )
|                                                                                     |                                                                  | Billings in excess of costs and estimated earnings on
contracts |        |                  | 37   |      |        |     | (42    | )
|                                                                                     |                                                                  | Federal and state income taxes                                  |        |                  |     |      |        |     | 42     |  
|                                                                                     |                                                                  |                                                                 |        |                  |      |      |        |    
|Net cash used in operating activities                                                |                                                                  |                                                                 | (3,144 | )                |      |      | (1,133 | )  
|                                                                                     |                                                                  |                                                                 |        |                  |      |      |        |    
|Cash flows from investing activities:                                                |                                                                  |                                                                 |        |                  |      |      |        |    
|Long-term investment                                                                 |                                                                  |                                                                 |       |                  |      |      | (3,000 | )  
|Acquisition of assets                                                                |                                                                  |                                                                 | (2,000 | )                |      |      |       |    
|Purchase of property and equipment                                                   |                                                                  |                                                                 | (12    | )                |      |      | (112   | )  
|                                                                                     |                                                                  |                                                                 |        |                  |      |      |        |    
|Net cash used in investing activities                                                |                                                                  |                                                                 | (2,012 | )                |      |      | (3,112 | )  
|Cash flows from financing activities:                                                |                                                                  |                                                                 |        |                  |      |      |        |    
|Proceeds from exercise of stock options under stock option plans                     |                                                                  |                                                                 | 17     |                  |      |      | 133    |    
|                                                                                     |                                                                  |                                                                 |        |                  |      |      |        |    
|Net cash provided by financing activities                                            |                                                                  |                                                                 | 17     |                  |      |      | 133    |    
|                                                                                     |                                                                  |                                                                 |        |                  |      |      |        |    
|Net decrease in cash and cash equivalents                                            |                                                                  |                                                                 | (5,139 | )                |      |      | (4,112 | )  
|Cash and cash equivalents, beginning of period                                       |                                                                  |                                                                 | 36,655 |                  |      |      | 38,347 |    
|                                                                                     |                                                                  |                                                                 |        |                  |      |      |        |    
|Cash and cash equivalents, end of period                                             |                                                                  | $                                                               | 31,516 |                  |      | $    | 34,235 |    
|                                                                                     |                                                                  |                                                                 |        |                  |      |      |        |    
|Supplemental disclosure of cash flow information:                                    |                                                                  |                                                                 |        |                  |      |      |        |    
|Cash paid during the period for:                                                     |                                                                  |                                                                 |        |                  |      |      |        |    
|                                                                                     | Taxes                                                            |                                                                 | $      | 40               |      |      | $      | 735 |       
|                                                                                     |                                                                  |                                                                 |        |                  |      |      |        |    

See accompanying Notes to Condensed Consolidated Financial Statements.

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ATLANTIC DATA SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2001

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been
prepared by Atlantic Data Services, Inc. (the Company) in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting solely of normal
recurring adjustments) considered necessary for a fair presentation have been
included. Operating results for the three-month period ended September 30, 2001
are not necessarily indicative of the results that may be expected for future
periods of the full fiscal year. These Condensed Consolidated Financial
Statements should be read in conjunction with the Consolidated Financial
Statements and related notes included in the Companys Annual Report on Form
10-K for the year ended March 31, 2001.

The balance sheet at March 31, 2001 has been derived from the audited financial
statements at that date, but does not include all the information and footnotes
required by generally accepted accounting principles for complete financial
statements.

2. Summary of Significant Accounting Policies

Revenue Recognition

The Company primarily derives its revenue from consulting services under time
and material billing arrangements. Under these arrangements, revenue is
recognized as the services are provided. Deferred revenue pertains to time and
material billing arrangements and represents cash collected in advance of the
performance of services.

Revenue on fixed price contracts is recognized using the percentage of
completion method of accounting and is adjusted monthly for the cumulative
impact of any revision in estimates. The Company determines the percentage of
its contracts by comparing costs incurred to date to total estimated costs.
Contract costs include all direct labor and expenses related to the contract
performance. An asset, Costs and estimated earnings in excess of billings on
contracts, would represent revenues recognized in excess of amounts billed. The
liability, Billings in excess of costs and estimated earnings on contracts,
represents billings in excess of revenues recognized.

Included in revenues are reimbursable contract-related travel and entertainment
expenses of $909,000 and $1,734,000 for the quarters ended September 30, 2001
and 2000, respectively, and $1,529,000 and $3,424,000 for the six months ended
September 30, 2001 and 2000, respectively, which are separately billed to
clients.

In the beginning of the fourth quarter of fiscal 2001, the Company adopted Staff
Accounting Bulletin 101 (SAB 101), Revenue Recognition, which was issued by
the Securities and Exchange Commission (SEC) in December 1999. SAB 101
outlines the basic criteria that must be met to recognize revenue and it
provides guidance for presentation and disclosure of revenue recognition
policies in financial statements filed with the SEC. Adoption of SAB 101 had no
material impact on the Companys reported revenues and results of operations.

