<PAGE>   1


                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549


                                    FORM 10-Q
                                    ---------

(Mark One)

[X]      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
         EXCHANGE ACT OF 1934

         For the quarterly period ended DECEMBER 31, 1998

                                       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                 (I.R.S. Employer
        Incorporation or Organization)              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 January 31, 1999, there were 12,863,542 shares of the Registrant's Common
Stock, $.01 par value per share, outstanding.



<PAGE>   2


                          ATLANTIC DATA SERVICES, INC.

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>


                                                                                          Page
                                                                                          ----
<S>                                                                                        <C>
PART I -  FINANCIAL INFORMATION


ITEM 1:   Financial Statements

Condensed Consolidated Balance Sheets as of December 31, 1998 (Unaudited) 
 and March 31, 1998                                                                         3

Condensed Consolidated Statements of Income for the Three and Nine Months                   4
 Ended December 31, 1998 and 1997 (Unaudited)

Condensed Consolidated Statements of Cash Flows for the Nine                                5 
 Months Ended December 31, 1998 and 1997 (Unaudited)

Notes to Condensed Consolidated Financial Statements                                        6

ITEM 2:   Management's Discussion and Analysis of Financial Condition and
          Results of Operations                                                             9


PART II - OTHER INFORMATION

ITEM 2:   Changes in Securities and Use of Proceeds                                        15

ITEM 6:   Exhibits and Reports on Form 8-K                                                 16


SIGNATURES                                                                                 17


EXHIBIT INDEX                                                                              18

</TABLE>




<PAGE>   3
                          ATLANTIC DATA SERVICES, INC.
                      Condensed Consolidated Balance Sheets
                    (in thousands, except share related data)



<TABLE>
<CAPTION>
                                                                          December 31,    March 31,
                                                                              1998          1998
                                                                          ------------    ---------
                                                                           (Unaudited)
<S>                                                                        <C>             <C>
ASSETS
Current assets:
     Cash and cash equivalents                                              $ 32,939       $  3,401
     Accounts receivable, net of allowances of $725 and $375
       at December 31, 1998 and March 31, 1998, respectively                  10,863          9,100
     Prepaid expenses                                                            506            462
     Deferred taxes                                                              284            284
                                                                            --------       --------
         Total current assets                                                 44,592         13,247
     Property and equipment, net                                               1,372            995
     Other assets                                                                209            243
                                                                            --------       --------
TOTAL ASSETS                                                                $ 46,173       $ 14,485
                                                                            ========       ========

LIABILITIES AND STOCKHOLDERS' EQUITY 
Current liabilities:
     Accounts payable and accrued expenses                                  $  5,445       $  4,174
     Billings in excess of costs and estimated earnings on contracts             163            640
     Federal and state income taxes                                              154            830
     Other current liabilities                                                    97            123
                                                                            --------       --------
         Total current liabilities                                             5,859          5,767
                                                                            --------       --------

Capital lease obligation                                                          22             35
                                                                            --------       --------

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,
       12,975,542 shares issued and 12,863,542 outstanding
       at December 31, 1998 and 11,746,840 shares authorized,
       6,847,960 shares issued and outstanding at March 31, 1998                 130             68
     Class A common stock, $.01 par value, no shares authorized, issued
       or outstanding at December 31, 1998 and 1,694,800 shares
       authorized, 928,790 shares issued and 816,790 outstanding at
       March 31, 1998                                                             --              9
     Special common stock, $.01 par value, no shares authorized, issued
       or outstanding at December 31, 1998 and 3,104,080 shares
       authorized, issued and outstanding at March 31, 1998                       --             31
     Additional paid-in capital                                               26,452          2,245
     Retained earnings                                                        13,735          6,355
     Less:  Treasury common stock at cost, 112,000 shares                        (25)           (25)
                                                                            --------       --------
         Total stockholders' equity                                           40,292          8,683
                                                                            --------       --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                  $ 46,173       $ 14,485
                                                                            ========       ========


See accompanying Notes to Condensed Consolidated Financial Statements.

