##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q




(Mark One)

|    |  |                                                                                         
|--- |  | ----------------------------------------------------------------------------------------
|[X] |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|    |  |                                                                                         
|    |  | For the quarterly period ended December 31, 2002                                        

OR

|     |  |                                                                                          
|---- |  | -----------------------------------------------------------------------------------------
|[  ] |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|     |  |                                                                                          
|     |  | For the transition period from______to______.                                            

Commission File Number: 000-24193

ATLANTIC DATA SERVICES, INC.

(Exact Name of Registrant as Specified in its Charter)


|                                                                             |  |                                                   
|---------------------------------------------------------------------------- |  | --------------------------------------------------
|MASSACHUSETTS
(State or Other Jurisdiction of
Incorporation or Organization) |  | 04-2696393
(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 [ X ] No [  ]

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

As of February 1, 2003, there were 13,088,245 shares of the Registrants Common
Stock, $.01 par value per share, outstanding.



---

TABLE OF CONTENTS



|                                                 |                                                                                               |                                                      |  |  |  |  |  | 
|------------------------------------------------ | --------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|PART I                                          
|                                                 | 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                           
|                                                 | ITEM 4: CONTROLS AND PROCEDURES                                                              
|PART II OTHER INFORMATION                       
|                                                 | ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURES                                      
|CERTIFICATIONS                                  
|EXHIBIT INDEX                                   
|Ex-99.1 Certification by Chief Executive Officer
|Ex-99.2 Certification of Chief Financial Officer



---



##### 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 December 31, 2002 (Unaudited)
and March 31, 2002                               |  |      | 3  | 
|Condensed Consolidated Statements of Operations for the Three and Nine Months
Ended December 31, 2002 and 2001 (Unaudited) |  |      | 4  | 
|Condensed Consolidated Statements of Cash Flows for the Nine Months
Ended December 31, 2002 and 2001 (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 | 
|ITEM 4: Controls and Procedures                                                                                            |  |      | 16 | 
|PART II - OTHER INFORMATION                                                                                                |  |      |    | 
|ITEM
6:  Exhibits and Reports on Form 8-K                                                                                  |  |      | 17 | 
|SIGNATURES                                                                                                                 |  |      | 18 | 
|CERTIFICATIONS                                                                                                             |  |      | 19 | 
|EXHIBIT INDEX                                                                                                              |  |      | 21 | 

- 2 -



---



##### Table of Contents






PART I




ITEM 1: FINANCIAL STATEMENTS




ATLANTIC DATA SERVICES, INC.

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


|                                           |                                                                                                                                                                                                            |   |                            |        |              |        |           |        |   |        | 
|------------------------------------------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | -------------------------- | ------ | ------------ | ------ | --------- | ------ | - | ------ | 
|                                           |                                                                                                                                                                                                            |   |                            |        | December 31, |        | March 31,
|                                           |                                                                                                                                                                                                            |   |                            |        | 2002         |        | 2002     
|                                           |                                                                                                                                                                                                            |   |                            |        |              |        |          
|                                           |                                                                                                                                                                                                            |   |                            |        | (Unaudited)  |        |           |        |  
|Assets                                     |                                                                                                                                                                                                            |   |                            |        |              |        |           |       
|Current assets:                            |                                                                                                                                                                                                            |   |                            |        |              |        |           |       
|                                           | Cash and cash equivalents                                                                                                                                                                                  |   | $                          | 28,313 |              |        | $         | 15,457 |  
|                                           | Short-term investments                                                                                                                                                                                     |   |                            | 8,745  |              |        |           | 16,601 |  
|                                           | Accounts receivable, net of allowances for doubtful accounts
of $275 at December 31, 2002 and $375 at March 31, 2002                                                                                       |   |                            | 1,582  |              |        |           | 3,170  |  
|                                           | Tax receivable                                                                                                                                                                                             |   |                            |       |              |        |           | 1,764  |  
|                                           | Deferred tax assets                                                                                                                                                                                        |   |                            | 1,020  |              |        |           | 1,020  |  
|                                           | Prepaid expenses                                                                                                                                                                                           |   |                            | 201    |              |        |           | 260    |  
|                                           |                                                                                                                                                                                                            |   |                            |        |              |        |           |       
|                                           |                                                                                                                                                                                                            |   | Total current assets       |        |              | 39,861 |           |        |   | 38,272 | 
|Property and equipment, net                |                                                                                                                                                                                                            |   | 212                        |        |              |        | 308       |       
|Other assets                               |                                                                                                                                                                                                            |   | 182                        |        |              |        | 182       |       
|                                           |                                                                                                                                                                                                            |   |                            |        |              |        |           |       
|Total assets                               |                                                                                                                                                                                                            | $ | 40,255                     |        |              | $      | 38,762    |       
|                                           |                                                                                                                                                                                                            |   |                            |        |              |        |           |       
|Liabilities and stockholders equity       |                                                                                                                                                                                                            |   |                            |        |              |        |           |       
|Current liabilities:                       |                                                                                                                                                                                                            |   |                            |        |              |        |           |       
|                                           | Accounts payable                                                                                                                                                                                           |   | $                          | 352    |              |        | $         | 455    |  
|                                           | Accrued expenses and other liabilities                                                                                                                                                                     |   |                            | 983    |              |        |           | 2,055  |  
|                                           | Deferred revenue                                                                                                                                                                                           |   |                            | 923    |              |        |           | 531    |  
|                                           | Billings in excess of costs and estimated earnings                                                                                                                                                         |   |                            |       |              |        |           | 12     |  
|                                           | Federal and state income taxes payable                                                                                                                                                                     |   |                            | 300    |              |        |           |       |  
|                                           |                                                                                                                                                                                                            |   |                            |        |              |        |           |       
|                                           |                                                                                                                                                                                                            |   | Total current liabilities  |        |              | 2,558  |           |        |   | 3,053  | 
|                                           |                                                                                                                                                                                                            |   |                            |        |              |        |           |       
|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,
13,046,245 shares issued and outstanding at December 31, 2002
and 13,151,123 shares issued and 13,039,123 shares outstanding at March 31, 2002 |   |                            | 132    |              |        |           | 131    |  
|                                           | Additional paid-in capital                                                                                                                                                                                 |   |                            | 27,550 |              |        |           | 27,565 |  
|                                           | Retained earnings                                                                                                                                                                                          |   |                            | 10,015 |              |        |           | 8,038  |  
|                                           | Treasury stock (112,000 shares carried at cost)                                                                                                                                                            |   |                            |       |              |        |           | (25    | )
|                                           |                                                                                                                                                                                                            |   |                            |        |              |        |           |       
|                                           |                                                                                                                                                                                                            |   | Total stockholders equity |        |              | 37,697 |           |        |   | 35,709 | 
|                                           |                                                                                                                                                                                                            |   |                            |        |              |        |           |       
|Total liabilities and stockholders equity |                                                                                                                                                                                                            | $ | 40,255                     |        |              | $      | 38,762    |       
|                                           |                                                                                                                                                                                                            |   |                            |        |              |        |           |       