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Earnings Per Share

The Company follows Statement of Financial Accounting Standards No. 128,
Earnings Per Share (FAS 128). FAS 128 requires the presentation of two
amounts, basic earnings per share and diluted earnings per share.

3. Earnings Per Share

The following table sets forth the computation of basic earnings per share and
diluted earnings per share for the three months ended September 30, 2001 and
2000:

|                                                                                          |                        |                                                                                                |        |                       |        |      |        |     |        | 
|----------------------------------------------------------------------------------------- | ---------------------- | ---------------------------------------------------------------------------------------------- | ------ | --------------------- | ------ | ---- | ------ | --- | ------ | 
|                                                                                          |                        |                                                                                                |        | Three Months Ended   
|                                                                                          |                        |                                                                                                |        | September 30,        
|                                                                                          |                        |                                                                                                |        |                      
|                                                                                          |                        |                                                                                                |        | 2001                  |        | 2000
|                                                                                          |                        |                                                                                                |        |                       |        |     
|                                                                                          |                        |                                                                                                |        | (in thousands, except
|                                                                                          |                        |                                                                                                |        | per share data)      
|                                                                                          |                        |                                                                                                |       
|Numerator:                                                                                |                        |                                                                                                |        |                       |        |      |        |    
|Net income (loss) (numerator for basic earnings per share
and diluted earnings per share) |                        | $                                                                                              | (3,643 | )                     |        | $    | 621    |    
|                                                                                          |                        |                                                                                                |        |                       |        |      |        |    
|Denominator:                                                                              |                        |                                                                                                |        |                       |        |      |        |    
|Denominator for basic earnings per share  weighted average
shares                        |                        |                                                                                                | 13,023 |                       |        |      | 12,987 |    
|Effect of dilutive securities:                                                            |                        |                                                                                                |        |                       |        |      |        |    
|                                                                                          | Employee stock options |                                                                                                |        |                      |        |      |        | 241 |       
|                                                                                          |                        |                                                                                                |        |                       |        |      |        |    
|                                                                                          |                        | Denominator for diluted earnings per share  adjusted
weighted average and assumed conversions |        |                       | 13,023 |      |        |     | 13,228 | 
|                                                                                          |                        |                                                                                                |        |                       |        |      |        |    
|Basic earnings (loss) per share                                                           |                        | $                                                                                              | (0.28  | )                     |        | $    | 0.05   |    
|                                                                                          |                        |                                                                                                |        |                       |        |      |        |    
|Diluted earnings (loss) per share                                                         |                        | $                                                                                              | (0.28  | )                     |        | $    | 0.05   |    
|                                                                                          |                        |                                                                                                |        |                       |        |      |        |    

|                                                                                          |                        |                                                                                                |        |                       |        |      |        |     |        | 
|----------------------------------------------------------------------------------------- | ---------------------- | ---------------------------------------------------------------------------------------------- | ------ | --------------------- | ------ | ---- | ------ | --- | ------ | 
|                                                                                          |                        |                                                                                                |        | Six Months Ended     
|                                                                                          |                        |                                                                                                |        | September 30,        
|                                                                                          |                        |                                                                                                |        |                      
|                                                                                          |                        |                                                                                                |        | 2001                  |        | 2000
|                                                                                          |                        |                                                                                                |        |                       |        |     
|                                                                                          |                        |                                                                                                |        | (in thousands, except
|                                                                                          |                        |                                                                                                |        | per share data)      
|                                                                                          |                        |                                                                                                |       
|Numerator:                                                                                |                        |                                                                                                |        |                       |        |      |        |    
|Net income (loss) (numerator for basic earnings per share
and diluted earnings per share) |                        | $                                                                                              | (6,366 | )                     |        | $    | 911    |    
|                                                                                          |                        |                                                                                                |        |                       |        |      |        |    
|Denominator:                                                                              |                        |                                                                                                |        |                       |        |      |        |    
|Denominator for basic earnings per share  weighted average
shares                        |                        |                                                                                                | 13,023 |                       |        |      | 12,986 |    
|Effect of dilutive securities:                                                            |                        |                                                                                                |        |                       |        |      |        |    
|                                                                                          | Employee stock options |                                                                                                |        |                      |        |      |        | 245 |       
|                                                                                          |                        |                                                                                                |        |                       |        |      |        |    
|                                                                                          |                        | Denominator for diluted earnings per share  adjusted
weighted average and assumed conversions |        |                       | 13,023 |      |        |     | 13,231 | 
|                                                                                          |                        |                                                                                                |        |                       |        |      |        |    
|Basic earnings (loss) per share                                                           |                        | $                                                                                              | (0.49  | )                     |        | $    | 0.07   |    
|                                                                                          |                        |                                                                                                |        |                       |        |      |        |    
|Diluted earnings (loss) per share                                                         |                        | $                                                                                              | (0.49  | )                     |        | $    | 0.07   |    
|                                                                                          |                        |                                                                                                |        |                       |        |      |        |    

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In addition, as of September 30, 2001 there were options outstanding to purchase
1,490,167 shares that are potentially anti-dilutive.

