Use these links to rapidly review the documentFORM 10-K INDEX PART IV



UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

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FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934

(Mark One)

|ý |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934    
|- |  | ----------------------------------------------------------------------------------------
|  |  | For the fiscal year ended December 31, 2003                                             
|  |  | OR                                                                                      
|o |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

Commission File No. 000-30271

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PEC SOLUTIONS, INC.(Exact name of registrant as specified in its charter)

|Delaware(State or other jurisdiction
of incorporation or organization) |  | 54-1339972(IRS Employer Identification No.)
|---------------------------------------------------------------------- |  | -------------------------------------------

12730 Fair Lakes Circle, Fairfax, Virginia 22033(Address of principal executive offices, zip code)

Registrant's telephone number, including area code: (703) 679-4900
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.01 par value(Title of Each 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 ý No o

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 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. o

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

The aggregate market value of voting stock held by non-affiliates of the registrant was $198,975,964 based upon the closing price on the Nasdaq
National Market on the last business day of the registrant's most recently completed second fiscal quarter (June 30, 2003).

Number
of shares of Common Stock outstanding as of February 27, 2004 was: 27,308,207 shares.

Documents Incorporated By Reference:

Part IIIProxy Statement for the 2004 Annual Meeting of Stockholders on May 19, 2004. Such proxy statement will be filed with the
Securities and Exchange Commission not later than 120 days after the Registrant's fiscal year ended December 31, 2003.



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FORM 10-K  INDEX



|         |  |                                                                                      
|-------- |  | -------------------------------------------------------------------------------------
|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 Company's Common Equity and Related Stockholder Matters               
|ITEM 6   |  | Selected 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 in and Disagreements with Accountants on Accounting and Financial Disclosure 
|ITEM 9A  |  | Controls and Procedures                                                              
|PART III
|ITEM 10  |  | Directors and Executive Officers of the Company                                      
|ITEM 11  |  | Executive Compensation                                                               
|ITEM 12  |  | Security Ownership of Certain Beneficial Owners and Management                       
|ITEM 13  |  | Certain Relationships and Related Transactions                                       
|ITEM 14  |  | Principal Accounting Fees and Services                                               
|PART IV 
|ITEM 15  |  | Exhibits, Financial Statement Schedules, and Reports on Form 8-K                     
|         |  | Signatures                                                                           

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PART I

Item 1. Business

Overview

PEC Solutions, Inc. (www.pec.com) is a professional services firm providing high-end solutions that help government clients harness the power
of the Internet and other advanced technologies to improve mission performance. We specialize in Web-Enabling Government® by providing secure, interoperable technology
solutions for clients in homeland security, law enforcement, intelligence, defense, and civilian agencies within the federal government and at state and local levels. As a total solutions provider, we
address the full technology lifecycle, including formulating technology strategies, creating business solutions, performing long-term operational management and continuing enhancement of
the solution.

Our
clients have included every cabinet-level department of the federal government as well as numerous additional entities at the federal, state and local levels. This group includes a
cross-section of civil, law enforcement, intelligence and judicial government organizations. Our largest clients include the Drug Enforcement Administration, EDS, the prime contractor for the Navy
Marine Corps Intranet ("NMCI") program, the Department of Homeland Security, the Veterans Benefits Administration, the Internal Revenue Service, the Bureau of Alcohol, Tobacco and Firearms, the
Department of Defense and the intelligence community. Since 1999, we have provided more than $585 million of services in the government market and have increased revenues at approximately a 34%
compound annual growth rate.

PEC
Solutions, Inc. was originally incorporated under the laws of the Commonwealth of Virginia as Performance Engineering Corporation ("PEC") on June 25, 1985. On
January 1, 2000, PEC was reincorporated under the laws of Delaware as PEC Solutions, Inc.

Industry Background

Government has emerged in recent years as one of the leading purchasers of advanced technology solutions. The federal government's 2004 approved budget allocates
$56.3 billion for information technology spending. According to INPUT, a research firm that tracks federal government spending trends, the federal government will spend $13.9 billion on
information technology services by 2008, up from $10.3 billion in 2004. This represents a five-year compound annual growth rate of 6.56 percent.

Efforts to Improve Homeland Security and Mount Counter-Terrorism Programs will Stimulate Government Technology Spending

We believe that the events of September 11, 2001, resulted in escalating priorities relating to the needs of the nation's law enforcement infrastructure,
and in the broader areas of national defense and homeland security. The President's 2004 budget provides continued strong support for federal information technology spending. Much of the spending
focuses on homeland security and electronic government. We believe that high-end technology solutions providers, with strong legacy practices and client bases in the agencies and
government verticals relating to homeland security, law enforcement, intelligence and defense, could experience increases in demand as the federal market moves forward.

