##### 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 June 30, 2002                                            
|          
|OR        
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|          
|           |  | For the transition period from

to                                                      

|                                                                                  
|----------------------------------------------------------------------------------
|Commission File Number: 000-24193                                                 
|                                                                                  
|ATLANTIC
DATA SERVICES, INC.(Exact Name of Registrant as Specified in its
Charter)



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

|                                                                                                    
|----------------------------------------------------------------------------------------------------
|One
Batterymarch Park
Quincy, Massachusetts 02169(Address of Principal Executive Offices) (Zip
Code)
|                                                                                                    
|(617) 770  3333(Registrants Telephone Number, Including Area
Code)                                

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

As of August 6, 2002, there were 13,039,123 shares of the Registrants Common
Stock, $.01 par value per share, outstanding.



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TABLE OF CONTENTS



|                                        |                                                                                                   |  |  |  |  |  |  | 
|--------------------------------------- | ------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                 
|                                        | ITEM 1: FINANCIAL STATEMENTS                                                                     
|                                        | Condensed Consolidated Balance Sheets (in thousands, except share data)                          
|                                        | Condensed Consolidated Statements of Operations (in thousands, except per share data) (Unaudited)
|                                        | Condensed Consolidated Statements of Cash Flows (in thousands) (unaudited)                       
|                                        | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) June 30, 2002                   
|                                        | ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS    
|                                        | ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                               
|PART II                                
|OTHER INFORMATION                      
|                                        | ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K                                                         
|SIGNATURES                             
|Ex-99.1 906 Certification  Robert Howe 
|Ex-99.2 906 Certification  Paul McGrath



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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 June 30, 2002 (Unaudited)
and March 31, 2002                      |  |  |  |  |  |      | 3  | 
|                                                                                                             
|Condensed Consolidated Statements of Operations for the Three Months
Ended June 30, 2002 and 2001 (Unaudited) |  |  |  |  |  |      | 4  | 
|                                                                                                             
|Condensed Consolidated Statements of Cash Flows for the Three Months
Ended June 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               |  |  |  |  |  |      | 10 | 
|                                                                                                             
|ITEM 3:   Quantitative and Qualitative Disclosures about Market Risk                                          |  |  |  |  |  |      | 13 | 
|                                                                                                             
|PART II  OTHER INFORMATION                                                                                   |  |  |  |  |  |      |    | 
|                                                                                                             
|ITEM 6:   Exhibits and Reports on Form 8-K                                                                    |  |  |  |  |  |      | 14 | 
|                                                                                                             
|SIGNATURES                                                                                                    |  |  |  |  |  |      | 15 | 

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 share data)




