##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

(Mark One)

|     |  |                                                                                          
|---- |  | -----------------------------------------------------------------------------------------
|[X]  |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934    
|     |  |                                                                                          
|     |  | For the Fiscal Year Ended March 31, 2003 OR                                              
|     |  |                                                                                          
|[  ] |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|     |  |                                                                                          
|     |  | For the transition period from      to      .                                            

Commission File Number: 000-24193

ATLANTIC DATA SERVICES, INC.

(Exact Name of Registrant as Specified in its Charter)


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

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

Securities Registered Pursuant to Section 12(b) of the Act: None.

Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, $.01 par value
(Title of Class)

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]

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

The aggregate market value of the voting common equity held by non-affiliates
of the Company was approximately $7,300,000 on September 30, 2002 based on the
last reported sale price of the Companys Common Stock on The NASDAQ National
Market on September 30, 2002 of $1.70 per share. There were 13,045,245 shares
of Common Stock issued and outstanding as of September 30, 2002.

1



---

TABLE OF CONTENTS



|                                                   |                                                                                               |  |  |  |  |  |  | 
|-------------------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                            
|                                                   | ITEM 1: BUSINESS                                                                             
|                                                   | ITEM 2: PROPERTIES                                                                           
|                                                   | ITEM 3: LEGAL PROCEEDINGS                                                                    
|                                                   | ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|PART II                                           
|                                                   | ITEM 5: MARKET FOR THE REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS            
|                                                   | ITEM 6: SELECTED CONSOLIDATED FINANCIAL DATA                                                 
|                                                   | ITEM 7: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                                                   | ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                          
|                                                   | ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                          
|                                                   | ITEM 9: CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES   
|PART III                                          
|                                                   | ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                  
|                                                   | ITEM 11: EXECUTIVE COMPENSATION                                                              
|                                                   | ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                      
|                                                   | ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                      
|                                                   | ITEM 14: CONTROLS AND PROCEDURES                                                             
|                                                   | ITEM 15: PRINCIPAL ACCOUNTANT FEES AND SERVICES                                              
|PART IV                                           
|                                                   | ITEM 16: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K                    
|SIGNATURES                                        
|CERTIFICATIONS                                    
|EXHIBIT INDEX                                     
|EX-10.14 EMPLOYMENT AGREEMENT THOMAS P MCCARTHY JR
|EX-10.15 EMPLOYMENT AGREEMENT IRV NAAR            
|EX-10.21 AGREEMENT TO RESTRUCTURE AND EXTEND      
|EX-21.01 SUBSIDIARIES                             
|EX-23.01 CONSENT OF PRICEWATERHOUSECOOPERS LLP    
|EX-99.01 CERTIFICATION - ROBERT W HOWE            
|EX-99.02 CERTIFICATION - PAUL K MCGRATH           



---



##### Table of Contents



ATLANTIC DATA SERVICES, INC.

ANNUAL REPORT ON FORM 10-K
FOR THIS FISCAL YEAR ENDED MARCH 31, 2003

FORWARD LOOKING STATEMENTS

This Report includes forward-looking statements, which are made pursuant to the
safe-harbor provisions of the Private Securities Litigation Reform Act of 1995.
You can identify these forward-looking statements when you see us using words
such as expect, anticipate, believe, intend, may, predict, and
other similar expressions. These forward-looking statements cover, among other
items: events, conditions and financial trends that may affect our future
plans of operation, business strategy, growth of operations and financial
position, including statements regarding revenue and earnings or loss per share
projections, concentration of revenues among a limited number of customers,
expected capital expenditures for fiscal 2004 and sufficiency of cash to meet
working capital and capital expenditure requirements for 2004. Any
forward-looking statements are not guarantees of future performance and are
necessarily subject to a number of risks and uncertainties, some of which are
beyond our control. 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.




PART I




ITEM 1: BUSINESS

A.     General

Atlantic Data Services, Inc. (We or ADS), provides information technology
(IT) strategy consulting and systems integration services to the financial
services industry. We offer rapid, cost-effective IT solutions to the business
challenges faced by financial services companies through our in-depth financial
services experience, technological expertise and project management skills.
Our service offerings are organized around four practice areas: Customer
Relationship Management (CRM), Conversions and Consolidations, IT Strategy
and Consulting, and e-Business. We were incorporated in Massachusetts on March
25, 1980.

The business challenges created by deregulation and consolidation, coupled with
the need to maintain existing systems and incorporate new technologies, have
forced banks to turn to third party IT providers for assistance in developing
IT solutions to meet their changing needs. Because of the critical importance
of their IT systems, many banks seek to engage IT service providers who have
in-depth knowledge of their systems and business processes and who can assume
responsibility for project management and delivery. IT service providers
working with banks must possess extensive experience in the financial services
industry and be fluent in both traditional legacy systems and newer
technologies. However, there is a shortage of professionals who have this
combination of skills. While many banks are concluding that using outside
specialists enables them to develop better IT solutions in less time and to
reduce implementation risks, most IT consulting firms do not have the
specialized knowledge of the financial services industry necessary to assist
banks in rapidly and cost-effectively meeting their business challenges.

2



---



##### Table of Contents



We enable our customers to leverage their existing IT systems and personnel to
compete more effectively, to rapidly assimilate changing technologies and to
meet their evolving business needs in a timely and cost-effective manner. We
work closely with our customers management and IT personnel from the
diagnostic and strategic planning stages through project completion. Our IT
professionals have extensive experience in the diverse technical environments,
legacy hardware platforms, programming languages, and software used by banks,
as well as newer technologies, including client/server applications and the
Internet. In addition, we have developed proprietary tools and methodologies
designed to reduce the risks inherent in complex systems implementations. We
work closely with our customers to determine the appropriate resources and
staffing to assign to their projects and deploy our staff from throughout the
United States to meet a customers needs.

Practice Areas

We offer and deliver our services through four practice areas that address the
major areas of interest and activity of our customers. These four practice
areas are:

CRM. We understand that a key success factor for financial services
organizations is the acquisition, servicing and growth of profitable customer
relationships. Our goal is to help our clients become more customer-focused so
they can maintain and grow market share in the competitive financial services
marketplace. Our approach is to assist our clients by delivering a practical
plan for transforming the enterprise to support their customer-oriented
business strategy. Then as each initiative is launched, our requirements
documentation services team can assist in the translation of business needs
into formal requirements for the project team  assuring that the solution
delivers business results. As an independent services firm, our team of
experts can also assist in the acquisition of best of breed tools and
solutions. We also recognize that high-performance customer information is the
foundation of any CRM program. Our customer information teams can provide
everything from diagnostic services to complete systems integration to assure
that this valuable asset supports our customers CRM program. Our approach
with every engagement is to focus on business objectives and
return-on-investment, and to deliver value at every step.

Conversions and Consolidations.The financial services industry continues to
undergo tremendous change and reorganization. We have been a leading solution
provider in hundreds of conversions, consolidations and migrations, deploying
the financial services expertise necessary to contribute to our customers
successes. As a core competency, we provide the requisite project management
skills to help our customers tackle the business and technological challenges
before them, and to exceed the goals of their original strategic objectives.
The financial industry experience resident on our consulting staff enables us
to provide our clients with both the business insight and operational expertise
to guarantee successful business integrations.

IT Strategy and Consulting. Firms in every segment of financial services are
facing unprecedented pressure to innovate and change. In the face of
competition from new and traditional rivals, financial institutions must
simultaneously develop or acquire new products and services, improve the level
of personalized service provided to customers, and significantly improve
operating efficiency. We provide the operational insight and major project
discipline to complete these strategic initiatives successfully. We leverage
our industry knowledge and technology expertise to help clients identify,
design and implement business solutions that produce measurable improvements.
Not only are new capabilities implemented, but operational performance
efficiencies are also achieved, resulting in a clients improved bottom line.

3



---



##### Table of Contents



e-Business. ADS defines e-Business as the transformation of key business
processes using Internet technologies. We believe that successful e-Business
is all about operational efficiency, return on investment, and execution. We
bring over twenty years of in-depth banking, project management, and systems
integration experience to assist clients in realizing their e-Business
potential. Our banking and system integration experience enables us to
identify innovative opportunities to achieve operational efficiency through
e-Business; our project management expertise ensures execution within fiscal
and scheduling constraints; and the combination of this efficiency and
execution results in a favorable return on investment for our clients. Our
e-Business services fall into three main categories: strategy, design, and
implementation. Combining our technology and financial industry expertise, we
work with our customers to create systems that build virtual bridges between
buyers, suppliers, customers, and financial institutions for swift and reliable
transactions.

4



---



##### Table of Contents



B.     Customers

Our customers consist primarily of banks and other financial services companies
located in the United States and Canada. The following is a list of
representative customer during fiscal 2003:

|                                  |  |                              
|--------------------------------- |  | -----------------------------
|The BISYS Group, Inc.             |  | IntraNet, Inc., a TSZ Company
|Capital One Services, Inc.        |  | Wells Fargo Services Company 
|Citizens Financial Corporation    |  | Zions Bancorporation         
|FleetBoston Financial Corporation |  |                              

We have derived and expect to continue to derive a significant portion of our
revenues from a relatively limited number of customers. For example, our five
largest customers in fiscal 2003, Citizens Financial Corporation, Zions
Bancorporation, FleetBoston Financial Corporation, IntraNet Inc., a TSA Company
and Capital One Services, Inc. accounted for approximately 41.7%, 32.5%, 9.0%,
6.9% and 1.8%, respectively, of revenues. In fiscal 2002, FleetBoston
Financial Corporation, Citizens Financial Corporation, Zions Bancorporation,
IntraNet, Inc., a TSA Company and National City Corporation accounted for
approximately 24.7%, 23.8%, 21.6%, 7.3% and 4.1%, respectively, of revenues.
Because a significant portion of our revenues are derived from services related
to deregulation and consolidation activities in the financial services
industry, changes in the regulatory environment or a reduction in consolidation
activity have in the past, and may in the future, have a material adverse
effect on our business, financial condition and results of operations. In
addition, the loss of a major customer or termination of a major project as a
result of an acquisition of a customer by an organization to which we do not
currently provide services could have a material adverse effect on our
business, financial condition and results of operations.

Although our largest customers have varied from period to period, we anticipate
that our results of operations will continue to significantly depend upon
revenues from a small number of customers. We cannot assure you that our major
customers will continue to purchase our services at current levels, if at all,
or that we would be able to replace revenues from lost customers with revenues
from other customers. The loss of, or a significant reduction in revenues
from, any of our major customers could materially adversely affect our
business, financial condition and results of operations.

C.     Sales and Marketing

We market and sell our services directly through our professional sales and
marketing staff and senior management operating principally from our offices in
Quincy, Massachusetts. As of March 31, 2003, we had 9 persons engaged in sales
and marketing activities.

Our senior business development representatives are assigned to a limited
number of customers to foster an in-depth understanding of each customers
individual needs and build a long-term customer relationship. We attempt to
develop customer relationships through a carefully coordinated effort between
our sales and professional services staff. Initial sales calls are made at the
customers senior management level and followed up by detailed presentations
targeted to their specific needs.

We employ a variety of business development and marketing techniques to
communicate directly with current and prospective customers, including targeted
print and direct mail advertisements, participation in financial services
industry trade shows and conferences, and our web site. In addition, we
maintain relationships with key industry research groups such as TowerGroup,
American Bankers Association, and the Bank Administration Institute.

5



---



##### Table of Contents



As part of our sales and marketing strategy, we intend, from time to time, to
partner with other IT consulting firms, including in some instances our
competitors, and to explore relationships with certain third party software
providers to the financial services market.

D.     Employees

As of March 31, 2003, we had 89 full time employees, of which 61 were project
personnel, 19 employees were in finance and administration and 9 were in sales
and marketing. None of our employees are subject to a collective bargaining
agreement. We believe relations with our employees are good.

E.     Intellectual Property Rights

Our success is dependent upon certain proprietary methodologies and software
tools, including our Engagement Management Methodology and Conversion
Productivity Tool that we use in providing services to customers. Our business
also includes developing custom software for various customers. Ownership of
such software is generally assigned to the customer, and we retain no right,
title or interest in it.

We rely on a combination of trade secret, nondisclosure and other contractual
arrangements and copyright and trademark laws to protect our proprietary
rights. We currently hold no patents or registered copyrights. We generally
enter into confidentiality agreements with our outside consultants, customers
and potential customers and limit access to and distribution of our proprietary
information. While we do not usually enter into confidentiality agreements
with our employees, such employees are generally required to sign
confidentiality agreements in connection with specific customer engagements.
There is no assurance that these steps will be adequate to deter
misappropriation of our proprietary information or of our customers or that we
will be able to detect unauthorized use of, and take appropriate steps to
enforce, our intellectual property rights.

In the future, litigation may be necessary to enforce and protect our trade
secrets, copyrights and other intellectual property or proprietary rights. We
may also be subject to litigation alleging claimed infringement or litigation
to determine the scope and validity of the intellectual property or proprietary
rights of others. Although we are not aware that our services, trademarks or
other proprietary rights infringe upon the proprietary rights of others, there
is no assurance that third parties will not assert infringement claims against
us or that such claims will not result in a material adverse effect on our
business, financial condition and results of operations. Any litigation
concerning our use of technology could result in substantial cost to us in
defending such actions and/or divert our attention from operations, either of
which could have a material adverse effect on our business, financial condition
or results of operations.

F.     Competition

The IT and systems integration market, especially in the financial services
industry, includes a large number of competitors and is subject to rapid
technological and market changes. We compete for customer projects and
experienced personnel with a number of companies having significantly greater
financial, technical and marketing resources and revenues. Many of these
competitors also have greater name recognition in the financial services
industry. Our competitors operate in a variety of market segments, including
systems consulting and integration, application software, professional services
(such as computer equipment companies like International Business Machines
Corporation), multinational professional service firms, and general management
consulting firms (such as Accenture, Computer Sciences Corporation and
Electronic Data Systems Corporation). In addition, the custom software
development market is highly fragmented with numerous firms, many of which
focus on their respective local markets. We also face competition from
internal IT departments of our customers.

6



---



##### Table of Contents



We expect to experience increasing competition from companies offering
established integration services and new service offerings and technologies.
In addition, current and potential competitors may make strategic acquisitions
or establish cooperative relationships among themselves or with others, thereby
increasing their ability to expand or increase their service offerings to
address the needs of our existing or prospective customers. Accordingly, it is
possible that new competitors or alliances among current and new competitors
may emerge and rapidly gain significant market share. Increased competition
could result in lower utilization rates, billing rate reductions, fewer
customer engagements, reduced gross margins, and loss of market share for us,
any of which could materially adversely affect our business, financial
condition and results of operations.

We believe the principal competitive factors in our market are: knowledge of
the financial services industry, responsiveness to customer needs, quality of
service, project management capability, technical expertise and price. We
believe we compete favorably in most of these areas and excel in the depth of
industry knowledge and experience we bring to our financial services customers.
We believe our ability to compete also depends in part on factors outside of
our control, including the ability of our competitors to attract, motivate and
retain project managers and other personnel.

To be successful in the future, we must respond promptly and effectively to
customer demands, technological changes and competitors innovations. Our
competitors may be able to respond more quickly to new and emerging
technologies and changes in service offerings to prospective customers. There
is no assurance that we will be able to compete successfully with existing or
new competitors or that competition will not have a material adverse effect on
our business, financial condition and results of operations.




ITEM 2: PROPERTIES

Our headquarters and administrative, sales and marketing operations are in
Quincy, Massachusetts in a leased facility, which currently consists of 27,325
square feet. At December 31, 2003, our lease arrangement provides that the
amount of leased space will be reduced to 16,376 square feet. At April 1,
2005, our lease arrangement provides that the amount of space will be further
reduced to 14,836 square feet. The lease expires on March 31, 2010.




ITEM 3: LEGAL PROCEEDINGS

On June 4, 2003, ADS and each of its directors were served with a complaint
filed as a purported class action lawsuit in Massachusetts state court by two
of the Companys stockholders on behalf of all other stockholders of the
Company. The complaint alleges, among other things, that ADS and its directors
have breached or may have breached fiduciary duties owed to ADS stockholders in
connection with its May 5, 2003 announcement that ADS had received from certain
of its directors and stockholders a preliminary expression of interest to
engage in a going private transaction. We believe that the action is without
merit and intend to contest it vigorously. Otherwise, we are not a party to
any litigation that we believe could have a material adverse effect on our
business, financial condition, cash flows and results of operations.




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

No matters were submitted to a vote of our security holders during the fourth
quarter of the year ended March 31, 2003.

7



---



##### Table of Contents






PART II




ITEM 5: MARKET FOR THE REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

Price Range of Common Stock

The Companys stock is currently traded on The NASDAQ National Market
(NASDAQ) under the symbol ADSC. The following table sets forth, on a per
share basis for the periods shown, the high and low bid information of our
common stock as reported on NASDAQ. Such information reflects inter-dealer
prices, without retail markup, markdown or commission and may not represent the
price of actual transactions.

|                  |                                          |  |      |        |     |  |   |        | 
|----------------- | ---------------------------------------- |  | ---- | ------ | --- |  | - | ------ | 
|                  |                                          |  | High |        | Low
|                  |                                          |  |      |        |    
|Fiscal Year 2003: |                                          |  |      |        |     |  |   |       
|                  | First Quarter (April 1  June 30, 2002)  |  | $    | 2.4000 |     |  | $ | 1.8000 | 
|                  | Second Quarter (July 1  Sept. 30, 2002) |  |      | 2.2900 |     |  |   | 1.3600 | 
|                  | Third Quarter (Oct. 1  Dec. 31, 2002)   |  |      | 2.9900 |     |  |   | 1.5500 | 
|                  | Fourth Quarter (Jan. 1  March 31, 2003) |  |      | 3.2200 |     |  |   | 2.0200 | 
|Fiscal Year 2002: |                                          |  |      |        |     |  |   |       
|                  | First Quarter (April 1  June 30, 2001)  |  | $    | 2.8400 |     |  | $ | 2.0000 | 
|                  | Second Quarter (July 1  Sept. 30, 2001) |  |      | 2.7200 |     |  |   | 2.0100 | 
|                  | Third Quarter (Oct. 1  Dec. 31, 2001)   |  |      | 2.1000 |     |  |   | 1.6000 | 
|                  | Fourth Quarter (Jan. 1  March 31, 2002) |  |      | 2.4000 |     |  |   | 1.7700 | 

As of June 13, 2003, there were approximately 126 stockholders of record.

Dividend Policy

We do not intend to pay cash dividends in the foreseeable future. The payment
of any future dividends will be at the discretion of our Board of Directors and
will depend upon, among other things, future earnings, operations, capital
requirements of the Company, business conditions and contractual restrictions
on payment of dividends, if any.

Equity Compensation Plan Information

|                                                       |  |                               |           |                      |  |                      |      |                    |  |                      |           | 
|------------------------------------------------------ |  | ----------------------------- | --------- | -------------------- |  | -------------------- | ---- | ------------------ |  | -------------------- | --------- | 
|                                                       |  |                               |           |                      |  |                      |      |                    |  | Number of           
|                                                       |  |                               |           |                      |  |                      |      |                    |  | securities remaining
|                                                       |  |                               |           |                      |  |                      |      |                    |  | available for future
|                                                       |  |                               |           |                      |  |                      |      |                    |  | issuance under      
|                                                       |  |                               |           |                      |  |                      |      |                    |  | equity              
|                                                       |  |                               |           |                      |  | Weighted-average     |      | compensation plans
|                                                       |  | Number of securities issuable |           | exercise price of    |  | (excluding          
|                                                       |  | upon exercise of outstanding  |           | outstanding options, |  | securities reflected
|Plan Category                                          |  | options, warrants and rights  |           | warrants and rights  |  | in column (a))      
|                                                       |  |                               |           |                      |  |                     
|Equity compensation plans
approved by security holders |  |                               | 1,629,251 |                      |  | $                    | 4.09 |                    |  |                      | 1,474,499 | 
|                                                       |  |                               |           |                      |  |                      |      |                    |  |                      |           | 
|Total                                                  |  |                               | 1,629,251 |                      |  | $                    | 4.09 |                    |  |                      | 1,474,499 | 
|                                                       |  |                               |           |                      |  |                      |      |                    |  |                      |           | 

All equity compensation plans have been approved by security holders.