</TABLE>

 
                                      3
<PAGE>   4
                          ATLANTIC DATA SERVICES, INC.

                   Condensed Consolidated Statements of Income
                    (in thousands, except share related data)
                                   (Unaudited)

<TABLE>
<CAPTION>

                                                  Three Months Ended              Nine Months Ended
                                                      December 31,                    December 31,
                                               ---------------------------    --------------------------
                                                   1998           1997            1998           1997
                                               --------------    ---------    -----------     ----------

<S>                                            <C>             <C>             <C>             <C>     
Revenues                                       $ 18,731        $ 10,870        $ 54,364        $ 28,219
Cost of revenues                                 10,891           6,236          31,393          16,252
                                               --------        --------        --------        --------

Gross profit                                      7,840           4,634          22,971          11,967

Operating expenses:
     Sales and marketing                          1,252             883           4,064           2,147
     General and administrative                   2,269           1,615           6,822           4,274
                                               --------        --------        --------        --------

         Total operating expenses                 3,521           2,498          10,886           6,421

Income from operations                            4,319           2,136          12,085           5,546

Interest income                                     357              52             873             109
Interest expense                                     (1)             (1)             (3)             (4)
                                               --------        --------        --------        --------

Income before provision for income taxes          4,675           2,187          12,955           5,651
Provision for income taxes                        2,022             919           5,575           2,374
                                               --------        --------        --------        --------

         Net income                            $  2,653        $  1,268        $  7,380        $  3,277
                                               ========        ========        ========        ========

Basic earnings per share                       $    .21        $    .13        $    .60        $    .33
                                               ========        ========        ========        ========

Shares used in basic earnings per
  share calculation                              12,854           9,952          12,335           9,952
                                               ========        ========        ========        ========

Diluted earnings per share                     $    .20        $    .13        $    .58        $    .33
                                               ========        ========        ========        ========

Shares used in diluted earnings per
  share calculation                              13,292           9,952          12,752           9,952
                                               ========        ========        ========        ========

</TABLE>



See accompanying Notes to Condensed Consolidated Financial Statements.




                                       4

<PAGE>   5
                          ATLANTIC DATA SERVICES, INC.

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

<TABLE>
<CAPTION>
                                                                           Nine Months Ended
                                                                              December 31,
                                                                       -------------------------
                                                                          1998        1997
                                                                       ---------    --------
<S>                                                                     <C>         <C> 
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income                                                              $  7,380    $  3,277
Adjustments to reconcile net income to net cash provided by
  operating activities:
    Depreciation and amortization                                            401         160
    Provision for bad debts                                                  350         108
    Other                                                                     --          12
    Tax benefit from exercise of stock options                               170         385
    Change in assets and liabilities:
      Accounts receivable                                                 (2,113)     (2,492)
      Costs and estimated earnings on contracts in excess of billings         --         185
      Prepaid expenses and other assets                                      (10)       (126)
      Accounts payable, accrued expenses, and other current
        liabilities                                                        1,274       1,393
      Billings in excess of costs and estimated earnings on contracts       (477)        298
      Deferred revenue                                                       (30)       --
      Federal and state income taxes                                        (676)       (487)
                                                                        --------    --------
Net cash provided by operating activities                                  6,269       2,713
                                                                        --------    --------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment                                          (781)       (392)
                                                                        --------    --------

CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under capital lease obligation                            (13)        (15)
Proceeds from exercise of stock options and
  employee stock purchase plan                                               692         396
Proceeds from issuance of common stock, net                               23,371        --
                                                                        --------    --------
Net cash provided by (used in) financing activities                       24,050         381
                                                                        --------    --------

Net increase in cash and cash equivalents                                 29,538       2,702

Cash and cash equivalents, beginning of period                             3,401       2,653
                                                                        --------    --------

Cash and cash equivalents, end of period                                $ 32,939    $  5,355
                                                                        ========    ========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
     Interest                                                           $      3    $      4
                                                                        ========    ========
     Taxes                                                              $  6,444    $  2,266
                                                                        ========    ========

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
 FINANCING ACTIVITIES:
     Dividends declared                                                 $     --    $  3,000
                                                                        ========    ========


</TABLE>


See accompanying Notes to Condensed Consolidated Financial Statements.