4. Major Customers

The nature of the Companys services results in the Company deriving significant
amounts of revenue from certain customers in a particular period. For the
quarter ended September 30, 2001, two customers accounted for 34.8% and 16.8% of
the Companys revenues. For the quarter ended September 30, 2000, two customers
accounted for 27.1% and 14.9% of the Companys revenues.

5. Long-Term Investment

On September 8, 2000, the Company made a $3 million preferred stock investment,
representing a minority interest, in S2 Systems, Inc., a software solution
provider in the banking and diversified financial services markets. During the
quarter ended September 30, 2001, we determined that our investment was
permanently impaired and it was written-down to zero.

6. Income Taxes

In assessing the realizability of net deferred tax assets, management considers
whether it is more likely than not that some portion of the net deferred tax
assets will not be realized in the foreseeable future. The ultimate realization
of net deferred tax assets is dependent upon the generation of future taxable
income during the periods in which temporary differences representing net future
deductible amounts become deductible. As such, management has established a
valuation allowance against the net deferred tax assets at September 30, 2001 to
bring the amount to its estimated realizable value of $174,000.

7. Recently Issued Accounting Pronouncements

In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, Business Combinations (FAS 141) and
No. 142, Goodwill and Other Intangible Assets (FAS 142).

FAS 141 requires that all business combinations be accounted for under the
purchase method and that certain acquired intangible assets in a business
combination be recognized as assets apart from goodwill. FAS 141 is effective
for all business combinations initiated after June 30, 2001 and for all business
combinations accounted for by the purchase method which were initiated before
but completed after June 30, 2001.

FAS 142 requires that ratable amortization of goodwill be replaced with periodic
testing of the goodwill for impairment and that intangible assets other than
goodwill be amortized over their estimated useful lives. The provisions of FAS
142 will be effective for fiscal years beginning after December 15, 2001.
However, early adoption of FAS 142 will be permitted for companies with a fiscal
year beginning after March 15, 2001, provided their first quarter financial
statements have not been previously issued. The Company has early adopted FAS
142 as of April 1, 2001. Since the Company had no goodwill or other intangible
assets at the date of adoption there is no effect on prior period financial
results.

8. Business Combinations

On June 29, 2001, the Company acquired substantially all of the assets
(including the intangibles and goodwill) of Cool Springs Associates, Inc. d/b/a
EarningsInsights (EarningsInsights) for $2,000,000 in cash and warrants to
purchase 300,000 shares of the Companys common stock, valued at approximately
$637,000. EarningsInsights, headquartered in Nashville, Tennessee, is a private
company that implements customer profitability methodologies exclusively
licensed to it by First Manhattan Consulting Group, Inc. (FMCG) and
incorporates these methodologies into an application service provider-delivered
CRM profitability model offered primarily to mid-tier financial institutions and
small banks.

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The Company is required to pay to EarningsInsights an additional cash payment
within 75 days after the end of each twelve-month period ending June 29, 2002,
June 29, 2003 and June 29, 2004 equal to 50% of the net income (as defined in
the Asset Purchase Agreement dated June 29, 2001 by and among the Company,
EarningsInsights and certain stockholders of EarningsInsights) recognized by the
Company that is attributable to the operation of the former business of
EarningsInsights by the Company. Such cash payments will not exceed (i) $100,000
for the period ending on June 29, 2002, (ii) $200,000 for the period ending June
29, 2003 and (iii) $300,000 for the period ending on June 29, 2004.

The acquisition has been accounted for under the purchase method and,
accordingly, the purchase price was allocated to assets acquired and liabilities
assumed based on their estimated fair value at June 29, 2001, as follows (in
thousands):

|                              |       |   |       |       | 
|----------------------------- | ----- | - | ----- | ----- | 
|Property, plant and equipment |       | $ | 412   |      
|Other assets                  |       |   | 9     |      
|Intangibles                   |       |   | 1,100 |      
|Goodwill                      |       |   | 1,291 |      
|                              |       |   |       |      
|                              | Total |   | $     | 2,812 | 
|                              |       |   |       |      

The purchase price is comprised of the following (in thousands):

|                      |       |   |       |       | 
|--------------------- | ----- | - | ----- | ----- | 
|Cash                  |       | $ | 2,000 |      
|Fair value of warrant |       |   | 637   |      
|Assumed liabilities   |       |   | 25    |      
|Transaction costs     |       |   | 150   |      
|                      |       |   |       |      
|                      | Total |   | $     | 2,812 | 
|                      |       |   |       |      

