##### 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 September 30, 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                                                  |  | 04-2696393                             
|                                                               |  |                                        
|(State or Other Jurisdiction of
Incorporation or Organization) |  | (I.R.S. Employer
Identification Number)

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

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

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

As of November 1, 2002, there were 13,045,245 shares of the Registrants Common
Stock, $.01 par value per share, outstanding.





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TABLE OF CONTENTS



|                                                                                              |                                                      |  |  |  |  |  |  | 
|--------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  |  | 
|PART I  FINANCIAL INFORMATION                                                               
|ITEM 1: Financial STATEMENTS                                                                 
|                                                                                              | Condensed Consolidated Balance Sheets               
|                                                                                              | Condensed Consolidated Statements of Operations     
|                                                                                              | Condensed Consolidated Statements of Cash Flows     
|                                                                                              | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|ITEM 2: Managements Discussion and Analysis of Financial Condition and Results of Operations
|ITEM 3: Quantitative and Qualitative Disclosures about Market Risk                           
|ITEM 4: CONTROLS AND PROCEDURES                                                              
|PART II  OTHER INFORMATION                                                                  
|ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURES                                                                                   
|CERTIFICATIONS                                                                               
|EXHIBIT INDEX                                                                                
|EX-99.1 CERTIFICATION PURSUANT TO SECTION 906                                                
|EX-99.2 CERTIFICATION PURSUANT TO SECTION 906                                                



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##### Table of Contents



ATLANTIC DATA SERVICES,
INC.

TABLE OF CONTENTS

|                                                                                              |                                                                                                                            |                    |    |      |   | 
|--------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------- | ------------------ | -- | ---- | - | 
|                                                                                              |                                                                                                                            |                    |    | Page
|                                                                                              |                                                                                                                            |                    |    |     
|PART I  FINANCIAL INFORMATION                                                                |                                                                                                                            |                    |    |     
|ITEM 1: Financial Statements                                                                  |                                                                                                                            |                    |    |     
|                                                                                              | Condensed Consolidated Balance Sheets as of September 30, 2002 (Unaudited)                                                 |                    |    |      |  
|                                                                                              |                                                                                                                            | and March 31, 2002 |    |      | 3 | 
|                                                                                              | Condensed Consolidated Statements of Operations for the Three and Six Months
Ended September 30, 2002 and 2001 (Unaudited) |                    |    | 4    |  
|                                                                                              | Condensed Consolidated Statements of Cash Flows for the Six Months
Ended September 30, 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 4: Submission of Matters to Vote of Security Holders                                     |                                                                                                                            |                    | 17 |     
|ITEM 6: Exhibits and Reports on Form 8-K                                                      |                                                                                                                            |                    | 17 |     
|SIGNATURES                                                                                    |                                                                                                                            |                    | 18 |     
|CERTIFICATIONS                                                                                |                                                                                                                            |                    | 19 |     
|EXHIBIT INDEX                                                                                 |                                                                                                                            |                    | 21 |     

2



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##### Table of Contents






PART I




Item 1: Financial Statements

ATLANTIC DATA SERVICES, INC.