                                       5
<PAGE>   6


                          ATLANTIC DATA SERVICES, INC.

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)
                                December 31, 1998


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 nine-month period ended December 31, 1998
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 Registration Statement on
Form S-1 for the year ended March 31, 1998.

The balance sheet at March 31, 1998 has been derived from the audited financial
statements at that date, but does not include all the information and footnotes
required by generally accepted accounting principles for complete financial
statements.


2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Revenue Recognition

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

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

Included in revenues are reimbursable contract-related travel and entertainment
expenses, which are separately billed to clients.

Earnings Per Share

On December 31, 1997, the Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" ("FAS 128"). FAS 128 requires the
presentation of two amounts, earnings per share and diluted earnings per share.

 
                                      6

<PAGE>   7
New Accounting Pronouncements

The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income," effective January 1, 1998.
This statement requires the disclosure of comprehensive income and its
components in a full set of general-purpose financial statements. Comprehensive
income is defined as net income plus revenues, expenses, gains and losses that,
under generally accepted accounting principles, are excluded from net income.
The components of comprehensive income, which are excluded from net income, are
not significant individually or in the aggregate, and therefore, no separate
statement of comprehensive income has been presented.

In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information,"
("SFAS 131") . SFAS 131 is effective for fiscal years beginning after December
15, 1997 and requires restatement of disclosures for all periods presented.
Disclosure of this information for interim periods is not required in the year
of adoption. The adoption of SFAS 131 will not impact the Company's financial
position, results of operations or cash flows.


3. EARNINGS PER SHARE

The following table sets forth the computation of basic earnings per share and
diluted earnings per share for the three and nine months ended December 31, 1998
and 1997:


<TABLE>
<CAPTION>
                                                            Three Months Ended
                                                               December 31,
                                                          ---------------------
                                                            1998         1997
                                                          --------      -------
                                                          (in thousands, except
                                                           share related data)

<S>                                                       <C>           <C> 
Numerator:
Net income (numerator for basic earnings
  per share and diluted earnings per share)               $ 2,653       $ 1,268
                                                          -------       -------

Denominator:
Denominator for basic earnings per share - weighted
  average shares and special common shares                 12,853         9,952
Effect of dilutive common securities:
     Common stock options                                     439            --
                                                          -------       -------
         Denominator for diluted earnings per share        13,292         9,952
                                                          -------       -------

Basic earnings per share                                  $   .21       $   .13
                                                          =======       =======

Diluted earnings per share                                $   .20       $   .13
                                                          =======       =======

</TABLE>

                                       7
<PAGE>   8
<TABLE>
<CAPTION>

                                                           Nine Months Ended
                                                              December 31,
                                                        -----------------------
                                                          1998            1997
                                                        -------         -------
                                                         in thousands, except
                                                          share related data)

<S>                                                     <C>             <C>                    
Numerator:
Net income (numerator for basic earnings
  per share and diluted earnings per share)             $ 7,381         $ 3,277
                                                        -------         -------

Denominator:
Denominator for basic earnings per share - weighted
  average shares and special common shares               12,335           9,952
Effect of dilutive common securities:
     Common stock options                                   416            --
                                                        -------         -------
         Denominator for diluted earnings per share      12,751           9,952
                                                        -------         -------

Basic earnings per share                                $   .60         $   .33
                                                        =======         =======

Diluted earnings per share                              $   .58         $   .33
                                                        =======         =======

</TABLE>



4. MAJOR CUSTOMERS

The nature of the Company's services results in the Company deriving significant
amounts of revenue from certain customers in a particular period. For the
quarter ended December 31, 1998, four customers accounted for 17.5%, 16.5%,
16.4% and 13.2% of the Company's revenues. For the quarter ended December 31,
1997, four customers accounted for 18.3%, 16.0%, 15.4% and 10.5% of the
Company's revenues.