The unaudited pro forma consolidated information for the six months ended
September 30, 2001 and 2000, determined as if the EarningsInsights acquisition
had occurred on April 1 of each period would have resulted in the following:

|                                  |  |                    |        |                    |  |             |        |           |  |   |        |  |  |   |        |  
|--------------------------------- |  | ------------------ | ------ | ------------------ |  | ----------- | ------ | --------- |  | - | ------ |  |  | - | ------ | -
|                                  |  | September 30, 2001 |        | September 30, 2000
|                                  |  | (Unaudited)        |        | (Unaudited)       
|                                  |  |                    |        |                   
|                                  |  | As Reported        |        | Pro Forma          |  | As Reported |        | Pro Forma
|                                  |  |                    |        |                    |  |             |        |          
|Revenues                          |  | $                  | 9,726  |                    |  | $           | 9,749  |           |  | $ | 19,995 |  |  | $ | 20,013 |  
|Income (loss) from operations     |  |                    | (3,651 | )                  |  |             | (4,057 | )         |  |   | 598    |  |  |   | (358   | )
|Net income (loss)                 |  |                    | (6,366 | )                  |  |             | (6,768 | )         |  |   | 911    |  |  |   | 424    |  
|Basic earnings (loss) per share   |  | $                  | (0.49  | )                  |  | $           | (0.52  | )         |  | $ | 0.07   |  |  | $ | 0.03   |  
|Diluted earnings (loss) per share |  |                    | (0.49  | )                  |  |             | (0.52  | )         |  |   | 0.07   |  |  |   | 0.03   |  

The unaudited pro forma information is presented for illustrative purposes only
and is not necessarily indicative of results of operations in future periods or
results that would have been achieved had the Company and the acquired company
been combined during the specified periods.

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9. Acquired Intangible Assets

The acquired intangible assets of EarningsInsights were purchased by the Company
on June 29, 2001 as described in detail in Note 8 above, and are being amortized
on a straight-line basis over three years.

|                                |                                   |  |                          |       |              |  |   |    | 
|------------------------------- | --------------------------------- |  | ------------------------ | ----- | ------------ |  | - | -- | 
|                                |                                   |  | As of September 30, 2001
|                                |                                   |  |                         
|                                |                                   |  | Gross Carrying           |       | Accumulated 
|                                |                                   |  | Amount                   |       | Amortization
|                                |                                   |  |                          |       |             
|                                |                                   |  | (in thousands)          
|Acquired Intangible Assets:     |                                   |  |                          |       |              |  |   |   
|                                | Purchased technology              |  | $                        | 1,100 |              |  | $ | 92 | 
|Estimated Amortization Expense: |                                   |  |                          |       |              |  |   |   
|                                | For the year ended March 31, 2002 |  | $                        | 275   |              |  |   |    | 
|                                | For the year ended March 31, 2003 |  |                          | 367   |              |  |   |    | 
|                                | For the year ended March 31, 2004 |  |                          | 367   |              |  |   |    | 
|                                | For the year ended March 31, 2005 |  |                          | 91    |              |  |   |    | 

10. Goodwill

The goodwill of EarningsInsights was acquired by the Company during the quarter
ended June 30, 2001 for $1,291,000 as described in detail in Note 8 above. The
balance as of April 1, 2001 was $0.

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ATLANTIC DATA SERVICES, INC.

FORWARD LOOKING STATEMENTS

This Report includes forward-looking statements, which are made pursuant to the
safe-harbor provisions of the Private Securities Litigation Reform Act of 1995.
You can identify these forward-looking statements when you see us using words
such as expect, anticipate, believe, intend, may, predict, and other
similar expressions. These forward-looking statements cover, among other items:
events, conditions and financial trends that may affect the Companys future
plans of operation, business strategy, growth of operations and financial
position, including statements regarding revenue and earnings/loss per share
projections, variability of revenues and operating results, intended capital
expenditures for fiscal 2002, impact of recent acquisitions on earnings,
adequacy of capital resources, dependence on the financial services industry,
dependence upon a limited number of customers, decreased utilization rates,
liquidity expectations, variability in revenues from our practice areas and
interest rate risks. Any forward-looking statements are not guarantees of future
performance and are necessarily subject to a number of risks and uncertainties,
some of which are beyond our control. Because of these risks and uncertainties,
the forward-looking events discussed in this Report might not transpire.




ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF
                OPERATIONS

Overview

Atlantic Data Services, Inc. (the Company or ADS) provides information
technology (IT) strategy consulting and systems integration services to the
financial services industry. We offer rapid, cost-effective IT solutions to the
business challenges faced by financial services companies through our in-depth
financial services experience, technological expertise and project management
skills. Our service offerings are organized around four practice areas:
e-Business, Customer Relationship Management (CRM), IT Strategy and
Consulting, and Conversions and Consolidations.