Government Reform is Driving Growth in Advanced Technology Spending

We believe that political pressures and budgetary constraints are forcing government agencies at all levels to improve their processes and services and to operate
more like commercial enterprises. Organizations throughout the federal, state and local governments are investing heavily in information technology to improve effectiveness, enhance productivity and
extend new services in order to deliver

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increasingly
responsive and cost-effective public services. We believe that Internet technologies provide an ideal solution to meet government's needs.

Changes
over the mid to late 1990's in federal government contract procurement and compliance regulations have streamlined the government's buying practices, resulting in a more
commercial approach to the procurement and management of technologies and services. As a result, procurement lead times have decreased and government buyers now have greater flexibility to purchase
services on the basis of distinguishing corporate capabilities and successful past performance. Federal government entities now are able to award contracts based on factors other than price alone, if
they judge that the government would receive a greater value. In addition, the General Services Administration's extension of basic government-wide contract vehicles for procuring
technology components and services, the GSA Schedules, makes purchasing technology services easier and faster. Federal government buyers can now order services directly from pre-approved
providers instead of using a time-consuming bid solicitation process. We believe that these changes have improved our ability to successfully pursue business in the government market.
There are currently no proposed changes to government procurement regulations that we believe will materially affect our business in the immediate future.

Government's Need to Outsource Technology Programs

Government organizations rely heavily on outside contractors to provide skilled resources to accomplish technology programs. We believe that this reliance will
continue to intensify due to political and budgetary pressures in many government agencies and due to the difficulties government faces in recruiting and retaining highly skilled technology
professionals in a competitive labor market. In concert with its transition to more commercial practices, government is increasingly outsourcing technology programs as a means of simplifying the
implementation and management of the technology, so that government workers can focus on their mission.

Technology Services Providers in the Government Sector

Engagements in the government market can be broadly classified into four categories based on the type of services provided. Many companies provide a mix of
services across these categories.

First,
at the low end, providing information technology staff augmentation at low hourly rates typically involves placing staff in client facilities. These engagements typically exhibit
low operating margins and slow growth.

Second,
large-scale systems integration and outsourcing engagements typically involve assuming responsibility for acquiring, assembling and operating large inventories of equipment and
software. Major portions of these engagements involve reselling commodity technologies at highly competitive fixed unit prices. These engagements typically exhibit moderate growth, but low operating
margins.

Third,
large-scale systems development engagements involve providing full-service solutions that combine hardware, software development, system engineering and operations.
These engagements typically exhibit moderate growth and operating margins.

Fourth,
at the high end, engagements involving high-value management consulting and development and integration of complex systems in core mission areas use specialized or
emerging technologies such as the Internet and advanced security. These engagements typically exhibit strong growth and operating margins.

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Challenges in the Government Technology Services Sector

Technology services providers face a unique combination of challenges when providing services to the government. These include:



Our Solution

We are a high-end technology solutions provider that addresses the needs and particular challenges of the evolving government market by combining the
following key elements in our solutions:

Total Solutions Provider Capabilities

As a total solutions provider, we address the full technology lifecycle through our deep technical capabilities and extensive government domain knowledge. We
possess a wide range of the specialized skills needed for government technology engagements including: strategic technology consulting; program management; system architectural design; network
engineering; applications development; and systems integration, deployment and operational support. We relieve our clients of the details of the application and management of technologies so they can
focus on their core competencies and mission. Our mission-critical solutions integrate an organization's back-office processes and legacy systems with customized applications, and enhance
the interoperability and accessibility of critical enterprise data.

Extensive Government Domain Experience

Our founders, who have worked together for more than 20 years in the government marketplace, have substantial technical and management backgrounds. Our
management maintains close working relationships with our clients and an active role in our projects, resulting in consistent contract performance and broad recognition of our managers. Our consulting
staff is knowledgeable in the government sector application of technology management policy formulation, acquisition strategy, business process re-engineering and best-value
procurement methods.

Deep Technology Expertise

We have expertise in the critical underlying infrastructure technologies necessary to support fully web-based enterprises, including security,
intranets, applications development and enterprise management. We have direct experience with the legacy automation architectures found in government agencies, allowing us to craft solutions that take
advantage of the substantial investments our clients have in legacy systems. Our employees have experience with emerging technologies, web-enabling tools and vendors such as Microsoft,
Oracle, Cisco, IBM/Lotus, IBM/Tivoli, Entrust and Linux.

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Reusable Solution Sets

For portions of our business, we develop reusable solution sets that can be reapplied to requirements commonly encountered in our markets. We develop the software
code and components comprising these reusable solution sets based on our government domain expertise. These solutions enable us to give our clients the benefit of our knowledge and experience in
addressing complex mission challenges and to develop and implement solutions more quickly and efficiently. We focus our efforts on customizing solutions to meet our clients' specific needs and to
deliver reliable solutions based on components that have been tested and perfected through repeated use.