8



---



##### Table of Contents






ITEM 6: SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated financial data presented below as of and for the
fiscal years ended March 31, 2003, 2002, 2001, 2000 and 1999 have been derived
from our audited consolidated financial statements. This data should be read
in conjunction with Managements Discussion and Analysis of Financial
Condition and Results of Operations, our Consolidated Financial Statements and
related notes thereto, and other financial information appearing elsewhere in
this Form 10-K. All amounts are in thousands, except per share data.

|                                                             |                                          |                       |        |                       |      |      |        |        |       |      |        |        |      |  |        |        |      |  |        |        |      | 
|------------------------------------------------------------ | ---------------------------------------- | --------------------- | ------ | --------------------- | ---- | ---- | ------ | ------ | ----- | ---- | ------ | ------ | ---- |  | ------ | ------ | ---- |  | ------ | ------ | ---- | 
|                                                             |                                          |                       |        | Years Ended March 31,
|                                                             |                                          |                       |        |                      
|                                                             |                                          |                       |        | 2003                  |      | 2002 |        | 2001   |       | 2000 |        | 1999  
|                                                             |                                          |                       |        |                       |      |      |        |        |       |      |        |       
|Consolidated Statements of Operations                        |                                          |                       |        |                       |      |      |        |        |       |      |        |        |      |  |        |        |      |  |        |       
|Data:                                                        |                                          |                       |        |                       |      |      |        |        |       |      |        |        |      |  |        |        |      |  |        |       
|                                                             | Total revenue                            |                       | $      | 21,703                |      |      | $      | 20,419 |       |      | $      | 34,135 |      |  | $      | 35,186 |      |  | $      | 66,763 |     
|                                                             | Gross profit                             |                       |        | 9,477                 |      |      |        | 6,882  |       |      |        | 10,245 |      |  |        | 8,979  |      |  |        | 25,680 |     
|                                                             | Income (loss) from operations            |                       |        | 2,856                 |      |      |        | (2,709 | )     |      |        | (1,868 | )    |  |        | (1,694 | )    |  |        | 12,362 |     
|                                                             | Income (loss) from continuing
operations |                       |        | 2,228                 |      |      |        | (3,394 | )     |      |        | 26     |      |  |        | 19     |      |  |        | 7,759  |     
|                                                             | Net income (loss)                        |                       |        | 2,299                 |      |      |        | (6,121 | )     |      |        | 26     |      |  |        | 19     |      |  |        | 7,759  |     
|                                                             | Basic earnings (loss) per share:         |                       |        |                       |      |      |        |        |       |      |        |        |      |  |        |        |      |  |        |        |     
|                                                             |                                          | Continuing operations |        |                       | 0.17 |      |        |        | (0.26 | )    |        |        | 0.00 |  |        |        | 0.00 |  |        |        | 0.62 | 
|                                                             |                                          | Net income (loss)     |        |                       | 0.18 |      |        |        | (0.47 | )    |        |        | 0.00 |  |        |        | 0.00 |  |        |        | 0.60 | 
|                                                             | Diluted earnings (loss) per share:       |                       |        |                       |      |      |        |        |       |      |        |        |      |  |        |        |      |  |        |        |     
|                                                             |                                          | Continuing operations |        |                       | 0.17 |      |        |        | (0.26 | )    |        |        | 0.00 |  |        |        | 0.00 |  |        |        | 0.62 | 
|                                                             |                                          | Net income (loss)     |        |                       | 0.17 |      |        |        | (0.47 | )    |        |        | 0.00 |  |        |        | 0.00 |  |        |        | 0.60 | 
|Shares used in computing earnings
(loss) per share (basic)   |                                          |                       | 13,062 |                       |      |      | 13,028 |        |       |      | 12,998 |        |      |  | 12,925 |        |      |  | 12,468 |       
|Shares used in computing earnings
(loss) per share (diluted) |                                          |                       | 13,253 |                       |      |      | 13,028 |        |       |      | 13,213 |        |      |  | 13,254 |        |      |  | 12,855 |       
|                                                             |                                          |                       |        |                       |      |      |        |        |       |      |        |        |      |  |        |        |      |  |        |       

|                                  |                            |  |                       |        |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |        | 
|--------------------------------- | -------------------------- |  | --------------------- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ------ |  |  | - | ------ | 
|                                  |                            |  | Years Ended March 31,
|                                  |                            |  |                      
|                                  |                            |  | 2003                  |        | 2002 |  | 2001 |        | 2000 |  | 1999
|                                  |                            |  |                       |        |      |  |      |        |      |  |     
|Consolidated Balance Sheets Data: |                            |  |                       |        |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |       
|                                  | Cash and cash equivalents  |  | $                     | 27,329 |      |  | $    | 15,457 |      |  | $    | 36,655 |  |  | $ | 38,347 |  |  | $ | 37,326 | 
|                                  | Short-term investments     |  |                       | 8,982  |      |  |      | 16,601 |      |  |      |       |  |  |   |       |  |  |   |       | 
|                                  | Working capital            |  |                       | 37,730 |      |  |      | 35,219 |      |  |      | 37,000 |  |  |   | 39,670 |  |  |   | 39,077 | 
|                                  | Total assets               |  |                       | 40,241 |      |  |      | 38,762 |      |  |      | 44,617 |  |  |   | 46,115 |  |  |   | 46,883 | 
|                                  | Total stockholders equity |  |                       | 38,103 |      |  |      | 35,709 |      |  |      | 41,165 |  |  |   | 40,976 |  |  |   | 40,745 | 
|                                  | Cash dividends paid        |  |                       |       |      |  |      |       |      |  |      |       |  |  |   |       |  |  |   |       | 
|                                  |                            |  |                       |        |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |       

9



---



##### Table of Contents



FORWARD LOOKING STATEMENTS

This Report includes forward-looking statements, which are made pursuant to the
safe-harbor provisions of the Private Securities Litigation Reform Act of 1995.
You can identify these forward-looking statements when you see us using words
such as expect, anticipate, believe, intend, may, predict, and
other similar expressions. These forward-looking statements cover, among other
items: events, conditions and financial trends that may affect our future
plans of operation, business strategy, growth of operations and financial
position, including statements regarding revenue and earnings or loss per share
projections, concentration of revenues among a limited number of customers,
expected capital expenditures for fiscal 2004 and sufficiency of cash to meet
working capital and capital expenditure requirements for 2004. Any
forward-looking statements are not guarantees of future performance and are
necessarily subject to a number of risks and uncertainties, some of which are
beyond our control. 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 7: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

Overview

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

On May 5, 2003, we announced that we received a preliminary expression of
interest to engage in a going private transaction from a group consisting of
two current members of management who are also Directors of the Company, one
outside Director and another entity affiliated with one of our outside
Directors (collectively, the Principals). The Board of Directors has
appointed an Independent Committee of the Board to consider the proposal and
enter into negotiations with the Principals regarding the proposal.

Our revenues are derived primarily from professional fees billed to customers
on a time and materials basis or, in certain limited instances, on a fixed
price basis. Included in revenues are reimbursable contract-related travel
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 1.4% and 2.2% of
our revenues for the fiscal years ended March 31, 2003 and 2002, 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 in fiscal 2003, 2002 and 2001 were 91.9%, 81.5% and 65.4%,
respectively, as a percentage of revenues. In the near and intermediate term,
we expect that this heavy concentration of revenues will continue. In fiscal
2003, Citizens

10



---



##### Table of Contents



Financial Corporation, Zions Bancorporation, FleetBoston
Financial Corporation, IntraNet Inc., a TSA Company and Capital One Services,
Inc. accounted for approximately 41.7%, 32.5%, 9.0%, 6.9% and 1.8%,
respectively, of revenues. In fiscal 2002, FleetBoston Financial Corporation,
Citizens Financial Corporation, Zions Bancorporation, IntraNet, Inc., a TSA
Company and National City Corporation accounted for approximately 24.7%, 23.8%,
21.6%, 7.3% and 4.1%, respectively, of revenues. In fiscal 2001, FleetBoston
Financial Corporation, Citizens Banking Corporation (MI), Brokat Financial
Systems, NBT Bancorp and Corillian Corporation accounted for approximately
27.2%, 12.5%, 9.2%, 8.3% and 8.2%, respectively, of revenues. Because a
significant portion of our revenues are derived from services related to
deregulation and consolidation activities in the financial services industry,
changes in the regulatory environment or a reduction in consolidation activity
have in the past, and could in the future, have a material adverse effect on
our business, financial condition and results of operations. In addition, the
loss of a major customer or termination of a major project as a result of an
acquisition of a customer by an organization to which we do not currently
provide services, or for any other reason, could have a material adverse effect
on our business, revenues and profitability.

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 expenses incurred in connection with the delivery of
our services. Customer project margins and personnel utilization percentages
are the most significant variables in determining our income from continuing
operations. We manage our personnel utilization rates by monitoring personnel
needs and generally adjust personnel levels based on specific project
requirements. The number of staff assigned to particular projects may vary
widely depending on the size, duration, and degree of completion and complexity
of each engagement. Delays in project completion and in implementation may
result in periods when personnel are not assigned to active projects and,
accordingly, result in lower average utilization rates during such periods,
which could have a materially adverse effect on our operating results. In
addition, we must maintain appropriate numbers of senior professionals both to
oversee existing engagements and for business development activities.

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.

First Quarter Outlook

For the first quarter of fiscal 2004, we anticipate that revenue will be in the
$4.1 to $4.4 million range, with net loss in the range of ($.01)
to ($.03) per share. The Company had previously projected revenue of
$4.7 to $5.0 million and net income of $.01 to $.03 per share.
Revenue is lower than projected because the Company did not enter into certain
contracts it expected to sign.

11



---



##### Table of Contents



Results of Operations

The following table sets forth, for the periods indicated, certain financial
data as a percentage of revenues:

|                                                             |                                                           |                          |       |                      |      |      |       |      |      |  |       |      |      | 
|------------------------------------------------------------ | --------------------------------------------------------- | ------------------------ | ----- | -------------------- | ---- | ---- | ----- | ---- | ---- |  | ----- | ---- | ---- | 
|                                                             |                                                           |                          |       | Year Ended March 31,
|                                                             |                                                           |                          |       |                     
|                                                             |                                                           |                          |       | 2003                 |      | 2002 |       | 2001
|                                                             |                                                           |                          |       |                      |      |      |       |     
|Revenues                                                     |                                                           |                          | 100.0 | %                    |      |      | 100.0 | %    |      |  | 100.0 | %   
|Cost of revenues                                             |                                                           |                          | 56.3  |                      |      |      | 66.3  |      |      |  | 70.0  |     
|                                                             |                                                           |                          |       |                      |      |      |       |      |      |  |       |     
|Gross profit                                                 |                                                           |                          | 43.7  |                      |      |      | 33.7  |      |      |  | 30.0  |     
|Operating expenses:                                          |                                                           |                          |       |                      |      |      |       |      |      |  |       |     
|                                                             | Sales and marketing                                       |                          |       | 7.6                  |      |      |       | 16.1 |      |  |       | 14.2 |     
|                                                             | General and administrative                                |                          |       | 22.9                 |      |      |       | 26.4 |      |  |       | 20.3 |     
|                                                             | Restructuring expense                                     |                          |       |                     |      |      |       | 4.5  |      |  |       | 1.0  |     
|                                                             |                                                           |                          |       |                      |      |      |       |      |      |  |       |     
|                                                             |                                                           | Total operating expenses |       |                      | 30.5 |      |       |      | 47.0 |  |       |      | 35.5 | 
|                                                             |                                                           |                          |       |                      |      |      |       |      |      |  |       |     
|Income (loss) from operations                                |                                                           |                          | 13.2  |                      |      |      | (13.3 | )    |      |  | (5.5  | )   
|Interest income, net                                         |                                                           |                          | 3.1   |                      |      |      | 5.1   |      |      |  | 6.3   |     
|Write-down of investment                                     |                                                           |                          |      |                      |      |      | 14.7  |      |      |  |      |     
|                                                             |                                                           |                          |       |                      |      |      |       |      |      |  |       |     
|Income (loss) from continuing operations before
income taxes |                                                           |                          | 16.3  |                      |      |      | (22.9 | )    |      |  | 0.8   |     
|Provision (benefit) for income taxes                         |                                                           |                          | 6.0   |                      |      |      | (6.2  | )    |      |  | 0.7   |     
|                                                             |                                                           |                          |       |                      |      |      |       |      |      |  |       |     
|Income (loss) from continuing operations                     |                                                           |                          | 10.3  |                      |      |      | (16.7 | )    |      |  | 0.1   |     
|Discontinued operations:                                     |                                                           |                          |       |                      |      |      |       |      |      |  |       |     
|                                                             | Loss from operations of discontinued business,
net of tax |                          |       |                     |      |      |       | 3.9  |      |  |       |     |     
|                                                             | (Income) loss on disposal of business, net of tax         |                          |       | (0.3                 | )    |      |       | 9.4  |      |  |       |     |     
|                                                             |                                                           |                          |       |                      |      |      |       |      |      |  |       |     
|Net income (loss)                                            |                                                           |                          | 10.6  | %                    |      |      | (30.0 | )%   |      |  | 0.1   | %   
|                                                             |                                                           |                          |       |                      |      |      |       |      |      |  |       |     

Variability of Operating Results

Variations in our revenues and operating results have occurred from quarter to
quarter, and on an annual basis, and may continue to occur as a result of a
number of factors. 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

12



---



##### Table of Contents



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.

Year Ended March 31, 2003 Compared to Year Ended March 31, 2002

Revenues

Revenues increased 6.4% for the year ended March 31, 2003 compared to the year
ended March 31, 2002, to $21.7 million from $20.4 million. This increase was
predominately due to an increase in the volume of services delivered to
customers, offset in part by a 2.2% decrease in the average billing rate from
$139 per hour for fiscal 2002 to $136 per hour for fiscal 2003.

Cost of Revenues

Cost of revenues decreased 9.6% to $12.2 million in fiscal 2003 compared to
$13.5 million in fiscal 2002, representing 56.3% and 66.3% of revenues,
respectively. The dollar decrease in cost of revenues was primarily due to a
decrease in the average number of billable personnel from 90 for fiscal 2002 to
75 for fiscal 2003. The percentage decrease was due to an increase in the
utilization rate from 71.0% for the year ended March 31, 2002 to 86.2% for the
year ended March 31, 2003.

Sales and Marketing

Sales and marketing expenses decreased 51.5% to $1.6 million in fiscal 2003
compared to $3.3 million in fiscal 2002, representing 7.6% and 16.1% of
revenues, respectively. The overall dollar decrease resulted primarily from a
decrease in our sales and marketing group from an average of 16 employees for
fiscal 2002 to an average of 8 employees for fiscal 2003. The percentage
decrease is the result of decreased expenses as well as an increase in the
revenue on which the percentage is calculated.

General and Administrative

General and administrative expenses decreased 7.4% to $5.0 million in fiscal
2003 compared to $5.4 million in fiscal 2002, representing 22.9% and 26.4% of
revenues, respectively. The dollar decrease is primarily due to a decrease in
compensation expenses as a result of a reduction in the average number of
general and administrative personnel from 21 employees for fiscal 2002 to 19
for fiscal 2003. The percentage decrease is the result of decreased expenses
as well as an increase in the revenue on which the percentage is calculated.

Restructuring Expense

In April of fiscal 2002, we reduced our headcount by 35 employees, resulting in
a pre-tax restructuring expense of $925,000.

13



---



##### Table of Contents



Write-Down of Investment

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

Interest Income, Net

Interest income, net decreased 34.6% to $681,000 in fiscal 2003 compared to
$1.04 million for fiscal 2002. This decrease was principally due to average
interest rate decreases of approximately 37.0%, offset in part by a 4.6%
increase in the average balances of cash and cash equivalents and short-term
investments. Interest expense is immaterial.

Provision for Income Taxes

The provision for income taxes from continuing operations increased $2.6
million to $1.3 million in fiscal 2003 compared to a $(1.3) million tax benefit
in fiscal 2002. The provision was established due to profitability. The
benefit was the result of the Economic Stimulus Act, which allowed a company to
carryback losses for five years to recover taxes previously paid. The tax
benefit was initiated in Q4 2002 and was net of a provision for taxes in Q1
2002 of $.4 million, which was to establish a valuation allowance for deferred
taxes. We established the valuation allowance because we believe it is more
likely than not that the deferred tax asset will not be realizable.

Due to varying state and local income tax rates and depending on our levels of
profitability, our effective tax rate may vary from period to period, depending
on the states in which we do business.

Discontinued Operations

On March 29, 2002, we announced our decision to discontinue the operations of
Cool Springs Associates, Inc. d/b/a EarningsInsights (EI). Consequently, we
incurred a charge of $1.9 million, net of income tax benefit, relating to the
write-off of EI assets and an accrual for estimated losses during the phase-out
period.

The disposition of the EI operation represented the disposal of a business
segment under APB No. 30. Accordingly, results of this operation have been
classified as discontinued, and interim quarterly periods have been restated.
For the fiscal year ended March 31, 2002, EI incurred a $797,000 loss, net of
income tax benefit.

For the year ended March 31, 2003, we had income on the disposal of business
(net of tax) of $71,000. This was because actual disposal costs were less than
those estimated in fiscal 2002.

Year Ended March 31, 2002 Compared to Year Ended March 31, 2001

Revenues

Revenues decreased 40.2% for the year ended March 31, 2002 compared to the year
ended March 31, 2001, to $20.4 million from $34.1 million. This decrease was
predominately due to a 46.6% decrease in volume of services delivered to
customers due to the continued IT spending freeze, offset in part by a 14.9%
increase in the average billing rate from $121 per hour for fiscal 2001 to $139
per hour for fiscal 2002.

14



---



##### Table of Contents



Cost of Revenues

Cost of revenues decreased 43.3% to $13.5 million in fiscal 2002 compared to
$23.9 million in fiscal 2001, representing 66.3% and 70.0% of revenues,
respectively. The dollar decrease in cost of revenues was primarily due to a
decrease in the average number of billable personnel from 150 for fiscal 2001
to 90 for fiscal 2002. The decrease in cost of revenues as a percentage of
revenues is due to the increase in the average billing rate.

Sales and Marketing

Sales and marketing expenses decreased 32.4% to $3.3 million in fiscal 2002
compared to $4.9 million in fiscal 2001, representing 16.1% and 14.2% of
revenues, respectively. The overall dollar decrease resulted primarily from a
decrease in our sales and marketing group from an average of 21 employees for
fiscal 2001 to an average of 16 employees for fiscal 2002. The increase in
sales and marketing expense as a percentage of revenues is due to the
significant reduction in revenue from the prior year.

General and Administrative

General and administrative expenses decreased 22.2% to $5.4 million in fiscal
2002 compared to $6.9 million in fiscal 2001, representing 26.4% and 20.3% of
revenues, respectively. The dollar decrease is primarily due to a decrease in
compensation expenses as a result of a reduction in the average number of
general and administrative personnel from 28 employees for fiscal 2001 to 21
for fiscal 2002. The percentage change is primarily due to the significant
reduction in revenue from the prior year.

Restructuring Expense

In April of fiscal 2002, we reduced our headcount by 35 employees, resulting in
a pre-tax restructuring expense of $925,000. In January of fiscal 2001, we
also reduced our headcount by 28 employees resulting in a pre-tax restructuring
expense of $337,000.

Write-Down of Investment

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

Interest Income, Net

Interest income, net decreased $1.1 million to $1.0 million in fiscal 2002
compared to $2.1 million for fiscal 2001. This decrease was principally due to
interest rate decreases and lower cash balances. Interest expense is
immaterial.

Provision (Benefit) for Income Taxes

The provision (benefit) for income taxes from continuing operations decreased
$1.5 million to a $(1.3) million tax benefit in fiscal 2002 compared to a
$250,000 provision in fiscal 2001. The benefit was the result of the passage
of the Economic Stimulus Act which allowed a company to carry-back losses for
five years to recover taxes previously paid. That tax benefit was initiated in
Q4 2002 and was net of a provision for taxes in Q1 2002 of $.4 million which
was to establish a valuation allowance for deferred taxes. Management
established the valuation allowance because it is more likely than not that the
deferred tax asset will not be realizable.

15



---



##### Table of Contents



Discontinued Operations

On March 29, 2002, we announced our decision to discontinue the operations of
EI. Consequently, we incurred a charge of $1.9 million, net of income tax
benefit, relating to the write-off of EI assets and an accrual for estimated
losses during the phase-out period.

The disposition of the EI operation represented the disposal of a business
segment under APB No. 30. Accordingly, results of this operation have been
classified as discontinued, and interim quarterly periods have been restated.
For the fiscal year ended March 31, 2002, EI incurred a $797,000 loss, net of
income tax benefit.

Liquidity and Capital Resources

We have no long-term debt and continue to operate primarily debt-free. Working
capital increased to $37.7 million at March 31, 2003 compared to $35.2 million
at March 31, 2002. This increase was primarily due to our profitability for
fiscal 2003. Our days sales in accounts receivable at March 31, 2003 was 48
compared to 49 days at March 31, 2002. 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 our credit and collection policies, there can be no assurance
that we will not encounter collection problems in the future.

Capital expenditures were approximately $16,000 for the fiscal year 2003. The
expenditures were used primarily for computer and other equipment, software
and, to a lesser extent, furniture and fixtures. For fiscal 2004, capital
expenditures are expected to be approximately $100,000, and will be used
primarily for computers and other equipment.

On May 5, 2003, we announced that we received a preliminary expression of
interest to engage in a going private transaction from a group consisting of
two current members of management who are also Directors of the Company, one
outside Director and another entity affiliated with one of our outside
Directors (collectively, the Principals). The Board of Directors has
appointed an Independent Committee of the Board to consider the proposal and
enter into negotiations with the Principals regarding the proposal.

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

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

We lease our facilities and other equipment under operating leases. Rent
expense recognized under these leases during the fiscal years ended March 31,
2003, 2002 and 2001 totaled approximately $648,000, $627,000 and $639,000,
respectively. Future minimum lease payments due under noncancelable operating
leases are as follows:

16



---



##### Table of Contents



|                      |            |   |                  |     | 
|--------------------- | ---------- | - | ---------------- | --- | 
|                      |            |   | Required Minimum
|                      |            |   | Payments        
|                      |            |   |                 
|                      |            |   | (in thousands)  
|Year ending March 31: |            |   |                  |    
|                      | 2004       |   | $                | 612 | 
|                      | 2005       |   |                  | 456 | 
|                      | 2006       |   |                  | 300 | 
|                      | 2007       |   |                  | 315 | 
|                      | 2008       |   |                  | 330 | 
|                      | Thereafter |   |                  | 705 | 
|                      |            |   |                  |     | 
|                      |            | $ | 2,718            |    
|                      |            |   |                  |     | 

There were no capital leases outstanding as of March 31, 2003.

Recent Accounting Pronouncements

In June 2001, the FASB issued SFAS No. 143, Accounting for Obligations
Associated with the Retirement of Long-Lived Assets. SFAS No. 143 provides
the accounting requirements for retirement obligations associated with tangible
long-lived assets. SFAS No. 143 is effective for financial statements for
fiscal years beginning after June 15, 2002. The Company does not expect that
the adoption of SFAS No. 143 will have a material impact on the Companys
financial statements.

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

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure which amended SFAS No. 123,
Accounting for Stock-Based Compensation. SFAS No. 148 provides alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based compensation. It also amends the disclosure
provisions to require prominent disclosure, in both annual and interim
financial statements, about the effects on reported net income of an entitys
accounting policy decisions with respect to stock-based employee compensation.
The provisions of SFAS No. 148 are to be applied to financial statements for
fiscal years ending after December 15, 2002. Reference is made to the
Stock-Based Compensation section of Note 2 of Item 8 for disclosure of the
Companys stock-based compensation accounting policies and the effect of those
polices on reported net income. The adoption of SFAS No. 148 did not have an
impact on the Companys financial position or results of operations.

In November 2002, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. (FIN) 45 Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others an interpretation of FASB Statements No. 5, 57, and 107 and rescission
of FIN 34. The Interpretation requires that a guarantor recognize, at the
inception of a guarantee, a liability for the fair value of the obligation
undertaken by issuing the guarantee. The Interpretation also requires
additional disclosures to be made by a guarantor in its interim and annual
financial statements about its obligations under certain guarantees it has
issued. The accounting requirements for the initial recognition of guarantees
became applicable on a prospective basis for guarantees issued or modified
after December 31, 2002. The disclosure requirements are effective for all
guarantees outstanding, regardless of when they were issued or modified as of
December 15, 2002. The

17



---



##### Table of Contents



adoption of FIN 45 did not have a material effect on
the Companys consolidated financial statements. The Company has
the following guarantee:

To the extent permitted under Massachusetts law and the Companys Second
Amended and Restated Articles of Organization and to the extent provided for in
the Companys corporate by-laws, the Company will indemnify its officers and
directors for certain events or occurrences while the director or officer is or
was serving at our request in such capacity. The maximum potential amount of
future payments the Company could be required to make under these
indemnification obligations is unlimited; however, the Company has a Directors
and Officers liability insurance policy that limits its exposure and enables
the Company to recover a portion of any future amounts paid, provided that such
insurance policy provides coverage. As these indemnification obligations were
in effect prior to December 31, 2002 these obligations were grandfathered under
the provisions of FIN 45. Accordingly, the Company has not accrued a liability
for these agreements as of March 31, 2003.