Our revenues are derived primarily from professional fees billed to customers on
a time and materials basis, or, in certain instances, on a fixed price basis.
Included in revenues are reimbursable contract-related travel and entertainment
expenses, which are separately billed to customers. Substantially all of our
contracts, other than fixed price contracts, are terminable by the customer
following limited notice and without significant penalty to the customer.
Revenues from fixed price contracts represented approximately 3.0% and 3.1% of
our revenues for the quarters ended September 30, 2001 and 2000, respectively.

We have derived, and expect to continue to derive, a significant portion of our
revenues from a relatively limited number of customers. Revenues from our five
largest customers for the quarters ended September 30, 2001 and 2000 were 74.9%
and 69.7%, respectively, as a percentage of revenues. For the quarter ended
September 30, 2001, FleetBoston Financial Corporation, Zions Bancorporation,
Citizens Financial Corporation, General Motors Acceptance Corporation and
IntraNet, Inc., a TSA Company, accounted for approximately 34.8%, 16.8%, 9.0%,
7.9% and 6.4%, respectively, of revenues. For the quarter ended September 30,
2000, FleetBoston Financial Corporation, Citizens Banking Corporation (MI),
Corillian Corp., Brokat Financial and NBT Bancorp accounted for approximately
27.1%, 14.9%, 9.8%, 9.0% and 8.9%, respectively, of revenues.

Cost of revenues consists primarily of salaries and employee benefits for
personnel dedicated to customer assignments, fees paid to subcontractors for
work performed in connection with customer assignments, and reimbursable
contract-related travel and entertainment expenses incurred by us in connection
with the delivery of our services.

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Sales and marketing expenses consist primarily of salaries, employee benefits,
travel expenses and promotional costs. General and administrative expenses
consist primarily of expenses associated with our management, finance and
administrative groups, including recruiting, training, depreciation and
amortization and occupancy costs.

Outlook

With respect to ADS earnings projections for the future, with the continued
uncertainty in the U.S. economy, we see no near term thawing of the IT spending
freeze in the U.S. Further, in the near term, the acquisition of
EarningsInsights will have a negative impact on earnings. Consequently, we are
estimating our third quarter revenue will be in the $4.8 to $5.6 million range,
with a per share net loss in the range of $(.09) to $(.03).

Variability of Quarterly Operating Results

Variations in our revenues and operating results have occurred from quarter to
quarter and may continue to occur as a result of a number of factors. Quarterly
revenues and operating results can depend on:



| |  | the number, size and scope of customer projects commenced and completed
during a quarter,                                                                                            
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | changes in employee utilization rates,                                                                                                                                               
| 
| |  | changes in average billing rates,                                                                                                                                                    
| 
| |  | the number of working days in a quarter,                                                                                                                                             
| 
| |  | the timing of introduction of new service offerings, both by us and our
competitors,                                                                                                 
| 
| |  | changes in pricing, both by us and our competitors,                                                                                                                                  
| 
| |  | loss of a significant customer,                                                                                                                                                      
| 
| |  | increased competition from our competitors,                                                                                                                                          
| 
| |  | loss of key personnel,                                                                                                                                                               
| 
| |  | other factors that adversely impact the financial services industry,                                                                                                                 
| 
| |  | general economic conditions,                                                                                                                                                         
| 
| |  | potential acquisitions and our ability to
successfully integrate the acquired business or technologies into our
existing business and operations, and                                
| 
| |  | our ability to develop and introduce new service offerings, improve
existing service offerings and develop and maintain the skills necessary to
keep pace with changing technologies.

The timing of revenues is difficult to forecast because our sales cycle is
relatively long, ranging from one to six months for new projects with existing
customers and three to six months for new customers, and may depend on factors
such as the size and scope of projects or other factors that adversely impact
the financial services industry and general economic conditions. In addition,
the relatively long length of our sales cycle may negatively impact the
operating results for any particular quarter as a result of increased sales and
marketing expenses without associated increases in revenues in the particular
quarter. Furthermore, many of our projects are, and may be in the future,
terminable without customer penalty. An unanticipated termination of a major
project or loss of a major customer could require us to maintain or terminate
underutilized employees, resulting in a higher than expected number of
unassigned persons or higher than expected severance expenses.

Quarter Ended September 30, 2001 Compared to Quarter Ended September 30, 2000

Revenues

Revenues decreased 50.6% for the quarter ended September 30, 2001 over the
quarter ended September 30, 2000, from $10.5 million to $5.2 million. This
decrease was predominately due to a 57.7% decrease in the volume of services
delivered to customers due to the continued IT spending freeze in the U.S.,
which was offset by a 15.4% increase in the average billing rate from $117 for
the three months ended September 30, 2000 to $135 for the three months ended
September, 2001.