                                       8
<PAGE>   9
                          ATLANTIC DATA SERVICES, INC.

                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS


OVERVIEW

ADS provides IT strategy consulting and systems integration services to
customers exclusively in the financial services industry, primarily banks. The
Company's service offerings are organized around five practice areas: IT
Strategy Consulting, Consolidations and Conversions, Year 2000 Resolution,
Application Outsourcing, and Electronic Commerce and Home Banking.

The Company was organized in Massachusetts in 1980 to provide consulting
services to banks and bank service bureaus. The Company's 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 clients. Substantially all of the Company's 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 15.7% and 8.4% of the Company's
revenues for the quarters ended December 31, 1997 and 1998, respectively.

Revenues from the Company's five largest customers for the quarters ended
December 31, 1997 and 1998, were 69.8% and 69.1%, respectively, as a percentage
of revenues. For the quarter ended December 31, 1997, Associated Banc-Corp.,
National City Corporation, First Security Information Technology, Inc. and
NationsBank (Barnett Bank) accounted for approximately 18.3%, 16.0%, 15.4% and
10.5%, respectively, of revenues. For the quarter ended December 31, 1998, First
Security Information Technology, Inc., Associated Banc-Corp., National City
Corporation and US Trust accounted for approximately 17.5%, 16.5%, 16.4% and
13.2%, 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 the Company in
connection with the delivery of its services.

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


CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS

This Form 10-Q contains forward-looking statements. Forward-looking statements
and the contents in this Form 10-Q are made pursuant to the safe-harbor
provisions of Section 21E of the Securities Exchange Act of 1934, as amended.
Such statements relating to, among other things, events, conditions and
financial trends that may effect the Company's future plans of operations,
business strategy, growth of operations and financial position, including any
statements relating to new customer opportunities and replacement of lost
revenue, are not guarantees of future performance and are necessarily subject to
risks and uncertainties, some of which are significant in scope and nature that
could cause actual results to differ materially from forward-looking statements
and those results anticipated. Such risks and uncertainties include, but may 
not be limited to, variability in quarterly operating results, including the
effects of customer


                                       9

<PAGE>   10
purchasing patterns due to Year 2000 issues, dependence on the financial
services industry, concentration of revenues and the Company's dependence on
major customers, competition for, availability of and retention of professional
staff, the impact of a major customer's recent decision not to extend its
contracts with the Company beyond December 31, 1998 (discussed below), and other
factors described in the Company's filings with the Securities and Exchange
Commission, including those set forth under "Risk Factors" in the Company's
Registration Statement on Form S-1, as amended, as filed with the Securities and
Exchange Commission and declared effective on May 21, 1998.

VARIABILITY OF QUARTERLY OPERATING RESULTS

Variations in the Company's 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, employee
utilization rates, billing rates, the number of working days in a quarter, the
timing of introduction of new service offerings, both by the Company and its
competitors, changes in pricing, both by the Company and its competitors, and
general economic conditions. The timing of revenues is difficult to forecast
because the Company's 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 the Company's
sales cycle may negatively impact the operating results for any particular
quarter as a result of increased sales and marketing expenses without associated
increase in revenues in the particular quarter. Furthermore, many of the
Company's 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 the Company to maintain or terminate under utilized
employees, resulting in a higher than expected number of unassigned persons or
higher than expected severance expenses.

On December 21, 1998, the Company announced that one of its major customers
would not be extending its contracts beyond December 31, 1998. For the nine
months ended December 31, 1998, this customer accounted for approximately 19.8%
of the Company's revenues. In addition, on January 23, 1999, the Company
announced the resignation of David E. Olsson, Executive Vice President and
Director of Business Development. These events, either individually or in the
aggregate, could adversely affect the Company's operating results and growth
rate for the quarters ended March 31, 1999 and beyond.