The PEC PhilosophyFlexibility and Objectivity

We retain the maximum possible flexibility in the systems and components that we use in our solutions by maintaining both strong established product credentials
and substantial hands-on experience with emerging products. We focus on providing strategic and high-end technical service contributions to large programs, while assisting our
clients to assemble, contract with and manage the vendors of commodity program elements. By remaining independent of specific vendors, we are able to work with providers that best serve the interests
of our clients.

Our Strategy

Our strategy is to continue to grow by capitalizing on our leadership position in the government technology solutions market. Our strategies for obtaining this
objective include:

Maintaining Our Technology Leadership Position

We will continue to focus on high-end engagements that require specialized knowledge of emerging technologies. We intend to maintain our technology
leadership by recruiting employees who will add to our inventory of technology skills and by refining the skills and capabilities of our existing staff through training, certification and
hands-on laboratory experimentation. We seek to work closely with our technology partners to share expertise and innovations and to stay well ahead of competitors in the practical aspects
of applying and integrating emerging technologies.

Increasing Federal Government Market Penetration

We endeavor to capitalize on our long-term relationships with government clients and our reputation within the government market to
cross-sell our full range of services to our existing client base and to expand into organizations in the federal government for which we have not already performed services. We pursue
these opportunities through a continued active sales and marketing effort and by continuing to promote the success stories stemming from our aggressive application of government technology solutions.
We also strive to leverage our relationships with our technology providers and their sales resources to obtain new federal government clients.

Enhancing the PEC Solutions Brand and Culture

We are implementing an aggressive program to build the identity and awareness of the PEC Solutions brand in order to improve our visibility in the marketplace and
to attract the best and brightest employees. We seek to hire and retain outstanding professionals, provide incentives to achieve corporate goals and maintain a culture that fosters innovation. We will
continue to emphasize professional development and training of our employees. We maintain an active internal communications program to promote a team culture and foster high employee morale. We also
continue to emphasize our corporate technology infrastructure to facilitate the sharing of knowledge among our employees.

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Expanding Our Presence in State and Local Government and Selected Commercial Markets

We attempt to leverage our domain expertise and deep technology skills for providing services to state and local governments. We also explore available
opportunities to expand our business of web-enabling private sector organizations that operate in highly regulated industries and that have significant interactions with the government
agencies with which we work. We believe our existing solution sets, such as case management systems, criminal suspect booking stations, and land and financial records automation, are applicable to
projects at the state and local level, as well as at private sector organizations.

Undertaking a Disciplined Acquisition Program

We are seeking to broaden our capabilities and client base and extend our geographic presence in state and local government markets by acquiring select
businesses. Acquired businesses will perform similar technical work for organizations outside our current client base, will support solution sets that are consistent with and extend our
web-enabling strategy, or will be located in geographic areas strategic to significant state and local governments and programs.

Our Services

As a provider of government technology solutions, we offer a variety of services across the full technology lifecycle. These services include:

Strategy and Design

We help clients develop the operational vision for integrated mission solutions, and formulate the business and execution plans for realizing imaginative,
integrated and aggressive technology solutions. We develop sophisticated enterprise architecturesthe technology blueprints and systematic guidance that allow enterprises to incrementally
develop, migrate to and operate large-scale systems. By re-engineering government processes, we move organizations to an eGovernment environment. We perform economic analyses to weigh the
costs of technology investment against the operational benefits expected from such technology implementation. We provide support to organizations that are executing programs to privatize large-scale
information systems operations, or are undertaking far-reaching changes in their business models, such as migrating from appropriated to fee-for-service financial
models.

Solutions Development and Implementation

We develop, engineer and integrate computer hardware, commercial software, reusable solution sets, custom-built applications and networks to create integrated
business solutions for our clients. Our emphasis on Internet technology allows us to combine leading-edge technologies with disciplined and effective system development methodologies. Our
methods are designed to ensure that the technology fits with business processes and that users realize process improvement. We distinguish ourselves by addressing the core technical and business
challenges in migrating large government enterprises to integrated eGovernment solutions. We build:



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Ongoing Systems Management and Enhancement

We provide long-term, ongoing support for our solutions including the operation, management and enhancement actions necessary to keep solutions
up-to-date with evolving business processes and technologies. We use sophisticated tools to reduce the burden and costs of maintaining large complex intranets, and to enhance
whole systems without the need to deploy engineers and field service technicians to the operating locations of an enterprise. We operate highly automated enterprise technology management processes
that support integration, configuration management, software distribution and user support, and allow clients to outsource the responsibilities for maintaining their technology infrastructures and
applications. The results are reduced operating costs for our clients and improved performance and reliability.

Recent Developments

On January 28, 2004, the United States District Court for the Eastern District of Virginia dismissed the class action complaint that had been filed against
us and certain of our officers. Plaintiffs have filed notice of appeal. In addition, an independent committee of the Board, which had received a demand letter to investigate the same charges,
concluded after its investigation and based on its business judgement to reject the demand letter.