See accompanying Notes to Condensed Consolidated Financial Statements.

- 3 -



---



##### Table of Contents






ATLANTIC DATA SERVICES, INC.



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


|                                                                           |                                       |                          |                   |       |                    |     |                   |       |       |      |        |       |       |       |        |       |       |        |  
|-------------------------------------------------------------------------- | ------------------------------------- | ------------------------ | ----------------- | ----- | ------------------ | --- | ----------------- | ----- | ----- | ---- | ------ | ----- | ----- | ----- | ------ | ----- | ----- | ------ | -
|                                                                           |                                       |                          |                   |       | Three Months Ended |     | Nine Months Ended
|                                                                           |                                       |                          |                   |       | December 31,       |     | December 31,     
|                                                                           |                                       |                          |                   |       |                    |     |                  
|                                                                           |                                       |                          |                   |       | 2002               |     | 2001              |       | 2002  |      | 2001  
|                                                                           |                                       |                          |                   |       |                    |     |                   |       |       |      |       
|Revenues                                                                   |                                       | $                        | 4,171             |       |                    | $   | 4,934             |       |       | $    | 16,991 |       |       | $     | 14,638 |      
|Cost of revenues                                                           |                                       |                          | 2,515             |       |                    |     | 3,091             |       |       |      | 9,425  |       |       |       | 10,272 |      
|                                                                           |                                       |                          |                   |       |                    |     |                   |       |       |      |        |       |       |       |        |      
|Gross profit                                                               |                                       |                          | 1,656             |       |                    |     | 1,843             |       |       |      | 7,566  |       |       |       | 4,366  |      
|                                                                           |                                       |                          |                   |       |                    |     |                   |       |       |      |        |       |       |       |        |      
|Operating expenses:                                                        |                                       |                          |                   |       |                    |     |                   |       |       |      |        |       |       |       |        |      
|                                                                           | Sales and marketing                   |                          |                   | 391   |                    |     |                   | 750   |       |      |        | 1,264 |       |       |        | 2,540 |      
|                                                                           | General and administrative            |                          |                   | 1,208 |                    |     |                   | 1,064 |       |      |        | 3,783 |       |       |        | 4,026 |      
|                                                                           | Restructuring expense                 |                          |                   |      |                    |     |                   |      |       |      |        |      |       |       |        | 925   |      
|                                                                           |                                       |                          |                   |       |                    |     |                   |       |       |      |        |       |       |       |        |      
|                                                                           |                                       | Total operating expenses |                   |       | 1,599              |     |                   |       | 1,814 |      |        |       | 5,047 |       |        |       | 7,491 |       
|                                                                           |                                       |                          |                   |       |                    |     |                   |       |       |      |        |       |       |       |        |      
|Income (loss) from operations                                              |                                       |                          | 57                |       |                    |     | 29                |       |       |      | 2,519  |       |       |       | (3,125 | )    
|Interest income, net                                                       |                                       |                          | 167               |       |                    |     | 198               |       |       |      | 524    |       |       |       | 869    |      
|Write-down of investment                                                   |                                       |                          |                  |       |                    |     |                  |       |       |      |       |       |       |       | (3,000 | )    
|                                                                           |                                       |                          |                   |       |                    |     |                   |       |       |      |        |       |       |       |        |      
|Income (loss) from continuing operations before
provision for income taxes |                                       |                          | 224               |       |                    |     | 227               |       |       |      | 3,043  |       |       |       | (5,256 | )    
|Provision for income taxes                                                 |                                       |                          | 85                |       |                    |     |                  |       |       |      | 1,131  |       |       |       | 386    |      
|                                                                           |                                       |                          |                   |       |                    |     |                   |       |       |      |        |       |       |       |        |      
|Income (loss) from continuing operations                                   |                                       |                          | 139               |       |                    |     | 227               |       |       |      | 1,912  |       |       |       | (5,642 | )    
|                                                                           |                                       |                          |                   |       |                    |     |                   |       |       |      |        |       |       |       |        |      
|Discontinued operations:                                                   |                                       |                          |                   |       |                    |     |                   |       |       |      |        |       |       |       |        |      
|                                                                           | Income (loss) on disposal of business |                          |                   |      |                    |     |                   | (392  | )     |      |        | 101   |       |       |        | (889  | )    
|                                                                           | Tax benefit (provision)               |                          |                   |      |                    |     |                   |      |       |      |        | (36   | )     |       |        |      |      
|                                                                           |                                       |                          |                   |       |                    |     |                   |       |       |      |        |       |       |       |        |      
|                                                                           |                                       |                          |                  |       |                    |     | (392              | )     |       |      | 65     |       |       |       | (889   | )    
|                                                                           |                                       |                          |                   |       |                    |     |                   |       |       |      |        |       |       |       |        |      
|                                                                           |                                       |                          | Net income (loss) |       | $                  | 139 |                   |       | $     | (165 | )      |       | $     | 1,977 |        |       | $     | (6,531 | )
|                                                                           |                                       |                          |                   |       |                    |     |                   |       |       |      |        |       |       |       |        |      
|Earnings (loss) per share from continuing operations:                      |                                       |                          |                   |       |                    |     |                   |       |       |      |        |       |       |       |        |      
|                                                                           | Basic                                 |                          | $                 | 0.01  |                    |     | $                 | 0.02  |       |      | $      | 0.15  |       |       | $      | (0.43 | )    
|                                                                           | Diluted                               |                          | $                 | 0.01  |                    |     | $                 | 0.02  |       |      | $      | 0.15  |       |       | $      | (0.43 | )    
|Earnings (loss) per share from discontinued operations:                    |                                       |                          |                   |       |                    |     |                   |       |       |      |        |       |       |       |        |      
|                                                                           | Basic                                 |                          | $                 |      |                    |     | $                 | (0.03 | )     |      | $      | 0.00  |       |       | $      | (0.07 | )    
|                                                                           | Diluted                               |                          | $                 |      |                    |     | $                 | (0.03 | )     |      | $      | 0.00  |       |       | $      | (0.07 | )    
|Earnings (loss) per share from net income:                                 |                                       |                          |                   |       |                    |     |                   |       |       |      |        |       |       |       |        |      
|                                                                           | Basic                                 |                          | $                 | 0.01  |                    |     | $                 | (0.01 | )     |      | $      | 0.15  |       |       | $      | (0.50 | )    
|                                                                           | Diluted                               |                          | $                 | 0.01  |                    |     | $                 | (0.01 | )     |      | $      | 0.15  |       |       | $      | (0.50 | )    
|                                                                          
|Shares used in computing earnings (loss) per share
(basic)                 |                                       |                          | 13,046            |       |                    |     | 13,033            |       |       |      | 13,041 |       |       |       | 13,026 |      
|Shares used in computing earnings (loss) per share
(diluted)               |                                       |                          | 13,238            |       |                    |     | 13,155            |       |       |      | 13,221 |       |       |       | 13,026 |      