QUARTERS ENDED DECEMBER 31, 1998 AND 1997

REVENUES

Revenues increased 72.3% for the quarter ended December 31, 1998 over the
quarter ended December 31, 1997, from $10.9 million to $18.7 million. This
increase was primarily due to an increase in volume of services delivered to
customers and an increase in the average billing rate.

COST OF REVENUES

Cost of revenues increased 74.6% from $6.2 million for the quarter ended
December 31, 1997 to $10.9 million for the quarter ended December 31, 1998,
representing 57.4% and 58.1%, respectively, of revenues in each quarter. The
dollar increase in cost of revenues was primarily due to an increase in billable
personnel from 221 at December 31, 1997 to 316 at December 31, 1998.



                                       10

<PAGE>   11
SALES AND MARKETING

Sales and marketing expenses increased 42% from $.9 million for the quarter
ended December 31, 1997 to $1.3 million for the quarter ended December 31, 1998,
representing 8.1% and 6.7% of revenues, respectively. This increase resulted
primarily from the Company's decision to expand its sales and marketing group
from 13 employees at December 31, 1997 to 17 employees at December 31, 1998, the
increase in sales commissions related to the significant increase in revenues,
travel related expenses for the sales group, as well as increased investment in
marketing initiatives. The Company expects its sales and marketing expenses to
increase in absolute dollars as the Company continues to add sales and marketing
staff.

GENERAL AND ADMINISTRATIVE

General and administrative expenses increased 40% from $1.6 million for the
quarter ended December 31, 1997 to $2.3 million for the quarter ended December
31, 1998, representing 14.9% and 12.1% of revenues, respectively. This increase
is primarily due to increases in recruiting, occupancy and equipment costs to
support the Company's expansion, as well as costs associated with being a public
company. The decrease in general and administrative expenses as a percentage of
revenues reflects the significant increase in revenues for the quarter ended
December 31, 1998 compared to the quarter ended December 31, 1997.

INTEREST INCOME

Interest income increased $305,000 from $52,000 for the quarter ended December
31, 1997 to $357,000 for the quarter ended December 31, 1998. This increase was
principally due to the increase in the amount of cash and cash equivalents
available for investment because of the net proceeds received from the Company's
initial public offering completed on May 28, 1998 of $23.4 million.

PROVISION FOR INCOME TAXES

The provision for income taxes increased $1.1 million from $.9 million for the
quarter ended December 31, 1997 to $2.0 million for the quarter ended
December 31, 1998, resulting in effective tax rates of 42% and 43.3%,
respectively. The Company's tax rate may vary from period to period based on its
expansion into areas with varying state and local statutory income tax rates.
The increase in the effective tax rate is primarily due to differences in
applicable state income tax rates.


NINE MONTHS ENDED DECEMBER 31, 1998 AND 1997

REVENUES

Revenues increased 93% for the nine months ended December 31, 1998 over the nine
months ended December 31, 1997, from $28.2 million to $54.4 million. This
increase was primarily due to an increase in volume of services delivered to
customers and an increase in the average billing rate.

COST OF REVENUES

Cost of revenues increased 93% from $16.3 million for the nine months ended
December 31, 1997 to $31.4 million for the nine months ended December 31, 1998,
representing 57.6% and 57.7%, respectively, of revenues in each period. The
dollar increase in cost of revenues was primarily due to an increase in billable
personnel from 221 at December 31, 1997 to 316 at December 31, 1998.


                                       11

<PAGE>   12
SALES AND MARKETING

Sales and marketing expenses increased 89% from $2.1 million for the nine months
ended December 31, 1997 to $4.1 million for the nine months ended December 31,
1998, representing 7.6% and 7.5% of revenues, respectively. This increase
resulted primarily from the Company's decision to expand its sales and marketing
group from thirteen employees at December 31, 1997 to seventeen employees at
December 31, 1998, the increase in sales commissions related to the significant
increase in revenues, travel related expenses for the sales group, as well as
increased investment in marketing initiatives. The Company expects its sales and
marketing expenses to increase in absolute dollars as the Company continues to
add sales and marketing staff.