Sales and Marketing

Our marketing efforts are focused on creating awareness of opportunities in government technology innovation, establishing PEC Solutions as a leader in this new
category and building the PEC Solutions brand.

We
market and sell our services through multiple channels by using our business development staff, leveraging existing client relationships, capitalizing on our task order contracts,
responding to competitive solicitations, attending marketing events and engaging in other public relations activities. We employ marketing research services to identify and track potential contract
opportunities. We also cultivate relationships with leading-edge technology vendors, such as Microsoft and IBM, and prime contractors, such as EDS, to identify and obtain project leads
consistent with our capabilities.

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We
employ a team selling approach, whereby our business developers collaborate with our service delivery professionals and management to identify prospects, conduct sales and manage
client relationships. Our Director of Strategic Programs initiates and coordinates the activities of our business development staff. We allocate business developers to each of our business units who
pursue new clients and programs across their market segments. Each current client is assigned to a relationship manager who is responsible for ensuring client satisfaction and successful project
performance, and identifying new business opportunities with the client.

Culture, People and Recruiting

We have developed a corporate culture that promotes excellence in job performance, respect for the ideas and judgment of our colleagues and recognition of the
value of the unique skills and capabilities of our professional staff. We seek to attract highly qualified and ambitious staff. We strive to establish an environment in which all employees can make
their best personal contribution and have the satisfaction of being part of a unique team. We believe that we have successfully attracted and retained highly skilled employees because of the quality
of our work environment, the professional challenge of our assignments, and the financial and career advancement opportunities we make available to our staff.

We
occupy state-of-the-art facilities that are conducive to highly technical and collaborative work, while providing individual privacy. In our
solutions centers, we configure large networks of leading-edge equipment and software, and provide our engineers and developers with advanced tools to evaluate and apply new technologies.
We believe that the location, environment and amenities provided by our new Fair Lakes campus facility will contribute to our ability to attract and retain highly skilled employees.

As
of December 31, 2003, we had 1,223 personnel. Of our total personnel, 1,107 were consulting and service delivery professionals, and 116 were management and administrative
personnel performing corporate marketing, human resources, finance, accounting, legal, internal information systems and
administrative functions. None of our personnel is represented by a collective bargaining unit. As of March 15, 2004, comparative numbers were 1,220, 1,101 and 119, respectively.

In
addition to standard company benefits, we provide:



We
invest heavily in technical staff recruiting resources and hiring programs. Each of our business units is staffed with a dedicated recruiter, and we aggressively use a variety of
recruiting methods, including advertising, job fairs, open houses and Internet-based career placement services. We also offer substantial awards and recognition to our current employees for referrals,
which has been particularly effective in identifying and recruiting talented staff.

We
have developed an active and effective college recruiting program that draws on management staff and recent college hires from across our company to attract graduating students with
strong academic backgrounds in our core disciplines. We currently target colleges and universities in Washington, D.C., Maryland, and Virginia with this program, and perform on-campus
recruiting during the spring and fall recruiting seasons at five universities.

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Competition

Our current competitors include, and may in the future include, the following:



Many
of our competitors have long operating histories and strong client relationships, greater financial, technical, marketing and public relations resources, larger client bases and
greater brand or name recognition than we have.

We
believe that the major competitive factors in our market relate to a company's distinctive technical capabilities, successful past contract performance, reputation for quality and key
management and marketing staff. Under best-value procurement methods, price is an important, but secondary, factor in the selection of a technology service provider.

Intellectual Property Rights

Our success is dependent, in part, upon our proprietary processes, components and other intellectual property rights. We do not have any patents or patent
applications pending. We rely on a combination of trade secret, nondisclosure and other contractual agreements, and copyright and trademark laws, to protect our proprietary rights. Existing trade
secret and copyright laws afford us only limited protection. We enter into confidentiality agreements with our employees and our contractors and limit access to and distribution of our proprietary
information. There can be no assurance that the steps we have taken in this regard will be adequate to deter misappropriation of our proprietary information or that we will be able to detect
unauthorized use and take appropriate steps to enforce our intellectual property rights.

A
portion of our business involves the development of software applications for specific client engagements. Although ownership of client-specific software is generally retained by the
client, we retain some rights to the applications, processes and intellectual property developed in connection with client engagements.

Backlog

Our current funded backlog is approximately $76 million. Our contracts typically are funded incrementally, and therefore the funded backlog only represents
that portion of the contract value. Funding occurs as work progresses. The federal civilian budget normally is signed before the end of the calendar year. The 2003 and 2004 Federal civilian budgets
were not signed until the end of February 2003 and January 2004, respectively, which adversely effected the funding of contracts. Our average contract/task performance period runs
between 10 to 12 months. Our backlog is typically subject to large variations from quarter to quarter as existing contracts/tasks are renewed or new contracts are awarded. Additionally, all
federal government contracts, whether or not funded, may be terminated at the convenience of the government.

Environmental Issues

We have not incurred any costs associated with environmental issues.