See accompanying Notes to Condensed Consolidated Financial Statements.

- 4 -



---



##### Table of Contents






ATLANTIC DATA SERVICES, INC.



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


|                                                                                                   |                                                                                  |                                                    |        |                   |       |      |         |       |        |  
|-------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------- | -------------------------------------------------- | ------ | ----------------- | ----- | ---- | ------- | ----- | ------ | -
|                                                                                                   |                                                                                  |                                                    |        | Nine Months Ended
|                                                                                                   |                                                                                  |                                                    |        | December 31,     
|                                                                                                   |                                                                                  |                                                    |        |                  
|                                                                                                   |                                                                                  |                                                    |        | 2002              |       | 2001
|                                                                                                   |                                                                                  |                                                    |        |                   |       |     
|Cash flows from operating activities:                                                              |                                                                                  |                                                    |        |                   |       |      |         |      
|Net income (loss)                                                                                  |                                                                                  | $                                                  | 1,977  |                   |       | $    | (6,531  | )    
|Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities: |                                                                                  |                                                    |        |                   |       |      |         |      
|                                                                                                   | Depreciation and amortization                                                    |                                                    |        | 174               |       |      |         | 251   |       
|                                                                                                   | Discontinued operations                                                          |                                                    |        | (65               | )     |      |         | 889   |       
|                                                                                                   | Deferred taxes                                                                   |                                                    |        |                  |       |      |         | 464   |       
|                                                                                                   | Provision for bad debts                                                          |                                                    |        | (100              | )     |      |         | 46    |       
|                                                                                                   | Write-down of investment                                                         |                                                    |        |                  |       |      |         | 3,000 |       
|                                                                                                   | Change in assets and liabilities (net of effect of acquisition
and disposition): |                                                    |        |                   |       |      |         |       |       
|                                                                                                   |                                                                                  | Accounts receivable                                |        |                   | 1,688 |      |         |       | 1,571  |  
|                                                                                                   |                                                                                  | Tax receivable                                     |        |                   | 619   |      |         |       |       |  
|                                                                                                   |                                                                                  | Prepaid expenses and other assets                  |        |                   | (9    | )    |         |       | 272    |  
|                                                                                                   |                                                                                  | Accounts payable                                   |        |                   | (98   | )    |         |       | (92    | )
|                                                                                                   |                                                                                  | Accrued expenses and other liabilities             |        |                   | (835  | )    |         |       | (1,418 | )
|                                                                                                   |                                                                                  | Deferred revenue                                   |        |                   | 392   |      |         |       |       |  
|                                                                                                   |                                                                                  | Billings in excess of costs and estimated earnings |        |                   | (12   | )    |         |       | 527    |  
|                                                                                                   |                                                                                  | Federal and state income taxes payable             |        |                   | 266   |      |         |       |       |  
|                                                                                                   |                                                                                  |                                                    |        |                   |       |      |         |      
|Net cash provided by (used in) operating activities of continuing
operations                       |                                                                                  |                                                    | 3,997  |                   |       |      | (1,021  | )    
|                                                                                                   |                                                                                  |                                                    |        |                   |       |      |         |      
|Cash flows from investing activities:                                                              |                                                                                  |                                                    |        |                   |       |      |         |      
|Purchase of short-term investments                                                                 |                                                                                  |                                                    | (5,620 | )                 |       |      | (15,930 | )    
|Sale and maturities of short-term investments                                                      |                                                                                  |                                                    | 13,472 |                   |       |      | 3,300   |      
|Purchase of property and equipment                                                                 |                                                                                  |                                                    | (15    | )                 |       |      | (15     | )    
|                                                                                                   |                                                                                  |                                                    |        |                   |       |      |         |      
|Net cash provided by (used in) investing activities of continuing
operations                       |                                                                                  |                                                    | 7,837  |                   |       |      | (12,645 | )    
|                                                                                                   |                                                                                  |                                                    |        |                   |       |      |         |      
|Cash flows from financing activities:                                                              |                                                                                  |                                                    |        |                   |       |      |         |      
|Proceeds from exercise of stock options under stock option plans                                   |                                                                                  |                                                    | 12     |                   |       |      | 17      |      
|                                                                                                   |                                                                                  |                                                    |        |                   |       |      |         |      
|Net cash provided by financing activities                                                          |                                                                                  |                                                    | 12     |                   |       |      | 17      |      
|                                                                                                   |                                                                                  |                                                    |        |                   |       |      |         |      
|Net cash provided by (used in) continuing operations                                               |                                                                                  |                                                    | 11,846 |                   |       |      | (13,649 | )    
|Net cash provided by (used in) discontinued operations                                             |                                                                                  |                                                    | 1,010  |                   |       |      | (2,657  | )    
|                                                                                                   |                                                                                  |                                                    |        |                   |       |      |         |      
|Net increase (decrease) in cash and cash equivalents                                               |                                                                                  |                                                    | 12,856 |                   |       |      | (16,306 | )    
|Cash and cash equivalents, beginning of period                                                     |                                                                                  |                                                    | 15,457 |                   |       |      | 36,655  |      
|                                                                                                   |                                                                                  |                                                    |        |                   |       |      |         |      
|Cash and cash equivalents, end of period                                                           |                                                                                  | $                                                  | 28,313 |                   |       | $    | 20,349  |      
|                                                                                                   |                                                                                  |                                                    |        |                   |       |      |         |      
|Supplemental disclosure of cash flow information:                                                  |                                                                                  |                                                    |        |                   |       |      |         |      
|Cash paid during the period for taxes                                                              |                                                                                  | $                                                  | 872    |                   |       | $    | 44      |      
|                                                                                                   |                                                                                  |                                                    |        |                   |       |      |         |      
|Supplemental disclosure of non-cash investing activities:                                          |                                                                                  |                                                    |        |                   |       |      |         |      
|Acquisition of assets with warrant                                                                 |                                                                                  | $                                                  |       |                   |       | $    | 637     |      
|                                                                                                   |                                                                                  |                                                    |        |                   |       |      |         |      