GENERAL AND ADMINISTRATIVE

General and administrative expenses increased 60% from $4.3 million for the nine
months ended December 31, 1997 to $6.8 million for the nine months ended
December 31, 1998, representing 15.1% and 12.5% of revenues, respectively. This
increase is primarily due to increases in recruiting, occupancy and equipment
costs to support the Company's expansion, as well as costs associated with being
a public company. The decrease in general and administrative expenses as a
percentage of revenues reflects the significant increase in revenues for the
nine months ended December 31, 1998 compared to the nine months ended December
31, 1997. The Company expects that general and administrative expenses will
increase over time in absolute dollars as personnel and facilities are added and
as the Company incurs costs associated with being a public company.

INTEREST INCOME

Interest income increased $764,000 from $109,000 for the nine months ended
December 31, 1997 to $873,000 for the nine months ended December 31, 1998. This
increase was principally due to the increase in the amount of cash and cash
equivalents available for investment because of the net proceeds received from
the Company's initial public offering completed on May 28, 1998 of 
$23.4 million.

PROVISION FOR INCOME TAXES

The provision for income taxes increased $3.2 million from $2.4 million for the
nine months ended December 31, 1997 to $5.6 million for the nine months ended
December 31, 1998, resulting in effective tax rates of 42% and 43%,
respectively. The Company's tax rate may vary from period to period based on its
expansion into areas with varying state and local statutory income tax rates.
The increase in the effective tax rate is primarily due to differences in
applicable state income tax rates.


LIQUIDITY AND CAPITAL RESOURCES

In May 1998, the Company completed its initial public offering of 2,500,000
shares of which 2,000,000 shares were offered by the Company at a price of $13
per share (the "IPO"). The net proceeds to the Company after deducting
underwriting discounts and commissions and offering expenses payable by the
Company were approximately $23.4 million.

The Company has no long-term debt and continues to operate primarily debt-free.
Working capital increased to $38.7 million at December 31, 1998 compared to $7.5
million at March 31, 1998. This increase was primarily due to an increase in
cash of $29.5 million and an increase in accounts receivable of $2.1 million.
Net proceeds from the IPO of $23.4 million contributed to the increase in cash
as well as increased profitability. The Company's days sales in accounts
receivable at December 31, 1998 was 





                                       12

<PAGE>   13
52 compared to 56 days at March 31, 1998. The decrease in days sales outstanding
was the result of increased emphasis on collections.

Capital expenditures for the quarter ended December 31, 1998 of $179,000 were
primarily to support the addition of new employees. Capital expenditures for the
remainder of fiscal 1999 are expected to be approximately $250,000 and will be
used principally for computer and other equipment and to a lesser extent
leasehold improvements.

The Company expects that existing cash and cash equivalent balances, together
with cash provided from operations, will be sufficient to meet the Company's
working capital and capital expenditure requirements for at least the next
twelve months.

IMPACT OF YEAR 2000

The Year 2000 issue is the result of computer programs using a two-digit format,
as opposed to four digits, to indicate the year. Computer systems based on a
two-digit format will be unable to interpret dates beyond the year 1999 which
could cause a system failure or other computer errors, leading to disruptions in
operations. The Year 2000 problem affects virtually all computer systems,
processes, and products in all segments of the economy. The Company is aware of
the issues associated with the Year 2000 issue and believes that it has three
general areas of potential exposure: (1) its own service offerings and products;
(2) its internal informational systems; and (3) the effects of third party
compliance efforts. Based on the Company's analysis through December 31, 1998,
the Company does not believe that the Year 2000 issue will materially affect its
business.