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Risk Factors

Risk Factors Related to Our Business

Substantially all of our revenues would be threatened if our relationships with agencies of the federal government were harmed

Our largest clients are agencies of the federal government. If the federal government in general, or any significant government agency, uses less of our services
or terminates its relationship with us, our revenues would decline substantially, and our business would be seriously harmed. During 2003, contracts with the federal government and contracts with
prime contractors of the federal government accounted for approximately 93% of our revenues. During that same period, our ten largest clients, all agencies of the federal government, generated
approximately 61% of our revenues, with the top five clients accounting for 41% of our revenues. We believe that federal government contracts are likely to continue to account for a significant
portion of our revenues for the foreseeable future. The volume of work that we perform for a specific client, however, is likely to vary from year to year, and a significant client in one year may not
use our services as extensively, or at all, in a subsequent year.

Major changes to the government's fundamental organization could negatively impact revenues

The recent establishment of the Department of Homeland Security, the largest government reorganization since 1947, required new and enhanced oversight of
technology spending programs at the numerous and disparate agencies being rolled into the new organization. In some cases, certain technology projects are being temporarily halted until an Office of
Management and Budget review can be held to determine that technology spending will not be duplicated and thus wasted. This can materially impact our ability to begin or proceed on work for clients
affected by the reorganization. Any future reorganization, or delays in technology spending that might result as the reorganization is implemented, could adversely impact company revenues.

Our government contracts may be terminated prior to their completion, and if we do not replace them, our operating results may be harmed

We derive substantially all of our revenues from government contracts that typically are awarded through competitive processes and span a one year base period and
one or more option years. The unexpected termination or non-renewal of one or more of our significant contracts could result in significant revenue shortfalls. Our clients generally have
the right not to exercise the option periods. In addition, our contracts typically contain provisions permitting an agency to terminate the contract on short notice, with or without cause.

Following
termination, if the client requires further services of the type provided in the contract, there is frequently a competitive re-bidding process. We may not win any
particular re-bid or be able to successfully bid on new contracts to replace those that have been terminated. Even if we do win the re-bid, we may experience revenue shortfalls
in periods where we anticipated revenues from the contract rather than its termination and subsequent re-bidding. These revenue shortfalls could harm operating results for those periods.

Our lack of long-term contracts with clients and our relatively fixed operating expenses expose us to greater risk of incurring losses

Our clients retain us on an engagement-by-engagement basis, rather than under long-term contracts. We incur costs based on our
expectations of future revenues. Our operating expenses are relatively fixed and cannot be reduced on short notice to compensate for unanticipated variations in the number or size of engagements in
progress. These factors make it difficult for us to predict our

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revenues
and operating results. If we fail to predict our revenues accurately, it may seriously harm our financial condition and results of operation.

A reduction in or the termination of our services could lead to underutilization of our employees and could harm our operating results

Our employee compensation expenses are relatively fixed. Therefore, if a client defers, modifies or cancels an engagement or chooses not to retain us for
additional phases of a project, our operating
results will be harmed unless we can rapidly re-deploy our employees to other engagements in order to minimize underutilization.

Failing to maintain strong relationships with prime contractors could result in a decline in our revenues

We derived approximately 23% of our revenues during 2003 through our relationships with prime contractors, which, in turn, have contractual relationships with
end-clients. One of our prime contractors, EDS (NMCI), accounted for approximately 9.5% of our revenues during 2003. We expect to continue to depend on these relationships for a material
portion of our revenues in the foreseeable future. If any of these prime contractors eliminate or reduce their engagements with us, or have their engagements eliminated or reduced by their
end-clients, we will lose a source of revenues, which, if not replaced, will adversely affect our operating results.

We must recruit and retain qualified professionals to succeed in our labor-intensive business

Our future success depends in large part on our ability to recruit and retain qualified professionals skilled in complex information technology services and
solutions, including encryption and other security systems. Such personnel are in great demand and are likely to remain a limited resource in the foreseeable future. Competition for qualified
professionals is intense. Any inability to recruit and retain a sufficient number of these professionals could hinder the growth of our business.

We may lose money on fixed-price contracts if we miscalculate the resources we need to complete the contract

We derived approximately 24% of our revenues in 2003 from fixed-price contracts. We anticipate a material portion of our future engagements will continue to be
contracted at a fixed price. Unlike time and materials contracts, for which we are reimbursed based on our actual expenditures of resources, fixed-price contracts require us to price our contracts by
predicting our expenditures in advance. If we miscalculate the resources we need to complete fixed-price engagements, our operating results could be seriously harmed because we are not compensated for
the higher costs.