See accompanying Notes to Condensed Consolidated Financial Statements.

- 5 -



---



##### Table of Contents






ATLANTIC DATA SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)
December 31, 2002


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 and nine month periods ended
December 31, 2002 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, 2002.

The balance sheet at March 31, 2002 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.

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, represents
billings in excess of revenues recognized.

Included in revenues are reimbursable contract-related travel and entertainment
expenses of $552,000 and $707,000 for the quarters ended December 31, 2002 and
2001, respectively, and $2,165,000 and $2,236,000 for the nine months ended
December 31, 2002 and 2001, respectively, which are separately billed to
clients.

Earnings Per Share

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

- 6 -



---



##### Table of Contents



Short-Term Investments

Short-term investments consist primarily of high-grade commercial paper,
municipal bonds and corporate debt with original maturities at the date of
purchase greater than three months and less than twelve months. All short-term
investments have been classified as held to maturity and are carried at
amortized cost, which approximates fair value, due to the short period of time
to maturity.

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 December 31, 2002 and
2001:

|                                                                                                       |                                   |                                                                                                |        |                                       |        |      |        |       |        | 
|------------------------------------------------------------------------------------------------------ | --------------------------------- | ---------------------------------------------------------------------------------------------- | ------ | ------------------------------------- | ------ | ---- | ------ | ----- | ------ | 
|                                                                                                       |                                   |                                                                                                |        | Three Months Ended                   
|                                                                                                       |                                   |                                                                                                |        | December 31,                         
|                                                                                                       |                                   |                                                                                                |        |                                      
|                                                                                                       |                                   |                                                                                                |        | 2002                                  |        | 2001
|                                                                                                       |                                   |                                                                                                |        |                                       |        |     
|                                                                                                       |                                   |                                                                                                |        | (in
thousands, except per share data)
|Numerator for earnings (loss) per common share and earnings (loss)
per common share assuming dilution: |                                   |                                                                                                |        |                                       |        |      |        |      
|                                                                                                       | Income from continuing operations |                                                                                                | $      | 139                                   |        |      | $      | 227   |       
|                                                                                                       | Loss from discontinued operations |                                                                                                |        |                                      |        |      |        | (392  | )     
|                                                                                                       |                                   |                                                                                                |        |                                       |        |      |        |      
|                                                                                                       | Net income (loss)                 |                                                                                                | $      | 139                                   |        |      | $      | (165  | )     
|                                                                                                       |                                   |                                                                                                |        |                                       |        |      |        |      
|Denominator:                                                                                           |                                   |                                                                                                |        |                                       |        |      |        |      
|Denominator for basic earnings per share  weighted average
shares                                     |                                   |                                                                                                | 13,046 |                                       |        |      | 13,033 |      
|Effect of dilutive securities:                                                                         |                                   |                                                                                                |        |                                       |        |      |        |      
|                                                                                                       | Employee stock options            |                                                                                                |        | 192                                   |        |      |        | 122   |       
|                                                                                                       |                                   |                                                                                                |        |                                       |        |      |        |      
|                                                                                                       |                                   | Denominator for diluted earnings per share  adjusted
weighted average and assumed conversions |        |                                       | 13,238 |      |        |       | 13,155 | 
|                                                                                                       |                                   |                                                                                                |        |                                       |        |      |        |      
|Basic earnings (loss) per share:                                                                       |                                   |                                                                                                |        |                                       |        |      |        |      
|                                                                                                       | Continuing operations             |                                                                                                | $      | 0.01                                  |        |      | $      | 0.02  |       
|                                                                                                       | Discontinued operations           |                                                                                                |        |                                      |        |      |        | (0.03 | )     
|                                                                                                       | Net income (loss)                 |                                                                                                |        | 0.01                                  |        |      |        | (0.01 | )     
|                                                                                                      
|Diluted earnings (loss) per share:                                                                     |                                   |                                                                                                |        |                                       |        |      |        |      
|                                                                                                       | Continuing operations             |                                                                                                | $      | 0.01                                  |        |      | $      | 0.02  |       
|                                                                                                       | Discontinued operations           |                                                                                                |        |                                      |        |      |        | (0.03 | )     
|                                                                                                       | Net income (loss)                 |                                                                                                |        | 0.01                                  |        |      |        | (0.01 | )     