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

|                                           |                                                                                                                                                                                                                 |   |                            |        |               |        |           |        |   |        | 
|------------------------------------------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | -------------------------- | ------ | ------------- | ------ | --------- | ------ | - | ------ | 
|                                           |                                                                                                                                                                                                                 |   |                            |        | September 30, |        | March 31,
|                                           |                                                                                                                                                                                                                 |   |                            |        | 2002          |        | 2002     
|                                           |                                                                                                                                                                                                                 |   |                            |        |               |        |          
|                                           |                                                                                                                                                                                                                 |   |                            |        | (Unaudited)  
|Assets                                     |                                                                                                                                                                                                                 |   |                            |        |               |        |           |       
|Current assets:                            |                                                                                                                                                                                                                 |   |                            |        |               |        |           |       
|                                           | Cash and cash equivalents                                                                                                                                                                                       |   | $                          | 23,628 |               |        | $         | 15,457 |  
|                                           | Short-term investments                                                                                                                                                                                          |   |                            | 11,103 |               |        |           | 16,601 |  
|                                           | Accounts receivable, net of allowances for doubtful accounts
of $300 at September 30, 2002 and $375 at March 31, 2002                                                                                           |   |                            | 1,688  |               |        |           | 3,170  |  
|                                           | Tax receivable                                                                                                                                                                                                  |   |                            | 1,764  |               |        |           | 1,764  |  
|                                           | Deferred tax assets                                                                                                                                                                                             |   |                            | 1,020  |               |        |           | 1,020  |  
|                                           | Prepaid expenses                                                                                                                                                                                                |   |                            | 215    |               |        |           | 260    |  
|                                           |                                                                                                                                                                                                                 |   |                            |        |               |        |           |       
|                                           |                                                                                                                                                                                                                 |   | Total current assets       |        |               | 39,418 |           |        |   | 38,272 | 
|Property and equipment, net                |                                                                                                                                                                                                                 |   | 261                        |        |               |        | 308       |       
|Other assets                               |                                                                                                                                                                                                                 |   | 183                        |        |               |        | 182       |       
|                                           |                                                                                                                                                                                                                 |   |                            |        |               |        |           |       
|Total assets                               |                                                                                                                                                                                                                 | $ | 39,862                     |        |               | $      | 38,762    |       
|                                           |                                                                                                                                                                                                                 |   |                            |        |               |        |           |       
|
|Liabilities
and stockholders equity       |                                                                                                                                                                                                                 |   |                            |        |               |        |           |       
|Current
liabilities:                       |                                                                                                                                                                                                                 |   |                            |        |               |        |           |       
|                                           | Accounts payable                                                                                                                                                                                                |   | $                          | 246    |               |        | $         | 455    |  
|                                           | Accrued expenses and other liabilities                                                                                                                                                                          |   |                            | 1,459  |               |        |           | 2,055  |  
|                                           | Deferred revenue                                                                                                                                                                                                |   |                            | 372    |               |        |           | 531    |  
|                                           | Billings in excess of costs and estimated earnings                                                                                                                                                              |   |                            |       |               |        |           | 12     |  
|                                           | Federal and state income taxes payable                                                                                                                                                                          |   |                            | 229    |               |        |           |       |  
|                                           |                                                                                                                                                                                                                 |   |                            |        |               |        |           |       
|                                           |                                                                                                                                                                                                                 |   | Total current liabilities  |        |               | 2,306  |           |        |   | 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,
13,157,245 shares issued and 13,045,245 outstanding at September 30, 2002 and 13,151,123 shares issued and
13,039,123 outstanding at March 31, 2002 |   |                            | 131    |               |        |           | 131    |  
|                                           | Additional paid-in capital                                                                                                                                                                                      |   |                            | 27,574 |               |        |           | 27,565 |  
|                                           | Retained earnings                                                                                                                                                                                               |   |                            | 9,876  |               |        |           | 8,038  |  
|                                           | Treasury stock (112,000 shares carried at cost)                                                                                                                                                                 |   |                            | (25    | )             |        |           | (25    | )
|                                           |                                                                                                                                                                                                                 |   |                            |        |               |        |           |       
|                                           |                                                                                                                                                                                                                 |   | Total stockholders equity |        |               | 37,556 |           |        |   | 35,709 | 
|                                           |                                                                                                                                                                                                                 |   |                            |        |               |        |           |       
|Total liabilities and stockholders equity |                                                                                                                                                                                                                 | $ | 39,862                     |        |               | $      | 38,762    |       
|                                           |                                                                                                                                                                                                                 |   |                            |        |               |        |           |       

See accompanying Notes to
Condensed Consolidated Financial Statements.

3



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##### Table of Contents



ATLANTIC DATA SERVICES, INC.