In May 2003, the FASB issued SFAS 150, Accounting For Certain Financial
Instruments with Characteristics of Both Liabilities and Equity (SFAS 150),
which establishes standards for how an issuer of financial instruments
classifies and measures certain financial instruments with characteristics of
both liabilities and equity. SFAS 150 requires that an issuer classify a
financial instrument that is within the scope of SFAS 150 as a liability (or an
asset in some circumstances) if, at inception, the monetary value of the
obligation is based solely or predominantly on a fixed monetary amount known at
inception, variations in something other than the fair value of the issuers
equity shares or variations inversely related to changes in the fair value of
the issuers equity shares. This Statement is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. The Company does not expect the adoption of this statement to have a
material impact on its financial statements.

Critical Accounting Policies

We believe the following represent our critical accounting policies:

Revenue Recognition

The Company primarily derives its revenue by providing consulting services on a
time and materials basis and, to a lesser extent, on a fixed price basis. In
fiscal 2003, 98.6% of our revenue from consulting services was provided under
time and materials billing arrangements. Under both time and materials and
fixed price arrangements, revenue is recognized as the consulting services are
performed over the term of the arrangement. Deferred revenue represents cash
collected and/or billings in advance of the performance of services.

Income Taxes

We recognize deferred tax assets and liabilities for the expected consequences
of temporary differences between the financial statement basis and tax basis of
our assets and liabilities. A deferred tax valuation allowance is established
if, in managements opinion, it is more likely than not that all or a portion
of our deferred tax assets will not be realized.

At March 31, 2003, a full valuation allowance has been provided for our
deferred tax assets. If we achieve sustained profitability, some or all of
this valuation allowance would be reversed to income.

18



---



##### Table of Contents



Accounts Receivable

We perform ongoing credit evaluations of our customers and adjust credit limits
based upon payment history and the customers current credit worthiness, as
determined by our review of their current credit information. We continuously
monitor collections and payments from our customers and maintain a provision
for estimated credit losses based upon our historical experience and any
specific customer collection issues that we have identified. While such credit
losses have historically been within our expectations and the provisions
established, we cannot guarantee that we will continue to experience the same
credit loss rates that we have in the past. Since our accounts receivable are
concentrated in a relatively few number of customers, a significant change in
the liquidity or financial position of any one of these customers could have a
material adverse impact on the collectibility of our accounts receivables and
our business, financial condition and results of operations.

Valuation of Long-Lived Assets

We periodically evaluate long-lived assets for potential impairment under SFAS
144. We will perform these evaluations whenever events or changes in
circumstances suggest that the carrying value of an asset or group of assets is
not recoverable. Indicators of potential impairment include:



| |  | a significant change in the manner in which an asset is used;
|- |  | -------------------------------------------------------------
| 
| |  | a significant decrease in the market value of an asset; and  
| 
| |  | a significant adverse change in our business or our industry.

If we believe an indicator of potential impairment exists, we test to determine
whether the impairment recognition criteria of SFAS 144 has been met. In
evaluating long-lived assets for potential impairment, we make several
significant estimates and judgments, including:



| |  | estimating future cash flows associated with the asset or group of assets; and
|- |  | ------------------------------------------------------------------------------
| 
| |  | determining an appropriate discount rate to use in the analysis.              

Use of different estimates and judgments could yield materially different
results in our analysis, and could result in significant different asset
impairment charges.

Marketable Securities

We invest in marketable securities as part of our strategy to invest excess
cash and achieve income therefrom. On a quarterly basis we review the fair
market value of these marketable securities in comparison to historical cost.

If the fair market value of a marketable security is less than our carrying
value, we consider all available evidence in assessing when and if the value of
the investment can be expected to recover to at least its historical cost.
This evidence would include:



| |  | a lack of any substantial company-specific adverse events causing declines in value; and
|- |  | ----------------------------------------------------------------------------------------
| 
| |  | overall financial condition and liquidity of the issuer of the securities.              

If our review indicates that the decline in value is other than temporary, we
write-down our investment to the then current market value and record an
impairment charge in our statements of operations. The determination of
whether an unrealized loss is other than temporary requires significant
judgment, and can have a material impact on our reported results.

19



---



##### Table of Contents






ITEM 7A. 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
March 31, 2003 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 risk are
both immaterial to the Company.

20



---



##### Table of Contents






ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Consolidated Financial Statements

|                                                                                                   |                                                 |  |      |    | 
|-------------------------------------------------------------------------------------------------- | ----------------------------------------------- |  | ---- | -- | 
|                                                                                                   |                                                 |  | Page
|                                                                                                   |                                                 |  |     
|Report of Independent Accountants  PricewaterhouseCoopers LLP                                     |                                                 |  | 22   |   
|Consolidated Balance Sheets as of March 31, 2003 and 2002                                          |                                                 |  | 23   |   
|Consolidated Statements of Operations for the Years Ended March 31, 2003, 2002 and 2001            |                                                 |  | 24   |   
|Consolidated Statements of Stockholders Equity for the Years Ended March 31, 2003, 2002,
and 2001 |                                                 |  | 25   |   
|Consolidated Statements of Cash Flows for the Years Ended March 31, 2003, 2002 and
2001            |                                                 |  | 26   |   
|Notes to Consolidated Financial Statements                                                         |                                                 |  | 27   |   
|Schedule:                                                                                          |                                                 |  |      |   
|                                                                                                   | Schedule II  Valuation and Qualifying Accounts |  |      | 43 | 

21



---



##### Table of Contents



REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of
Atlantic Data Services, Inc:

In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Atlantic Data Services, Inc. and its subsidiary (the Company) at
March 31, 2003 and 2002, and the results of their operations and their cash
flows for each of the three years in the period ended March 31, 2003 in
conformity with accounting principles generally accepted in the United States
of America. In addition, in our opinion, the financial statement schedule
listed in the accompanying index presents fairly in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and the
financial statement schedule are the responsibility of the Companys
management; our responsibility is to express an opinion on these financial
statements and the financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

PricewaterhouseCoopers LLP

Boston, Massachusetts
May 5, 2003, except for the fourth paragraph of Note 14 for which the date is June 4, 2003

22



---



##### Table of Contents



ATLANTIC DATA SERVICES, INC.

Consolidated Balance Sheets
(in thousands, except share data)

|                                           |                                                                                                                                                                                                  |                            |        |           |        |           |        |        |        | 
|------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | -------------------------- | ------ | --------- | ------ | --------- | ------ | ------ | ------ | 
|                                           |                                                                                                                                                                                                  |                            |        | March 31, |        | March 31,
|                                           |                                                                                                                                                                                                  |                            |        | 2003      |        | 2002     
|                                           |                                                                                                                                                                                                  |                            |        |           |        |          
|Assets                                     |                                                                                                                                                                                                  |                            |        |           |        |           |        |       
|Current assets:                            |                                                                                                                                                                                                  |                            |        |           |        |           |        |       
|                                           | Cash and cash equivalents                                                                                                                                                                        |                            | $      | 27,329    |        |           | $      | 15,457 |       
|                                           | Short-term investments                                                                                                                                                                           |                            |        | 8,982     |        |           |        | 16,601 |       
|                                           | Accounts receivable, net of allowance for doubtful accounts
of $275 at March 31, 2003 and $375 at March 31, 2002                                                                                 |                            |        | 2,517     |        |           |        | 3,170  |       
|                                           | Tax refund receivable                                                                                                                                                                            |                            |        | 850       |        |           |        | 1,764  |       
|                                           | Prepaid expenses                                                                                                                                                                                 |                            |        | 190       |        |           |        | 260    |       
|                                           | Deferred taxes, net                                                                                                                                                                              |                            |        |          |        |           |        | 1,020  |       
|                                           |                                                                                                                                                                                                  |                            |        |           |        |           |        |        |       
|                                           |                                                                                                                                                                                                  | Total current assets       |        |           | 39,868 |           |        |        | 38,272 | 
|                                           |                                                                                                                                                                                                  |                            |        |           |        |           |        |        |       
|Property and equipment, net                |                                                                                                                                                                                                  |                            | 177    |           |        |           | 308    |       
|Other assets                               |                                                                                                                                                                                                  |                            | 196    |           |        |           | 182    |       
|                                           |                                                                                                                                                                                                  |                            |        |           |        |           |        |        |       
|Total assets                               |                                                                                                                                                                                                  | $                          | 40,241 |           |        | $         | 38,762 |       
|                                           |                                                                                                                                                                                                  |                            |        |           |        |           |        |        |       
|Liabilities and Stockholders Equity       |                                                                                                                                                                                                  |                            |        |           |        |           |        |       
|Current liabilities:                       |                                                                                                                                                                                                  |                            |        |           |        |           |        |       
|                                           | Accounts payable                                                                                                                                                                                 |                            | $      | 350       |        |           | $      | 455    |       
|                                           | Accrued expenses and other liabilities                                                                                                                                                           |                            |        | 982       |        |           |        | 2,055  |       
|                                           | Deferred revenue                                                                                                                                                                                 |                            |        | 443       |        |           |        | 543    |       
|                                           | Federal and state income taxes payable                                                                                                                                                           |                            |        | 363       |        |           |        |       |       
|                                           |                                                                                                                                                                                                  |                            |        |           |        |           |        |        |       
|                                           |                                                                                                                                                                                                  | Total current liabilities  |        |           | 2,138  |           |        |        | 3,053  | 
|                                           |                                                                                                                                                                                                  |                            |        |           |        |           |        |        |       
|Commitments and Contingencies (Note 14)    |                                                                                                                                                                                                  |                            |        |           |        |           |        |       
|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,
13,135,457 shares issued and outstanding at March 31, 2003
and 13,151,123 shares issued and 13,039,123 outstanding at
March 31, 2002 |                            |        | 131       |        |           |        | 131    |       
|                                           | Additional paid-in capital                                                                                                                                                                       |                            |        | 27,635    |        |           |        | 27,565 |       
|                                           | Retained earnings                                                                                                                                                                                |                            |        | 10,337    |        |           |        | 8,038  |       
|                                           | Treasury stock (112,000 shares carried at cost at March 31,
2002)                                                                                                                                |                            |        |          |        |           |        | (25    | )     
|                                           |                                                                                                                                                                                                  |                            |        |           |        |           |        |        |       
|                                           |                                                                                                                                                                                                  | Total stockholders equity |        |           | 38,103 |           |        |        | 35,709 | 
|                                           |                                                                                                                                                                                                  |                            |        |           |        |           |        |        |       
|Total liabilities and stockholders equity |                                                                                                                                                                                                  | $                          | 40,241 |           |        | $         | 38,762 |       
|                                           |                                                                                                                                                                                                  |                            |        |           |        |           |        |        |       

The accompanying notes are an integral part of these consolidated financial statements.

23



---



##### Table of Contents



ATLANTIC DATA SERVICES, INC.

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

|                                                                           |                                                                                                                       |                          |        |            |       |            |        |            |        |   |        |       |        | 
|-------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------- | ------------------------ | ------ | ---------- | ----- | ---------- | ------ | ---------- | ------ | - | ------ | ----- | ------ | 
|                                                                           |                                                                                                                       |                          |        | Year Ended |       | Year Ended |        | Year Ended
|                                                                           |                                                                                                                       |                          |        | March 31,  |       | March 31,  |        | March 31, 
|                                                                           |                                                                                                                       |                          |        | 2003       |       | 2002       |        | 2001      
|                                                                           |                                                                                                                       |                          |        |            |       |            |        |           
|Revenues                                                                   |                                                                                                                       | $                        | 21,703 |            |       | $          | 20,419 |            |        | $ | 34,135 |      
|Cost of revenues                                                           |                                                                                                                       |                          | 12,226 |            |       |            | 13,537 |            |        |   | 23,890 |      
|                                                                           |                                                                                                                       |                          |        |            |       |            |        |            |        |   |        |      
|Gross profit                                                               |                                                                                                                       |                          | 9,477  |            |       |            | 6,882  |            |        |   | 10,245 |      
|                                                                           |                                                                                                                       |                          |        |            |       |            |        |            |        |   |        |      
|Operating expenses:                                                        |                                                                                                                       |                          |        |            |       |            |        |            |        |   |        |      
|                                                                           | Sales and marketing                                                                                                   |                          |        | 1,645      |       |            |        | 3,284      |        |   |        | 4,856 |       
|                                                                           | General and administrative                                                                                            |                          |        | 4,976      |       |            |        | 5,382      |        |   |        | 6,920 |       
|                                                                           | Restructuring expense                                                                                                 |                          |        |           |       |            |        | 925        |        |   |        | 337   |       
|                                                                           |                                                                                                                       |                          |        |            |       |            |        |            |        |   |        |      
|                                                                           |                                                                                                                       | Total operating expenses |        |            | 6,621 |            |        |            | 9,591  |   |        |       | 12,113 | 
|                                                                           |                                                                                                                       |                          |        |            |       |            |        |            |        |   |        |      
|Income (loss) from operations                                              |                                                                                                                       |                          | 2,856  |            |       |            | (2,709 | )          |        |   | (1,868 | )    
|Interest income, net                                                       |                                                                                                                       |                          | 681    |            |       |            | 1,041  |            |        |   | 2,144  |      
|Write-down of investment                                                   |                                                                                                                       |                          |       |            |       |            | 3,000  |            |        |   |       |      
|                                                                           |                                                                                                                       |                          |        |            |       |            |        |            |        |   |        |      
|Income (loss) from continuing operations
before provision for income taxes |                                                                                                                       |                          | 3,537  |            |       |            | (4,668 | )          |        |   | 276    |      
|Provision (benefit) for income taxes                                       |                                                                                                                       |                          | 1,309  |            |       |            | (1,274 | )          |        |   | 250    |      
|                                                                           |                                                                                                                       |                          |        |            |       |            |        |            |        |   |        |      
|Income (loss) from continuing operations                                   |                                                                                                                       |                          | 2,228  |            |       |            | (3,394 | )          |        |   | 26     |      
|Discontinued operations:                                                   |                                                                                                                       |                          |        |            |       |            |        |            |        |   |        |      
|                                                                           | Loss from operations of discontinued
business, less applicable income tax
benefit of $410                             |                          |        |           |       |            |        | 797        |        |   |        |      |       
|                                                                           | (Income) loss on disposal of business, less
applicable income tax (provision) benefit
of $(39) and $735, respectively |                          |        | (71        | )     |            |        | 1,930      |        |   |        |      |       
|                                                                           |                                                                                                                       |                          |        |            |       |            |        |            |        |   |        |      
|                                                                           |                                                                                                                       | Net income (loss)        |        | $          | 2,299 |            |        | $          | (6,121 | ) |        | $     | 26     | 
|                                                                           |                                                                                                                       |                          |        |            |       |            |        |            |        |   |        |      
|Earnings (loss) per share from continuing
operations:                      |                                                                                                                       |                          |        |            |       |            |        |            |        |   |        |      
|                                                                           | Basic                                                                                                                 |                          | $      | 0.17       |       |            | $      | (0.26      | )      |   | $      | 0.00  |       
|                                                                           | Diluted                                                                                                               |                          | $      | 0.17       |       |            | $      | (0.26      | )      |   | $      | 0.00  |       
|                                                                           |                                                                                                                       |                          |        |            |       |            |        |            |        |   |        |      
|Earnings (loss) per share from discontinued
operations:                    |                                                                                                                       |                          |        |            |       |            |        |            |        |   |        |      
|                                                                           | Basic                                                                                                                 |                          | $      | 0.01       |       |            | $      | (0.21      | )      |   |        |      |       
|                                                                           | Diluted                                                                                                               |                          | $      | 0.01       |       |            | $      | (0.21      | )      |   |        |      |       
|                                                                           |                                                                                                                       |                          |        |            |       |            |        |            |        |   |        |      
|Earnings (loss) per share from net income:                                 |                                                                                                                       |                          |        |            |       |            |        |            |        |   |        |      
|                                                                           | Basic                                                                                                                 |                          | $      | 0.18       |       |            | $      | (0.47      | )      |   | $      | 0.00  |       
|                                                                           | Diluted                                                                                                               |                          | $      | 0.17       |       |            | $      | (0.47      | )      |   | $      | 0.00  |       
|                                                                           |                                                                                                                       |                          |        |            |       |            |        |            |        |   |        |      
|Shares used in computing earnings (loss) per
share (basic)                 |                                                                                                                       |                          | 13,062 |            |       |            | 13,028 |            |        |   | 12,998 |      
|                                                                           |                                                                                                                       |                          |        |            |       |            |        |            |        |   |        |      
|Shares used in computing earnings (loss) per
share (diluted)               |                                                                                                                       |                          | 13,253 |            |       |            | 13,028 |            |        |   | 13,213 |      
|                                                                           |                                                                                                                       |                          |        |            |       |            |        |            |        |   |        |      

The accompanying notes are an integral part of these consolidated financial
statements.

24



---



##### Table of Contents



ATLANTIC DATA SERVICES, INC.

Consolidated Statements of Stockholders Equity
(in thousands, except share data)

|                          |                                 |  |              |          |            |   |          |    |          |   |                |     |        |   |        |        |   |  |         |          |   |   |     |    |  |   |        |        |  
|------------------------- | ------------------------------- |  | ------------ | -------- | ---------- | - | -------- | -- | -------- | - | -------------- | --- | ------ | - | ------ | ------ | - |  | ------- | -------- | - | - | --- | -- |  | - | ------ | ------ | -
|                          |                                 |  | Common Stock |          | Additional |   |          |    |          |   | Treasury Stock |     |        |   |       
|                          |                                 |  |              |          | Paid-In    |   | Retained |    |          |   |                |     |       
|                          |                                 |  | Shares       |          | Amount     |   | Capital  |    | Earnings |   | Shares         |     | Amount |   | Total 
|                          |                                 |  |              |          |            |   |          |    |          |   |                |     |        |   |       
|Balance at March 31, 2000 |                                 |  | 13,087,599   |          |            | $ | 131      |    |          | $ | 26,737         |     |        | $ | 14,133 |        |   |  | 112,000 |          |   | $ | (25 | )  |  | $ | 40,976 |       
|                          | Shares issued under stock
plans |  |              | 47,527   |            |   |          |   |          |   |                | 163 |        |   |        |       |   |  |         |         |   |   |     |   |  |   |        | 163    |  
|                          | Net income                      |  |              |         |            |   |          |   |          |   |                |    |        |   |        | 26     |   |  |         |         |   |   |     |   |  |   |        | 26     |  
|                          |                                 |  |              |          |            |   |          |    |          |   |                |     |        |   |        |        |   |  |         |          |   |   |     |    |  |   |        |       
|Balance at March 31, 2001 |                                 |  | 13,135,126   |          |            |   | 131      |    |          |   | 26,900         |     |        |   | 14,159 |        |   |  | 112,000 |          |   |   | (25 | )  |  |   | 41,165 |       
|                          | Shares issued under stock
plans |  |              | 15,997   |            |   |          |   |          |   |                | 28  |        |   |        |       |   |  |         |         |   |   |     |   |  |   |        | 28     |  
|                          | Warrant issued                  |  |              |         |            |   |          |   |          |   |                | 637 |        |   |        |       |   |  |         |         |   |   |     |   |  |   |        | 637    |  
|                          | Net loss                        |  |              |         |            |   |          |   |          |   |                |    |        |   |        | (6,121 | ) |  |         |         |   |   |     |   |  |   |        | (6,121 | )
|                          |                                 |  |              |          |            |   |          |    |          |   |                |     |        |   |        |        |   |  |         |          |   |   |     |    |  |   |        |       
|Balance at March 31, 2002 |                                 |  | 13,151,123   |          |            |   | 131      |    |          |   | 27,565         |     |        |   | 8,038  |        |   |  | 112,000 |          |   |   | (25 | )  |  |   | 35,709 |       
|                          | Shares issued under stock
plans |  |              | 96,334   |            |   |          | 1  |          |   |                | 94  |        |   |        |       |   |  |         |         |   |   |     |   |  |   |        | 95     |  
|                          | Retirement of treasury stock    |  |              | (112,000 | )          |   |          | (1 | )        |   |                | (24 | )      |   |        |       |   |  |         | (112,000 | ) |   |     | 25 |  |   |        |       |  
|                          | Net income                      |  |              |         |            |   |          |   |          |   |                |    |        |   |        | 2,299  |   |  |         |         |   |   |     |   |  |   |        | 2,299  |  
|                          |                                 |  |              |          |            |   |          |    |          |   |                |     |        |   |        |        |   |  |         |          |   |   |     |    |  |   |        |       
|Balance at March 31, 2003 |                                 |  | 13,135,457   |          |            |   | 131      |    |          |   | 27,635         |     |        |   | 10,337 |        |   |  |        |          |   |   |    |    |  |   | 38,103 |       
|                          |                                 |  |              |          |            |   |          |    |          |   |                |     |        |   |        |        |   |  |         |          |   |   |     |    |  |   |        |       

The accompanying notes are an integral part of these consolidated financial
statements.

25



---



##### Table of Contents



ATLANTIC DATA SERVICES, INC.