|                                           |                                                                                                                                                                                                            |                            |        |             |        |           |        |        |        | 
|------------------------------------------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------ | ----------- | ------ | --------- | ------ | ------ | ------ | 
|                                           |                                                                                                                                                                                                            |                            |        | June 30,    |        | March 31,
|                                           |                                                                                                                                                                                                            |                            |        | 2002        |        | 2002     
|                                           |                                                                                                                                                                                                            |                            |        |             |        |          
|                                           |                                                                                                                                                                                                            |                            |        | (Unaudited) |        |           |        |       
|Assets                                     |                                                                                                                                                                                                            |                            |        |             |        |           |        |       
|Current assets:                            |                                                                                                                                                                                                            |                            |        |             |        |           |        |       
|                                           | Cash and cash equivalents                                                                                                                                                                                  |                            | $      | 14,358      |        |           | $      | 15,457 |       
|                                           | Short-term investments                                                                                                                                                                                     |                            |        | 18,234      |        |           |        | 16,601 |       
|                                           | Accounts receivable, net of allowances for doubtful accounts of
$375 at June 30, 2002 and at March 31, 2002                                                                                                |                            |        | 3,689       |        |           |        | 3,170  |       
|                                           | Tax receivable                                                                                                                                                                                             |                            |        | 2,784       |        |           |        | 2,784  |       
|                                           | Prepaid expenses                                                                                                                                                                                           |                            |        | 289         |        |           |        | 260    |       
|                                           |                                                                                                                                                                                                            |                            |        |             |        |           |        |       
|                                           |                                                                                                                                                                                                            | Total current assets       |        |             | 39,354 |           |        |        | 38,272 | 
|Property and equipment, net                |                                                                                                                                                                                                            |                            | 305    |             |        |           | 308    |       
|Other assets                               |                                                                                                                                                                                                            |                            | 177    |             |        |           | 182    |       
|                                           |                                                                                                                                                                                                            |                            |        |             |        |           |        |       
|Total assets                               |                                                                                                                                                                                                            | $                          | 39,836 |             |        | $         | 38,762 |       
|                                           |                                                                                                                                                                                                            |                            |        |             |        |           |        |       
|Liabilities and stockholders equity       |                                                                                                                                                                                                            |                            |        |             |        |           |        |       
|Current liabilities:                       |                                                                                                                                                                                                            |                            |        |             |        |           |        |       
|                                           | Accounts payable                                                                                                                                                                                           |                            | $      | 531         |        |           | $      | 455    |       
|                                           | Accrued expenses and other liabilities                                                                                                                                                                     |                            |        | 1,801       |        |           |        | 2,055  |       
|                                           | Deferred revenue                                                                                                                                                                                           |                            |        | 458         |        |           |        | 531    |       
|                                           | Billings in excess of costs and estimated earnings                                                                                                                                                         |                            |        |            |        |           |        | 12     |       
|                                           | Federal and state income taxes payable                                                                                                                                                                     |                            |        | 479         |        |           |        |       |       
|                                           |                                                                                                                                                                                                            |                            |        |             |        |           |        |       
|                                           |                                                                                                                                                                                                            | Total current liabilities  |        |             | 3,269  |           |        |        | 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,
13,151,123 shares issued and 13,039,123 outstanding at
June 30, 2002 and 13,151,123 shares issued and
13,039,123 outstanding at March 31, 2002 |                            |        | 131         |        |           |        | 131    |       
|                                           | Additional paid-in capital                                                                                                                                                                                 |                            |        | 27,565      |        |           |        | 27,565 |       
|                                           | Retained earnings                                                                                                                                                                                          |                            |        | 8,896       |        |           |        | 8,038  |       
|                                           | Treasury stock (112,000 shares carried at cost)                                                                                                                                                            |                            |        | (25         | )      |           |        | (25    | )     
|                                           |                                                                                                                                                                                                            |                            |        |             |        |           |        |       