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

|                                                                           |                                       |                          |                   |       |                    |     |                  |       |       |        |        |       |       |       |        |       |       |        |  
|-------------------------------------------------------------------------- | ------------------------------------- | ------------------------ | ----------------- | ----- | ------------------ | --- | ---------------- | ----- | ----- | ------ | ------ | ----- | ----- | ----- | ------ | ----- | ----- | ------ | -
|                                                                           |                                       |                          |                   |       | Three Months Ended |     | Six Months Ended
|                                                                           |                                       |                          |                   |       | September 30,      |     | September 30,   
|                                                                           |                                       |                          |                   |       |                    |     |                 
|                                                                           |                                       |                          |                   |       | 2002               |     | 2001             |       | 2002  |        | 2001  
|                                                                           |                                       |                          |                   |       |                    |     |                  |       |       |        |       
|Revenues                                                                   |                                       | $                        | 5,886             |       |                    | $   | 5,150            |       |       | $      | 12,820 |       |       | $     | 9,704  |      
|Cost of revenues                                                           |                                       |                          | 3,134             |       |                    |     | 3,424            |       |       |        | 6,910  |       |       |       | 7,181  |      
|                                                                           |                                       |                          |                   |       |                    |     |                  |       |       |        |        |       |       |       |        |      
|Gross profit                                                               |                                       |                          | 2,752             |       |                    |     | 1,726            |       |       |        | 5,910  |       |       |       | 2,523  |      
|                                                                           |                                       |                          |                   |       |                    |     |                  |       |       |        |        |       |       |       |        |      
|Operating expenses:                                                        |                                       |                          |                   |       |                    |     |                  |       |       |        |        |       |       |       |        |      
|                                                                           | Sales and marketing                   |                          |                   | 334   |                    |     |                  | 792   |       |        |        | 873   |       |       |        | 1,790 |      
|                                                                           | General and administrative            |                          |                   | 1,035 |                    |     |                  | 1,379 |       |        |        | 2,575 |       |       |        | 2,962 |      
|                                                                           | Restructuring expense                 |                          |                   |      |                    |     |                  |      |       |        |        |      |       |       |        | 925   |      
|                                                                           |                                       |                          |                   |       |                    |     |                  |       |       |        |        |       |       |       |        |      
|                                                                           |                                       | Total operating expenses |                   |       | 1,369              |     |                  |       | 2,171 |        |        |       | 3,448 |       |        |       | 5,677 |       
|                                                                           |                                       |                          |                   |       |                    |     |                  |       |       |        |        |       |       |       |        |      
|Income (loss) from operations                                              |                                       |                          | 1,383             |       |                    |     | (445             | )     |       |        | 2,462  |       |       |       | (3,154 | )    
|Interest income, net                                                       |                                       |                          | 171               |       |                    |     | 299              |       |       |        | 357    |       |       |       | 671    |      
|Write-down of investment                                                   |                                       |                          |                  |       |                    |     | (3,000           | )     |       |        |       |       |       |       | (3,000 | )    
|                                                                           |                                       |                          |                   |       |                    |     |                  |       |       |        |        |       |       |       |        |      
|Income (loss) from continuing operations before
provision for income taxes |                                       |                          | 1,554             |       |                    |     | (3,146           | )     |       |        | 2,819  |       |       |       | (5,483 | )    
|Provision for income taxes                                                 |                                       |                          | 590               |       |                    |     |                 |       |       |        | 1,046  |       |       |       | 386    |      
|                                                                           |                                       |                          |                   |       |                    |     |                  |       |       |        |        |       |       |       |        |      
|Income (loss) from continuing operations                                   |                                       |                          | 964               |       |                    |     | (3,146           | )     |       |        | 1,773  |       |       |       | (5,869 | )    
|                                                                           |                                       |                          |                   |       |                    |     |                  |       |       |        |        |       |       |       |        |      
|Discontinued operations:                                                   |                                       |                          |                   |       |                    |     |                  |       |       |        |        |       |       |       |        |      
|                                                                           | Income (loss) on disposal of business |                          |                   | 25    |                    |     |                  | (497  | )     |        |        | 101   |       |       |        | (497  | )    
|                                                                           | Tax benefit (provision)               |                          |                   | (9    | )                  |     |                  |      |       |        |        | (36   | )     |       |        |      |      
|                                                                           |                                       |                          |                   |       |                    |     |                  |       |       |        |        |       |       |       |        |      
|                                                                           |                                       |                          | 16                |       |                    |     | (497             | )     |       |        | 65     |       |       |       | (497   | )    
|                                                                           |                                       |                          |                   |       |                    |     |                  |       |       |        |        |       |       |       |        |      
|                                                                           |                                       |                          | Net income (loss) |       | $                  | 980 |                  |       | $     | (3,643 | )      |       | $     | 1,838 |        |       | $     | (6,366 | )
|                                                                           |                                       |                          |                   |       |                    |     |                  |       |       |        |        |       |       |       |        |      
|Earnings (loss) per share from continuing operations:                      |                                       |                          |                   |       |                    |     |                  |       |       |        |        |       |       |       |        |      
|                                                                           | Basic                                 |                          | $                 | 0.07  |                    |     | $                | (0.24 | )     |        | $      | 0.14  |       |       | $      | (0.45 | )    
|                                                                           | Diluted                               |                          | $                 | 0.07  |                    |     | $                | (0.24 | )     |        | $      | 0.13  |       |       | $      | (0.45 | )    
|Earnings (loss) per share from discontinued operations:                    |                                       |                          |                   |       |                    |     |                  |       |       |        |        |       |       |       |        |      
|                                                                           | Basic                                 |                          | $                 | 0.00  |                    |     | $                | (0.04 | )     |        | $      | 0.00  |       |       | $      | (0.04 | )    
|                                                                           | Diluted                               |                          | $                 | 0.00  |                    |     | $                | (0.04 | )     |        | $      | 0.00  |       |       | $      | (0.04 | )    
|Earnings (loss) per share from net income:                                 |                                       |                          |                   |       |                    |     |                  |       |       |        |        |       |       |       |        |      
|                                                                           | Basic                                 |                          | $                 | 0.08  |                    |     | $                | (0.28 | )     |        | $      | 0.14  |       |       | $      | (0.49 | )    
|                                                                           | Diluted                               |                          | $                 | 0.07  |                    |     | $                | (0.28 | )     |        | $      | 0.14  |       |       | $      | (0.49 | )    
|Shares used in computing earnings (loss) per share
(basic)                 |                                       |                          | 13,039            |       |                    |     | 13,023           |       |       |        | 13,039 |       |       |       | 13,023 |      
|Shares used in computing earnings (loss) per share
(diluted)               |                                       |                          | 13,208            |       |                    |     | 13,023           |       |       |        | 13,212 |       |       |       | 13,023 |      

See accompanying Notes to
Condensed Consolidated Financial Statements.