Consolidated Statements of Cash Flows
(in thousands)

|                                                                                                                                            |                                                                                  |                                        |        |                      |        |      |         |       |        |   |        |     |        |  
|------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------- | -------------------------------------- | ------ | -------------------- | ------ | ---- | ------- | ----- | ------ | - | ------ | --- | ------ | -
|                                                                                                                                            |                                                                                  |                                        |        | Year Ended March 31,
|                                                                                                                                            |                                                                                  |                                        |        |                     
|                                                                                                                                            |                                                                                  |                                        |        | 2003                 |        | 2002 |         | 2001 
|                                                                                                                                            |                                                                                  |                                        |        |                      |        |      |         |      
|Cash flows from operating activities:                                                                                                       |                                                                                  |                                        |        |                      |        |      |         |       |        |   |        |    
|Net income (loss)                                                                                                                           |                                                                                  | $                                      | 2,299  |                      |        | $    | (6,121  | )     |        | $ | 26     |    
|Adjustments to reconcile income from continuing operations
to net cash provided by (used in) operating activities of continuing
operations: |                                                                                  |                                        |        |                      |        |      |         |       |        |   |        |    
|                                                                                                                                            | Discontinued operations                                                          |                                        |        | (71                  | )      |      |         | 2,727 |        |   |        |    |       
|                                                                                                                                            | Depreciation of fixed assets                                                     |                                        |        | 189                  |        |      |         | 334   |        |   |        | 536 |       
|                                                                                                                                            | Amortization of investment premiums                                              |                                        |        | 86                   |        |      |         | 61    |        |   |        |    |       
|                                                                                                                                            | Write-down of investment                                                         |                                        |        |                     |        |      |         | 3,000 |        |   |        |    |       
|                                                                                                                                            | Deferred taxes                                                                   |                                        |        | 967                  |        |      |         | 464   |        |   |        | 381 |       
|                                                                                                                                            | Provision for bad debt                                                           |                                        |        | (104                 | )      |      |         |      |        |   |        |    |       
|                                                                                                                                            | Change in assets and liabilities (net of effect of acquisition and
disposition): |                                        |        |                      |        |      |         |       |        |   |        |     |       
|                                                                                                                                            |                                                                                  | Accounts receivable                    |        |                      | 753    |      |         |       | (80    | ) |        |     | 2,424  |  
|                                                                                                                                            |                                                                                  | Tax receivable                         |        |                      | 914    |      |         |       | (618   | ) |        |     |       |  
|                                                                                                                                            |                                                                                  | Deferred taxes                         |        |                      |       |      |         |       | (1,020 | ) |        |     |        |  
|                                                                                                                                            |                                                                                  | Prepaid expenses and other assets      |        |                      | 56     |      |         |       | 405    |   |        |     | (289   | )
|                                                                                                                                            |                                                                                  | Accounts payable                       |        |                      | (105   | )    |         |       | (88    | ) |        |     | (219   | )
|                                                                                                                                            |                                                                                  | Accrued expenses and other liabilities |        |                      | (1,073 | )    |         |       | (1,037 | ) |        |     | (1,169 | )
|                                                                                                                                            |                                                                                  | Deferred revenue                       |        |                      | (100   | )    |         |       | 457    |   |        |     | 44     |  
|                                                                                                                                            |                                                                                  | Federal and state income taxes payable |        |                      | 363    |      |         |       |       |   |        |     | (343   | )
|                                                                                                                                            |                                                                                  |                                        |        |                      |        |      |         |       |        |   |        |    
|Net cash provided by (used in) operating activities of continuing
operations                                                                |                                                                                  |                                        | 4,174  |                      |        |      | (1,516  | )     |        |   | 1,391  |    
|                                                                                                                                            |                                                                                  |                                        |        |                      |        |      |         |       |        |   |        |    
|Cash flows from investing activities:                                                                                                       |                                                                                  |                                        |        |                      |        |      |         |       |        |   |        |    
|Purchase of short-term investments                                                                                                          |                                                                                  |                                        | (7,118 | )                    |        |      | (22,162 | )     |        |   |       |    
|Sale of short-term investments                                                                                                              |                                                                                  |                                        | 7,015  |                      |        |      | 1,300   |       |        |   |       |    
|Maturity of short-term investments                                                                                                          |                                                                                  |                                        | 7,801  |                      |        |      | 4,200   |       |        |   |       |    
|Long-term investment                                                                                                                        |                                                                                  |                                        |       |                      |        |      |        |       |        |   | (3,000 | )  
|Purchase of property and equipment                                                                                                          |                                                                                  |                                        | (16    | )                    |        |      | (15     | )     |        |   | (246   | )  
|                                                                                                                                            |                                                                                  |                                        |        |                      |        |      |         |       |        |   |        |    
|Net cash provided by (used in) investing activities of continuing
operations                                                                |                                                                                  |                                        | 7,682  |                      |        |      | (16,677 | )     |        |   | (3,246 | )  
|                                                                                                                                            |                                                                                  |                                        |        |                      |        |      |         |       |        |   |        |    
|Cash flows from financing activities:                                                                                                       |                                                                                  |                                        |        |                      |        |      |         |       |        |   |        |    
|Proceeds from exercise of stock options under stock option plans                                                                            |                                                                                  |                                        | 95     |                      |        |      | 28      |       |        |   | 163    |    
|                                                                                                                                            |                                                                                  |                                        |        |                      |        |      |         |       |        |   |        |    
|Net cash provided by financing activities of continuing operations                                                                          |                                                                                  |                                        | 95     |                      |        |      | 28      |       |        |   | 163    |    
|                                                                                                                                            |                                                                                  |                                        |        |                      |        |      |         |       |        |   |        |    
|Net cash provided by (used in) continuing operations                                                                                        |                                                                                  |                                        | 11,951 |                      |        |      | (18,165 | )     |        |   | (1,692 | )  
|Net cash provided by (used in) discontinued operations                                                                                      |                                                                                  |                                        | (79    | )                    |        |      | (3,033  | )     |        |   |       |    
|                                                                                                                                            |                                                                                  |                                        |        |                      |        |      |         |       |        |   |        |    
|Net increase (decrease) in cash and cash equivalents                                                                                        |                                                                                  |                                        | 11,872 |                      |        |      | (21,198 | )     |        |   | (1,692 | )  
|Cash and cash equivalents, beginning of year                                                                                                |                                                                                  |                                        | 15,457 |                      |        |      | 36,655  |       |        |   | 38,347 |    
|                                                                                                                                            |                                                                                  |                                        |        |                      |        |      |         |       |        |   |        |    
|Cash and cash equivalents, end of year                                                                                                      |                                                                                  | $                                      | 27,329 |                      |        | $    | 15,457  |       |        | $ | 36,655 |    
|                                                                                                                                            |                                                                                  |                                        |        |                      |        |      |         |       |        |   |        |    
|Supplemental disclosure of cash flow information:                                                                                           |                                                                                  |                                        |        |                      |        |      |         |       |        |   |        |    
|                                                                                                                                            | Cash paid during the year for taxes                                              |                                        | $      | 872                  |        |      | $       | 46    |        |   | $      | 759 |       
|                                                                                                                                            |                                                                                  |                                        |        |                      |        |      |         |       |        |   |        |    
|Supplemental disclosure of non-cash investing activities:                                                                                   |                                                                                  |                                        |        |                      |        |      |         |       |        |   |        |    
|                                                                                                                                            | Acquisition of assets with warrant                                               |                                        | $      |                     |        |      | $       | 637   |        |   | $      |    |       
|                                                                                                                                            |                                                                                  |                                        |        |                      |        |      |         |       |        |   |        |    

The accompanying notes are an integral part of these consolidated financial
statements.

26



---



##### Table of Contents



ATLANTIC DATA SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.     DESCRIPTION OF BUSINESS

Atlantic Data Services, Inc. (ADS), provides information technology (IT)
strategy consulting and systems integration services to customers exclusively
in the financial services industry, primarily banks. The Company offers IT
solutions to the business challenges faced by financial services companies
through its in-depth financial services experience, technological expertise and
project management skills. The Companys service offerings are organized
around four practice areas: Customer Relationship Management (CRM),
Conversions and Consolidations, IT Strategy and Consulting, and e-Business.

2.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements include the accounts of Atlantic Data
Services, Inc. and its wholly owned subsidiary, ADS Securities Corp.
(collectively the Company). All intercompany accounts and transactions have
been eliminated in consolidation.

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with an original
maturity date of three months or less to be cash equivalents.

At March 31, 2003 and 2002, cash equivalents were comprised of money market
funds, commercial paper, CDs, municipal bonds and corporate debt totaling
approximately $23,678,000 and $14,878,000, respectively, and repurchase
agreements totaling approximately $3,651,000 and $288,000, respectively. These
investments are subject to minimal credit and market risk.

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.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to credit risk
consist primarily of cash equivalents, short-term investments and accounts
receivable. The risk with respect to cash equivalents and short-term
investments is minimized by the Companys policies in which investments have
relatively short maturities and are only placed with highly rated issuers. A
significant portion of the Companys revenues and accounts receivable are
derived from services provided to banks and other financial institutions. The
risk with respect to accounts receivable is minimized by the creditworthiness
of the Companys customers and the Companys credit and collection policies.
The Company performs ongoing credit evaluations of its customers, generally
does not require collateral, and maintains allowances for potential credit
losses which, when realized, have been within the range of managements
expectations.

27



---



##### Table of Contents



ATLANTIC DATA SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Revenue Recognition

The Company primarily derives its revenue by providing consulting services on a
time and materials basis and, to a lesser extent, on a fixed price basis.
Revenues recognized under fixed price contracts are not material.
Under the Companys consulting arrangements, revenue is recognized as services are performed
over the term of the arrangement. Deferred revenue represents cash collected
and/or billings in advance of the performance of services. Also included in
revenues for the years ended March 31, 2003, 2002 and 2001 are reimbursable
contract-related travel and entertainment expenses of $2,734,000, $2,986,000
and $5,777,000, respectively, which are separately billed to customers.

Accounts Receivable

The Company performs ongoing credit evaluations of its customers and adjusts
credit limits based upon payment history and the customers current credit
worthiness, as determined by its review of its current credit information. The
Company continuously monitors collections and payments from its customers and
maintains a provision for estimated credit losses based upon its historical
experience and any specific customer collection issues that have been
identified. While such credit losses have historically been within the
Companys expectations and the provisions established, the Company cannot
guarantee that it will continue to experience the same credit loss rates that
it has in the past. Since the Companys accounts receivable are concentrated
in a relatively few number of customers, a significant change in the liquidity
or financial position of any one of these customers could have a material
adverse impact on the collectibility of its accounts receivables and future
operating results.

Property and Equipment

Property and equipment are stated at cost, less depreciation. Depreciation
expense is recognized using the straight-line method over the estimated useful
lives of the related assets. When assets are sold or retired, the related
costs and accumulated depreciation are removed from the accounts and any
resulting gain or loss is reflected in operations.

Impairment of Long-Lived Assets

On April 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets (SFAS 144). In accordance with SFAS 144, the Company assesses the
potential impairment of long-lived assets whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. Factors
the Company considers important which could indicate an impairment include
significant underperformance relative to historical or projected future
operating results, significant changes in the manner of the Companys use of
the acquired asset or the strategy of its overall business and significant
negative industry or economic trends. When the Company determines that the
carrying value of long-lived assets may not be recoverable, the related
estimated future undiscounted cash flows expected to result from the use of the
asset and its eventual disposition are compared to the carrying amount of the
asset. If the sum of the estimated future cash flows is less than the carrying
amount, the Company records an impairment based on the estimated discounted
cash flows using a discount rate determined by Company management to be
commensurate with the associated risks.

28



---



##### Table of Contents



ATLANTIC DATA SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Leases

Leases are recorded as capital or operating leases. Any lease where
substantially all of the benefits and risks related to the ownership of the
leased asset are transferred to the lessee, as defined by Statement of
Financial Accounting Standards (SFAS) No. 13, Accounting for Leases, is
accounted for as if the asset was acquired and as if the obligation were
assumed as of the date of the lease. All other leases are recorded as
operating leases, whereby the related costs are charged to income on a
straight-line basis over the lease term.

Stock-Based Compensation

Proceeds from the exercise of stock options under the Companys stock plans are
credited to common stock at par value and the excess is credited to additional
paid-in capital. There are no charges or credits to income for stock options.

The Company applies Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations, in accounting for its
stock-based compensation plans. Accordingly, no compensation expense has been
recognized for its stock-based compensation plans other than for restricted
stock. The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 148, Accounting for Stock-Based
Compensation -Transition and Disclosure, an amendment of FASB Statement No.
123 (SFAS No. 148); therefore, no compensation expense was recognized for the
Companys stock option plans.

Had compensation expense for the Companys stock option plans been determined
based on the fair value at the grant date for awards under these plans,
consistent with the methodology prescribed under SFAS No. 148, the Companys
net income and earnings per share would have approximated the pro forma amounts
indicated below:

|                                                                      |  |                                           |       |           |  |           |        |   |  |   |        |  
|--------------------------------------------------------------------- |  | ----------------------------------------- | ----- | --------- |  | --------- | ------ | - |  | - | ------ | -
|                                                                      |  | For the Year Ended                       
|                                                                      |  |                                          
|                                                                      |  | March 31,                                 |       | March 31, |  | March 31,
|                                                                      |  | 2003                                      |       | 2002      |  | 2001     
|                                                                      |  |                                           |       |           |  |          
|                                                                      |  | (In thousands, except for per share data)
|Reported net income (loss)                                            |  | $                                         | 2,299 |           |  | $         | (6,121 | ) |  | $ | 26     |  
|                                                                      |  |                                           |       |           |  |           |        |   |  |   |        |  
|Reported basic earnings (loss) per share                              |  |                                           | .18   |           |  |           | (0.47  | ) |  |   | 0.00   |  
|Reported diluted earnings (loss) per share                            |  |                                           | .17   |           |  |           | (0.47  | ) |  |   | 0.00   |  
|                                                                      |  |                                           |       |           |  |           |        |   |  |   |        |  
|Adjustment to compensation expense for
stock-based awards, net of tax |  |                                           | (349  | )         |  |           | (184   | ) |  |   | (3,838 | )
|                                                                      |  |                                           |       |           |  |           |        |   |  |   |        |  
|Pro forma net income (loss)                                           |  |                                           | 1,950 |           |  |           | (6,305 | ) |  |   | (3,812 | )
|Pro forma basic earnings (loss) per share                             |  |                                           | 0.15  |           |  |           | (0.48  | ) |  |   | (0.29  | )
|Pro forma diluted earnings (loss) per share                           |  |                                           | 0.15  |           |  |           | (0.48  | ) |  |   | (0.29  | )
|                                                                      |  |                                           |       |           |  |           |        |   |  |   |        |  

The weighted-average fair value of each stock option granted in 2003, 2002, and
2001 was estimated as $1.05, $1.44 and $3.77, respectively, on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions:

29



---



##### Table of Contents



ATLANTIC DATA SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|                       |  |                    |    |           |  |           |    |   |  |  |     |  
|---------------------- |  | ------------------ | -- | --------- |  | --------- | -- | - |  |  | --- | -
|                       |  | For the Year Ended
|                       |  |                   
|                       |  | March 31,          |    | March 31, |  | March 31,
|                       |  | 2003               |    | 2002      |  | 2001     
|                       |  |                    |    |           |  |          
|Dividend yield         |  |                    |   |           |  |           |   |   |  |  |    |  
|Expected life in years |  | 4 years            |    | 4 years   |  | 4 years  
|Dividend rate          |  |                    |   |           |  |           |   |   |  |  |    |  
|Volatility             |  |                    | 50 | %         |  |           | 75 | % |  |  | 118 | %

The risk free interest rate ranged from 2.1% to 2.6% in 2003, 3.6% to 4.7% in
2002, and 4.7% to 6.6% in 2001.

Segment Information

The Company follows SFAS No. 131, Disclosure about Segments of an Enterprise
and Related Information. SFAS No. 131 prescribes the use of the management
approach whereby the Companys reportable segments are established based on the
internal reporting that is used by management for making operating decisions
and assessing performance. Also required by SFAS No. 131 are disclosures about
products and services, geographic areas and major customers (see Note 12).

Earnings per Common Share

The Company follows SFAS No. 128, Earnings per Share. SFAS No. 128 requires
the presentation of two amounts, basic earnings (loss) per share and diluted
earnings (loss) per share. Basic earnings (loss) per share is calculated by
dividing income (loss) from continuing operations, discontinued operations and
net income (loss) by the weighted average number of shares of common stock
outstanding during the period. Diluted earnings (loss) per share is computed
using the weighted average number of common stock outstanding during the
period, plus the dilutive effect of common stock equivalents.

Income Taxes

The Company recognizes deferred tax assets and liabilities for the expected
consequences of temporary differences between the financial statement basis and
tax basis of the Companys assets and liabilities. A deferred tax valuation
allowance is established if, in managements opinion, it is more likely than
not that all or a portion of the Companys deferred tax assets will not be
realized.

Use of Estimates

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported period.
Actual results could differ from those estimates.

Guarantees & Indemnifications

In November 2002, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. (FIN) 45 Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others an interpretation of FASB Statements No. 5, 57, and 107 and rescission
of FIN 34.

30



---



##### Table of Contents



ATLANTIC DATA SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Interpretation requires that a guarantor recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken by
issuing the guarantee. The Interpretation also requires additional disclosures
to be made by a guarantor in its interim and annual financial statements about
its obligations under certain guarantees it has issued. The accounting
requirements for the initial recognition of guarantees became applicable on a
prospective basis for guarantees issued or modified after December 31, 2002.
The disclosure requirements are effective for all guarantees outstanding,
regardless of when they were issued or modified as of December 15, 2002. The
adoption of FIN 45 did not have a material effect on the Companys consolidated
financial statements. The Company has the following guarantee:

To the extent permitted under Massachusetts law and the Companys Second
Amended and Restated Articles of Organization and to the extent provided for in
the Companys corporate by-laws, the Company will indemnify its officers and
directors for certain events or occurrences while the director or officer is or
was serving at our request in such capacity. The maximum potential amount of
future payments the Company could be required to make under these
indemnification obligations is unlimited; however, the Company has a Directors
and Officers liability insurance policy that limits its exposure and enables
the Company to recover a portion of any future amounts paid, provided that such
insurance policy provides coverage. As these indemnification obligations were
in effect prior to December 31, 2002 these obligations were grandfathered under
the provisions of FIN 45. Accordingly, the Company has not accrued a liability
for these agreements as of March 31, 2003.

Other Recent Accounting Pronouncements

In June 2001, the FASB issued SFAS No. 143, Accounting for Obligations
Associated with the Retirement of Long-Lived Assets. SFAS No. 143 provides
the accounting requirements for retirement obligations associated with tangible
long-lived assets. SFAS No. 143 is effective for financial statements for
fiscal years beginning after June 15, 2002. The Company does not expect that
the adoption of SFAS No. 143 will have a material impact on the Companys
financial statements.

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

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure which amended SFAS No. 123,
Accounting for Stock-Based Compensation. SFAS No. 148 provides alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based compensation. It also amends the disclosure
provisions to require prominent disclosure, in both annual and interim
financial statements, about the effects on reported net income of an entitys
accounting policy decisions with respect to stock-based employee compensation.
The provisions of SFAS No. 148 are to be applied to financial statements for
fiscal years ending after December 15, 2002. Reference is made to the
Stock-Based Compensation section of Note 2 for disclosure of the Companys
stock-based compensation accounting policies and the effect of those polices on
reported net income. The adoption of SFAS No. 148 did not have an impact on
the Companys financial position or results of operations.

31



---



##### Table of Contents



ATLANTIC DATA SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In May 2003, the FASB issued SFAS 150, Accounting For Certain Financial
Instruments with Characteristics of Both Liabilities and Equity (SFAS 150),
which establishes standards for how an issuer of financial instruments
classifies and measures certain financial instruments with characteristics of
both liabilities and
equity. SFAS 150 requires that an issuer classify a financial instrument that
is within the scope of SFAS 150 as a liability (or an asset in some
circumstances) if, at inception, the monetary value of the obligation is based
solely or predominantly on a fixed monetary amount known at inception,
variations in something other than the fair value of the issuers equity shares
or variations inversely related to changes in the fair value of the issuers
equity shares. This Statement is effective for financial instruments entered
into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. The
Company does not expect the adoption of this statement to have a material
impact on its financial statements.

3.     PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

|                                          |  |             |      |           |     |                |        |   |     |   |        |  
|----------------------------------------- |  | ----------- | ---- | --------- | --- | -------------- | ------ | - | --- | - | ------ | -
|                                          |  | Useful Life |      | March 31, |     | March 31,     
|                                          |  | in Years    |      | 2003      |     | 2002          
|                                          |  |             |      |           |     |               
|                                          |  |             |      |           |     | (in thousands)
|Computer equipment and software           |  |             | 3-5  |           |     | $              | 2,140  |   |     | $ | 2,124  |  
|Office furniture and equipment            |  |             | 5-7  |           |     |                | 677    |   |     |   | 669    |  
|Leasehold improvements                    |  | Lease Term  |      |           | 509 |                |        |   | 509 |  
|Building                                  |  |             | 31.5 |           |     |                | 183    |   |     |   | 183    |  
|                                          |  |             |      |           |     |                |        |   |     |   |        |  
|                                          |  |             |      |           |     |                | 3,509  |   |     |   | 3,485  |  
|Accumulated depreciation and amortization |  |             |      |           |     |                | (3,332 | ) |     |   | (3,177 | )
|                                          |  |             |      |           |     |                |        |   |     |   |        |  
|                                          |  |             |      |           |     | $              | 177    |   |     | $ | 308    |  
|                                          |  |             |      |           |     |                |        |   |     |   |        |  

Depreciation and amortization expense relating to fixed assets was $189, $334
and $536 for the years ended March 31, 2003, 2002 and 2001, respectively.