- 7 -



---



##### Table of Contents



The following table sets forth the computation of basic earnings per share and
diluted earnings per share for the nine months ended December 31, 2002 and
2001:

|                                                                                                       |                                            |                                                                                                |        |                                       |        |      |        |        |        | 
|------------------------------------------------------------------------------------------------------ | ------------------------------------------ | ---------------------------------------------------------------------------------------------- | ------ | ------------------------------------- | ------ | ---- | ------ | ------ | ------ | 
|                                                                                                       |                                            |                                                                                                |        | Nine Months Ended                    
|                                                                                                       |                                            |                                                                                                |        | December 31,                         
|                                                                                                       |                                            |                                                                                                |        |                                      
|                                                                                                       |                                            |                                                                                                |        | 2002                                  |        | 2001
|                                                                                                       |                                            |                                                                                                |        |                                       |        |     
|                                                                                                       |                                            |                                                                                                |        | (in
thousands, except per share data)
|Numerator for earnings (loss) per common share and earnings (loss)
per common share assuming dilution: |                                            |                                                                                                |        |                                       |        |      |        |       
|                                                                                                       | Income (loss) from continuing operations   |                                                                                                | $      | 1,912                                 |        |      | $      | (5,642 | )     
|                                                                                                       | Income (loss) from discontinued operations |                                                                                                |        | 65                                    |        |      |        | (889   | )     
|                                                                                                       |                                            |                                                                                                |        |                                       |        |      |        |       
|                                                                                                       | Net income (loss)                          |                                                                                                | $      | 1,977                                 |        |      | $      | (6,531 | )     
|                                                                                                       |                                            |                                                                                                |        |                                       |        |      |        |       
|Denominator:                                                                                           |                                            |                                                                                                |        |                                       |        |      |        |       
|Denominator for basic earnings per share  weighted average
shares                                     |                                            |                                                                                                | 13,041 |                                       |        |      | 13,026 |       
|Effect of dilutive securities:                                                                         |                                            |                                                                                                |        |                                       |        |      |        |       
|                                                                                                       | Employee stock options                     |                                                                                                |        | 180                                   |        |      |        |       |       
|                                                                                                       |                                            |                                                                                                |        |                                       |        |      |        |       
|                                                                                                       |                                            | Denominator for diluted earnings per share  adjusted
weighted average and assumed conversions |        |                                       | 13,221 |      |        |        | 13,026 | 
|                                                                                                       |                                            |                                                                                                |        |                                       |        |      |        |       
|Basic earnings (loss) per share:                                                                       |                                            |                                                                                                |        |                                       |        |      |        |       
|                                                                                                       | Continuing operations                      |                                                                                                | $      | 0.15                                  |        |      | $      | (0.43  | )     
|                                                                                                       | Discontinued operations                    |                                                                                                |        | 0.00                                  |        |      |        | (0.07  | )     
|                                                                                                       | Net income (loss)                          |                                                                                                |        | 0.15                                  |        |      |        | (0.50  | )     
|                                                                                                      
|Diluted earnings (loss) per share:                                                                     |                                            |                                                                                                |        |                                       |        |      |        |       
|                                                                                                       | Continuing operations                      |                                                                                                | $      | 0.15                                  |        |      | $      | (0.43  | )     
|                                                                                                       | Discontinued operations                    |                                                                                                |        | 0.00                                  |        |      |        | (0.07  | )     
|                                                                                                       | Net income (loss)                          |                                                                                                |        | 0.15                                  |        |      |        | (0.50  | )     

In addition, as of December 31, 2002 there were options outstanding to purchase
949,250 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 December 31, 2002, three customers accounted for 39.7%,
24.8% and 12.8% of the Companys revenues. For the quarter ended December 31,
2001, three customers accounted for 29.9%, 24.8% and 13.9% of the Companys
revenues.

5.     Income Taxes

Management has evaluated the positive and negative evidence bearing upon the
realizability of its deferred tax assets and has established a valuation
allowance for certain of such assets, which are comprised principally of net
operating loss carryforwards and various accruals.

For the quarter ended December 31, 2002, the Company established a provision
for taxes due to its profitability. However, the Company did not adjust its
deferred tax assets due to the uncertainty of profitability in future quarters.
Also, for the year ended March 31, 2002, the Company reclassified $1,020,000
of tax receivable to deferred tax assets as a result of a reconciliation to its
tax returns for fiscal year 2002 that was prepared during the quarter ended
September 30, 2002.