We could lose revenues and clients and expose our Company to liability if we fail to meet client expectations

We create, implement and maintain technology solutions that are often critical to our clients' operations. If our technology solutions or other applications have
significant defects or errors or fail to meet our clients' expectations, we may:



While
many of our contracts limit our liability for damages that may arise from negligent acts, errors, mistakes or omissions in rendering services to our clients, we cannot be sure that
these contractual provisions will protect us from liability for damages if we are sued. Furthermore, our

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general
liability insurance coverage may not continue to be available on reasonable terms or in sufficient amounts to cover one or more large claims, or the insurer may disclaim coverage as to any
future claim. The successful assertion of any large claim against us could seriously harm our business. Even if not successful, such claims could result in significant legal and other costs and may be
a distraction to management.

Security breaches in sensitive government systems could result in the loss of clients and negative publicity

Many of the systems we develop involve managing and protecting information involved in law enforcement and other sensitive government functions. A security breach
in one of these systems could cause serious harm to our business, could result in negative publicity and could prevent us from having further access to such critically sensitive systems or other
similarly sensitive areas for other governmental clients. Losses that we could incur from such a security breach could exceed the policy limits that we have for "errors and omissions" or product
liability insurance.

If we cannot obtain the necessary security clearances, we may not be able to perform classified work for the government and our revenues may suffer

Government contracts require us, and some of our employees, to maintain security clearances. If we lose or are unable to obtain security clearances, the client
can terminate the contract or decide not to renew it upon its expiration. As a result, to the extent we cannot obtain the required security clearances for our employees working on a particular
engagement, we may not derive the revenue anticipated from the engagement, which, if not replaced with revenue from other engagements, could seriously harm our operating results.

We depend on our senior management team, and the loss of any member may adversely affect our ability to obtain and maintain clients

We believe that our success will depend on the continued employment of our senior management team, including David Karlgaard, our Chief Executive Officer, Paul
Rice, our Chief Operating Officer and Alan Harbitter, our Chief Technology Officer. This dependence is particularly important to our business because personal relationships are a critical element of
obtaining and maintaining client engagements. If one or more members of our senior management team was unable or unwilling to continue in their present positions, such persons would be difficult to
replace and our business could be seriously harmed. Furthermore, clients or other companies seeking to develop in-house capabilities may hire away some of our key employees. Employee
defections to clients or competitors would not only result in the loss of key employees but could also result in the loss of a client relationship or a new business opportunity. Any losses of client
relationships could seriously harm our business.

We may not be able to successfully identify, manage and integrate future acquisitions, which may harm our operating results

We may use a portion of the proceeds from public offerings and operations to acquire companies or businesses that are complementary to ours. However, we have no
immediate plans or current agreements to acquire any additional companies or businesses, and we cannot assure you that we will identify appropriate acquisition candidates. If we do identify an
appropriate acquisition candidate, we cannot assure you that we would be able to successfully negotiate the terms of an acquisition, finance the acquisition or integrate the acquired business into our
existing business. Negotiations of potential acquisitions and the integration of an acquired business could disrupt our business by diverting management away from day-to-day
operations. Further, failure to successfully integrate any acquisition may cause significant operating inefficiencies and adversely affect our profitability. Consummating a merger could require us to
raise additional funds through additional equity or debt financing. Additional equity financing could result in further dilution of the per share value of your stock.

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Additional
debt financing could force us to accept contractual limitations that could harm our ability to grow.

Audits of our government contracts may result in a reduction in revenues we receive from those contracts or may result in civil or criminal penalties
that could harm our reputation

Federal government agencies routinely audit government contracts. These agencies review a contractor's performance on its contract, pricing practices, cost
structure and compliance with applicable laws, regulations and standards. An audit could result in a substantial adjustment to our revenues because any costs found to be improperly allocated to a
specific contract will not be reimbursed, while improper costs already reimbursed must be refunded. If a government audit uncovers improper or illegal activities, we may be subject to civil and
criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, suspension of payments, fines and suspension or debarment from doing business with federal
government agencies. In addition, we could suffer serious reputational harm if allegations of impropriety were made against us.

We may be liable for penalties under a variety of procurement rules and regulations, and changes in government regulations could slow our growth or
reduce our profitability

We must comply with and are affected by federal government regulations relating to the formation, administration and performance of government contracts. These
regulations affect how we do business
with our clients and may impose added costs on our business. Any failure to comply with applicable laws and regulations could result in contract termination, price or fee reductions or suspension or
debarment from contracting with the federal government. Further, the federal government may reform its procurement practices or adopt new contracting methods relating to the GSA schedule or other
government-wide contract vehicles. If we are unable to successfully adapt to those changes, our business could be seriously harmed.

Our failure to adequately protect our confidential information and proprietary rights may harm our competitive position

While our employees execute confidentiality agreements, we cannot guarantee that this will be adequate to deter misappropriation of our confidential information.
In addition, we may not be able to detect unauthorized use of our intellectual property in order to take appropriate steps to enforce our rights. If third parties infringe or misappropriate our
copyrights, trademarks or other proprietary information, our competitive position could be seriously harmed. In addition, other parties may assert infringement claims against us or claim that we have
violated their intellectual property rights. Such claims, even if not true, could result in significant legal and other costs and may be a distraction to management.