12



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Cost of Revenues

Cost of revenues decreased 47.7% to $3.5 million from $6.8 million for the
quarter ended September 30, 2001 compared to the quarter ended September 30,
2000, representing 68.6% and 64.8%, respectively, of revenues in each quarter.
The dollar decrease in cost of revenues was primarily due to a decrease in
billable personnel from 162 at September 30, 2000 to 94 at September 30, 2001.
The increase in cost of revenues as a percentage of revenues is due to the
aforementioned decrease in the volume of services delivered to customers.

Sales and Marketing

Sales and marketing expenses decreased 31.4% to $900,000 from $1.3 million for
the quarter ended September 30, 2001 compared to the quarter ended September 30,
2000, representing 17.2% and 12.4% of revenues, respectively. The dollar
decrease resulted primarily from a decrease in our sales and marketing group
from 23 employees at September 30, 2000 to 17 employees at September 30, 2001.
The increase in sales and marketing expense as a percentage of revenues is due
to the significant reduction in revenue from the prior year.

General and Administrative

General and administrative expenses decreased 6.6% to $1.7 million from $1.8
million for the quarter ended September 30, 2001 compared to the quarter ended
September 30, 2000, representing 32.4% and 17.2% of revenues, respectively. The
dollar decrease is primarily due to decreases in compensation and travel expense
as a result of a decrease in the number of administrative personnel from 31 at
September 30, 2000 to 21 at September 30, 2001, offset in
part by higher general and administrative expenses from the
EarningsInsights acquisition. The increase in general and
administrative expense as a percentage of revenues is due to the significant
reduction in revenue from the prior year.

Interest Income, Net

Interest income, net decreased $272,000 from $571,000 for the quarter ended
September 30, 2000 to $299,000 for the quarter ended September 30, 2001. This
decrease was principally due to interest rate decreases and to lower cash
balances.

Provision for Income Taxes

The provision for income taxes decreased $544,000 to $0 from $544,000 for the
quarter ended September 30, 2001 compared to the quarter ended September 30,
2000. We did not have a provision for income taxes for the quarter ended
September 30, 2001 because of the significant loss before taxes. Our effective
tax rate may vary from period to period depending on states in which we do
business due to varying state and local statutory income tax rates and depending
on our levels of profitability.

Six Months Ended September 30,
2001 Compared to the Six Months Ended September 30, 2000

Revenues

Revenues decreased 51.4% for the six months ended September 30, 2001 over the
six months ended September 30, 2000, from $20.0 million to $10.0 million. This
decrease was predominantly due to a 58.3% decrease in volume of services
delivered to customers due to the continued IT spending freeze in the U.S.,
which was offset by an increase in the average billing rate of 19.1% from $115
for the six months ended September 30, 2000 to $137 for the six months ended
September 30, 2001.

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Cost of Revenues

Cost of revenues decreased 45.8% to $7.3 million from $13.5 million for the six
months ended September 30, 2001 compared to the six months ended September 30,
2000, representing 75.1% and 67.4%, respectively, of revenues in each period.
The dollar decrease in cost of revenues was primarily due to a decrease in
billable personnel from 162 at September 30, 2000 to 94 at September 30, 2001.
The increase in cost of revenues as a percentage of revenues is due to the
significant reduction in revenue from the prior year.

Sales and Marketing

Sales and marketing expenses decreased 18.0% to $1.9 million from $2.3 million
for the six months ended September 30, 2001 compared to the six months ended
September 30, 2000, representing 19.4% and 11.5% of revenues, respectively. This
decrease resulted primarily from a decrease in our sales and marketing group
from 23 employees at September 30, 2000 to 17 employees at September 30, 2001.
The increase in sales and marketing expense as a percentage of revenues is due
to the significant reduction in revenue from the prior year.

General and Administrative

General and administrative expenses decreased 10.0% to $3.3 million for the six
months ended September 30, 2001 from $3.6 million for the six months ended
September 30, 2000, representing 33.5% and 18.1% of revenues, respectively. The
dollar decrease is primarily due to decreases in compensation expense as a
result of a decrease in the number of administrative personnel from 31 at
September 30, 2000 to 21 at September 30, 2001, offset in
part by higher general and administrative expenses from the
EarningsInsights acquisition. The percentage change is
primarily due to the significant reduction in revenue from the prior year.

Interest Income, Net

Interest income, net decreased $436,000 from $1.1 million for the six months
ended September 30, 2000 to $700,000 for the six months ended September 30,
2001. This decrease was principally due to interest rate decreases and lower
cash balances.