- 8 -



---



##### Table of Contents



6.     Recently Issued Accounting Pronouncements

In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, which became effective January 1, 2002. SFAS
144 supersedes SFAS 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of, and the accounting and reporting
provisions relating to the disposal of a segment of a business described in
Accounting Principals Board Opinion No. 30, Reporting the Results of
Operations  Reporting the Effects of Disposal of a Segment of Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions
(APB No. 30). The Company adopted SFAS 144 as of April 1, 2002. The
adoption had no material impact on the Companys financial statements.

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. This statement requires recording costs
associated with exit or disposal activities at their fair values when a
liability has been incurred. Under previous guidance, certain exit costs were
accrued upon managements commitment to an exit plan, which is generally before
an actual liability has been incurred. This statement is effective for
financial statements issued for fiscal years beginning after December 31, 2002.
We do not expect the adoption of this statement to have a material impact to
the financial statements.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FAS 123 (SFAS
148). SFAS 148 was issued to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, this statement amends the disclosure
requirements of FAS 123 to require prominent disclosures in both annual
and interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results.
The amendments to FAS 123 in paragraphs 2(a)-2(e) of this statement shall
be effective for financial statements for fiscal years ending after December
15, 2002.

7.     Business Combinations/Disposition

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. In addition, the Company had agreed to make additional cash payments
to the shareholders of EarningsInsights based on the net income realized by the
Company attributable to the operation of the business of EarningsInsights.
EarningsInsights, headquartered in Nashville, Tennessee, was a private company
that implemented customer profitability methodologies exclusively licensed to
it by First Manhattan Consulting Group, Inc. and incorporated these
methodologies into an application service provider-delivered Customer
Relationship Management (CRM) profitability model offered primarily to
mid-tier financial institutions and small banks.

On March 29, 2002, the Company announced its decision to discontinue the
operations of EarningsInsights. Accordingly, the Company will not be required
to make any additional cash payments to the shareholders of EarningsInsights.

The acquisition was 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 | 
|                              |       |   |       |      

- 9 -



---



##### Table of Contents



The purchase price was 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 nine months ended
December 31, 2001, determined as if the EarningsInsights acquisition had
occurred on April 1 for that period would have resulted in the following (in
thousands, except per share data):

|                                  |  |                   |        |           |  |   |        |  
|--------------------------------- |  | ----------------- | ------ | --------- |  | - | ------ | -
|                                  |  | Nine
Months Ended
|                                  |  | December
31, 2001
|                                  |  | (Unaudited)      
|                                  |  |                  
|                                  |  | As
Reported       |        | Pro
Forma
|                                  |  |                   |        |          
|Revenues                          |  | $                 | 14,638 |           |  | $ | 14,706 |  
|Loss from operations              |  |                   | (3,125 | )         |  |   | (4,419 | )
|Net loss                          |  |                   | (6,531 | )         |  |   | (6,933 | )
|                                 
|Basic earnings (loss) per share   |  | $                 | (0.50  | )         |  | $ | (0.53  | )
|Diluted earnings (loss) per share |  |                   | (0.50  | )         |  |   | (0.53  | )

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 period.

On March 29, 2002, the Company announced its decision to discontinue the
operations of EarningsInsights. Consequently, the Company incurred a charge of
$1.9 million, net of income tax benefit, relating to the write-off of
EarningsInsights long-lived assets and an accrual for estimated losses during
the phase-out period. The disposition of the EarningsInsights operation
represents the disposal of a business segment under APB No. 30.

The discontinuation of the operations of EarningsInsights resulted in the
termination of four employees. Revenue relating to the discontinued business
was $90,000 during fiscal 2002. All long-lived assets were written off except
for various computer equipment, which was appraised and written down to its
estimated net realizable value.

- 10 -



---



##### Table of Contents



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, will
be, and other similar expressions. These forward-looking statements cover,
among other items: events, conditions and financial trends that may affect our
future plans of operation, business strategy, growth of operations and
financial position, including statements regarding revenue, profitability,
earnings or loss per share projections, fiscal 2003 capital expenditures and
sufficiency of cash to fund working capital and capital expenditure
requirements. Any forward-looking statements are not guarantees of future
performance and actual results could differ materially from those anticipated
as a result of certain risks and uncertainties, some of which are beyond our
control. These risks and uncertainties include, among others: variability of
our quarterly operating results due to, among other things, the number, size
and scope of customer projects commenced and completed during a quarter,
changes in employee utilization rates and changes in average billing rates; our
dependence on the financial services industry; general economic uncertainty;
concentration of revenues and our dependence on major customers; risks
associated with fixed price contracts; our dependence on key personnel; intense
competition in the IT consulting industry; and risks associated with potential
acquisitions. 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

We provide 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 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 0.0% and 0.8% of our revenues for the quarters ended December 31,
2002 and 2001, 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 December 31, 2002 and 2001 were 91.0%
and 82.3%, respectively, as a percentage of revenues. For the quarter ended
December 31, 2002, Zions Bancorporation, Citizens Financial Corporation,
FleetBoston Financial Corporation, IntraNet, Inc., a TSA Company, and Capital
One Services, Inc. accounted for approximately 39.7%, 24.8%, 12.8%, 9.0% and
4.7%, respectively, of revenues. For the quarter ended December 31, 2001,
Citizens Financial Corporation, Zions Bancorporation, FleetBoston Financial
Corporation, IntraNet, Inc., a TSA Company and National City Corporation
accounted for approximately 29.9%, 24.8%, 13.9%, 8.1% and 5.6%, 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

- 11 -



---



##### Table of Contents



reimbursable contract-related travel and entertainment expenses incurred by
us in connection with the delivery of our services.

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 our earnings projections for the future, because of the
continuing unstable economic and geopolitical climate we continue to be
cautious about our outlook for the next quarter and are currently estimating
our fourth quarter revenues will be in the $4.7 million to $5.0 million range,
with net income in the range of $.01 to $.03 per share.

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.