-    SERVICE OFFERINGS AND PRODUCTS. The Company believes that its information
     technology ("IT") strategy consulting and systems integration services
     offerings to its customers will not be affected by the Year 2000 issue
     because such IT service offerings do not involve computer processes that
     store or manipulate date-related fields. The Company will continue to
     monitor newly developed or acquired IT service offerings and products for
     Year 2000 compliance. In the event that any of the Company's developed or
     acquired IT service offerings or products are not Year 2000 compliant in a
     timely manner, the Company's sales may decline materially, customers and
     those with whom they do business may assert product liability and other
     claims, and the Company's business, results of operations and financial
     condition would be materially and adversely affected.

-    INTERNAL INFORMATION SYSTEMS. The Company has commenced and has partially
     completed an assessment of its major internal operating systems, computer
     hardware and other equipment and is continuing to monitor any new additions
     to its internal operating systems for Year 2000 compliance. The Company
     completed its assessment of Year 2000 risks and is in the process of
     developing its contingency plans in the event that its internal operating
     systems, suppliers, facilities, IT service offerings or products, or any
     other components of its business operations, fail to operate in compliance
     with the Year 2000. The Company expects to develop its contingency plans by
     March 31, 1999. The cost of the Company's Year 2000 compliance program has
     not had and is not expected to have a material effect on the Company's
     results of operations or liquidity. However, there can be no assurance that
     the Company will not experience material adverse consequences in the event
     that the Company's Year 2000 compliance program is not successful or its
     suppliers and other strategic relationships are unable to resolve their
     Year 2000 compliance issues in a timely manner.

     If the Company's major internal operating systems are not Year 2000
     compliant in a timely manner, the Company's business operations would be
     materially and adversely affected and the Company may be required to incur
     unanticipated expenses to remedy any problems not addressed by these
     compliance efforts including costs of replacement or remediation of
     internal and vended systems.




                                     13

<PAGE>   14
-    EFFECTS OF THIRD PARTY COMPLIANCE. The Company is currently evaluating the
     Year 2000 readiness of its material suppliers and other strategic
     relationships. The Company intends to contact material suppliers and other
     strategic relationships through written or telephone inquires and will
     evaluate responses on a case-by-case basis. The Company will place the
     emphasis of its review on its primary suppliers, such as payroll services,
     computer services and phone systems. The Company believes that the problems
     related to computer systems used by its material suppliers and other
     strategic relationships could have a material adverse effect on the
     Company's business, results of operations and financial condition.

The Company has established a Year 2000 Committee to lead and coordinate its
Year 2000 compliance efforts. The goal of the Company's Year 2000 compliance
program is to assess the risk and impact of potential system failures and to
mitigate those risks through appropriate measures. The Company has upgraded and
replaced some of its non-Year 2000 compliant hardware and software systems,
including its telephone system, and intends to update and replace other hardware
and software systems as the Year 2000 Committee assesses the Company's Year 2000
risks. Since the Year 2000 problem may have far-reaching and unpredictable
effects, management does not expect that the Company's Year 2000 compliance
program will be able to eliminate all risk to the Company associated with the
century change.

The Company has not separately tracked the costs of its Year 2000 compliance
program for years before fiscal 1999. The Company projects that the cost to
address Year 2000 compliance issues in fiscal 1999 and fiscal 2000 are expected
not to exceed in the aggregate $90,000. This projection is based on costs
estimated at the end of fiscal 1998, and it is likely that the Company's actual
costs will be different. Because the Company has not yet determined the specific
cost of repairing systems other than mission-critical systems, these estimates
are subject to change. Funds for costs associated with the Company's Year 2000
compliance efforts will come out of working capital.

The information concerning the Company's Year 2000 compliance effort includes
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve known and
unknown risks, uncertainties, and other factors that may cause actual events or
costs to be materially different than indicated by such forward-looking
statements. These factors include, among others, unanticipated costs of
remediation and replacement of the Company's Year 2000 compliance efforts, the
Company's inability to meet its targeted dates as scheduled and the failure of
the Company's material suppliers and other strategic relationships to ensure
Year 2000 compliance. Any estimates and projections described have been
developed by the management of the Company and are based on the Company's best
judgments together with the information that is available to date. Due to the
many uncertainties surrounding the Year 2000 issue, the Company's stockholders
are cautioned not to place undue reliance on such forward-looking statements.