Changes to federal government procurement rules and regulations could impact revenues

While the government procurement changes of the mid-1990s generally benefited companies servicing the federal government (such as government agencies
being able to award outsourcing contracts based on "best value" over lowest price), any future changes that sought to limit or reduce government outsourcing, perhaps, for example, bringing more
technology systems work "in-house," could have a negative impact on company revenues.

Continued involvement in Iraq, or other nations, could impact federal government spending on our civilian and defense programs

Although our work focuses primarily on our clients' mission-critical programs, continued involvement in Iraq or a war in another country could change the federal
government's spending

14

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priorities
for domestic and military programs. Spending on our clients' programs could also be negatively impacted by Congress's unwillingness to pass the necessary appropriation bills required to pay
for a war effort.

Risks Factors Related to the Government Technology Solutions Market

Competition could result in price reductions, reduced profitability and loss of market share

Competition in the market for government technology solutions is intense. If we are unable to differentiate our services from those of our competitors, our
revenue growth and operating margins may decline. Many of our competitors are larger and have greater financial, technical, marketing and public relations resources, larger client bases and greater
brand or name recognition than us. Our larger competitors may be able to provide clients with additional benefits, including reduced prices. We may be unable to meet those prices, which may cause us
to lose business and market share. Alternatively, we could decide to meet the lower prices, which could harm our profitability. If we fail to compete successfully, our business could be seriously
harmed.

Our
current competitors include, and may in the future include, the following:



Current
and potential competitors also have established or may establish cooperative relationships among themselves or with third parties to increase their ability to address client
needs. Accordingly, it is possible that new competitors or alliances among competitors may emerge and rapidly acquire significant market share. In addition, some of our competitors may develop
services that are superior to, or have greater market acceptance than, the services that we offer.

Our business will be harmed if government agencies are unwilling to replace or supplement expensive legacy systems

Government agencies have spent substantial resources over an extended period of time to develop computer systems and to train their personnel to use them. These
agencies may be reluctant to abandon or supplement these legacy systems with Internet and other advanced technology systems because of the cost of developing them or the additional cost of
re-training their personnel. Such reluctance would make it more difficult to acquire new engagements which would harm our business prospects.

Our growth will be harmed if a viable market for government technology services is not sustained

We cannot be certain that a viable government market for Internet and other advanced technology services will be sustainable. If this market is not sustained and
we are unable to refocus our services on the private sector market or other in-demand technologies, our growth would be negatively affected. Although government agencies have recently
increased focus on and funding for technology initiatives, we cannot be certain that these initiatives will continue in the future. Budget cutbacks or political changes could result in a change of
focus or reductions in funding for technology initiatives, which, in turn, could seriously harm our revenues.

15

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Risks Related to the Ownership of Our Common Stock

Our quarterly revenues and operating results could be volatile and may cause our stock price to fluctuate

Our quarterly revenues and operating results may fluctuate significantly in the future. In particular, if the federal government does not adopt a budget for its
fiscal year beginning on October 1, federal agencies may be forced to suspend our contracts due to a lack of funding. Consequently, we may realize lower revenues in the quarter ending
December 31. Further, the rate at which the Federal government procures technology may be negatively affected following changes in Presidential administrations and in senior government
officials. As a result, our operating results could be volatile and difficult to predict and period-to-period comparisons of our operating results may not be a good indication
of our future performance.

A
significant portion of our operating expenses, such as personnel and facilities costs, are fixed in the short term. Therefore, any failure to generate revenues according to our
expectations in a particular quarter could result in reduced income in the quarter. In addition, our quarterly operating results may not meet the expectations of securities analysts or investors,
which in turn may have an adverse effect on the market price of our common stock.

Our officers and directors directly own 53.0% of our stock and can control matters submitted to stockholders for their approval

Our directors and executive officers directly own, in the aggregate, 53.0% of our outstanding common stock. As a result, these stockholders will be able to
exercise control over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This concentration of ownership may also have
the effect of delaying or preventing a change in control of PEC Solutions.

We have various mechanisms in place that may prevent a change in control that stockholders may consider favorable

Our certificate of incorporation and bylaws may discourage, delay or prevent a change in control of PEC Solutions that stockholders may consider favorable. Our
certificate of incorporation and bylaws:



16

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In
addition, Section 203 of the Delaware General Corporation Law may discourage, delay or prevent a change in control by prohibiting us from engaging in a business combination
with an interested stockholder for a period of three years after the person becomes an interested stockholder.

Website Access to Reports

Our filings with the U.S. Securities and Exchange Commission (the "SEC") and other information, including our Ethics Policy, can be found on the PEC Solutions
website (www.pec.com). Information on our website does not constitute part of this report.