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##### Table of Contents



ATLANTIC DATA SERVICES, INC.




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

|                                                                                                   |                                                                                  |                                                    |        |                  |       |      |         |       |      |  
|-------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------- | -------------------------------------------------- | ------ | ---------------- | ----- | ---- | ------- | ----- | ---- | -
|                                                                                                   |                                                                                  |                                                    |        | Six Months Ended
|                                                                                                   |                                                                                  |                                                    |        | September 30,   
|                                                                                                   |                                                                                  |                                                    |        |                 
|                                                                                                   |                                                                                  |                                                    |        | 2002             |       | 2001
|                                                                                                   |                                                                                  |                                                    |        |                  |       |     
|Cash flows from operating activities:                                                              |                                                                                  |                                                    |        |                  |       |      |         |      
|Net income (loss)                                                                                  |                                                                                  | $                                                  | 1,838  |                  |       | $    | (6,366  | )    
|Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities: |                                                                                  |                                                    |        |                  |       |      |         |      
|                                                                                                   | Depreciation and amortization                                                    |                                                    |        | 140              |       |      |         | 167   |     
|                                                                                                   | Discontinued operations                                                          |                                                    |        | (65              | )     |      |         | 497   |     
|                                                                                                   | Deferred taxes                                                                   |                                                    |        |                 |       |      |         | 464   |     
|                                                                                                   | Provision for bad debts                                                          |                                                    |        | 75               |       |      |         | (75   | )   
|                                                                                                   | Write-down of investment                                                         |                                                    |        |                 |       |      |         | 3,000 |     
|                                                                                                   | Change in assets and liabilities (net of effect of acquisition
and disposition): |                                                    |        |                  |       |      |         |       |     
|                                                                                                   |                                                                                  | Accounts receivable                                |        |                  | 1,407 |      |         |       | 117  |  
|                                                                                                   |                                                                                  | Prepaid expenses and other assets                  |        |                  | (24   | )    |         |       | 270  |  
|                                                                                                   |                                                                                  | Accounts payable                                   |        |                  | (204  | )    |         |       | 66   |  
|                                                                                                   |                                                                                  | Accrued expenses and other liabilities             |        |                  | (359  | )    |         |       | (939 | )
|                                                                                                   |                                                                                  | Deferred revenue                                   |        |                  | (159  | )    |         |       |     |  
|                                                                                                   |                                                                                  | Billings in excess of costs and estimated earnings |        |                  | (12   | )    |         |       | 37   |  
|                                                                                                   |                                                                                  | Federal and state income taxes payable             |        |                  | 196   |      |         |       |     |  
|                                                                                                   |                                                                                  |                                                    |        |                  |       |      |         |      
|Net cash provided by (used in) operating activities of continuing
operations                       |                                                                                  |                                                    | 2,833  |                  |       |      | (2,762  | )    
|                                                                                                   |                                                                                  |                                                    |        |                  |       |      |         |      
|Cash flows from investing activities:                                                              |                                                                                  |                                                    |        |                  |       |      |         |      
|Purchase of short-term investments                                                                 |                                                                                  |                                                    | (3,022 | )                |       |      | (9,115  | )    
|Sale and maturities of short-term investments                                                      |                                                                                  |                                                    | 8,499  |                  |       |      |        |      
|Purchase of property and equipment                                                                 |                                                                                  |                                                    | (13    | )                |       |      | (12     | )    
|                                                                                                   |                                                                                  |                                                    |        |                  |       |      |         |      
|Net cash provided by (used in) investing activities of continuing
operations                       |                                                                                  |                                                    | 5,464  |                  |       |      | (9,127  | )    
|                                                                                                  
|Cash flows from financing activities:                                                              |                                                                                  |                                                    |        |                  |       |      |         |      
|Proceeds from exercise of stock options under stock option plans                                   |                                                                                  |                                                    | 9      |                  |       |      | 17      |      
|                                                                                                   |                                                                                  |                                                    |        |                  |       |      |         |      
|Net cash provided by financing activities                                                          |                                                                                  |                                                    | 9      |                  |       |      | 17      |      
|                                                                                                   |                                                                                  |                                                    |        |                  |       |      |         |      
|Net cash provided by (used in) continuing operations                                               |                                                                                  |                                                    | 8,306  |                  |       |      | (11,872 | )    
|Net cash used in discontinued operations                                                           |                                                                                  |                                                    | (135   | )                |       |      | (2,382  | )    
|                                                                                                   |                                                                                  |                                                    |        |                  |       |      |         |      
|Net decrease in cash and cash equivalents                                                          |                                                                                  |                                                    | 8,171  |                  |       |      | (14,254 | )    
|Cash and cash equivalents, beginning of period                                                     |                                                                                  |                                                    | 15,457 |                  |       |      | 36,655  |      
|                                                                                                   |                                                                                  |                                                    |        |                  |       |      |         |      
|Cash and cash equivalents, end of period                                                           |                                                                                  | $                                                  | 23,628 |                  |       | $    | 22,401  |      
|                                                                                                   |                                                                                  |                                                    |        |                  |       |      |         |      
|Supplemental disclosure of cash flow information:                                                  |                                                                                  |                                                    |        |                  |       |      |         |      
|Cash
paid during the period for taxes                                                              |                                                                                  | $                                                  | 862    |                  |       | $    | 40      |      
|                                                                                                   |                                                                                  |                                                    |        |                  |       |      |         |      
|Supplemental
disclosure of non-cash investing activities:                                          |                                                                                  |                                                    |        |                  |       |      |         |      
|                                                                                                   | Acquisition of assets with warrant                                               |                                                    | $      |                 |       |      | $       | 647   |     
|                                                                                                   |                                                                                  |                                                    |        |                  |       |      |         |      