4.      ACCRUED EXPENSES AND OTHER LIABILITIES

Accrued expenses and other liabilities consist of the following:

|                     |  |                |     |           |  |   |       | 
|-------------------- |  | -------------- | --- | --------- |  | - | ----- | 
|                     |  | March 31,      |     | March 31,
|                     |  | 2003           |     | 2002     
|                     |  |                |     |          
|                     |  | (in thousands)
|Accrued payroll      |  | $              | 302 |           |  | $ | 652   | 
|Accrued medical      |  |                | 26  |           |  |   | 294   | 
|Compensated absences |  |                | 94  |           |  |   | 134   | 
|Other                |  |                | 560 |           |  |   | 975   | 
|                     |  |                |     |           |  |   |       | 
|                     |  | $              | 982 |           |  | $ | 2,055 | 
|                     |  |                |     |           |  |   |       | 

32



---



##### Table of Contents



ATLANTIC DATA SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5.      INCOME TAXES

Significant components of the provision (benefit) for income taxes from
continuing operations are presented below:

|          |         |   |                |     |           |   |           |        |   |   |     |     |  
|--------- | ------- | - | -------------- | --- | --------- | - | --------- | ------ | - | - | --- | --- | -
|          |         |   | March 31,      |     | March 31, |   | March 31,
|          |         |   | 2003           |     | 2002      |   | 2001     
|          |         |   |                |     |           |   |          
|          |         |   | (in thousands)
|Current:  |         |   |                |     |           |   |           |        |   |   |     |    
|          | Federal |   | $              | 275 |           |   | $         | (1,638 | ) |   | $   | (37 | )
|          | State   |   |                | 67  |           |   |           |       |   |   |     | 106 |  
|Deferred: |         |   |                |     |           |   |           |        |   |   |     |    
|          | Federal |   |                | 967 |           |   |           | 148    |   |   |     | 250 |  
|          | State   |   |                |    |           |   |           | 216    |   |   |     | (69 | )
|          |         |   |                |     |           |   |           |        |   |   |     |     |  
|          |         | $ | 1,309          |     |           | $ | (1,274    | )      |   | $ | 250 |    
|          |         |   |                |     |           |   |           |        |   |   |     |     |  

The reconciliation of the Companys effective tax rate from continuing
operations for the years ended March 31, 2003, 2002 and 2001 is as follows:

|                                    |                 |   |                |       |      |   |        |        |   |   |     |     | 
|----------------------------------- | --------------- | - | -------------- | ----- | ---- | - | ------ | ------ | - | - | --- | --- | 
|                                    |                 |   | 2003           |       | 2002 |   | 2001  
|                                    |                 |   |                |       |      |   |       
|                                    |                 |   | (in thousands)
|Pretax income                       |                 | $ | 3,537          |       |      | $ | (4,668 | )      |   | $ | 276 |    
|                                    |                 |   |                |       |      |   |        |        |   |   |     |    
|Statutory income tax rate           |                 |   | 1,203          |       |      | $ | (1,587 | )      |   | $ | 96  |    
|State taxes, net of federal benefit |                 |   | 188            |       |      |   | (481   | )      |   |   | 24  |    
|Permanent differences               |                 |   | 16             |       |      |   | 35     |        |   |   | 134 |    
|Net valuation allowance             |                 |   | (119           | )     |      |   | 762    |        |   |   |    |    
|Other                               |                 |   | 21             |       |      |   | (3     | )      |   |   | (4  | )  
|                                    |                 |   |                |       |      |   |        |        |   |   |     |    
|                                    | Total provision |   | $              | 1,309 |      |   | $      | (1,274 | ) |   | $   | 250 | 
|                                    |                 |   |                |       |      |   |        |        |   |   |     |    

The Companys deferred tax assets are comprised of the following:

|                                |  |                |        |           |  |   |        |  
|------------------------------- |  | -------------- | ------ | --------- |  | - | ------ | -
|                                |  | March 31,      |        | March 31,
|                                |  | 2003           |        | 2002     
|                                |  |                |        |          
|                                |  | (in thousands)
|Allowance for doubtful accounts |  | $              | 110    |           |  | $ | 151    |  
|Compensated absence accrual     |  |                | 38     |           |  |   | 54     |  
|Depreciation                    |  |                | 198    |           |  |   | 254    |  
|Net operating loss carryforward |  |                | 634    |           |  |   | 808    |  
|Other accruals                  |  |                | 182    |           |  |   | 340    |  
|Valuation allowance             |  |                | (1,162 | )         |  |   | (1,607 | )
|                                |  |                |        |           |  |   |        |  
|                                |  | $              |       |           |  | $ |       |  
|                                |  |                |        |           |  |   |        |  

33



---



##### Table of Contents



ATLANTIC DATA SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Management continues to evaluate the positive and negative evidence bearing
upon the realizability of its deferred tax assets and believes that a full
valuation allowance against these assets, which are comprised principally of
net operating loss carryforwards and various accruals, is appropriate. The
information considered in making this determination includes the amounts and
trends of income in prior years and projections of future income in fiscal
2004 and beyond. While the business was profitable in fiscal 2003, management
believes that significant uncertainty continues to exist relative to the
Company achieving sustained profitability and believes it is more likely then
not that the deferred tax asset will not be realizable in the future.
Management will continue to reevaluate the positive and negative evidence
periodically.

6.     STOCKHOLDERS EQUITY

On June 29, 2001, the Company issued a warrant to purchase 300,000 shares of
common stock at an exercise price of $5.08 in connection with the
EarningsInsights (EI) acquisition. Such warrant expires seven years from the
date of issuance. The warrant may be exercised in whole or in part during the
seven-year exercise period. The warrant was valued as of the issuance date at
$637,000 based on the Black-Scholes Option Pricing Model. (For additional
information concerning the EI acquisition, please see Note 15.)

7.     STOCK OPTION PLANS

Key Person Stock Plan

In March 1985, the Board of Directors approved the Companys Key Person Stock
Plan (the Key Person Plan) and authorized that 560,000 shares of common stock
be reserved for issuance under such plan. Under the terms of the Key Person
Plan, the Company is authorized to sell shares at the then fair market value of
common stock to officers and other key employees of and consultants to the
Company. To date, 394,800 have been issued under the Key Person Plan, of which
an aggregate 112,000 shares were repurchased by the Company and were held in
treasury at March 31, 2002. On October 30, 2002, the Board of Directors voted
that any and all shares of any class or series of stock of the Company,
including the 112,000 shares of common stock $0.01 par value per share, held in
treasury by the Company be restored to the status of authorized but unissued
shares of the applicable class or series of such stock. No common stock was
issued pursuant to this plan during the years ended March 31, 2003, 2002 and
2001. At March 31, 2003, 165,200 shares of common stock were available for
future issuance under the Key Person Plan; however, the Company does not intend
to issue additional shares under the Key Person Plan.

Incentive Stock Option Plan

On January 26, 1993, the Board of Directors approved the Companys 1992
Incentive Stock Option Plan (the 1992 Plan). Under the terms of the 1992
Plan, the Company is authorized to grant incentive stock options to purchase
shares of common stock to officers and other employees of and consultants to
the Company. The aggregate number of shares of common stock which may be
issued pursuant to the 1992 Plan is 812,000. Vesting is determined by the
Board of Directors. All options issued were issued to employees and vested
immediately upon issuance. At March 31, 2003, no options were available for
future grant under the 1992 Plan.

1997 Stock Plan

In October 1997, the Board of Directors approved the Companys 1997 Stock Plan
(the Plan), and authorized that 500,000 shares of common stock be reserved
for issuance under such plan. Under the terms of the Plan, the Company is
authorized to grant incentive stock options and non-qualified stock options, as
well as awards and direct purchases of common stock to employees, consultants,
directors and officers of the Company. In March

34



---



##### Table of Contents



ATLANTIC DATA SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1998, the Board of Directors
voted to amend the Stock Plan to provide, among other things, that the number
of shares reserved for issuance under the Stock Plan be increased from 500,000
shares of common stock to 1,500,000 shares of common stock. In March 1999, the
Board of Directors voted to increase the authorized number of shares for
issuance under the Plan to 3,000,000, which vote was ratified and approved by
the Companys stockholders at the July 28, 1999 Annual Meeting of Stockholders.

1998 Employee Stock Purchase Plan

The 1998 Employee Stock Purchase Plan (the 1998 Plan) provides for the grant
of rights to eligible employees on a semi-annual basis to purchase shares of
the Companys common stock. The 1998 Plan allows eligible employees to
purchase up to 500 shares at the lesser of (1) 85% of the average market price
of the common stock on the first business day of the Payment Period or (2) 85%
of the average market price of the common stock on the last business day of the
Payment Period. The participant can contribute up to 10% of total compensation
to the 1998 Plan.

Stock Option Activity

The option activity for the years ended March 31, 2003, 2002 and 2001 was as
follows:

|                                          |           |  |           |          |          |   |          |      |          |  |           |            |          |   |      |      |  |  |           |           |   |   |      |      | 
|----------------------------------------- | --------- |  | --------- | -------- | -------- | - | -------- | ---- | -------- |  | --------- | ---------- | -------- | - | ---- | ---- |  |  | --------- | --------- | - | - | ---- | ---- | 
|                                          |           |  | 2003      |          | 2002     |   | 2001    
|                                          |           |  |           |          |          |   |         
|                                          |           |  |           |          |          |   | Weighted |      |          |  |           |            | Weighted |   |      |      |  |  | Weighted 
|                                          |           |  | Number    |          | Average  |   | Number   |      | Average  |  | Number    |            | Average 
|                                          |           |  | of        |          | Exercise |   | of       |      | Exercise |  | of        |            | Exercise
|                                          |           |  | Shares    |          | Price    |   | Shares   |      | Price    |  | Shares    |            | Price   
|                                          |           |  |           |          |          |   |          |      |          |  |           |            |         
|Options outstanding
at beginning of year  |           |  | 1,658,169 |          |          | $ | 4.34     |      |          |  | 2,257,000 |            |          | $ | 5.08 |      |  |  | 1,990,625 |           |   | $ | 5.64 |     
|                                          | Granted   |  |           | 334,000  |          |   |          | 2.00 |          |  |           | 422,000    |          |   |      | 2.09 |  |  |           | 1,019,000 |   |   |      | 4.28 | 
|                                          | Exercised |  |           | (85,000  | )        |   |          | 0.92 |          |  |           |           |          |   |      |     |  |  |           | (26,000   | ) |   |      | 4.97 | 
|                                          | Cancelled |  |           | (277,918 | )        |   |          | 3.99 |          |  |           | (1,020,831 | )        |   |      | 5.05 |  |  |           | (726,625  | ) |   |      | 5.39 | 
|                                          |           |  |           |          |          |   |          |      |          |  |           |            |          |   |      |      |  |  |           |           |   |   |      |     
|Outstanding options
at end of year        |           |  | 1,629,251 |          |          |   | 4.09     |      |          |  | 1,658,169 |            |          |   | 4.34 |      |  |  | 2,257,000 |           |   |   | 5.08 |     
|                                          |           |  |           |          |          |   |          |      |          |  |           |            |          |   |      |      |  |  |           |           |   |   |      |     
|Exercisable at end of
year                |           |  | 1,056,293 |          |          |   | 4.95     |      |          |  | 1,094,196 |            |          |   | 4.87 |      |  |  | 1,085,625 |           |   |   | 5.47 |     
|                                          |           |  |           |          |          |   |          |      |          |  |           |            |          |   |      |      |  |  |           |           |   |   |      |     
|Available for future
grant at end of year |           |  | 1,474,499 |          |          |   |         |      |          |  | 1,530,581 |            |          |   |     |      |  |  | 932,750   |           |   |   |     |     
|                                          |           |  |           |          |          |   |          |      |          |  |           |            |          |   |      |      |  |  |           |           |   |   |      |     

35



---



##### Table of Contents



ATLANTIC DATA SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes stock options outstanding at March 31, 2003:

|               |       |             |           |                     |         |                     |      |             |      |          |      |   |       |  |           |          |         |   |      |   |       | 
|-------------- | ----- | ----------- | --------- | ------------------- | ------- | ------------------- | ---- | ----------- | ---- | -------- | ---- | - | ----- |  | --------- | -------- | ------- | - | ---- | - | ----- | 
|               |       |             |           | Options Outstanding |         | Options Exercisable
|               |       |             |           |                     |         |                    
|               |       |             |           |                     |         |                     |      | Weighted    |      |          |      |   |       |  |           |          |         |   |      |  
|               |       |             |           |                     |         |                     |      | Average     |      | Weighted |      |   |       |  |           | Weighted
|               |       |             |           |                     |         |                     |      | Remaining   |      | Average  |      |   |       |  |           | Average 
|Range of       |       | Number      |           | Contractual         |         | Exercise            |      | Number      |      | Exercise
|Exercise Price |       | Outstanding |           | Life                |         | Price               |      | Exercisable |      | Price   
|               |       |             |           |                     |         |                     |      |             |      |         
|$              | 0.91  |             |           |                     | 193,000 |                     |      |             | 3.59 |          |      | $ | 0.91  |  |           |          | 193,000 |   |      | $ | 0.91  | 
|               | 1.74  |             |           |                     | 144,667 |                     |      |             | 8.74 |          |      |   | 1.74  |  |           |          | 40,005  |   |      |   | 1.74  | 
|               | 1.80  |             |           |                     | 92,000  |                     |      |             | 9.55 |          |      |   | 1.80  |  |           |          | 500     |   |      |   | 1.80  | 
|               | 1.95  |             |           |                     | 160,000 |                     |      |             | 9.08 |          |      |   | 1.95  |  |           |          | 2,500   |   |      |   | 1.95  | 
|               | 2.01  |             |           |                     | 20,000  |                     |      |             | 8.39 |          |      |   | 2.01  |  |           |          | 20,000  |   |      |   | 2.01  | 
|               | 2.20  |             |           |                     | 500     |                     |      |             | 8.41 |          |      |   | 2.20  |  |           |          | 500     |   |      |   | 2.20  | 
|               | 2.25  |             |           |                     | 19,000  |                     |      |             | 9.39 |          |      |   | 2.25  |  |           |          |        |   |      |   |      | 
|               | 2.34  |             |           |                     | 61,000  |                     |      |             | 9.12 |          |      |   | 2.34  |  |           |          | 334     |   |      |   | 2.34  | 
|               | 2.48  |             |           |                     | 30,500  |                     |      |             | 8.33 |          |      |   | 2.48  |  |           |          | 10,500  |   |      |   | 2.48  | 
|               | 3.63  |             |           |                     | 30,000  |                     |      |             | 7.18 |          |      |   | 3.63  |  |           |          |        |   |      |   |      | 
|               | 4.13  |             |           |                     | 30,000  |                     |      |             | 6.57 |          |      |   | 4.13  |  |           |          | 30,000  |   |      |   | 4.13  | 
|               | 4.25  |             |           |                     | 60,000  |                     |      |             | 4.78 |          |      |   | 4.25  |  |           |          | 60,000  |   |      |   | 4.25  | 
|               | 4.69  |             |           |                     | 120,334 |                     |      |             | 7.42 |          |      |   | 4.69  |  |           |          | 80,704  |   |      |   | 4.69  | 
|               | 5.05  |             |           |                     | 45,000  |                     |      |             | 7.30 |          |      |   | 5.05  |  |           |          | 15,000  |   |      |   | 5.05  | 
|               | 5.06  |             |           |                     | 368,000 |                     |      |             | 5.94 |          |      |   | 5.06  |  |           |          | 368,000 |   |      |   | 5.06  | 
|               | 5.25  |             |           |                     | 60,000  |                     |      |             | 7.09 |          |      |   | 5.25  |  |           |          | 40,000  |   |      |   | 5.25  | 
|               | 7.13  |             |           |                     | 8,000   |                     |      |             | 6.91 |          |      |   | 7.13  |  |           |          | 8,000   |   |      |   | 7.13  | 
|               | 9.00  |             |           |                     | 127,750 |                     |      |             | 4.87 |          |      |   | 9.00  |  |           |          | 127,750 |   |      |   | 9.00  | 
|               | 13.00 |             |           |                     | 31,500  |                     |      |             | 5.14 |          |      |   | 13.00 |  |           |          | 31,500  |   |      |   | 13.00 | 
|               | 13.44 |             |           |                     | 20,000  |                     |      |             | 5.16 |          |      |   | 13.44 |  |           |          | 20,000  |   |      |   | 13.44 | 
|               | 15.00 |             |           |                     | 8,000   |                     |      |             | 5.42 |          |      |   | 15.00 |  |           |          | 8,000   |   |      |   | 15.00 | 
|               |       |             |           |                     |         |                     |      |             |      |          |      |   |       |  |           |          |         |   |      |  
|$0.91  $15.00 |       |             | 1,629,251 |                     |         |                     | 6.73 |             |      | $        | 4.09 |   |       |  | 1,056,293 |          |         | $ | 4.95 |  
|               |       |             |           |                     |         |                     |      |             |      |          |      |   |       |  |           |          |         |   |      |  

36



---



##### Table of Contents



ATLANTIC DATA SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8.      EARNINGS PER SHARE

The following table sets forth per share earnings (loss) for the year ended
March 31, 2003 and 2002:

|                                                                                                       |                                                                                                              |                        |   |                    |         |           |   |            |   |  |   |            |         | 
|------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------ | ---------------------- | - | ------------------ | ------- | --------- | - | ---------- | - |  | - | ---------- | ------- | 
|                                                                                                       |                                                                                                              |                        |   | For the Year Ended
|                                                                                                       |                                                                                                              |                        |   |                   
|                                                                                                       |                                                                                                              |                        |   | March 31,          |         | March 31, |   | March 31, 
|                                                                                                       |                                                                                                              |                        |   | 2003               |         | 2002      |   | 2001      
|                                                                                                       |                                                                                                              |                        |   |                    |         |           |   |           
|Numerator for earnings (loss) per common
share and earnings (loss)
per common share assuming dilution: |                                                                                                              |                        |   |                    |         |           |   |            |   |  |   |           
|                                                                                                       | Income (loss) from continuing operations                                                                     |                        | $ | 2,228,000          |         |           | $ | (3,394,319 | ) |  | $ | 25,511     |        
|                                                                                                       | Income (loss) from discontinued
operations                                                                   |                        |   | 71,000             |         |           |   | (2,726,998 | ) |  |   |           |        
|                                                                                                       |                                                                                                              |                        |   |                    |         |           |   |            |   |  |   |           
|                                                                                                       | Net income (loss)                                                                                            |                        |   | 2,299,000          |         |           |   | (6,121,317 | ) |  |   | 25,511     |        
|                                                                                                       |                                                                                                              |                        |   |                    |         |           |   |            |   |  |   |           
|Denominator:                                                                                           |                                                                                                              |                        |   |                    |         |           |   |            |   |  |   |           
|                                                                                                       | Denominator for basic earnings (loss)
per share  weighted
average shares                                    |                        |   | 13,061,826         |         |           |   | 13,027,949 |   |  |   | 12,997,765 |        
|                                                                                                       | Effect of dilutive securities:                                                                               |                        |   |                    |         |           |   |            |   |  |   |            |        
|                                                                                                       |                                                                                                              | Employee stock options |   |                    | 191,111 |           |   |            |  |  |   |            | 215,003 | 
|                                                                                                       |                                                                                                              |                        |   |                    |         |           |   |            |   |  |   |            |        
|                                                                                                       | Denominator for diluted earnings (loss)
per share  adjusted
weighted average shares and assumed
conversions |                        |   | 13,252,937         |         |           |   | 13,027,949 |   |  |   | 13,212,768 |        
|                                                                                                       |                                                                                                              |                        |   |                    |         |           |   |            |   |  |   |           
|Basic earnings (loss) per share:                                                                       |                                                                                                              |                        |   |                    |         |           |   |            |   |  |   |           
|                                                                                                       | Continuing operations                                                                                        |                        | $ | 0.17               |         |           | $ | (0.26      | ) |  | $ | 0.00       |        
|                                                                                                       | Discontinued operations                                                                                      |                        |   | 0.01               |         |           |   | (0.21      | ) |  |   |           |        
|                                                                                                       | Net income (loss)                                                                                            |                        |   | 0.18               |         |           |   | (0.47      | ) |  |   | 0.00       |        
|Diluted earnings (loss) per share:                                                                     |                                                                                                              |                        |   |                    |         |           |   |            |   |  |   |           
|                                                                                                       | Continuing operations                                                                                        |                        | $ | 0.17               |         |           | $ | (0.26      | ) |  | $ | 0.00       |        
|                                                                                                       | Discontinued operations                                                                                      |                        |   | 0.01               |         |           |   | (0.21      | ) |  |   |           |        
|                                                                                                       | Net income (loss)                                                                                            |                        |   | 0.17               |         |           |   | (0.47      | ) |  | $ | 0.00       |        

In addition, as of March 31, 2003, 2002 and 2001, there were options
outstanding to purchase 908,584, 1,147,169 and 1,782,000 shares, respectively
that were anti-dilutive. Such options were not included in the denominator as
their effect on earnings (loss) per share would have been antidilutive.

9.     RESTRUCTURING

The Company had two restructuring plan initiatives during fiscal 2001 and 2002
to better align costs with the then current market conditions. Pursuant to the
plans, 28 employees were terminated during fiscal 2001 and 35 were terminated
during fiscal 2002. Restructuring expenses were principally for severance pay
and health insurance benefits for terminated employees. Employees from all
departments of the Company were terminated. All restructuring expenses are
separately stated in the Consolidated Statements of Operations as part of
Operating expenses.

37



---



##### Table of Contents



ATLANTIC DATA SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Companys restructuring costs are as follows (in thousands except for
employee termination information):

|                                                           |                                            |   |                    |     |           |   |      |      |  
|---------------------------------------------------------- | ------------------------------------------ | - | ------------------ | --- | --------- | - | ---- | ---- | -
|                                                           |                                            |   | For the Year Ended
|                                                           |                                            |   |                   
|                                                           |                                            |   | March 31,          |     | March 31,
|                                                           |                                            |   | 2003               |     | 2002     
|                                                           |                                            |   |                    |     |          
|Accrued liability at beginning of year                     |                                            | $ | 43                 |     |           | $ | 50   |     
|                                                           |                                            |   |                    |     |           |   |      |     
|Charges and other liabilities accrued:                     |                                            |   |                    |     |           |   |      |     
|                                                           | Severance and other employee-related costs |   |                    | 0   |           |   |      | 835  |  
|                                                           | Other related costs                        |   |                    | 0   |           |   |      | 90   |  
|                                                           |                                            |   |                    |     |           |   |      |     
|                                                           |                                            |   | 0                  |     |           |   | 925  |     
|                                                           |                                            |   |                    |     |           |   |      |     
|Costs incurred:                                            |                                            |   |                    |     |           |   |      |     
|                                                           | Severance and other employee-related costs |   |                    | (43 | )         |   |      | (853 | )
|                                                           | Other related costs                        |   |                    | 0   |           |   |      | (79  | )
|                                                           |                                            |   |                    |     |           |   |      |     
|                                                           |                                            |   | (43                | )   |           |   | (932 | )   
|                                                           |                                            |   |                    |     |           |   |      |     
|Accrued liability at end of year                           |                                            | $ | 0                  |     |           | $ | 43   |     
|                                                           |                                            |   |                    |     |           |   |      |     
|Cash expenditures                                          |                                            | $ | 43                 |     |           | $ | 853  |     
|Number of employee terminations due to
restructuring plans |                                            |   |                   |     |           |   | 35   |     
|                                                           |                                            |   |                    |     |           |   |      |     

10.     MAJOR CUSTOMERS

The nature of the Companys business results in the Company deriving
significant amounts of revenue from a small number of customers in a particular
year. For the year ended March 31, 2003, three customers accounted for 41.7%,
32.5% and 9.0% of the Companys revenues. At March 31, 2003, these customers
accounted for 32.3%, 28.6% and 7.4% of accounts receivable. At March 31, 2002,
three customers accounted for 24.7%, 23.8% and 21.6% of the Companys revenues.
At March 31, 2002, these customers accounted for 5.8%, 64.3% and 20.9% of
accounts receivable. For the year ended March 31, 2001, two customers
accounted for 27.2% and 12.5% of the Companys revenues.

11.     EMPLOYEE RETIREMENT PLAN

The Company maintains a defined contribution retirement plan under Section
401(k) of the Internal Revenue Code for eligible employees (the 401(k) Plan).
The 401(k) Plan is funded by employee contributions of up to 100% of gross
compensation, not to exceed IRS limits, and by discretionary Company
contributions. In accordance with the provisions of the 401(k) Plan, employees
may make tax-deferred contributions and the Company, at its discretion, may
match 50% of employee contributions up to 5% of their earnings. The Company
may also elect to make additional contributions to the 401(k) Plan. Company
contributions vest over five years of employment. Expense recognized in
connection with the 401(k) Plan amounted to $188,574, $239,471 and $357,998 for
the years ended March 31, 2003, 2002 and 2001, respectively.