|                                           |                                                                                                                                                                                                            | Total stockholders equity |        |             | 36,567 |           |        |        | 35,709 | 
|                                           |                                                                                                                                                                                                            |                            |        |             |        |           |        |       
|Total liabilities and stockholders equity |                                                                                                                                                                                                            | $                          | 39,836 |             |        | $         | 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
|                                                                           |                                                                              |                          |        | June 30,          
|                                                                           |                                                                              |                          |        |                   
|                                                                           |                                                                              |                          |        | 2002               |       | 2001
|                                                                           |                                                                              |                          |        |                    |       |     
|Revenues                                                                   |                                                                              | $                        | 6,935  |                    |       | $    | 4,554  |      
|Cost of revenues                                                           |                                                                              |                          | 3,776  |                    |       |      | 3,757  |      
|                                                                           |                                                                              |                          |        |                    |       |      |        |      
|Gross profit                                                               |                                                                              |                          | 3,159  |                    |       |      | 797    |      
|                                                                           |                                                                              |                          |        |                    |       |      |        |      
|Operating expenses:                                                        |                                                                              |                          |        |                    |       |      |        |      
|                                                                           | Sales and marketing                                                          |                          |        | 539                |       |      |        | 998   |       
|                                                                           | General and administrative                                                   |                          |        | 1,541              |       |      |        | 1,583 |       
|                                                                           | Restructuring expense                                                        |                          |        |                   |       |      |        | 925   |       
|                                                                           |                                                                              |                          |        |                    |       |      |        |      
|                                                                           |                                                                              | Total operating expenses |        |                    | 2,080 |      |        |       | 3,506  |  
|                                                                           |                                                                              |                          |        |                    |       |      |        |      
|Income (loss) from operations                                              |                                                                              |                          | 1,079  |                    |       |      | (2,709 | )    
|Interest income, net                                                       |                                                                              |                          | 186    |                    |       |      | 372    |      
|                                                                           |                                                                              |                          |        |                    |       |      |        |      
|Income (loss) from continuing operations before provision for
income taxes |                                                                              |                          | 1,265  |                    |       |      | (2,337 | )    
|Provision for income taxes                                                 |                                                                              |                          | 455    |                    |       |      | 386    |      
|                                                                           |                                                                              |                          |        |                    |       |      |        |      
|Income (loss) from continuing operations                                   |                                                                              |                          | 810    |                    |       |      | (2,723 | )    
|Discontinued operations:                                                   |                                                                              |                          |        |                    |       |      |        |      
|                                                                           | Income on disposal of business (less applicable income
tax provision of $27) |                          |        | 48                 |       |      |        |      |       
|                                                                           |                                                                              |                          |        |                    |       |      |        |      
|                                                                           |                                                                              | Net income (loss)        |        | $                  | 858   |      |        | $     | (2,723 | )
|                                                                           |                                                                              |                          |        |                    |       |      |        |      
|Earnings (loss) per share from continuing operations:                      |                                                                              |                          |        |                    |       |      |        |      
|                                                                           | Basic                                                                        |                          | $      | 0.06               |       |      | $      | (0.21 | )     
|                                                                           | Diluted                                                                      |                          | $      | 0.06               |       |      | $      | (0.21 | )     
|Income per share from discontinued operations:                             |                                                                              |                          |        |                    |       |      |        |      
|                                                                           | Basic                                                                        |                          | $      | 0.01               |       |      |        |      |       
|                                                                           | Diluted                                                                      |                          | $      | 0.00               |       |      |        |      |       
|Earnings (loss) per share from net income:                                 |                                                                              |                          |        |                    |       |      |        |      
|                                                                           | Basic                                                                        |                          | $      | 0.07               |       |      | $      | (0.21 | )     
|                                                                           | Diluted                                                                      |                          | $      | 0.06               |       |      | $      | (0.21 | )     
|                                                                          
|Shares used in computing earnings (loss) per share (basic)                 |                                                                              |                          | 13,039 |                    |       |      | 13,023 |      
|                                                                           |                                                                              |                          |        |                    |       |      |        |      
|Shares used in computing earnings (loss) per share (diluted)               |                                                                              |                          | 13,216 |                    |       |      | 13,023 |      
|                                                                           |                                                                              |                          |        |                    |       |      |        |      