See accompanying Notes to
Condensed Consolidated Financial Statements.

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ATLANTIC DATA SERVICES, INC.




NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 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 six month periods ended September 30, 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.

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

Included in revenues are reimbursable contract-related travel and entertainment
expenses of $743,000 and $909,000 for the quarters ended September 30, 2002 and
2001, respectively, and $1,613,000 and $1,529,000 for the six months ended
September 30, 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.

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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 September 30, 2002 and
2001:

|                                                                                                       |                                            |                                                                                               |        |                       |        |      |        |        |        | 
|------------------------------------------------------------------------------------------------------ | ------------------------------------------ | --------------------------------------------------------------------------------------------- | ------ | --------------------- | ------ | ---- | ------ | ------ | ------ | 
|                                                                                                       |                                            |                                                                                               |        | Three Months Ended   
|                                                                                                       |                                            |                                                                                               |        | September 30,        
|                                                                                                       |                                            |                                                                                               |        |                      
|                                                                                                       |                                            |                                                                                               |        | 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   |                                                                                               | $      | 964                   |        |      | $      | (3,146 | )     
|                                                                                                       | Income (loss) from discontinued operations |                                                                                               |        | 16                    |        |      |        | (497   | )     
|                                                                                                       |                                            |                                                                                               |        |                       |        |      |        |       
|                                                                                                       | Net income (loss)                          |                                                                                               | $      | 980                   |        |      | $      | (3,643 | )     
|                                                                                                       |                                            |                                                                                               |        |                       |        |      |        |       
|Denominator:                                                                                           |                                            |                                                                                               |        |                       |        |      |        |       
|Denominator for basic earnings per share weighted average shares                                      |                                            |                                                                                               | 13,039 |                       |        |      | 13,023 |       
|Effect of dilutive securities:                                                                         |                                            |                                                                                               |        |                       |        |      |        |       
|                                                                                                       | Employee stock options                     |                                                                                               |        | 169                   |        |      |        |       |       
|                                                                                                       |                                            |                                                                                               |        |                       |        |      |        |       
|                                                                                                       |                                            | Denominator for diluted earnings per share adjusted
weighted average and assumed conversions |        |                       | 13,208 |      |        |        | 13,023 | 
|                                                                                                       |                                            |                                                                                               |        |                       |        |      |        |       
|Basic earnings (loss) per share:                                                                       |                                            |                                                                                               |        |                       |        |      |        |       
|                                                                                                       | Continuing operations                      |                                                                                               | $      | 0.07                  |        |      | $      | (0.24  | )     
|                                                                                                       | Discontinued operations                    |                                                                                               |        | 0.00                  |        |      |        | (0.04  | )     
|                                                                                                       | Net income (loss)                          |                                                                                               |        | 0.08                  |        |      |        | (0.28  | )     
|Diluted earnings (loss) per share:                                                                     |                                            |                                                                                               |        |                       |        |      |        |       
|                                                                                                       | Continuing operations                      |                                                                                               | $      | 0.07                  |        |      | $      | (0.24  | )     
|                                                                                                       | Discontinued operations                    |                                                                                               |        | 0.00                  |        |      |        | (0.04  | )     
|                                                                                                       | Net income (loss)                          |                                                                                               |        | 0.07                  |        |      |        | (0.28  | )     

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The following table sets forth the computation of basic earnings per share and
diluted earnings per share for the six months ended September 30, 2002 and 2001:

|                                                                                                       |                                            |                                                                                               |        |                       |        |      |        |        |        | 
|------------------------------------------------------------------------------------------------------ | ------------------------------------------ | --------------------------------------------------------------------------------------------- | ------ | --------------------- | ------ | ---- | ------ | ------ | ------ | 
|                                                                                                       |                                            |                                                                                               |        | Six Months Ended     
|                                                                                                       |                                            |                                                                                               |        | September 30,        
|                                                                                                       |                                            |                                                                                               |        |                      
|                                                                                                       |                                            |                                                                                               |        | 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   |                                                                                               | $      | 1,773                 |        |      | $      | (5,869 | )     
|                                                                                                       | Income (loss) from discontinued operations |                                                                                               |        | 65                    |        |      |        | (497   | )     
|                                                                                                       |                                            |                                                                                               |        |                       |        |      |        |       
|                                                                                                       | Net income (loss)                          |                                                                                               | $      | 1,838                 |        |      | $      | (6,366 | )     
|                                                                                                       |                                            |                                                                                               |        |                       |        |      |        |       
|Denominator:                                                                                           |                                            |                                                                                               |        |                       |        |      |        |       
|Denominator for basic earnings per share weighted average
shares                                      |                                            |                                                                                               | 13,039 |                       |        |      | 13,023 |       
|Effect of dilutive securities:                                                                         |                                            |                                                                                               |        |                       |        |      |        |       
|                                                                                                       | Employee stock options                     |                                                                                               |        | 173                   |        |      |        |       |       
|                                                                                                       |                                            |                                                                                               |        |                       |        |      |        |       
|                                                                                                       |                                            | Denominator for diluted earnings per share adjusted
weighted average and assumed conversions |        |                       | 13,212 |      |        |        | 13,023 | 
|                                                                                                       |                                            |                                                                                               |        |                       |        |      |        |       
|Basic earnings (loss) per share:                                                                       |                                            |                                                                                               |        |                       |        |      |        |       
|                                                                                                       | Continuing operations                      |                                                                                               | $      | 0.14                  |        |      | $      | (0.45  | )     
|                                                                                                       | Discontinued operations                    |                                                                                               |        | 0.00                  |        |      |        | (0.04  | )     
|                                                                                                       | Net income (loss)                          |                                                                                               |        | 0.14                  |        |      |        | (0.49  | )     
|Diluted earnings (loss) per share:                                                                     |                                            |                                                                                               |        |                       |        |      |        |       
|                                                                                                       | Continuing operations                      |                                                                                               | $      | 0.13                  |        |      | $      | (0.45  | )     
|                                                                                                       | Discontinued operations                    |                                                                                               |        | 0.00                  |        |      |        | (0.04  | )     
|                                                                                                       | Net income (loss)                          |                                                                                               |        | 0.14                  |        |      |        | (0.49  | )     

In addition, as of September 30, 2002 there were options outstanding to purchase
1,412,250 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 September 30, 2002, three customers accounted for 42.2%, 32.2% and
10.3% of the Companys revenues. For the quarter ended September 30, 2001, two
customers accounted for 34.8% and 16.8% 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 September 30, 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 quarter ended September 30, 2002 and the year ended March 31,
2002, the Company has 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
prepared during the quarter ended September 30, 2002.

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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 is 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.

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 | 
|                              |       |   |       |      

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 | 
|                      |       |   |       |      

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The unaudited pro forma consolidated information for the six months ended
September 30, 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):

|                                  |  |                    |        |           |  |   |        |  
|--------------------------------- |  | ------------------ | ------ | --------- |  | - | ------ | -
|                                  |  | September 30, 2001
|                                  |  |                   
|                                  |  | (Unaudited)       
|                                  |  | As Reported        |        | Pro Forma
|                                  |  |                    |        |          
|Revenues                          |  | $                  | 9,704  |           |  | $ | 9,749  |  
|Income (loss) from operations     |  |                    | (3,154 | )         |  |   | (4,057 | )
|Net income (loss)                 |  |                    | (6,366 | )         |  |   | (6,768 | )
|Basic earnings (loss) per share   |  | $                  | (0.49  | )         |  | $ | (0.52  | )
|Diluted earnings (loss) per share |  |                    | (0.49  | )         |  |   | (0.52  | )

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. The Company expects to liquidate or utilize
these assets in its existing business within six months.

For the quarter ended September 30, 2002, the Company reversed $16,000 of
estimated discontinued operations accruals, net of tax provision, because the
actual miscellaneous expenses were less than the estimated accrual therefore.

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ATLANTIC DATA SERVICES, INC.

FORWARD LOOKING STATEMENTS

This Report includes forward-looking statements, which are made pursuant to the
safe-harbor provisions of the Private Securities Litigation Reform Act of 1995.
You can identify these forward-looking statements when you see us using words
such as expect, anticipate, believe, intend, may, predict, 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 1.0% and 3.0% of
our revenues for the quarters ended September 30, 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 September 30, 2002 and 2001 were 93.2%
and 74.9%, respectively, as a percentage of revenues. For the quarter ended
September 30, 2002, Citizens Financial Corporation, Zions Bancorporation,
FleetBoston Financial Corporation, IntraNet, Inc., a TSA Company and American
Savings Bank accounted for approximately 42.2%, 32.3%, 10.3%, 6.5% and 1.9%,
respectively, of revenues. For the quarter ended September 30, 2001, FleetBoston
Financial Corporation, Zions Bancorporation, Citizens Financial Corporation,
General Motors Acceptance Corporation and IntraNet, Inc., a TSA Company,
accounted for approximately 34.8%, 16.8%, 9.0%, 7.9% and 6.4%, respectively, of
revenues.