12.     SEGMENT INFORMATION

The Company operates in a single business segment, which offers similar
products and services. The Companys products are similar in nature, providing
information technology strategy consulting and systems integration services to
customers primarily in the financial services industry, with a primary focus on
banks.

38



---



##### Table of Contents



ATLANTIC DATA SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

13.     LONG-TERM INVESTMENT

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

14.     COMMITMENTS AND CONTINGENCIES

The Company leases its facilities and other equipment under operating leases.
Rent expense recognized under these leases during the fiscal years ended March
31, 2003, 2002 and 2001 totaled approximately $648,000, $627,000 and $639,000,
respectively.

The Company entered into an agreement to restructure and extend its existing
lease agreement. Under the terms of this agreement, the Company will surrender
10,949 square feet on January 1, 2004 and will surrender another 1,540 square
feet as of April 1, 2005. This will reduce the Companys leased square footage
from 27,325 to 14,836. Further, the parties have agreed to extend the lease
for another five-year term commencing April 1, 2005 and ending March 31, 2010.

After giving effect to the terms of the amended lease agreement discussed
above, future minimum lease payments due under all noncancelable operating
leases are as follows:

|                      |            |   |                  |     | 
|--------------------- | ---------- | - | ---------------- | --- | 
|                      |            |   | Required Minimum
|                      |            |   | Payments        
|                      |            |   |                 
|                      |            |   | (in thousands)  
|Year ending March 31: |            |   |                  |    
|                      | 2004       |   | $                | 612 | 
|                      | 2005       |   |                  | 456 | 
|                      | 2006       |   |                  | 300 | 
|                      | 2007       |   |                  | 315 | 
|                      | 2008       |   |                  | 330 | 
|                      | Thereafter |   |                  | 705 | 
|                      |            |   |                  |     | 
|                      |            | $ | 2,718            |    
|                      |            |   |                  |     | 

On June 4, 2003, the Company and each of its directors were served with a
complaint filed as a purported class action lawsuit in Massachusetts state
court by two of the Companys stockholders on behalf of all other stockholders
of the Company. The complaint alleges, among other things, that the Company
and its directors have breached or may have breached fiduciary duties owed to
the Companys stockholders in connection with the Companys May 5, 2003
announcement that it had received from certain of its directors and
stockholders a preliminary expression of interest to engage in a going private
transaction. The Company believes that the action is without merit and intends
to contest it vigorously. The Company does not believe that the outcome of
this matter will have a material impact on the Companys financial position,
results of operations or cash flows.

39



---



##### Table of Contents



ATLANTIC DATA SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

15.     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 (EI) for $2,000,000 in cash and a warrant to purchase
300,000 shares of the Companys common stock, valued at approximately $637,000.
EI, 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 CRM profitability
model, offered primarily to mid-tier financial institutions and small banks.

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

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 | 
|                      |       |   |       |      

On March 29, 2002, the Company announced its decision to discontinue the
operations of EI. Consequently, the Company incurred a charge of $1.9 million,
net of an income tax benefit of $735, 000, relating to the write-off of EI
long-lived assets and an accrual for estimated losses during the phase-out
period. The disposition of the EI operation represents the disposal of a
business segment under APB No. 30. Accordingly, results of this operation have
been classified as discontinued, and interim quarterly periods have been
restated. For the fiscal year ended March 31, 2002, EI incurred a $797,000
loss, net of an income tax benefit of $410,000.

The closing of EI 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 did not make any additional cash payments as defined in the Asset
Purchase Agreement dated June 29, 2001 due to the discontinuation of the
operations of EI.

40



---



##### Table of Contents



ATLANTIC DATA SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

16.     PROPOSED TRANSACTION

On May 5, 2003, the Company announced that it received a preliminary expression
of interest to engage in a going private transaction from a group consisting of
two current members of management who are also Directors of the Company, one of
its outside Directors and an entity affiliated with one of its outside
Directors (collectively, the Principals). The Board of Directors has
appointed an Independent Committee of the Board to consider the proposal and
enter into negotiations with the Principals regarding the proposal.

Reference is made to Note 14 for additional information with respect to a
complaint filed in Massachusetts state court against the Company and its
directors related to the aforementioned going private transaction.

17.      SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

The following table presents unaudited quarterly financial information for the
years ended March 31, 2003 and 2002 (in thousands, except per share data):

|                                                 |         |   |                        |      |               |   |              |      |           |   |       |      |  |   |       |      | 
|------------------------------------------------ | ------- | - | ---------------------- | ---- | ------------- | - | ------------ | ---- | --------- | - | ----- | ---- |  | - | ----- | ---- | 
|                                                 |         |   | For the Quarters Ended
|                                                 |         |   |                       
|                                                 |         |   | June 30,               |      | September 30, |   | December 31, |      | March 31,
|                                                 |         |   | 2002                   |      | 2002          |   | 2002         |      | 2003     
|                                                 |         |   |                        |      |               |   |              |      |          
|Revenue                                          |         | $ | 6,935                  |      |               | $ | 5,886        |      |           | $ | 4,171 |      |  | $ | 4,710 |     
|Gross margin                                     |         |   | 3,159                  |      |               |   | 2,752        |      |           |   | 1,656 |      |  |   | 1,911 |     
|Income from operations                           |         |   | 1,079                  |      |               |   | 1,383        |      |           |   | 57    |      |  |   | 338   |     
|Income from continuing
Operations                |         |   | 810                    |      |               |   | 964          |      |           |   | 139   |      |  |   | 495   |     
|Net income                                       |         |   | 858                    |      |               |   | 980          |      |           |   | 139   |      |  |   | 322   |     
|Earnings per share from
continuing operations:   |         |   |                        |      |               |   |              |      |           |   |       |      |  |   |       |     
|                                                 | Basic   |   | $                      | 0.06 |               |   | $            | 0.07 |           |   | $     | 0.01 |  |   | $     | 0.02 | 
|                                                 | Diluted |   |                        | 0.06 |               |   |              | 0.07 |           |   |       | 0.01 |  |   |       | 0.02 | 
|Earnings per share from
discontinued operations: |         |   |                        |      |               |   |              |      |           |   |       |      |  |   |       |     
|                                                 | Basic   |   |                        | 0.01 |               |   |              | 0.00 |           |   |       | 0.00 |  |   |       | 0.00 | 
|                                                 | Diluted |   |                        | 0.00 |               |   |              | 0.00 |           |   |       | 0.00 |  |   |       | 0.00 | 
|Earnings per share from
net income:              |         |   |                        |      |               |   |              |      |           |   |       |      |  |   |       |     
|                                                 | Basic   |   |                        | 0.07 |               |   |              | 0.08 |           |   |       | 0.01 |  |   |       | 0.02 | 
|                                                 | Diluted |   |                        | 0.06 |               |   |              | 0.07 |           |   |       | 0.01 |  |   |       | 0.02 | 

41



---



##### Table of Contents



ATLANTIC DATA SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|                                                        |         |   |                        |       |               |   |              |       |           |   |       |       |   |   |       |       |  
|------------------------------------------------------- | ------- | - | ---------------------- | ----- | ------------- | - | ------------ | ----- | --------- | - | ----- | ----- | - | - | ----- | ----- | -
|                                                        |         |   | For the Quarters Ended
|                                                        |         |   |                       
|                                                        |         |   | June 30,               |       | September 30, |   | December 31, |       | March 31,
|                                                        |         |   | 2001                   |       | 2001          |   | 2001         |       | 2002     
|                                                        |         |   |                        |       |               |   |              |       |          
|Revenue                                                 |         | $ | 4,554                  |       |               | $ | 5,150        |       |           | $ | 4,934 |       |   | $ | 5,781 |      
|Gross margin                                            |         |   | 797                    |       |               |   | 1,726        |       |           |   | 1,843 |       |   |   | 2,516 |      
|Income (loss) from operations                           |         |   | (2,709                 | )     |               |   | (445         | )     |           |   | 29    |       |   |   | 416   |      
|Income (loss) from continuing
Operations                |         |   | (2,723                 | )     |               |   | (3,146       | )     |           |   | 227   |       |   |   | 2,248 |      
|Net income (loss)                                       |         |   | (2,723                 | )     |               |   | (3,643       | )     |           |   | (165  | )     |   |   | 410   |      
|Earnings (loss) per share from
continuing operations:   |         |   |                        |       |               |   |              |       |           |   |       |       |   |   |       |      
|                                                        | Basic   |   | $                      | (0.21 | )             |   | $            | (0.24 | )         |   | $     | 0.02  |   |   | $     | 0.17  |  
|                                                        | Diluted |   |                        | (0.21 | )             |   |              | (0.24 | )         |   |       | 0.02  |   |   |       | 0.17  |  
|Earnings (loss) per share from
discontinued operations: |         |   |                        |       |               |   |              |       |           |   |       |       |   |   |       |      
|                                                        | Basic   |   |                        | 0.00  |               |   |              | (0.04 | )         |   |       | (0.03 | ) |   |       | (0.14 | )
|                                                        | Diluted |   |                        | 0.00  |               |   |              | (0.04 | )         |   |       | (0.03 | ) |   |       | (0.14 | )
|Earnings (loss) per share from
net income:              |         |   |                        |       |               |   |              |       |           |   |       |       |   |   |       |      
|                                                        | Basic   |   |                        | (0.21 | )             |   |              | (0.28 | )         |   |       | (0.01 | ) |   |       | 0.03  |  
|                                                        | Diluted |   |                        | (0.21 | )             |   |              | (0.28 | )         |   |       | (0.01 | ) |   |       | 0.03  |  

42



---



##### Table of Contents



SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

The following schedule shows the allowance for doubtful accounts for the years
ended March 31, 2001, 2002 and 2003 (in thousands):

|                          |  |            |     |               |  |            |      |            |  |   |     |  |  |   |     | 
|------------------------- |  | ---------- | --- | ------------- |  | ---------- | ---- | ---------- |  | - | --- |  |  | - | --- | 
|                          |  |            |     |               |  | Charged    |      | Charged to |  |   |     | 
|                          |  | Balance at |     | (Credited) to |  | Other      |      | Balance at
|Allowance                 |  | Beginning  |     | Cost and      |  | Accounts  |      | End of    
|for Doubtful Accounts     |  | of Period  |     | Expenses      |  | Write-Offs |      | Period    
|                          |  |            |     |               |  |            |      |           
|Year Ended March 31, 2001 |  | $          | 650 |               |  | $          | 7    |            |  | $ | 282 |  |  | $ | 375 | 
|Year Ended March 31, 2002 |  |            | 375 |               |  |            | (46  | )          |  |   | 46  |  |  |   | 375 | 
|Year Ended March 31, 2003 |  |            | 375 |               |  |            | (104 | )          |  |   | 4   |  |  |   | 275 | 






|ITEM 9: | CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
|------- | ----------------------------------------------------------------------------------

None.

43



---



##### Table of Contents






PART III




ITEM 10:      DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Occupations of Directors and Executive Officers

The following table sets forth the directors and executive officers of the
Company, their ages and current positions with the Company:

|                         |  |     |    |          |  |                                                                                                
|------------------------ |  | --- | -- | -------- |  | -----------------------------------------------------------------------------------------------
|Name                     |  | Age |    | Position
|                         |  |     |    |         
|Robert W. Howe           |  |     | 56 |          |  | Chief Executive Officer and Chairman of the Board                                              
|                         |  |     |    |          |  |                                                                                                
|William H. Gallagher     |  |     | 55 |          |  | President, Chief Operating Officer, Assistant Clerk and Director                               
|                         |  |     |    |          |  |                                                                                                
|Paul K. McGrath          |  |     | 57 |          |  | Senior Vice President, Finance and Administration, Chief
Financial Officer, Treasurer and Clerk
|                         |  |     |    |          |  |                                                                                                
|Peter A. Cahill          |  |     | 49 |          |  | Executive Vice President, Strategic Development                                                
|                         |  |     |    |          |  |                                                                                                
|Erik C. Golz             |  |     | 42 |          |  | Senior Vice President, Professional Services                                                   
|                         |  |     |    |          |  |                                                                                                
|Thomas P. McCarthy       |  |     | 38 |          |  | Senior Vice President, Director, Business Development                                          
|                         |  |     |    |          |  |                                                                                                
|Isaac H. Naar            |  |     | 59 |          |  | Senior Vice President, People Department                                                       
|                         |  |     |    |          |  |                                                                                                
|David C. Hodgson (1) (2) |  |     | 46 |          |  | Director                                                                                       
|                         |  |     |    |          |  |                                                                                                
|Lee M. Kennedy (1)       |  |     | 69 |          |  | Director                                                                                       
|                         |  |     |    |          |  |                                                                                                
|George F. Raymond (2)    |  |     | 66 |          |  | Director                                                                                       
|                         |  |     |    |          |  |                                                                                                
|Richard D. Driscoll (1)  |  |     | 72 |          |  | Director                                                                                       



---

|(1) |  | Member of Audit Committee.       
|--- |  | ---------------------------------
|   
|(2) |  | Member of Compensation Committee.

Robert W. Howehas been Chief Executive Officer and Chairman of the Board of
Directors of the Company since January 1994 and a Director since March 1980.
From March 1980 to January 1994, Mr. Howe served as President of the Company,
and he served as Treasurer of the Company from March 1980 to July 1991. Prior
to forming the Company in March 1980 with Mr. Gallagher, Mr. Howe served as
Executive Vice President of Savings Management Computer Corporation, a bank
service bureau. Mr. Howe is also a director of Cognizant Technology Solutions
and the chairman of the board of trustees of Boston College High School. Mr.
Howe received his B.A. from Boston College.

William H. Gallagherhas been President and Chief Operating Officer of the
Company since January 1994 and a Director since March 1980. From March 1980 to
January 1994, Mr. Gallagher served as Executive Vice President and Clerk of the
Company. Prior to forming the Company in March 1980 with Mr. Howe, Mr.
Gallagher served as Vice President of Savings Management Computer Corporation,
a bank service bureau. Mr. Gallagher is also a member of the board of
directors at the Holy Family School. Mr. Gallagher attended Harvard University
Extension School.

Paul K. McGrathhas been Senior Vice President, Finance and Administration, and
Chief Financial Officer of the Company since January 1998 and Treasurer and
Clerk since October 1998. Prior to joining the Company,

44



---



##### Table of Contents



Mr. McGrath served as Vice President, Chief Financial Officer and Treasurer of
Pivot point, Inc., an enterprise resource planning software company, from
December 1995 to January 1998. From April 1990 to January 1995, Mr. McGrath
served as Vice President, Chief Financial Officer and Treasurer of Bachman
Information Systems, Inc., a public software company in the computer aided
software engineering industry. Mr. McGrath is a Certified Public Accountant
and received his M.S. from Northeastern University and his B.A. from St. Anselm
College.

Peter A. Cahillhas been Executive Vice President, Strategic Development since
April 2002 and he served as Executive Vice President, Business Development from
October 2000 to March 2002. Prior to his transition into Business Development,
Mr. Cahill served as Executive Vice President and Director of Operations of the
Company from October 1995 to October 2000. From April 1992 to October 1995,
Mr. Cahill served as Senior Vice President of Operations of the Company, and
from April 1989 to April 1992, Mr. Cahill served as Vice President of
Operations. Mr. Cahill also served in a number of technical positions at the
Company from April 1980 to April 1989. Prior to joining the Company in April
1980, Mr. Cahill served as Senior Technician at Savings Management Computer
Corporation, a bank service bureau. Mr. Cahill attended Bridgewater State
College.

Erik C. Golzhas been Senior Vice President, Professional Services since
joining the Company in May 2000. Prior to joining the Company, Mr. Golz was
Executive Vice President of the Financial Services Division at Logica, Inc., a
London-based international computer consultancy and systems integration company
from May 1998 to April 2000. From May 1996 to May 1998, Mr. Golz was a Client
Partner at AT&T Solutions, a networking professional services firm and a part
of AT&T. From February 1994 to April 1996, Mr. Golz was a Senior Manager with
AT Kearney/EDS, a consulting company, and from July 1992 to December 1994, Mr.
Golz was Vice President, Business Development at First Data Corporation/The
Shareholder Services Group, a payment services and information processing
company. Mr. Golz received his B.A. in Marketing from Northeastern University.

Thomas P. McCarthyhas been Senior Vice President, Director of Business
Development since May 2002 and was Vice President, Business Development from
July 2000 to April 2002. Prior to joining the Company, Mr. McCarthy was a
business development manager for Logica, Inc. a London-based international
computer consultancy and systems integration company and an account executive
with Lucent Technologies, a telecommunications technology and equipment
company. Mr. McCarthy earned his Masters of Business Administration from the
Sawyer School of Management at Suffolk University and his Bachelor of Arts
degree from the University of Massachusetts.

Isaac H. Naarjoined the Company in 1992 as Director of Recruiting, and has
since assumed responsibility for all People Department functions. Prior to
joining ADS, Mr. Naar was a Partner with an executive search and technical
recruiting firm in the greater Boston area, servicing the high technology
community. Mr. Naar began his career in real-time computing, where he was last
the Director of Customer Engineering for MODCOMP, a designer and manufacturer
of minicomputers for the scientific and process control marketplace. A graduate
of Nova University, Mr. Naar earned his Bachelor of Science degree in Business
Administration.

David C. Hodgsonhas been a director of the Company since July 1988. He is a
managing member of General Atlantic Partners, LLC, a private equity investment
firm that invests in information technology, media, and communications
companies on a global basis, and has been with General Atlantic since 1982.
Mr. Hodgson serves as a director of ProBusiness Services, Inc., a payroll and
HR services outsourcing company; S1 Corporation, a provider of Internet-based
financial services solutions; Pinnacor Inc., a developer of proprietary
technology for the aggregation and distribution of digital content over the
Internet; and Creditek LLC, a provider of finance and accounting outsourcing
services. Mr. Hodgson holds an A.B. degree from Dartmouth College and an
M.B.A. degree from Stanford University.

Lee M. Kennedyhas been a director of the Company since March 1980. Mr.
Kennedy served as President of Lee Kennedy Co., Inc., a general contracting
company, from February 1978 until July 1995, as Chairman and Chief

45



---



##### Table of Contents



Executive Officer from August 1995 to April 2002 and has been Chairman since
May 2002. Mr. Kennedy attended Curry College and the Boston Architectural
Center.

George F. Raymondhas been a director of the Company since April 1991. Mr.
Raymond retired as the President and Founder of Automatic Business Centers,
Inc. in 1990. Mr. Raymond is also a director of BMC Software, Inc., Concord
EFS Inc., Emtec, Inc. and DocuCorp International, Inc. Mr. Raymond received
his B.A. from the University of Massachusetts, and is a Certified Public
Accountant.

Richard D. Driscollhas been a director of the Company since February 1998.
Mr. Driscoll served as President and Chief Executive Officer of the
Massachusetts Bankers Association from November 1990 to January 1997. From
April 1987 to January 1990, Mr. Driscoll served as the Chairman and Chief
Executive Officer of The Bank of New England, N.A. Mr. Driscoll is also a
director of Hillview Investment Trust and the Massachusetts Business
Development Corporation. Mr. Driscoll received his M.B.A. from Harvard
Business School and his A.B. from Boston College.

Executive officers of the Company are elected on an annual basis by the Board
of Directors to serve at the pleasure of the Board of Directors and until their
successors have been duly elected and qualified.

16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934 requires the Companys
officers and directors, and holders of more than 10% of the Companys Common
Stock (collectively, the Reporting Persons) to file with the Securities and
Exchange Commission (the Commission) initial reports of ownership and reports
of changes in ownership of Common Stock of the Company. Such persons are
required by regulations of the Commission to furnish the Company with copies of
all such filings. Based solely on its review of the copies of such filings
received by it with respect to the period ended March 31, 2003, the Company
believes that all Reporting Persons complied with Section 16(a) filing
requirements in the fiscal year ended March 31, 2003.




ITEM 11:      EXECUTIVE COMPENSATION

Executive Compensation Summary

The following table sets forth the annual and long-term compensation of the
Companys Chief Executive Officer and each of the Companys four other most
highly compensated executive officers (collectively, the Named Executive
Officers) for fiscal years ended March 31, 2003, 2002 and 2001.