See accompanying
Notes to Condensed Consolidated Financial Statements.

4



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ATLANTIC DATA SERVICES, INC.
 
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)




|                                                                                                   |                                                                                  |                                                                 |        |                             |      |      |        |     |      |  
|-------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------- | --------------------------------------------------------------- | ------ | --------------------------- | ---- | ---- | ------ | --- | ---- | -
|                                                                                                   |                                                                                  |                                                                 |        | Three
Months Ended
June 30,
|                                                                                                   |                                                                                  |                                                                 |        |                            
|                                                                                                   |                                                                                  |                                                                 |        | 2002                        |      | 2001
|                                                                                                   |                                                                                  |                                                                 |        |                             |      |     
|Cash flows from operating activities:                                                              |                                                                                  |                                                                 |        |                             |      |      |        |    
|Net income (loss)                                                                                  |                                                                                  | $                                                               | 858    |                             |      | $    | (2,723 | )  
|Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities: |                                                                                  |                                                                 |        |                             |      |      |        |    
|                                                                                                   | Depreciation and amortization                                                    |                                                                 |        | 88                          |      |      |        | 84  |     
|                                                                                                   | Accrued interest                                                                 |                                                                 |        | (26                         | )    |      |        |    |     
|                                                                                                   | Discontinued operations                                                          |                                                                 |        | (48                         | )    |      |        |    |     
|                                                                                                   | Deferred taxes                                                                   |                                                                 |        |                            |      |      |        | 464 |     
|                                                                                                   | Provision for bad debts                                                          |                                                                 |        |                            |      |      |        | (50 | )   
|                                                                                                   | Change in assets and liabilities (net of effect of acquisition
and disposition): |                                                                 |        |                             |      |      |        |     |     
|                                                                                                   |                                                                                  | Accounts receivable                                             |        |                             | (519 | )    |        |     | 973  |  
|                                                                                                   |                                                                                  | Prepaid expenses and other assets                               |        |                             | (68  | )    |        |     | (202 | )
|                                                                                                   |                                                                                  | Accounts payable                                                |        |                             | 76   |      |        |     | (113 | )
|                                                                                                   |                                                                                  | Accrued expenses and other liabilities                          |        |                             | (206 | )    |        |     | (641 | )
|                                                                                                   |                                                                                  | Deferred revenue                                                |        |                             | (73  | )    |        |     |     |  
|                                                                                                   |                                                                                  | Billings in excess of costs and estimated earnings on contracts |        |                             | (12  | )    |        |     | (86  | )
|                                                                                                   |                                                                                  | Federal and state income taxes payable                          |        |                             | 479  |      |        |     |     |  
|                                                                                                   |                                                                                  |                                                                 |        |                             |      |      |        |    
|Net cash provided by (used in) operating activities of continuing
operations                       |                                                                                  |                                                                 | 549    |                             |      |      | (2,294 | )  
|                                                                                                   |                                                                                  |                                                                 |        |                             |      |      |        |    
|Cash flows from investing activities:                                                              |                                                                                  |                                                                 |        |                             |      |      |        |    
|Purchase of short-term investments                                                                 |                                                                                  |                                                                 | (2,006 | )                           |      |      | (500   | )  
|Sale of short-term investments                                                                     |                                                                                  |                                                                 | 363    |                             |      |      |       |    
|Purchase of property and equipment                                                                 |                                                                                  |                                                                 | (5     | )                           |      |      |       |    
|                                                                                                   |                                                                                  |                                                                 |        |                             |      |      |        |    
|Net cash used in investing activities of continuing operations                                     |                                                                                  |                                                                 | (1,648 | )                           |      |      | (500   | )  
|                                                                                                  
|Net cash used in continuing operations                                                             |                                                                                  |                                                                 | (1,099 | )                           |      |      | (2,794 | )  
|Net cash used in discontinued operations                                                           |                                                                                  |                                                                 |       |                             |      |      | (2,000 | )  
|                                                                                                   |                                                                                  |                                                                 |        |                             |      |      |        |    
|Net decrease in cash and cash equivalents                                                          |                                                                                  |                                                                 | (1,099 | )                           |      |      | (4,794 | )  
|Cash and cash equivalents, beginning of period                                                     |                                                                                  |                                                                 | 15,457 |                             |      |      | 36,655 |    
|                                                                                                   |                                                                                  |                                                                 |        |                             |      |      |        |    
|Cash and cash equivalents, end of period                                                           |                                                                                  | $                                                               | 14,358 |                             |      | $    | 31,861 |    
|                                                                                                   |                                                                                  |                                                                 |        |                             |      |      |        |    
|Supplemental disclosure of cash flow information:                                                  |                                                                                  |                                                                 |        |                             |      |      |        |    
|Cash paid during the period for taxes                                                              |                                                                                  | $                                                               | 12     |                             |      | $    | 13     |    
|                                                                                                   |                                                                                  |                                                                 |        |                             |      |      |        |    
|Supplemental disclosure of non-cash investing activities:                                          |                                                                                  |                                                                 |        |                             |      |      |        |    
|Acquisition of assets with warrant                                                                 |                                                                                  | $                                                               |       |                             |      | $    | 637    |    
|                                                                                                   |                                                                                  |                                                                 |        |                             |      |      |        |    

See accompanying Notes to Condensed Consolidated Financial Statements.

5



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##### Table of Contents



ATLANTIC DATA SERVICES,
INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 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-month period ended June 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 on
contracts, represents billings in excess of revenues recognized.

Included in revenues are reimbursable contract-related travel and entertainment
expenses of $869,000 and $620,000 for the quarters ended June 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.

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.

6



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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 June 30, 2002 and 2001:

|                                                                                                       |                                          |                                                                                                |        |                                       |        |      |        |        |        | 
|------------------------------------------------------------------------------------------------------ | ---------------------------------------- | ---------------------------------------------------------------------------------------------- | ------ | ------------------------------------- | ------ | ---- | ------ | ------ | ------ | 
|                                                                                                       |                                          |                                                                                                |        | Three Months Ended June 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 |                                                                                                | $      | 810                                   |        |      | $      | (2,723 | )     
|                                                                                                       | Income from discontinued operations      |                                                                                                |        | 48                                    |        |      |        |       |       
|                                                                                                       |                                          |                                                                                                |        |                                       |        |      |        |       
|                                                                                                       | Net income (loss)                        |                                                                                                |        | 858                                   |        |      |        | (2,723 | )     
|                                                                                                       |                                          |                                                                                                |        |                                       |        |      |        |       
|Denominator:                                                                                           |                                          |                                                                                                |        |                                       |        |      |        |       
|Denominator for basic earnings per share  weighted average
shares                                     |                                          |                                                                                                | 13,039 |                                       |        |      | 13,023 |       
|Effect of dilutive securities:                                                                         |                                          |                                                                                                |        |                                       |        |      |        |       
|                                                                                                       | Employee stock options                   |                                                                                                |        | 177                                   |        |      |        |       |       
|                                                                                                       |                                          |                                                                                                |        |                                       |        |      |        |       
|                                                                                                       |                                          | Denominator for diluted earnings per share  adjusted
weighted average and assumed conversions |        |                                       | 13,216 |      |        |        | 13,023 | 
|                                                                                                       |                                          |                                                                                                |        |                                       |        |      |        |       
|Basic earnings (loss) per share:                                                                       |                                          |                                                                                                |        |                                       |        |      |        |       
|                                                                                                       | Continuing operations                    |                                                                                                | $      | 0.06                                  |        |      | $      | (0.21  | )     
|                                                                                                       | Discontinued operations                  |                                                                                                |        | 0.01                                  |        |      |        |       |       
|                                                                                                       | Net income (loss)                        |                                                                                                |        | 0.07                                  |        |      |        | (0.21  | )     
|Diluted earnings (loss) per share:                                                                     |                                          |                                                                                                |        |                                       |        |      |        |       
|                                                                                                       | Continuing operations                    |                                                                                                | $      | 0.06                                  |        |      | $      | (0.21  | )     
|                                                                                                       | Discontinued operations                  |                                                                                                |        | 0.00                                  |        |      |        |       |       
|                                                                                                       | Net income (loss)                        |                                                                                                |        | 0.06                                  |        |      |        | (0.21  | )     

In addition, as of June 30, 2002, there were options outstanding to purchase
1,099,125 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 June 30, 2002, two customers accounted for 55.1% and
27.5% of the Companys revenues. For the quarter ended June 30, 2001, two
customers accounted for 46.8% and 16.4% 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 full valuation
allowance for such assets, which are comprised principally of net operating
loss carryforwards and various accruals. Management has evaluated that it is
more likely than not that the deferred tax assets will not be realizable in the
future; management reevaluates the positive and negative evidence at each
reporting period.

For the quarter ended June 30, 2002, the Company established a provision for
taxes due to its profitability. The Company is unable to determine its annual
effective tax rate due to the uncertainty of its profitability for fiscal 2003;
therefore, the Company used the Discrete Method to establish a provision for
the current quarter. However, the Company did not adjust its deferred tax
assets due to the uncertainty of profitability in future quarters.

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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, (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.

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 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 three months ended
June 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):

|                       |  |               |        |           |  |   |        |  
|---------------------- |  | ------------- | ------ | --------- |  | - | ------ | -
|                       |  | June 30, 2001
|                       |  | (Unaudited)  
|                       |  | As Reported   |        | Pro Forma
|                       |  |               |        |          
|Revenues               |  | $             | 4,554  |           |  | $ | 4,577  |  
|Loss from operations   |  |               | (2,709 | )         |  |   | (3,115 | )
|Net loss               |  |               | (2,723 | )         |  |   | (3,125 | )
|Basic loss per share   |  | $             | (0.21  | )         |  | $ | (0.24  | )
|Diluted loss per share |  | $             | (0.21  | )         |  | $ | (0.24  | )

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 closing 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 June 30, 2002, the Company reversed $48,000 of estimated
discontinued operations accruals, net of tax provision, primarily due to a
termination and release agreement with the landlord signed May 2, 2002
partially releasing the Company from its remaining lease commitment for the
discontinued operation.

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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 the
Companys future plans of operation, business strategy, growth of operations
and financial position, including statements regarding our revenue and
earnings/loss per share projections, variability of revenues and operating
results, intended capital expenditures for fiscal 2003, impact of recent
acquisitions on earnings, adequacy of capital resources, dependence on the
financial services industry, dependence upon a limited number of customers, and
liquidity expectations. 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 service offerings
are organized around four practice areas: Customer Relationship Management
(CRM), Conversions and Consolidations, IT Strategy and Consulting, and
e-Business.