Provision for Income Taxes

The provision for income taxes decreased $408,000 to $386,000 from $794,000 for
the six months ended September 30, 2001 compared to the six months ended
September 30, 2000. We have a provision for income taxes even though we have a
loss before taxes because we have established a valuation allowance for our
deferred tax assets that may not be realized in the foreseeable future. Our
effective tax rate may vary from period to period based on doing business in
areas with varying state and local statutory income tax rates and based on our
levels of profitability.

Liquidity and Capital Resources

We have no long-term debt and continue to operate primarily debt-free. Working
capital was $32.0 million at September 30, 2001. Our days sales in accounts
receivable at September 30, 2001 was 53 compared to 62 days at September 30,
2000. While we believe that the risk with respect to collection of accounts
receivable is minimized by the creditworthiness of our customers, primarily
banks and other financial institutions, and because of our credit and collection
policies, there can be no assurance that we will not encounter collection
problems in the future. We attempt to further minimize this risk by performing
ongoing credit valuations of our customers and maintaining an allowance for
potential credit losses. We believe that our allowance for doubtful accounts and
collection policies are adequate.

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##### Table of Contents



On June 29, 2001, we acquired $412,000 of fixed assets pursuant to the asset
purchase agreement described below. Capital expenditures for the remainder of
fiscal 2002 are expected to be approximately $300,000 and will be used
principally for computers and other equipment.

On June 29, 2001, we acquired substantially all of the assets of Cool Springs
Associates, Inc. d/b/a EarningsInsights (EarningsInsights), pursuant to an
asset purchase agreement by and among us, EarningsInsights and certain
stockholders of EarningsInsights (the Asset Purchase Agreement). The purchase
price for the acquisition consisted of a $2 million cash payment and the
issuance by us of a warrant to purchase 300,000 shares of our common stock at
exercise price of $5.08 per share. We paid the cash portion of the consideration
for the acquired assets from our working capital.

We are required to pay to EarningsInsights an additional cash payment within 75
days after the end of each twelve-month period ending on June 29, 2002, June 29,
2003 and June 29, 2004 equal to 50% of the net income (as defined in the Asset
Purchase Agreement) recognized by the Company that is attributable to the
operation of the former business of EarningsInsights by the Company. Such cash
payments will not exceed (i) $100,000 for the period ending on June 29, 2002,
(ii) $200,000 for the period ending on June 29, 2003 and (iii) $300,000 for the
period ending on June 29, 2004.

In the near term, we expect that the acquisition of EarningsInsights will have a
negative impact on earnings.

We expect that existing cash and cash equivalent balances, together with cash
which may be provided from operations, will be sufficient to meet the Companys
working capital and capital expenditure requirements for at least the next
twelve months.

To date, inflation has not had a material impact on the Companys financial
results.

Recently Issued Accounting Pronouncements

In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, Business Combinations (FAS 141) and
No. 142, Goodwill and Other Intangible Assets (FAS 142).

FAS 141 requires that all business combinations be accounted for under the
purchase method and that certain acquired intangible assets in a business
combination be recognized as assets apart from goodwill. FAS 141 is effective
for all business combinations initiated after June 30, 2001 and for all business
combinations accounted for by the purchase method which were initiated before
but completed after June 30, 2001.

FAS 142 requires that ratable amortization of goodwill be replaced with periodic
testing of the goodwill for impairment and that intangible assets other than
goodwill be amortized over their estimated useful lives. The provisions of FAS
142 will be effective for fiscal years beginning after December 15, 2001.
However, early adoption of FAS 142 will be permitted for companies with a fiscal
year beginning after March 15, 2001, provided their first quarter financial
statements have not been previously issued. The Company has early adopted FAS
142 at the beginning of its current fiscal year. The Company anticipates that
the early adoption of this pronouncement has no material impact on the Companys
financial statements.

15



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ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risk from changes in interest rates due to investments
in instruments made for non-trading purposes. The interest rate risk relates
primarily to our portfolio of short-term investment grade securities. As of
September 30, 2001 we did not, nor do we intend to, use derivative financial
instruments for speculative trading purposes.

The majority of our sales are denominated in U.S. dollars and take place in
North America.

We believe that interest rate risk and foreign currency exchange rate risks are
both immaterial to the Company.

16



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##### Table of Contents






PART II

OTHER INFORMATION




ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS



|(d) |  | Recent Sales of Unregistered Securities
|--- |  | ---------------------------------------

On June 29, 2001, as partial consideration for our acquisition of
substantially all the assets of Cool Springs Associates, Inc. d/b/a
EarningsInsights (EarningsInsights), we issued a warrant to purchase 300,000
shares of our common stock at an exercise price of $5.08 per share to
EarningsInsights (the Warrant), pursuant to the terms of an asset purchase
agreement among us, EarningsInsights and certain stockholders of
EarningsInsights. The Warrant is immediately exercisable and may be exercised
through June 29, 2008. The amount of common stock issuable upon exercise of the
Warrant is subject to adjustment for stock dividends or subdivision or
combination of our common stock. The estimated value of the warrant is
approximately $637,000. The Warrant is exempt from registration under the
Securities Act of 1933, as amended (the Act), pursuant to Rule 504 and/or Rule
506 promulgated thereunder, since the aggregate offering price of the Warrant
does not exceed $1,000,000 and/or EarningsInsights is the sole purchaser and
qualifies as an accredited investor under Rule 506 of the Act.




ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Our Annual Meeting of Stockholders was held on July 26, 2001. Holders of an
aggregate of 13,023,126 shares at the close of business on June 21, 2001 were
entitled to vote at the meeting. At such meeting, the Companys Stockholders
voted as follows:

Proposal 1. To elect two directors to Class III of the Companys Board of
Directors, each to serve for a term of three years or until his successor is
elected and qualified.

|                  |  |            |            |          |  |             |     |           |  |        |        |  |  |  |     | 
|----------------- |  | ---------- | ---------- | -------- |  | ----------- | --- | --------- |  | ------ | ------ |  |  |  | --- | 
|                  |  |            |            |          |  | Total Vote  |     |           |  |        |        |  |  | 
|                  |  | Total Vote |            | Withheld |  |             |     |           |  |        |        | 
|                  |  | for Each   |            | for Each |  |             |     |           |  | Broker
|Director Name     |  | Nominee    |            | Nominee  |  | Abstentions |     | Non-Votes
|                  |  |            |            |          |  |             |     |          
|George F. Raymond |  |            | 11,846,221 |          |  |             | N/A |           |  |        | 56,410 |  |  |  | N/A | 
|Robert W. Howe    |  |            | 11,831,970 |          |  |             | N/A |           |  |        | 70,661 |  |  |  | N/A | 

Messrs. David C. Hodgson and Richard D. Driscoll will continue to hold office
until the 2002 Annual Meeting of Stockholders or until their successors have
been duly elected and qualified or until their earlier resignation or removal.
Messrs. William H. Gallagher and Lee M. Kennedy will continue to hold office
until the 2003 Annual Meeting of Stockholders or until their successors have
been duly elected and qualified or until their earliest resignation or removal.

Proposal 2. To ratify the selection of the firm of PricewaterhouseCoopers LLP,
independent public accountants, as auditors for the fiscal year ending March 31,
2002.

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##### Table of Contents



|               |  |                    |       |                 |  |                  |    |  |  |  |     | 
|-------------- |  | ------------------ | ----- | --------------- |  | ---------------- | -- |  |  |  | --- | 
|Total Vote for |  | Total Vote Against |       | Abstentions for |  |                  |    | 
|Proposal 2     |  | Proposal 2         |       | Proposal 2      |  | Broker Non-Votes
|               |  |                    |       |                 |  |                 
|11,900,908     |  |                    | 1,698 |                 |  |                  | 25 |  |  |  | N/A | 




ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K



|(a) |  | Exhibits
|--- |  | --------

2.1 Asset Purchase Agreement, dated as of June 29, 2001, by and among the
Company, EarningsInsights and certain stockholders of EarningsInsights
(incorporated by reference herein to Exhibit 2.1 to Form 8-K filed with the
Securities and Exchange Commission on July 12, 2001).



|(b) |  | Reports on Form 8-K
|--- |  | -------------------

On July 12, 2001, the Company filed a Form 8-K with the Securities and
Exchange Commission announcing the acquisition of Cool Springs Associates, Inc.
d/b/a EarningsInsights.

On August 10, 2001, the Company filed a Form 8-K/A with the Securities and
Exchange Commission to amend Items 2 and 7 of the Form 8-K filed on July 12,
2001.

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##### Table of Contents






SIGNATURES

Pursuant to the requirement 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.

|      |  |                  |  |                                                                                                                                      
|----- |  | ---------------- |  | -------------------------------------------------------------------------------------------------------------------------------------
|      |  |                  |  | ATLANTIC DATA SERVICES, INC.                                                                                                         
|     
|Date: |  | November 9, 2001 |  | By: /s/ Robert W. HoweRobert W. Howe
Chairman and Chief Executive Officer                                                            
|     
|Date: |  | November 9, 2001 |  | By: /s/ Paul K. McGrathPaul K. McGrath
Senior Vice President and Chief Financial
Officer (Principal Financial and Accounting
Officer)

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##### Table of Contents






EXHIBIT INDEX

|            |  |                                                                                                                                                                                                                                                                                                     |  | 
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | 
|Exhibit No.
|           
|2.1         |  | Asset Purchase Agreement, dated as of June 29, 2001, by and among the Company, EarningsInsights and certain stockholders of EarningsInsights (incorporated by reference herein to
Exhibit 2.1 to Form 8-K filed with the Securities and Exchange
Commission on July 12, 2001 (File No. 000-24193)).

20