- 12 -



---



##### Table of Contents



Quarter Ended December 31,
2002 Compared to the Quarter Ended December 31, 2001

Revenues

Revenues decreased 15.5% for the quarter ended December 31, 2002 over the
quarter ended December 31, 2001, from $4.9 million to $4.2 million. This
decrease was predominately due to a 7.0% decrease in the volume of services
delivered to customers due to the continued IT spending freeze in the U.S., a
4.0% decrease in the average billing rate, as well as a decrease in the amount
of revenue from contract-related travel and entertainment expenses as a
percentage of total revenue to 13.2% from 14.3% for the quarter ended December
31, 2001.

Cost of Revenues

Cost of revenues decreased 18.6% to $2.5 million from $3.1 million for the
quarter ended December 31, 2002 compared to the quarter ended December 31,
2001, representing 60.3% and 62.6%, respectively, of revenues in each quarter.
The dollar decrease in cost of revenues was primarily due to a decrease in the
average number of billable personnel from 90 for the quarter ended December 31,
2001 to 70 for the quarter ended December 31, 2002. The percentage decrease
was due to an increase in the utilization rate from 63.0% for the quarter ended
December 31, 2001 to 71.0% for the quarter ended December 31, 2002, offset in
part by the aforementioned rate decrease.

Sales and Marketing

Sales and marketing expenses were $.4 million for the quarter ended December
31, 2002 and $.8 million for the quarter ended December 31, 2001, representing
9.4% and 15.2% of revenues, respectively. The dollar decrease resulted
primarily from a decrease in the average number of employees in our sales and
marketing group from 14 for the quarter ended December 31, 2001 to 9 for the
quarter ended December 31, 2002.

General and Administrative

General and administrative expenses increased 13.5% to $1.2 million from $1.1
million for the quarter ended December 31, 2002 compared to the quarter ended
December 31, 2001, representing 29.0% and 21.6% of revenues, respectively. The
dollar increase is due to an increase in payroll, taxes and benefits expense
resulting from increased headcount. The increase in expenses as a percentage
of revenue is due to the increase in expenses, as well as the 15.5% decrease in
revenues on which the percentage is calculated.

Interest Income, Net

Interest income, net decreased $31,000 from $198,000 for the quarter ended
December 31, 2001 to $167,000 for the quarter ended December 31, 2002. This
decrease was principally due to interest rate decreases. Interest expense is
immaterial.

Provision for Income Taxes

The provision for income taxes for the quarter ended December 31, 2002 was
$85,000 compared to $0 for the quarter ended December 31, 2001. A provision
was established due to profitability. However, deferred tax assets were not
adjusted due to the uncertainty of profitability in future quarters. There was
no tax provision in the prior years quarter due to the significant
year-to-date operating loss. Due to varying state and local statutory income
tax rates and depending on our levels of profitability, our effective tax rate
may vary from period to period depending on the states in which we do business.

- 13 -



---



##### Table of Contents



Discontinued Operations

On March 29, 2002, the Company announced its decision to discontinue the
operations of EarningsInsights (EI). The disposition of EIs operations
represents the disposal of a business segment under Accounting Principals Board
Opinion No. 30, Reporting the Results of Operations  Reporting the Effects of
Disposal of a Segment of Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions (APB No. 30). The quarterly financial
information for the three months ended December 31, 2001 have been restated to
give retroactive effect to that disposition.

Nine Months Ended December 31, 2002 Compared to the Nine Months Ended December
31, 2001

Revenues

Revenues increased 16.1% for the nine months ended December 31, 2002 over the
nine months ended December 31, 2001, from $14.6 million to $17.0 million. This
increase was predominately due to expanded project activity at existing
customers resulting in a 23.7% increase in the volume of services delivered to
customers, offset in part by a decrease in the amount of revenue from
reimbursable contract-related travel and entertainment expenses as a percentage
of total revenue to 12.7% for the nine months ended December 31, 2002 from
15.3% for the nine months ended December 31, 2001 and a 2.0% decrease in the
average billing rate from $138 for the nine months ended December 31, 2001 to
$135 for the nine months ended December 31, 2002.

Cost of Revenues

Cost of revenues decreased 8.3% to $9.4 million from $10.3 million for the nine
months ended December 31, 2002 compared to the nine months ended December 31,
2001, representing 55.5% and 70.2%, respectively, of revenues in each period.
The dollar decrease is principally due to a decrease in the average number of
billable people from 86 for the nine months ended December 31, 2001 to 75 for
the nine months ended December 31, 2002, offset by increases in other expenses.
The decrease in cost of revenues as a percentage of revenues is due to the
aforementioned increase in the volume of services delivered to customers, which
resulted in an increase in the utilization rate from 65.0% to 87.0%, and
because a greater percentage of revenue was professional services which has a
higher margin than revenue from reimbursable contract-related travel and
entertainment expenses.

Sales and Marketing

Sales and marketing expenses were $1.3 million for the nine months ended
December 31, 2002 and $2.5 million for the nine months ended December 31, 2001,
representing 7.4% and 17.4% of revenues, respectively. The dollar decrease
resulted primarily from a decrease in the average number of employees in our
sales and marketing group from 17 for the nine months ended December 31, 2001
to 8 for the nine months ended December 31, 2002. The decrease in sales and
marketing expense as a percentage of revenues to 7.4% from 17.4% for the
corresponding period of the prior fiscal year is due to the increase in
revenue, as well as the decrease in expenses.

General and Administrative

General and administrative expenses decreased 6.0% to $3.8 million from $4.0
million for the nine months ended December 31, 2002 compared to the nine months
ended December 31, 2001, representing 22.3% and 27.5% of revenues,
respectively. The dollar decrease is primarily due to decreases in
depreciation and
amortization expense, as well as bad debt expense. The decrease in general and
administrative expense as a percentage of revenues is due to the decrease in
expense as well as the increase in revenue compared to the corresponding period
of the prior fiscal year.