46



---



##### Table of Contents



SUMMARY COMPENSATION TABLE

|                            |                                |      |                        |           |        |          |         |         |  |               |        |        |  |   |              |        |            |  |              |        |     |   |       |       | 
|--------------------------- | ------------------------------ | ---- | ---------------------- | --------- | ------ | -------- | ------- | ------- |  | ------------- | ------ | ------ |  | - | ------------ | ------ | ---------- |  | ------------ | ------ | --- | - | ----- | ----- | 
|                            |                                |      |                        |           |        |          |         |         |  |               |        |        |  |   |              |        |            |  | Long-Term    |        |     |   |      
|                            |                                |      |                        |           |        |          |         |         |  |               |        |        |  |   |              |        |            |  | Compensation |        |     |   |      
|                            |                                |      |                        |           |        |          |         |         |  |               |        |        |  |   |              |        |            |  |              |        |     |   |      
|                            |                                |      | Annual Compensation(1) |           | Awards |          |         |         | 
|                            |                                |      |                        |           |        |          |         |         | 
|                            |                                |      |                        |           |        |          |         |         |  |               |        |        |  |   | Other        |        | Securities |  | All         
|                            |                                |      |                        |           |        |          |         |         |  |               |        |        |  |   | Annual       |        | Underlying |  | Other       
|                            |                                |      |                        |           |        |          |         |         |  |               |        |        |  |   | Compensation |        | Options(2) |  | Compensation
|Name and Principal Position |                                | Year |                        | Salary($) |        | Bonus($) |         | ($)(1)  |  | (# of Shares) |        | ($)(3)
|                            |                                |      |                        |           |        |          |         |         |  |               |        |       
|Robert W. Howe              |                                |      | 2003                   |           |        | $        | 350,000 |         |  | $             | 25,975 |        |  | $ | 83,623       | (4)    |            |  |             |        |     | $ | 2,636 |      
|                            | Chief Executive Officer and    |      |                        | 2002      |        |          |         | 350,000 |  |               |        | 26,250 |  |   |              | 91,952 | (4)        |  |              |       |     |   |       | 3,697 | 
|                            | Chairman of the Board          |      |                        | 2001      |        |          |         | 350,000 |  |               |        | 61,250 |  |   |              | 87,195 | (4)        |  |              |       |     |   |       | 5,250 | 
|William H. Gallagher        |                                |      | 2003                   |           |        |          | 350,000 |         |  |               | 25,975 |        |  |   | 87,713       | (4)    |            |  |             |        |     |   | 5,500 |      
|                            | President and Chief Operating  |      |                        | 2002      |        |          |         | 350,000 |  |               |        | 26,250 |  |   |              | 91,049 | (4)        |  |              |       |     |   |       | 4,885 | 
|                            | Officer                        |      |                        | 2001      |        |          |         | 350,000 |  |               |        | 61,250 |  |   |              | 96,661 | (4)        |  |              |       |     |   |       | 5,250 | 
|Paul K. McGrath             |                                |      | 2003                   |           |        |          | 200,000 |         |  |               | 14,843 |        |  |   |             |        |            |  | 30,000       | (5)    |     |   | 4,625 |      
|                            | Senior Vice President, Finance |      |                        | 2002      |        |          |         | 200,000 |  |               |        | 15,000 |  |   |              |       |            |  |              |       |     |   |       | 5,250 | 
|                            | and Administration, and Chief  |      |                        | 2001      |        |          |         | 200,000 |  |               |        | 35,000 |  |   |              |       |            |  |              |       |     |   |       | 5,240 | 
|                            | Financial Officer              |     
|Peter A. Cahill             |                                |      | 2003                   |           |        |          | 260,000 |         |  |               | 19,295 |        |  |   |             |        |            |  | 30,000       | (5)    |     |   | 4,281 |      
|                            | Executive Vice President,      |      |                        | 2002      |        |          |         | 260,000 |  |               |        | 19,500 |  |   |              |       |            |  |              |       |     |   |       | 4,875 | 
|                            | Strategic Development          |      |                        | 2001      |        |          |         | 260,000 |  |               |        | 45,500 |  |   |              |       |            |  |              |       |     |   |       | 4,812 | 
|Erik C. Golz                |                                |      | 2003                   |           |        |          | 200,000 |         |  |               | 14,843 |        |  |   |             |        |            |  | 60,000       | (5)    |     |   | 2,825 |      
|                            | Senior Vice President,         |      |                        | 2002      |        |          |         | 200,000 |  |               |        | 15,000 |  |   |              |       |            |  |              | 90,000 | (5) |   |       | 2,815 | 
|                            | Professional Services          |      |                        | 2001      |        |          |         | 189,000 |  |               |        | 44,219 |  |   |              |       |            |  |              | 60,000 | (5) |   |       | 3,905 | 



---

|(1) |  | In accordance with the rules of the Securities and Exchange Commission,
other compensation in the form of perquisites and other personal benefits,
securities or property has been omitted for certain Named Executive
Officers because such perquisites and other personal benefits, securities
or property constituted in the aggregate less than the lesser of $50,000
or 10% of such persons salary and bonus shown in the table. Bonuses are
reported in the fiscal year earned, even if paid in a subsequent fiscal
year.                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | The Company did not grant any restricted stock awards or stock
appreciation rights or make any long term incentive plan payouts to the
Named Executive Officers during the fiscal years ended March 31, 2003,
2002 and 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   
|(3) |  | Represents matching contributions paid by the Company on behalf of the
Named Executive Officers under the Companys 401(k) Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   
|(4) |  | The Company provides a leased vehicle and automobile insurance to Messrs.
Howe and Gallagher. The total cost to the Company for the automobile
lease and insurance in fiscal years 2003, 2002 and 2001 was $21,205,
$17,468 and $17,178, respectively, for Mr. Howe and $17,094, $15,626 and
$22,197, respectively, for Mr. Gallagher. The Company pays for certain
financial consulting, legal and tax services on behalf of Messrs. Howe and
Gallagher. The total amount paid by the Company during fiscal years 2003,
2002 and 2001 was $6,706, $6,813 and $20,573, respectively, for Mr. Howe
and $8,602, $6,813 and $14,813, respectively, for Mr. Gallagher. Further,
the Company has paid federal taxes on behalf of Messrs. Howe and
Gallagher. The total taxes paid by the Company during fiscal years 2003,
2002 and 2001 was $37,331, $41,050 and $38,924, respectively, for Mr. Howe
and $39,159, $40,616 and $43,149, respectively, for Mr. Gallagher.
|   
|(5) |  | Granted pursuant to the Companys Amended and Restated 1997 Stock Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

47



---



##### Table of Contents



Option Grants in Last Fiscal Year

The following table sets forth certain information concerning grants of stock
options pursuant to the Companys Amended and Restated 1997 Stock Plan to the
Named Executive Officers during the fiscal year ended March 31, 2003.

OPTION/SAR GRANTS IN LAST FISCAL YEAR

|                     |  |                   |        |              |  |              |      |            |  |                      |        |                     |  |                       |        |                  |  |   |        |  |  |   |         | 
|-------------------- |  | ----------------- | ------ | ------------ |  | ------------ | ---- | ---------- |  | -------------------- | ------ | ------------------- |  | --------------------- | ------ | ---------------- |  | - | ------ |  |  | - | ------- | 
|                     |  | Individual Grants |        |              |  |              |      |            |  |                     
|                     |  |                   |        |              |  |              |      |            |  |                     
|                     |  |                   |        |              |  |              |      |            |  | Potential Realizable
|                     |  |                   |        |              |  | Percent      |      |            |  |                      |        |                     |  |                       |        | Value at Assumed
|                     |  | Number of         |        | of Total     |  |              |      |            |  |                      |        |                     |  | Annual Rates of Stock
|                     |  | Securities        |        | Options/SARs |  |              |      |            |  |                      |        |                     |  | Price Appreciation   
|                     |  | Underlying        |        | Granted to   |  | Exercise or  |      |            |  |                      |        | for Option Term (2)
|                     |  | Options/SARs      |        | Employees in |  | Base Price   |      | Expiration |  |                     
|Name                 |  | Granted (#)       |        | Fiscal Year  |  | ($/Share)(1) |      | Date       |  | 5% ($)               |        | 10% ($)            
|                     |  |                   |        |              |  |              |      |            |  |                      |        |                    
|Robert W. Howe       |  |                   |       |              |  |              |     |            |  |                      |       |                     |  |                       |       |                  |  |   |       |  |  |   |        | 
|William H. Gallagher |  |                   |       |              |  |              |     |            |  |                      |       |                     |  |                       |       |                  |  |   |       |  |  |   |        | 
|Paul K. McGrath      |  |                   | 30,000 |              |  |              | 9.0  | %          |  | $                    | 1.9500 |                     |  |                       | 5/1/12 |                  |  | $ | 36,790 |  |  | $ | 93,234  | 
|Peter A. Cahill      |  |                   | 30,000 |              |  |              | 9.0  | %          |  | $                    | 1.9500 |                     |  |                       | 5/1/12 |                  |  | $ | 36,790 |  |  | $ | 93,234  | 
|Erik Golz            |  |                   | 60,000 |              |  |              | 18.0 | %          |  | $                    | 1.9500 |                     |  |                       | 5/1/12 |                  |  | $ | 73,581 |  |  | $ | 186,468 | 



---

|(1) |  | The exercise price per share of each option was determined by the Board
of Directors to be equal to the fair market value per share of Common
Stock on the date of grant. These options have a term of ten years from
date of grant.                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. These
gains are based on assumed rates of stock price appreciation of 5% and 10%
compounded annually from the date the respective options were granted to
their expiration date. These assumptions are not intended to forecast
future appreciation of the Companys stock price. The potential
realizable value computation does not take into account federal or state
income tax consequences of option exercises or sales of appreciated stock.
This table does not take into account any appreciation in the price of
the Common Stock since the date of grant.

Aggregate Option Exercises and Year-End Values

The following table sets forth certain information with respect to any options
exercised in fiscal year 2003 by the Named Executive Officers, the value
realized upon such exercises (if any), and the value of options held by such
officers at the fiscal year end based upon the closing price of the Companys
Common Stock on March 31, 2003.

AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION/SAR VALUES

|                     |  |                        |         |                        |  |             |         |               |  |   |         |  |  |   |        | 
|-------------------- |  | ---------------------- | ------- | ---------------------- |  | ----------- | ------- | ------------- |  | - | ------- |  |  | - | ------ | 
|                     |  | Number of Securities   |         | Value of Unexercised, 
|                     |  | Underlying Unexercised |         | In-the-Money          
|                     |  | Options/SARs           |         | Options at            
|                     |  | at Fiscal Year End     |         | Fiscal Year End ($)(1)
|                     |  |                        |         |                       
|Name                 |  | Exercisable            |         | Unexercisable          |  | Exercisable |         | Unexercisable
|                     |  |                        |         |                        |  |             |         |              
|Robert W. Howe       |  |                        |        |                        |  |             |        |               |  |   |        |  |  |   |       | 
|William H. Gallagher |  |                        |        |                        |  |             |        |               |  |   |        |  |  |   |       | 
|Paul K. McGrath      |  |                        | 120,000 |                        |  |             | 30,000  |               |  |   | N/A     |  |  | $ | 18,000 | 
|Peter A. Cahill      |  |                        | 273,000 |                        |  |             | 30,000  |               |  | $ | 316,520 |  |  | $ | 18,000 | 
|Erik C. Golz         |  |                        | 70,000  |                        |  |             | 140,000 |               |  | $ | 24,300  |  |  | $ | 84,600 | 

48



---



##### Table of Contents





---

|(1) |  | Amounts calculated by subtracting the exercise price of the options from
the fair market value of the underlying Common Stock as quoted on The
NASDAQ National Market of $2.5500 per share on March 31, 2003, multiplied
by the number of shares underlying the options, and do not reflect amounts
that may be actually received by the Named Executive Officers upon
exercise of options.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Employment Arrangements

The Company has entered into employment agreements (the Agreements) with each
of its Named Executive Officers. The Agreements set forth the base salaries of
each such executive officer and such officers entitlement to participate in
the Companys standard benefits package generally available for all other
officers of the Company similarly situated. Generally, these officers are
entitled to a cash severance payment upon termination by the Company of their
employment without cause or upon termination by the officer of his employment
for any reason following a change of control (as defined in the Agreements).
Such severance payment is equal to 12 months salary at the officers then
current base rate, payable in the same manner as such salary was payable during
the period of such employees employment. In addition, upon a change of
control where the executive officer is not offered employment by the acquiring
company in a comparable position at a comparable salary or the executive
officer is terminated without cause within twelve months of such change of
control, the Company is obligated to continue the employees health benefits
for a 12-month period from the date of such change of control.

The Agreements also include certain restrictive covenants for the benefit of
the Company relating to non-disclosure by the officer of the Companys
confidential business information and the Companys right to inventions and
technical improvements made by the officer. The Agreements also contain a
provision prohibiting the officer from soliciting employees or customers of the
Company for a period of two years after any termination of the officers
employment.

Compensation Committee Report on Executive Compensation

This report is submitted by the Compensation Committee. The Compensation
Committee during fiscal year 2003 was comprised of Messrs. Raymond and Hodgson,
both of whom are non-employee directors. Pursuant to authority delegated by
the Board of Directors, the Compensation Committee is responsible for reviewing
and administering the Companys stock plans and reviewing and approving
compensation matters concerning the executive officers, employees and
consultants of the Company.

Overview and Philosophy.The Company uses its compensation program to achieve
the following objectives:



| |  | To provide compensation that attracts, motivates and retains the talented, high caliber officers and employees to achieve
the Companys strategic objectives, as determined by the Board of Directors.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | To align the interest of officers with the success of the Company.                                                                                                                                    
| 
| |  | To align the interest of officers with stockholders by including long-term equity incentives.                                                                                                         
| 
| |  | To increase the long-term profitability of the Company and, accordingly, increase stockholder value.                                                                                                  

Compensation under the executive compensation program is comprised of cash
compensation in the form of base salary, annual cash incentive bonuses, and
long-term incentive awards in the form of stock option grants. It is the
Compensation Committees objective to have a portion of each officers cash
compensation contingent upon the achievement of specific predetermined
corporate objectives. In addition, the compensation program includes various
other benefits, including medical and insurance plans, the Companys 401(k)
Plan, and the 1998 Employee Stock Purchase Plan, which plans are generally
available to all employees of the Company.

49



---



##### Table of Contents



The principal factors which the Compensation Committee considered with respect
to each officers compensation package for the fiscal year ended March 31, 2003
are summarized below. The Compensation Committee may, however, in its
discretion, apply different or additional factors in making decisions with
respect to executive compensation in future years.

Base Salary.Compensation levels for each of the Companys officers, including
the Chief Executive Officer, are generally set within the range of salaries
that the Compensation Committee believes are paid to officers with comparable
qualifications, experience and responsibilities at similar companies. In
setting compensation levels, the Compensation Committee takes into account such
factors as (i) the Companys past performance and future expectations, (ii)
individual performance and experience and (iii) past salary levels. The
Compensation Committee does not assign relative weights or rankings to these
factors, but instead makes a determination based upon the consideration of all
of these factors as well as the progress made with respect to the Companys
long-term goals and strategies.

Fiscal 2003 base salaries were determined by the Compensation Committee after
considering the base salary level of the officers in prior years, and taking
into account for each officer the amount of base salary as a component of total
compensation. Base salary, while reviewed annually, is only adjusted as deemed
necessary by the Compensation Committee in determining total compensation for
each officer. Base salary levels for each of the Companys officers, other
than the Chief Executive Officer, were also based in part upon evaluations and
recommendations made by the Chief Executive Officer.

Bonus Compensation.For fiscal 2003, performance objectives were set on a
quarterly basis. Bonus compensation for executives is based on the Companys
achievement of predetermined corporate objectives.

Long-Term Incentive Compensation.The Compensation Committee believes that
stock option participation aligns officers interests with those of the
stockholders. In addition, the Compensation Committee believes that equity
ownership by officers helps to balance the short-term focus of annual incentive
compensation with a longer-term view and may help to retain key executive
officers. Long-term incentive compensation, in the form of stock options,
allows the officers to share in any appreciation in the value of the Companys
Common Stock. The Committee generally grants options that become exercisable
over a four-year period as a means of encouraging executives to remain with the
Company and promote its success. The Company has also granted options which
vest in equal annual installments over three years. In certain cases, the
Committee has provided that the vesting schedule of certain options granted to
officers may be accelerated upon the achievement by the officer or the Company
of certain performance goals. In general, the Compensation Committee awards
executives of the Company stock options with exercise prices equal to the
market price of the Common Stock on the date of grant. As a result, executives
will benefit from these stock option grants only to the extent that the price
of the Companys Common Stock increases and the Companys stockholders have
also benefited.

When establishing stock option grant levels, the Compensation Committee
considers general corporate performance, the Chief Executive Officers
recommendations, level of seniority and experience, existing levels of stock
ownership, previous grants of stock options, vesting schedules of outstanding
options and the current stock price.

It is the standard policy of the Company to make an initial stock option grant
to executive officers at the time they commence employment consistent with the
number of options granted to executive officers within and without the industry
at similar levels of seniority. In addition, the Compensation Committee may
from time-to-time make performance-based grants as it deems appropriate. In
making such performance-based grants, the Compensation Committee considers
individual contributions to the Companys financial, operational and strategic
objectives.

While it has been the philosophy of the Compensation Committee to grant options
to the executive officers, Messrs. Howe and Gallagher have not received equity
compensation due to their levels of stock ownership.

50



---



##### Table of Contents



Other Benefits.The Company also has various broad-based employee benefit
plans. Executive officers participate in these plans on the same terms as
eligible, non-executive employees, subject to any legal limits on the amounts
that may be contributed or paid to executive officers under these plans. The
Company offers a stock purchase plan, under which employees may purchase Common
Stock at a discount, and a 401(k) plan, which allows employees to invest in a
wide array of funds on a pre-tax basis. The Company also maintains insurance
and other benefit plans for its employees, including executive officers of the
Company.

Chief Executive Officer Compensation.For the fiscal years ended March 31,
2003 and 2002, the Companys Chief Executive Officer, Robert W. Howe, received
a base salary of $350,000. The base salary is believed by the Committee to be
consistent with the range of salary levels received by executives in a similar
capacity in companies of comparable size and stage of development. Mr. Howe
received bonus compensation of $25,975, which was awarded to set Mr. Howes
total compensation package at a level commensurate with that of other
executives in an equivalent position, with an equivalent level of
responsibility, experience and importance to the Company.

Deductibility of Executive Compensation.In general, under Section 162(m) of
the Internal Revenue Code of 1986, as amended (the Code), the Company cannot
deduct, for federal income tax purposes, compensation in excess of $1,000,000
paid to any of the Named Executive Officers. This deduction limitation does
not apply, however, to compensation that constitutes qualified
performance-based compensation within the meaning of Section 162(m) of the
Code and the regulations promulgated thereunder. The Company has considered
the limitations on deductions imposed by Section 162(m) of the Code, and it is
the Companys present intention that, for so long as it is consistent with its
overall compensation objectives, substantially all tax deductions attributable
to executive compensation will not be subject to the deduction limitations of
Section 162(m) of the Code.

| |                                                          
| | ---------------------------------------------------------
| | Respectfully Submitted by the
    Compensation Committee:

| |                                   
| | ----------------------------------
| | George F. Raymond
David C. Hodgson

Compensation Committee Interlocks and Insider Participation

Messrs. Raymond and Hodgson, both non-employee directors, comprise the
Compensation Committee of the Board of Directors. No person who served as a
member of the Compensation Committee, during the fiscal year ended March 31,
2003, was an officer or employee of the Company, or was formerly an officer of
the Company.

As stated above, on May 5, 2003, the Company received a preliminary expression
of interest to engage in a going private transaction from a group consisting of
two current members of management who are also Directors of the Company, one
outside Director and another entity affiliated with one of our outside
Directors (collectively, the Principals). Mr. Hodgson is a managing member
of General Atlantic Partners, LLC, one of the Principals. The Board of
Directors has appointed an Independent Committee of the Board (the Committee)
to consider the proposal and enter into negotiations with the Principals
regarding the proposal. Mr. Raymond is a member of the Committee (along with
Mr. Driscoll) and will receive a compensation of $1,000 per meeting of the
Committee plus expenses.

Except for Messrs. Howe and Gallagher, no officer of the Company served as a
member of the compensation committee (or other committee performing equivalent
functions or, in the absence of any such committee, the entire board of
directors) of another entity, one of whose executive officers served as a
director of the Company. Messrs. Howe and Gallagher each currently serves as
a director on the board of directors of Lee Kennedy Co., Inc., of which Mr.
Kennedy is Chairman.

51



---



##### Table of Contents



Compensation of Directors

Directors who are not employees of the Company, who currently consist of
Messrs. Kennedy, Hodgson, Raymond and Driscoll, receive an annual retainer fee
of $10,000 and a fee of $750 (per meeting) for attending regular meetings of
the Board of Directors and for meetings of any committees of the Board of
Directors on which they serve, if such meetings are held separately. Directors
are also reimbursed for reasonable out-of-pocket expenses incurred in attending
such meetings. Outside Directors are also eligible for participation in the
Amended and Restated 1997 Stock Plan.

Stock Performance Graph

The following graph compares the percentage change in the cumulative total
stockholder return on the Companys Common Stock during the period from the
Companys initial public offering on May 21, 1998 through March 31, 2003, with
the cumulative total return of the NASDAQ Market Index and an SIC Index that
includes organizations in the Companys Standard Industrial Classification code
number 7374, Services  Computer Processing & Data Preparation (SIC Index).
The comparison assumes $100 was invested on May 21, 1998 at the $13.00 initial
offering price in the Companys Common Stock and in each of the foregoing
indices and assumes dividends, if any, were reinvested.

52



---



##### Table of Contents



Comparison of Cumulative Total Return Among Atlantic Data Services, Inc.,
NASDAQ Market Index and SIC Index(1)(2)

(PERFORMANCE GRAPH)

|                             |  |           |        |           |  |           |        |           |  |           |        |           |  |  |        |  |  |  |        |  |  |  |       | 
|---------------------------- |  | --------- | ------ | --------- |  | --------- | ------ | --------- |  | --------- | ------ | --------- |  |  | ------ |  |  |  | ------ |  |  |  | ----- | 
|                             |  | 5/22/1998 |        | 3/31/1999 |  | 3/31/2000 |        | 3/31/2001 |  | 3/31/2002 |        | 3/31/2003
|                             |  |           |        |           |  |           |        |           |  |           |        |          
|Atlantic Data
Services, Inc. |  |           | 100.00 |           |  |           | 31.86  |           |  |           | 86.27  |           |  |  | 20.59  |  |  |  | 17.64  |  |  |  | 20.00 | 
|SIC Index                    |  |           | 100.00 |           |  |           | 291.98 |           |  |           | 184.50 |           |  |  | 29.54  |  |  |  | 28.90  |  |  |  | 20.64 | 
|NASDAQ Market Index          |  |           | 100.00 |           |  |           | 139.69 |           |  |           | 257.24 |           |  |  | 105.88 |  |  |  | 107.20 |  |  |  | 78.62 | 



|(1) |  | Prior to May 21, 1998 the Companys Common Stock was not publicly traded.
Comparative data is provided only for the period since that date. This
graph is not soliciting material, is not deemed filed with the
Securities and Exchange Commission and is not to be incorporated by
reference in any filing of the Company under the Securities Act of 1933,
as amended, or the Securities Exchange Act of 1934, as amended, whether
made before or after the date hereof and irrespective of any general
incorporation language in any such filing.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | The stock price information shown on the graph is not necessarily
indicative of future price performance. Information used on the graph was
obtained from Media General Financial Services, a source believed to be

reliable, but the Company is not responsible for any errors or omissions
in such information.                                                                                                                                                                                                                                    

53



---



##### Table of Contents






|         |  |                                                               
|-------- |  | --------------------------------------------------------------
|ITEM 12: |  | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Please see ITEM 5 for information required by Item 201(d) of Regulation
S-K.