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 1.1% and 2.6% of our revenues for the quarters ended June 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 June 30, 2002 and 2001 were 95.9% and
82.5%, respectively, as a percentage of revenues. For the quarter ended June
30, 2002, Citizens Financial Corporation, Zions Bancorporation, FleetBoston
Financial Corporation, IntraNet Inc., a TSA Company and Metavante Corporation
accounted for approximately 55.1%, 27.5%, 6.0%, 4.9%, and 2.4%, respectively,
of revenue. For the quarter ended June 30, 2001, FleetBoston Financial
Corporation, Zions Bancorporation, IntraNet, Inc., a TSA Company, AAL Bank and
Trust Co., FSB and Citizens Financial Corporation accounted for approximately
46.8%, 16.4%, 7.8%, 6.9% and 4.6%, respectively, of revenues.

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

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

Outlook

With respect to our earnings projections for the future, we continue to be
cautious about our outlook for the next quarter but are currently estimating
our second quarter revenue will be in the range of $5.2 million to $6.2
million, with net income in the range of $0.00 to $0.04 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.

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

Revenues

Revenues increased 52.3% for the quarter ended June 30, 2002 over the quarter
ended June 30, 2001, from $4.6 million to $6.9 million. This increase was
predominately due to expanded project activity at existing customers resulting
in a 59.5% increase in the volume of services delivered to customers, offset in
part by a 3.6% decrease in the average billing rate from $138 to $133.

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Cost of Revenues

Cost of revenues were $3.8 million for each of the quarters ended June 30, 2002
and June 30, 2001, representing 54.4% and 82.5%, 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 of the utilization rate.

Sales and Marketing

Sales and marketing expenses were $539,000 for the quarter ended June 30, 2002
and $1.0 million for the quarter ended June 30, 2001, representing 7.8% and
21.9% of revenues, respectively. The dollar decrease resulted primarily from a
decrease in our sales and marketing group of 16 employees at June 30, 2001 to 7
employees at June 30, 2002. The decrease in sales and marketing expense as a
percentage of revenues is due to the significant increase in revenue compared
to the corresponding period of the prior fiscal year.

General and Administrative

General and administrative expenses decreased 2.7% to $1.5 million from $1.6
million for the quarter ended June 30, 2002 compared to the quarter ended June
30, 2001, representing 22.2% and 34.8% of revenues, respectively. The dollar
decrease is primarily due to decreases in travel related expenses. The decrease
in general and administrative expense as a percentage of revenues is due to the
significant increase in revenue compared to the corresponding period of the
prior fiscal year.

Interest Income, Net

Interest income, net decreased $186,000 from $372,000 for the quarter ended
June 30, 2001 to $186,000 for the quarter ended June 30, 2002. This decrease
was principally due to interest rate decreases and a lower average cash
balance. Interest expense is immaterial.

Provision for Income Taxes

The provision for income taxes increased $69,000 to $455,000 from $386,000 for
the quarter ended June 30, 2002 compared to the quarter ended June 30, 2001.
We had a provision for income taxes for the quarter ended June 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. We are unable to determine our annual effective tax rate
due to the uncertainty of our profitability for fiscal 2003; therefore, we used
the Discrete Method to establish a provision for the current quarter. 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, we announced our decision to discontinue the operations of
Cool Springs Associates, Inc., d/b/a EarningsInsights. Consequently, we
incurred a charge of $1.9 million, net of income tax benefit, relating to the
write-off of EarningsInsights assets and an accrual for estimated losses
during the phase-out period. For the quarter ended June 30, 2002, we reversed
$48,000 of estimated accruals, net of tax provision, primarily due to a
termination and release agreement with our landlord signed on May 2, 2002
partially releasing us from our lease commitment on the discontinued operation.

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Liquidity and Capital Resources

We have no long-term debt and continue to operate primarily debt-free. Working
capital was $36.1 million at June 30, 2002. Our days sales in accounts
receivable at June 30, 2002 was 48 compared to 43 days at June 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 expected to be
approximately $200,000 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.




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
June 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.

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PART II




OTHER INFORMATION




ITEM 6:     EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

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

(b) Reports on Form 8-K

On April 10, 2002, the Company filed a Form 8-K with the Securities and
Exchange Commission announcing the disposition of Cool Springs Associates, Inc.
d/b/a EarningsInsights.

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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: |  | August 12, 2002 |  | By: /s/ Robert W. HoweRobert W. Howe
Chairman and Chief Executive Officer                                                            
|     
|     
|Date: |  | August 12, 2002 |  | By: /s/ Paul K. McGrathPaul K. McGrath
Senior Vice President and Chief Financial
Officer (Principal Financial and Accounting
Officer)

15