- 14 -



---



##### Table of Contents



Interest Income, Net

Interest income, net decreased $345,000 from $869,000 for the nine months ended
December 31, 2001 to $524,000 for the nine months ended December 31, 2002.
This decrease was principally due to interest rate decreases. Interest expense
is immaterial.

Provision for Income Taxes

The provision for income taxes increased $745,000 to $1.1 million from $386,000
for the nine months ended December 31, 2002 compared to the nine months ended
December 31, 2001 because of the increased levels of profitability. Deferred
tax assets were not adjusted due to the uncertainty of profitability in future
quarters. We had a provision for income taxes for the nine months ended
December 31, 2001, even though we had a loss before taxes because we
established a partial 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 depending on the states in which we do business, due to
varying state and local statutory income tax rates and depending on our levels
of profitability.

Discontinued Operations

On March 29, 2002, the Company announced its decision to discontinue the
operations of EarningsInsights (EI). The disposition of EIs operations
represents the disposal of a business segment under APB No. 30. The quarterly
financial information for the nine months ended December 31, 2001 have been
restated to give retroactive effect to that disposition.

Liquidity and Capital Resources

We have no long-term debt and continue to operate primarily debt-free. Working
capital was $37.3 million at December 31, 2002. Our days sales in accounts
receivable at December 31, 2002 was 34 days compared to 27 days at December 31,
2001. While we believe that the risk with respect to collection of accounts
receivable is minimized by the creditworthiness of our customers, which are
primarily banks and other financial institutions, and 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.

Capital expenditures for the remainder of fiscal 2003 are not expected to
exceed $50,000 and will be used principally for computers and other equipment.

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

To date, inflation has not had a material impact on our financial results.

Recently Issued Accounting Pronouncements

In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets (SFAS 144), which became effective January 1,
2002. SFAS 144 supersedes SFAS 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and the
accounting and reporting provisions relating to the disposal of a segment of a
business described in APB No. 30. The Company adopted SFAS 144 as of April 1,
2002. The adoption had no material impact on our financial statements.

- 15 -



---



##### Table of Contents



In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. This statement requires recording costs
associated with exit or disposal activities at their fair values when a
liability has been incurred. Under previous guidance, certain exit costs were
accrued upon managements commitment to an exit plan, which is generally before
an actual liability has been incurred. This statement is effective for
financial statements issued for fiscal years beginning after December 31, 2002.
We do not expect the adoption of this statement to have a material impact to
the financial statements.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation -  Transition and Disclosure -  an amendment of FAS 123 (SFAS
148). SFAS 148 was issued to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, this statement amends the disclosure
requirements of FAS 123 to require prominent disclosures in both annual
and interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results.
The amendments to FAS 123 in paragraphs 2(a)-2(e) of this statement shall
be effective for financial statements for fiscal years ending after December
15, 2002.




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
December 31, 2002 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 us.




ITEM 4: CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

An evaluation was performed under the supervision and with the participation of
members of our management, including our Chief Executive Officer and our Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in the Securities Exchange Act
of 1934 Rules 13a-14(c) and 15 d-14(c)) as of a date (the Evaluation Date)
within 90 days before the filing date of this quarterly report. Based on that
evaluation, members of our management, including our Chief Executive Officer
and our Chief Financial Officer, have concluded that as of the Evaluation Date,
our disclosure controls and procedures were effective in enabling us to record,
process, summarize and report the information required to be included in this
quarterly report within the required time period.

Changes in Internal Controls

There have been no significant changes in our internal controls or, to our
knowledge, in other factors that could significantly affect our disclosure
controls and procedures subsequent to the Evaluation Date.

- 16 -



---



##### Table of Contents






PART II

OTHER INFORMATION




ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K



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

| |              |  |                                                                                                                       
| | ------------ |  | ----------------------------------------------------------------------------------------------------------------------
| | Exhibit 99.1 |  | Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
| |              |  |                                                                                                                       
| | Exhibit 99.2 |  | Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002



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

|     
|-----
|None.

- 17 -



---



##### 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: |  | February 12, 2003 |  | By: /s/ Robert W.
Howe                                                                                            | 
|      |  |                   |  | Robert W. Howe,
Chairman and Chief Executive Officer                                                              | 
|      |  |                   |  |                                                                                                                   | 
|Date: |  | February 12, 2003 |  | By: /s/ Paul K.
McGrath                                                                                           | 
|      |  |                   |  | Paul K. McGrath,
Senior Vice President and Chief Financial
 Officer (Principal Financial and Accounting
 Officer) | 

- 18 -



---



##### Table of Contents






CERTIFICATIONS

I, Robert W. Howe, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of Atlantic Data
Services, Inc.;

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

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

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

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

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

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

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

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

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

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

Date: February 12, 2003



| | By: /s/ Robert W. Howe
Robert W. Howe
Chairman and Chief Executive Officer
| | --------------------------------------------------------------------------

- 19 -



---



##### Table of Contents



CERTIFICATIONS
(continued)

I, Paul K. McGrath, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of Atlantic Data
Services, Inc.;

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

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

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

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

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

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

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

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

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

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

Date: February 12, 2003



| | By: /s/ Paul K. McGrath
Paul K. McGrath
Senior Vice President and Chief Financial
 Officer (Principal Financial and Accounting
 Officer)
| | ----------------------------------------------------------------------------------------------------------------------------------------

- 20 -



---



##### Table of Contents






EXHIBIT INDEX

|             |  |                                                                                                                       
|------------ |  | ----------------------------------------------------------------------------------------------------------------------
|Exhibit No.  |  |                                                                                                                       
|             |  |                                                                                                                       
|             |  |                                                                                                                       
|Exhibit 99.1 |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|             |  |                                                                                                                       
|Exhibit 99.2 |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

- 21 -