The following table sets forth as of March 31, 2003 (i) the name of each person
who is known by the Company to own beneficially more than 5% of the outstanding
shares of Common Stock; (ii) the name of each director of the Company; (iii)
the name of each executive officer of the Company named in the Summary
Compensation Table set forth above; and (iv) the number of shares beneficially
owned by each such person and all directors and executive officers of the
Company as a group and the percentage of the outstanding shares represented
thereby.

|                                                                |                                        |                                                                                 |           |               |  |            |      |      |   | 
|--------------------------------------------------------------- | -------------------------------------- | ------------------------------------------------------------------------------- | --------- | ------------- |  | ---------- | ---- | ---- | - | 
|                                                                |                                        |                                                                                 |           | Amount and    |  |            |      |     
|                                                                |                                        |                                                                                 |           | Nature        |  |            |      |     
|                                                                |                                        |                                                                                 |           | of Beneficial |  | Percent of
|Name and Address of Beneficial Owner (1)                        |                                        | Ownership(2)                                                                    |           | Class(3)     
|                                                                |                                        |                                                                                 |           |              
|Principal Stockholders:                                         |                                        |                                                                                 |           |               |  |            |      |     
|                                                                | General Atlantic Partners, LLC (4)(13) |                                                                                 |           | 3,125,080     |  |            |      | 23.8 | %
|                                                                |                                        | c/o General Atlantic Service Corporation, 3 Pickwick Plaza,
Greenwich, CT 06830 |           |               |  |            |      |      |   | 
|Named Officers:                                                 |                                        |                                                                                 |           |               |  |            |      |     
|                                                                | Robert W. Howe (5)(13)                 |                                                                                 |           | 2,152,800     |  |            |      | 16.4 |  
|                                                                | William H. Gallagher (6)(13)           |                                                                                 |           | 2,227,800     |  |            |      | 17.0 |  
|                                                                | Paul K. McGrath (7)                    |                                                                                 |           | 150,000       |  |            |      | 1.1  |  
|                                                                | Peter A. Cahill (8)                    |                                                                                 |           | 469,000       |  |            |      | 3.5  |  
|                                                                | Erik Golz (9)                          |                                                                                 |           | 93,000        |  |            |      | *    |  
|Directors:                                                      |                                        |                                                                                 |           |               |  |            |      |     
|                                                                | David C. Hodgson (4)(10)(13)           |                                                                                 |           | 3,130,080     |  |            |      | 23.8 |  
|                                                                | Lee M. Kennedy (10)(11)(13)            |                                                                                 |           | 1,005,000     |  |            |      | 7.6  |  
|                                                                | George F. Raymond (10)                 |                                                                                 |           | 47,000        |  |            |      | *    |  
|                                                                | Richard D. Driscoll (10)               |                                                                                 |           | 25,000        |  |            |      | *    |  
|All directors and executive officers
as a group(11 persons)(12) |                                        |                                                                                 | 9,416,680 |               |  |            | 68.7 | %   



---



|* Less than one percent of the outstanding Common Stock.
|--------------------------------------------------------
|                                                        
|(1)                                                     
|                                                        
|(2)                                                     
|                                                        
|(3)                                                     

54



---



##### Table of Contents





|(4)  |  | Consists of 3,104,080 shares of Common Stock owned by General Atlantic
Partners II, L.P. (GAP II) and 21,000 shares of Common Stock owned by
GAP Co-investment Partners, L.P. (GAPCO). The general partner of GAP II
is General Atlantic Partners, LLC (GAP LLC), and the managing members of
GAP LLC are also the general partners of GAPCO. David C. Hodgson is a
managing member of GAP LLC and a general partner of GAPCO. GAP II, GAP
LLC and GAPCO are a group within the meaning of Rule 13d-5 of the
Securities Exchange Act of 1934, as amended. Mr. Hodgson disclaims
beneficial ownership of such shares except to the extent of his pecuniary
interest therein. The address of GAP II, GAP LLC, GAPCO and Mr. Hodgson
is c/o General Atlantic Service Corporation, 3 Pickwick Plaza, Greenwich,
Connecticut 06830.
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|(5)  |  | Includes 147,330 shares held by the Howe Family Limited Partnership (the
Howe FLP). Mr. Howe disclaims beneficial ownership of these shares
except to the extent of his proportionate pecuniary interest therein,
which interest is a 1% general partnership interest. Also includes an
additional 174,677 shares (the Howe GRAT Shares) held of record by the
Robert W. Howe 2001 Grantor Retained Annuity Trust, of which Mr. Howe is
the Trustee.                                                                                                                                                                                                                                                                                                                                                                              
|    
|(6)  |  | Includes 223,860 shares held by the Gallagher Family Limited Partnership.
Mr. Gallagher disclaims beneficial ownership of these shares except to
the extent of his proportionate pecuniary interest therein, which interest
is a 1% general partnership interest. Also includes an additional 216,281
shares (the Gallagher GRAT Shares) held of record by the William H.
Gallagher 2001 Grantor Retained Annuity Trust, of which Mr. Gallagher is
the Trustee.                                                                                                                                                                                                                                                                                                                                                                     
|    
|(7)  |  | Includes 120,000 shares of Common Stock issuable upon exercise of
presently exercisable stock options granted pursuant to the Companys
Amended and Restated 1997 Incentive Stock Option Plan (the 1997 Plan).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    
|(8)  |  | Includes 193,000 shares of Common Stock issuable upon exercise of
presently exercisable stock options granted pursuant to the Companys
Amended and Restated 1992 Incentive Stock Option Plan and 80,000 shares of
Common Stock issuable upon exercise of presently exercisable stock options
granted pursuant to the 1997 Plan. Also includes 100,000 shares held by
the Peter and Andrea Cahill Family Limited Partnership. Mr. Cahill has
shared voting and investment power with his spouse with respect to such
shares. Mr. Cahill disclaims beneficial ownership of such shares except
to the extent of his proportionate pecuniary interest therein, which
interest is a 1% general partnership interest held by each of Mr. Cahill
and his spouse.                                                                            
|    
|(9)  |  | Includes 90,000 shares of Common Stock issuable upon exercise of
presently exercisable stock options granted pursuant to the 1997 Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    
|(10) |  | Includes 5,000 shares of Common Stock issuable upon exercise of presently
exercisable stock options granted pursuant to the 1997 Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    
|(11) |  | Does not include 20,000 shares held by Mary Elizabeth Kennedy and
Jennifer C. Snyder, and their successors, as Trustees of the Lee M.
Kennedy 1997 Irrevocable Trust f/b/o Eugene Kennedy dated November 6,
1997; 20,000 shares held by Mary Elizabeth Kennedy and Jennifer C. Snyder,
and their successors, as Trustees of the Lee M. Kennedy 1997 Irrevocable
Trust f/b/o Lee Michael Kennedy dated November 6, 1997; and 20,000 shares
held by Mary Elizabeth Kennedy and Jennifer C. Snyder, and their
successors, as Trustees of the Lee M. Kennedy 1997 Irrevocable Trust f/b/o
Shaila Kennedy dated November 6, 1997.                                                                                                                                                                                                          

55



---



##### Table of Contents





|(12) |  | Includes 503,000 shares of Common Stock issuable upon exercise of
presently exercisable stock options granted pursuant to the 1997 (see
footnotes 7, 8, 9, 10, and 11) and an additional 75,000 shares of Common
Stock issuable upon exercise of presently exercisable stock options issued
to the remaining Executive Officers.                                                                                                                                                                                                                                                                             
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|(13) |  | These beneficial owners may be deemed a group, within the meaning of
Section 13(d)(3) of the Exchange Act, with respect to the proposed
transaction described in Items 3 and 7. Except as expressly set forth
herein or set forth in the Schedule 13D filed by Messrs. Howe, Gallagher
and Kennedy on May 9, 2003 (SEC File No. 005-54161) and the Schedule 13D/A
filed by GAP II, GAPCO, GAP LLC on May 6, 2003 (SEC File No. 005-54161),
each such beneficial owner disclaims beneficial ownership of the shares of
Common Stock beneficially owned by any other member of the group or any
other person.




ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

As stated above, on May 5, 2003, the Company received a preliminary expression
of interest to engage in a going private transaction from a group consisting of
two current members of management who are also Directors of the Company , one
outside Director and another entity affiliated with one of our outside
Directors (collectively, the Principals). Mr. Hodgson is a managing member
of General Atlantic Partners, LLC, one of the Principals. The Board of
Directors has appointed an Independent Committee of the Board (the Committee)
to consider the proposal and enter into negotiations with the Principals
regarding the proposal. Mr. Raymond and Mr. Driscoll are members of the
Committee and will receive a compensation of $1,000 per meeting of the
Committee plus expenses.

The Company has contracted with the J. Barry Driscoll Insurance Agency for
insurance coverage for certain of the Companys corporate policies. J. Barry
Driscoll, the Chairman of the Board of Directors of J. Barry Driscoll Insurance
Agency, is the brother of Richard D. Driscoll, a Director of the Company. The
aggregate cost of the insurance coverage provided through the J. Barry Driscoll
Insurance Agency to the Company in fiscal 2003 was $31,715.00

The Company believes the transactions set forth above were made on terms no
less favorable to the Company than would have been obtained from unaffiliated
third parties. The Company has a policy whereby all transactions between the
Company and its officers, directors and affiliates will be on terms no less
favorable to the Company than could be obtained from unaffiliated third parties
and will be approved by a majority of the disinterested members of the Board of
Directors.




ITEM 14: CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

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

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

56



---



##### Table of Contents






ITEM 15: PRINCIPAL ACCOUNTANT FEES AND SERVICES

The Company retained PricewaterhouseCoopers LLP (PWC) to audit the
consolidated financial statements for fiscal 2002 and 2003. The aggregate fees
billed for professional services by PWC in fiscal 2002 and 2003 for these
services were:

Audit Fees: $92,030 for services rendered for the annual audit of the Companys
consolidated financial statements for fiscal 2003 and the quarterly reviews of
the financial statements included in the Companys Form 10-Q. $80,750 for
services rendered for the annual audit of the Companys consolidated financial
statements for fiscal 2002 and the quarterly reviews of the financial
statements included in the Companys Form 10-Q.

Audit Related Fees: There were no
audit related fees billed by PWC for fiscal 2003. During fiscal 2002
$42,000 for services rendered for the audit performed in connection
with the Companys acquisition of Earnings Insights
(EI).

Tax Fees: During fiscal 2003, $70,950 for services rendered in connection with
the preparation of the Companys Federal and State income tax returns and other
tax related services. During fiscal 2002, $85,655 for services rendered in
connection with the preparation of the Companys Federal and State income tax
returns and other tax related services.

All Other Fees: There were no other fees billed by PWC for services other than
those described above for fiscal 2003. During fiscal 2002 $32,904 was
paid to PWC for valuation services rendered in connection with the purchase price
allocation of EI.

The Companys Board of Directors considered the effect of PWCs performance of
the foregoing non-audit related services on PWCs independence as the Companys
outside auditor prior to the engagement of PWC for the performance of such
services, and the Companys Audit Committee has subsequently ratified the
engagement of PWC for the performance of such services and determined that the
provision of such services was compatible with maintaining PWCs independence.

57



---



##### Table of Contents









PART IV

ITEM 16: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K



|(a) |  | The following documents are filed as part of this Annual Report on Form
10-K:
|--- |  | -----------------------------------------------------------------------------



| | 1. |  | Consolidated Financial Statements See Index to Consolidated
Financial Statements at ITEM 8 and incorporated herein by reference.                                                                                                                                                                                                                                                            
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2. |  | Financial Statement Schedules Schedule II, Valuation and
Qualifying Accounts, is listed in the Index to Consolidated Financial
Statements, is included on page 43 and is filed as part of this
report. All other schedules to the consolidated financial statements
are omitted, as the required information is either inapplicable or
presented in the financial statements or related notes.
|
| | 3. |  | List of Exhibits The Exhibits which are filed with this Report
or which are incorporated by reference herein are set forth in the
Exhibit Index, which appears immediately before the Exhibits.                                                                                                                                                                                               



|(b) |  | Reports on Form 8-K There were no reports on Form 8-K filed by the
Company during the fourth quarter of fiscal year ended March 31, 2003.                                              
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(c) |  | Exhibits The Exhibits which are filed with this Report or which are
incorporated by reference herein are set forth in the Exhibit index, which
appears immediately before the Exhibits.
|   
|(d) |  | Financial Statement Schedule The Company hereby files as part of this
Form 10-K the consolidated financial statement schedule listed in ITEM
14(a)(2) above, which is attached hereto. 

58



---



##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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                                                
|                             |  |                                                      |  |              
|By:                          |  | /s/ Robert W. Howe                                   |  | June 25, 2003
|                             |  | Chairman of the Board and
   Chief Executive Officer |  |              

We, the undersigned officers and directors of Atlantic Data Services, Inc.,
hereby severally constitute and appoint Robert W. Howe and Paul K. McGrath, and
each of them singly, our true and lawful attorneys, with full power to them and
each of them singly, to sign for us in our names in the capacities to do all
things in our names and on our behalf in such capacities to enable Atlantic
Data Services, Inc. to comply with the provisions of the Securities Exchange
Act of 1934 and all requirements of the Securities Exchange Commission.

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.

|                                               |  |                                                                                                             |  |              
|---------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------- |  | -------------
|Signature                                      |  | Title                                                                                                       |  | Date         
|/s/ Robert W. Howe(Robert W. Howe)             |  | Chairman of the Board and Chief
  Executive Officer (Principal Executive
  Officer)                         |  | June 25, 2003
|                                              
|/s/ William H. Gallagher(William H. Gallagher) |  | President, Chief Operating Officer
  and Director                                                           |  | June 25, 2003
|                                              
|/s/ Paul K. McGrath(Paul K. McGrath)           |  | Senior Vice President, Finance and Chief
  Financial Officer (Principal Financial
  and Accounting Officer) |  | June 25, 2003
|                                              
|/s/ Richard D. Driscoll(Richard D. Driscoll)   |  | Director                                                                                                    |  | June 25, 2003
|                                              
|/s/ David C. Hodgson(David C. Hodgson)         |  | Director                                                                                                    |  | June 25, 2003
|                                              
|/s/ Lee M. Kennedy(Lee M. Kennedy)             |  | Director                                                                                                    |  | June 25, 2003
|                                              
|/s/ George F. Raymond(George F. Raymond)       |  | Director                                                                                                    |  | June 25, 2003

59



---



##### Table of Contents






CERTIFICATIONS

I, Robert W. Howe, certify that:



|1.           I have reviewed this Annual Report on Form 10-K of Atlantic Data Services,
Inc.;                                                                                                                                                                                                                                        
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                     
|2.           Based on my knowledge, this Annual Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this Annual
Report;
|                                                                                                                                                                                                                                                                                                                                     
|3.           Based on my knowledge, the financial statements, and other financial
information included in this Annual Report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this Annual Report;                   
|                                                                                                                                                                                                                                                                                                                                     
|4.           The registrants other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:                                                                                                



|(a)           designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this Annual Report is being prepared;
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                          
|(b)           evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
Annual Report (the Evaluation Date); and                                                                                                  
|                                                                                                                                                                                                                                                                                                          
|(c)           presented in this Annual Report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;                                                                                                                        



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



|(a)           all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                            
|(b)           any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and                                                                                                                                        



|6.           The registrants other certifying officer and I have indicated in this
Annual Report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Date: June 25, 2003

| |                                                                            
| | ---------------------------------------------------------------------------
| | By: /s/ Robert W. Howe

Robert W. Howe
Chairman and Chief Executive Officer

60



---



##### Table of Contents



CERTIFICATIONS
(continued)

I, Paul K. McGrath, certify that:



|1.           I have reviewed this Annual Report on Form 10-K of Atlantic Data Services,
Inc.;                                                                                                                                                                                                                                        
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                     
|2.           Based on my knowledge, this Annual Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this Annual
Report;
|                                                                                                                                                                                                                                                                                                                                     
|3.           Based on my knowledge, the financial statements, and other financial
information included in this Annual Report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this Annual Report;                   
|                                                                                                                                                                                                                                                                                                                                     
|4.           The registrants other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:                                                                                                



|(a)           designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this Annual Report is being prepared;
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                          
|(b)           evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
Annual Report (the Evaluation Date); and                                                                                                  
|                                                                                                                                                                                                                                                                                                          
|(c)           presented in this Annual Report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;                                                                                                                        



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



|(a)           all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                            
|(b)           any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and                                                                                                                                        



|6.           The registrants other certifying officer and I have indicated in this
Annual Report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Date: June 25, 2003

| |                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------
| | By: /s/ Paul K. McGrath

Paul K. McGrath
Senior Vice President, Finance and Chief Financial
  Officer (Principal Financial and Accounting Officer)

61



---



##### Table of Contents






EXHIBIT INDEX

|       |  |                                                                                                                                                                                                                                                     
|------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|No.    |  | Description                                                                                                                                                                                                                                         
|       |  |                                                                                                                                                                                                                                                     
|3.01   |  | Second Amended and Restated Articles of Organization of the Company
(Incorporated by reference to the Companys Registration Statement
on Form S-1 filed March 26, 1998 (File No. 333-48703))                                                       
|       |  |                                                                                                                                                                                                                                                     
|3.02   |  | Second Amended and Restated By-Laws of the Company (Incorporated by
reference to the Companys Registration Statement on Form S-1 filed
March 26, 1998 (File No. 333-48703))                                                                        
|       |  |                                                                                                                                                                                                                                                     
|4.01   |  | Specimen Certificate for Shares of the Companys Common Stock
(Incorporated by reference to the Companys Registration Statement
on Form S-1 filed March 26, 1998 (File No. 333-48703))                                                             
|       |  |                                                                                                                                                                                                                                                     
|10.01 |  | Key Person Stock Plan (Incorporated by reference to the Companys
Registration Statement on Form S-1 filed March 26, 1998 (File No.
333-48703))                                                                                                     
|       |  |                                                                                                                                                                                                                                                     
|10.02 |  | Amended and Restated 1992 Incentive Stock Option Plan (Incorporated
by reference to the Companys Registration Statement on Form S-1
filed March 26, 1998 (File No. 333-48703))                                                                     
|       |  |                                                                                                                                                                                                                                                     
|10.03 |  | Form of Incentive Stock Option Agreement for Shares Issued Under
the Amended and Restated 1992 Incentive Stock Option Plan
(Incorporated by reference to the Companys Registration Statement
on Form S-1 filed March 26, 1998 (File No. 333-48703))
|       |  |                                                                                                                                                                                                                                                     
|10.04 |  | Amended and Restated 1997 Stock Plan (Incorporated by reference to
the Companys Registration Statement on Form S-1 filed March 26,
1998 (File No. 333-48703))                                                                                      
|       |  |                                                                                                                                                                                                                                                     
|10.05 |  | Amended and Restated 1997 Stock Plan, as amended (Incorporated by
reference to the Companys Registration Statement on Form S-8 filed
September 13, 1999 (File No. 333-86997))                                                                      
|       |  |                                                                                                                                                                                                                                                     
|10.06 |  | Form of Incentive Stock Option Agreement under the Amended and
Restated 1997 Stock Plan (Incorporated by reference to the
Companys Registration Statement on Form S-1 filed March 26, 1998
(File No. 333-48703))                                   
|       |  |                                                                                                                                                                                                                                                     
|10.07 |  | Form of Non-Qualified Stock Option Agreement under the Amended and
Restated 1997 Stock Plan (Incorporated by reference to the
Companys Registration Statement on Form S-1 filed March 26, 1998
(File No. 333-48703))                               
|       |  |                                                                                                                                                                                                                                                     
|10.08 |  | 1998 Employee Stock Purchase Plan (Incorporated by reference to the
Companys Registration Statement on Form S-1 filed March 26, 1998
(File No. 333-48703))                                                                                         
|       |  |                                                                                                                                                                                                                                                     
|10.09 |  | Employment Agreement between the Company and Robert W. Howe dated
March 25, 1998 (Incorporated by reference to the Companys
Registration Statement on Form S-1 filed March 26, 1998 (File No.
333-48703))                                          
|       |  |                                                                                                                                                                                                                                                     
|10.10 |  | Employment Agreement between the Company and William H. Gallagher
dated March 25, 1998 (Incorporated by reference to the Companys
Registration Statement on Form S-1 filed March 26, 1998 (File No.
333-48703))                                    
|       |  |                                                                                                                                                                                                                                                     
|10.11 |  | Employment Agreement between the Company and Paul K. McGrath dated
March 25, 1998 (Incorporated by reference to the Companys
Registration Statement on Form S-1 filed March 26, 1998 (File No.
333-48703))                                         
|       |  |                                                                                                                                                                                                                                                     
|10.12 |  | Employment Agreement between the Company and Peter A. Cahill dated
March 25, 1998 (Incorporated by reference to the Companys
Registration Statement on Form S-1 filed March 26, 1998 (File No.
333-48703))                                         

62



---



##### Table of Contents



|        |  |                                                                                                                                                                                                                                                                          
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|No.     |  | Description                                                                                                                                                                                                                                                              
|        |  |                                                                                                                                                                                                                                                                          
|10.13  |  | Employment Agreement between the Company and Erik C. Golz dated March 26, 2001
(Incorporated by reference to the Companys Annual Report on Form 10-K filed June 25,
2001) (File No. 000-24193))                                                                         
|        |  |                                                                                                                                                                                                                                                                          
|10.14* |  | Employment Agreement between the Company and Thomas P. McCarthy Jr. dated June 5, 2002                                                                                                                                                                                   
|        |  |                                                                                                                                                                                                                                                                          
|10.15* |  | Employment Agreement between the Company and Irv Naar dated March 23, 1998                                                                                                                                                                                               
|        |  |                                                                                                                                                                                                                                                                          
|10.17   |  | Lease Agreement between the Company and National Fire Protection Association dated
April 1, 1995, as amended July 31, 1998 and January 15, 1997 (Incorporated by
reference to the Companys Registration Statement on Form S-1 filed March 26, 1998
(File No. 333-48703))
|        |  |                                                                                                                                                                                                                                                                          
|10.18   |  | Third Amendment - Lease Agreement between the Company and National Fire Protection
Association dated October 15, 1998 (Incorporated by reference to the Companys Annual
Report on Form 10-K filed June 25, 1999 (File No. 000-24193))                                   
|        |  |                                                                                                                                                                                                                                                                          
|10.19   |  | Fourth Amendment - Lease Agreement between the Company and National Fire Protection
Association dated May 1, 1999 (Incorporated by reference to the Companys Annual
Report on Form 10-K filed June 25, 1999 (File No. 000-24193))                                       
|        |  |                                                                                                                                                                                                                                                                          
|10.20   |  | Agreement for Exercise of Option between the Company and National Fire Protection
Association dated November 23, 1999 (Incorporated by reference to the Companys
Annual Report on Form 10-K filed June 21, 2000 (File No. 000-24193))                                   
|        |  |                                                                                                                                                                                                                                                                          
|10.21*  |  | Agreement to Restructure and Extend the Lease Agreement between the Company and
Nation Fire Protection Association dated May 5, 2003                                                                                                                                     
|        |  |                                                                                                                                                                                                                                                                          
|21.01*  |  | Subsidiaries of the Company                                                                                                                                                                                                                                              
|        |  |                                                                                                                                                                                                                                                                          
|23.01*  |  | Consent of PricewaterhouseCoopers LLP                                                                                                                                                                                                                                    
|        |  |                                                                                                                                                                                                                                                                          
|24.01*  |  | Power of Attorney (included on the Signature Page hereto)                                                                                                                                                                                                                
|        |  |                                                                                                                                                                                                                                                                          
|99.01*  |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002  Robert W. Howe, Chairman and Chief Executive
Officer                                                                                            
|        |  |                                                                                                                                                                                                                                                                          
|99.02*  |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002  Paul K. McGrath, Senior Vice President, Finance
and Chief Financial Officer (Principal Accounting Officer)                                      



---



|* Filed herewith                                                                 
|---------------------------------------------------------------------------------
|                                                                                 
|  Indicates management contract or a compensatory plan, contract or arrangement.

63