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

11



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

Outlook

With respect to our earnings projections for the future, we continue to be
cautious about our outlook for the next quarter but are currently estimating our
third quarter revenue and net income per share will be less then the second
quarter and will be in the range of $4.0 million to $4.7 million, with net
income in the range of $0.00 to $0.02 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



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Quarter Ended September 30, 2002 Compared to Quarter Ended September 30, 2001

Revenues

Revenues increased 14.0% for the quarter ended September 30, 2002 over the
quarter ended September 30, 2001, from $5.2 million to $5.9 million. This
increase was predominately due to expanded project activity at existing
customers resulting in a 19.0% increase in the volume of services delivered to
customers, offset by a decrease in the amount of revenue from reimbursable
contract-related travel and entertainment expenses as a percentage of total
revenue to 13.0% for the quarter ended September 30, 2002 from 18.0% for the
quarter ended September 30, 2001.

Cost of Revenues

Cost of revenues decreased 8.5% to $3.1 million from $3.4 million for the
quarter ended September 30, 2002 compared to the quarter ended September 30,
2001, representing 53.3% and 66.5%, respectively, of revenues in each quarter.
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 to 89.0% from 73.0%.

Sales and
Marketing

Sales and marketing expenses were $334,000 for the quarter ended September 30,
2002 and $792,000 for the quarter ended September 30, 2001, representing 5.7%
and 15.4% of revenues, respectively. The dollar decrease resulted primarily from
a decrease in the average number of employees in our sales and marketing group
from 16 for the quarter ended September 30, 2001 to 7 for the quarter ended
September 30, 2002. The decrease in sales and marketing expense as a percentage
of revenues is due to the increase in revenue, as well as the decreased expense,
compared to the corresponding period of the prior fiscal year.

General and
Administrative

General and administrative expenses decreased 25.0% to $1.0 million from $1.4
million for the quarter ended September 30, 2002 compared to the quarter ended
September 30, 2001, representing 17.6% and 26.8% of revenues, respectively. The
dollar decrease is primarily due to decreases in recruiting expense and 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 significant increase
in revenue compared to the corresponding period of the prior fiscal year.

Interest Income,
Net

Interest income, net decreased $128,000 from $299,000 for the quarter ended
September 30, 2001 to $171,000 for the quarter ended September 30, 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 September 30, 2002 was
$590,000 compared to $0 for the quarter ended September 30, 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 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 states in which we do business.

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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 periods ended September 30, 2001 have been restated to give
retroactive effect to that disposition.

Six Months Ended September 30, 2002 Compared to the Six Months Ended September 30, 2001

Revenues

Revenues increased 32.0% for the six months ended September 30, 2002 over the
six months ended September 30, 2001, from $9.7 million to $12.8 million. This
increase was predominately due to expanded project activity at existing
customers resulting in a 38.0% increase in the volume of services delivered to
customers, offset in part by a slight decrease in the average billing rate and
further offset by a decrease in the amount of revenue from reimbursable
contract-related travel and entertainment expenses as a percentage of total
revenue to 12.6% for the six months ended September 30, 2002 from 15.8% for the
six months ended September 30, 2001.

Cost of Revenues

Cost of revenues decreased 3.8% to $6.9 million from $7.2 million for the six
months ended September 30, 2002 compared to the six months ended September 30,
2001, representing 53.9% and 74.0%, respectively, of revenues in each period.
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 66.0% to 94.0%.

Sales and
Marketing

Sales and marketing expenses were $873,000 for the six months ended September
30, 2002 and $1.8 million for the six months ended September 30, 2001,
representing 6.8% and 18.5% of revenues, respectively. The dollar decrease
resulted primarily from a decrease in the average number of people in our sales
and marketing group from 17 employees for the six months ended September 30,
2001 to 8 employees for the six months ended September 30, 2002. The decrease in
sales and marketing expense as a percentage of revenues is due to the decrease
in expenses as well as the significant increase in revenue compared to the
corresponding period of the prior fiscal year.

General and
Administrative

General and administrative expenses decreased 13.0% to $2.6 million from $3.0
million for the six months ended September 30, 2002 compared to the six months
ended September 30, 2001, representing 20.0% and 30.5% of revenues,
respectively. The dollar decrease is primarily due to decreases in bad debt
expense, professional fees, and depreciation and amortization expense. The
decrease in general and administrative expense as a percentage of revenues is
due to the decrease in expenses as well as the significant increase in revenue
compared to the corresponding period of the prior fiscal year.

Interest Income,
Net

Interest income, net decreased $314,000 from $671,000 for the six months ended
September 30, 2001 to $357,000 for the six months ended September 30, 2001. This
decrease was principally due to interest rate decreases. Interest expense is
immaterial.