                                       14


<PAGE>   15
                                     PART II

                                OTHER INFORMATION


ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS

        (d) Use of Proceeds

On May 22, 1998, the Company commenced an initial public offering ("IPO") of
2,500,000 shares of common stock, par value $.01 per share (the "Common Stock"),
pursuant to the Company's final prospectus dated May 22, 1998 (the
"Prospectus"). The Prospectus was contained in the Company's Registration
Statement on Form S-1, which was declared effective by the Securities and
Exchange Commission (SEC File No. 333-48703) on May 21, 1998. Of the 2,500,000
shares of Common Stock offered, 2,000,000 shares were offered and sold by the
Company and 500,000 shares were offered and sold by certain stockholders of the
Company. As part of the IPO, certain stockholders of the Company granted the
several underwriters, for whom BancAmerica Robertson Stephens, BT Alex Brown and
Adams, Harkness & Hill, Inc., acted as representatives (the "Representatives"),
an overallotment option to purchase up to an additional 375,000 shares of Common
Stock (the "Underwriters' Option"). The IPO closed on May 28, 1998.

On June 22, 1998, the Representatives, on behalf of the several underwriters,
purchased 375,000 shares of Common Stock from certain stockholders of the
Company pursuant to the exercise of the Underwriters' Option.

The aggregate offering price of the IPO to the public was $32,500,000 (exclusive
of the Underwriters' Option), with proceeds to the Company and the selling
stockholders, after deduction of underwriting discounts, of $24,180,000 (before
deducting offering expenses payable by the Company) and $6,045,000,
respectively. The aggregate offering price of the Underwriters' Option exercised
was $4,875,000, with proceeds to the selling stockholders, after deduction of
the underwriting discounts and commissions, of $4,533,750.

The aggregate amount of expenses incurred by the Company through December 31,
1998 in connection with the issuance and distribution of the shares of Common
Stock offered and sold in the IPO were approximately $3,084,000, including
$2,275,000 in underwriting discounts and approximately $809,000 in other
expenses.

None of the expenses paid by the Company in connection with the IPO or the
exercise of the Underwriters' Option were paid, directly or indirectly, to
directors, officers, persons owning ten percent or more of the Company's equity
securities, or affiliates of the Company.

The net proceeds to the Company from the IPO, after deducting underwriting
discounts and commissions and other expenses, were approximately $23,371,000.

From May 21, 1998 through December 31, 1998, the Company has applied
approximately $781,000 of the net proceeds from the IPO to working capital. The
Company invested the balance of such net proceeds primarily in Money Market
Accounts.

None of the net proceeds from the IPO were used to pay, directly or indirectly,
directors, officers, persons owning ten percent or more of the Company's equity
securities, or affiliates of the Company.

                                       15


<PAGE>   16

ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K

        (a) Exhibits

            27.1 Financial data schedule

        (b) Reports on Form 8-K

            None


                                       16

<PAGE>   17
                                   SIGNATURES


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


                          ATLANTIC DATA SERVICES, INC.




Date:  February 16, 1999              By: /s/ Robert W. Howe
                                          ------------------------------------
                                          Robert W. Howe
                                          Chairman and Chief Executive Officer




Date:  February 16, 1999              By: /s/ Paul K. McGrath
                                          ------------------------------------
                                          Paul K. McGrath
                                          Senior Vice President
                                           and Chief Financial Officer
                                           (Principal Financial and Accounting
                                           Officer)


                                       17

<PAGE>   18




                                  EXHIBIT INDEX
                                  ------------- 

                                                                           Page
                                                                           ----


27.1 - Financial Data Schedule                                              19





                                       18