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Provision for Income
Taxes

The provision for income taxes increased $660,000 to $1,046,000 from $386,000
for the six months ended September 30, 2002 compared to the six months ended
September 30, 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 six months ended September
30, 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 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 periods ended September 30, 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 $37.1 million at September 30, 2002. Our days sales in accounts
receivable at September 30, 2002 was 26 compared to 53 days at September 30,
2001. While we believe that the risk with respect to collection of accounts
receivable is minimized by the creditworthiness of our customers, primarily
banks and other financial institutions, and because of our credit and collection
policies, there can be no assurance that we will not encounter collection
problems in the future. We attempt to further minimize this risk by performing
ongoing credit valuations of our customers and maintaining an allowance for
potential credit losses. We believe that our allowance for doubtful accounts and
collection policies are adequate.

Capital expenditures for the remainder of fiscal 2003 are not expected to exceed
$150,000 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 the Companys
working capital and capital expenditure requirements for at least the next
twelve months.

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

Recently Issued Accounting Pronouncements

In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets (SFAS 144), which is 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.

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.

15



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##### Table of Contents






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.

Item
3:  Quantitative and Qualitative Disclosures about
Market Risk

We are exposed to market risk from changes in interest rates due to investments
in instruments made for non-trading purposes. The interest rate risk relates
primarily to our portfolio of short-term investment grade securities. As of
September 30, 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 the Company.




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



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##### Table of Contents






PART II

OTHER INFORMATION




Item 4:  Submission of
Matters to a Vote of Security Holders

Our Annual Meeting of Stockholders was held on July 25, 2002. Holders of an
aggregate of 13,039,123 shares at the close of business on June 19, 2002 were
entitled to vote at the meeting. At such meeting, the Companys stockholders
voted as follows:

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

|                    |  |            |            |          |  |             |  |           |        |        |  |    
|------------------- |  | ---------- | ---------- | -------- |  | ----------- |  | --------- | ------ | ------ |  | ---
|                    |  |            |            |          |  | Total Vote  |  |           |        |        |  |    
|                    |  | Total Vote |            | Withheld |  |             |  |           |        |       
|                    |  | for Each   |            | for Each |  |             |  |           |        | Broker
|Director Name       |  | Nominee    |            | Nominee  |  | Abstentions |  | Non-Votes
|                    |  |            |            |          |  |             |  |          
|David C. Hodgson    |  |            | 11,902,493 |          |  | N/A         |  |           | 11,217 |        |  | N/A
|Richard D. Driscoll |  |            | 11,903,348 |          |  | N/A         |  |           | 10,362 |        |  | N/A

Messrs. William H. Gallagher and Lee M. Kennedy will continue to hold office
until the 2003 Annual Meeting of Stockholders or until their successors have
been duly elected and qualified or until their earlier resignation or removal.
Messrs. Robert W. Howe and George F. Raymond will continue to hold office until
the 2004 Annual Meeting of Stockholders or until their successors have been duly
elected and qualified or until their earliest resignation or removal.

Proposal 2. To ratify the selection of the firm of PricewaterhouseCoopers LLP,
independent public accountants, as auditors for the fiscal year ending March 31,
2003.

|               |  |                    |       |                 |  |                  |     |  |  |    
|-------------- |  | ------------------ | ----- | --------------- |  | ---------------- | --- |  |  | ---
|Total Vote for |  | Total Vote Against |       | Abstentions for |  |                 
|Proposal 2     |  | Proposal 2         |       | Proposal 2      |  | Broker Non-Votes
|               |  |                    |       |                 |  |                 
|11,910,819     |  |                    | 1,991 |                 |  |                  | 900 |  |  | N/A




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



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##### Table of Contents






SIGNATURES

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

|      |  |                   |  |                                                                                                                                      
|----- |  | ----------------- |  | -------------------------------------------------------------------------------------------------------------------------------------
|      |  |                   |  | ATLANTIC DATA SERVICES, INC.                                                                                                         
|     
|Date: |  | November 13, 2002 |  | By: /s/ Robert W. HoweRobert W. Howe
Chairman and Chief Executive Officer                                                            
|     
|Date: |  | November 13, 2002 |  | By: /s/ Paul K. McGrathPaul K. McGrath
Senior Vice President and Chief Financial
Officer (Principal Financial and Accounting
Officer)

18



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##### 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: November 13, 2002 |  |                                                                          
|                       
|                        |  | By: /s/ Robert W. HoweRobert W. Howe
Chairman and Chief Executive Officer

19



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##### 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: November 13, 2002 |  | By: /s/ Paul K. McGrathPaul K. McGrath
Senior Vice President and Chief Financial
Officer (Principal Financial and Accounting
Officer)

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##### Table of Contents






EXHIBIT INDEX

|             |  |                                                                                                                       
|------------ |  | ----------------------------------------------------------------------------------------------------------------------
|Exhibit No.  |  |                                                                                                                       
|             |  |                                                                                                                       
|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