We
make available free of charge, on or through our Internet website, as soon as reasonably practicable after they are electronically filed or furnished to the SEC, our annual reports on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange
Act of 1934.

Item 2. Properties

Our operations occupy approximately 365,000 square feet of space located in Alexandria, Fairfax, Falls Church and Norfolk, Virginia; Baltimore and Columbia,
Maryland; Washington, D.C.; San Diego, California; San Antonio, Texas; and Trevose, Pennsylvania. We also have employees working at client sites throughout the United States. The large majority of the
space is office space, all of which is leased. For lease commitment information, reference is made to Note 15 in the accompanying consolidated financial statements. Existing facilities are
considered to be generally suitable and adequate for our present needs. We have a 48% equity interest in the company that owns our newest building in Fairfax, Virginia. Future contracts may require us
to lease additional office space in other cities located in the United States.

Item 3. Legal Proceedings

On and after March 18, 2003, several purported class action complaints were filed against us and certain of our officers in the United States District
Court for the Eastern District of Virginia. The complaints allege that between October 22, 2002 and March 14, 2003, the defendants made, or were aware of, false and misleading statements
which had the effect of inflating the market price of our stock, in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The complaints were consolidated into a single action
on June 13, 2003. The complaint was dismissed by the Court on January 28, 2004. Plaintiffs have filed notice of appeal. In addition, a stockholder's legal counsel sent a letter of demand
that the Board of Directors investigate the same charges addressed in the class action suit. An independent committee of the Board concluded after its investigation and based on its business judgement
to reject the demand letter.

On
September 11, 2003, we instituted a lawsuit in the United States District Court of Minnesota against NCS Pearson, Inc. for improperly withholding payment of funds owed
to us under a subcontract, we contend that NCS Pearson has no legal basis to justify the withholding of payment and we are seeking recovery of $6.3 million in unpaid receivables plus interest
and costs. The proceedings are moving according to schedule.

Item 4. Submission of Matters To a Vote of Security Holders

None

17

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PART II

Item 5. Market for the Company's Common Equity and Related Stockholder Matters

At February 27, 2004, we had approximately 7,100 holders of record of our common stock. We had 27,308,207 shares of common stock outstanding. Our
stock began trading on the Nasdaq National Market on April 20, 2000 under the symbol "PECS". The following high and low sale prices indicated for our common stock are as reported on the Nasdaq
National Market during each of the quarters indicated.

High

Low2003 Quarter Ended:December 31

$
18.760

$
13.780September 30

$
22.990

$
14.406June 30

$
16.380

$
11.730March 31

$
33.140

$
9.0502002 Quarter Ended:December 31

$
38.250

$
21.940September 30

$
27.690

$
17.050June 30

$
28.690

$
18.750March 31

$
44.440

$
22.050


In
April 2000, we commenced and completed a firm commitment underwritten initial public offering of 3,000,000 shares of our common stock at a price of $9.50 per share. The shares
were registered with the Securities and Exchange Commission pursuant to a registration statement on Form S-1 (No. 333-95331), which was declared effective on
April 19, 2000. The public offering was underwritten by a syndicate of underwriters led by Donaldson, Lufkin & Jenrette Securities Corporation, Chase Securities Inc., Legg Mason
Wood Walker, Incorporated; and DLJdirect Inc. as their representatives. After deducting underwriting discounts and commissions of approximately $2 million and expenses of approximately
$0.9 million, we received net proceeds of $25.6 million. We have used approximately $23 million of this amount to fund acquisitions and the balance to fund a portion of our
investment in the limited liability company that owns our corporate headquarters building.

We
expect to retain future earnings, if any, for use in the operation and expansion of the business and do not anticipate paying any cash dividends in the foreseeable future.

Recent Sales of Unregistered Securities

None

18

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Item 6. Selected Financial Data

Our selected consolidated financial data for the years ended December 31, 2003, 2002, 2001 2000 and 1999 have been derived from our audited consolidated
financial statements. The 2003, 2002 and 2001 information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our
consolidated financial statements and the related notes thereto appearing elsewhere in this Annual Report on Form 10-K. Certain reclassifications have been made to the prior period
financial statements to conform to the presentation used in our December 31, 2003, consolidated financial statements.

|                                                                    |         | 1999 |        | 2000 |   | 2001   |      | 2002 |         | 2003
|------------------------------------------------------------------- | ------- | ---- | ------ | ---- | - | ------ | ---- | ---- | ------- | ----
|
|Operating Results:                                                  |         |      |        |      |   |        |      |      |         |     
|Revenues                                                            |         | $    | 53,202 |      | $ | 68,305 |      | $    | 109,213 |     
|Gross profit (a)                                                    |         |      | 22,793 |      |   | 30,996 |      |      | 48,797  |     
|Operating income                                                    |         |      | 8,975  |      |   | 10,211 |      |      | 19,262  |     
|Net income                                                          |         |      | 5,639  |      |   | 7,272  |      |      | 13,067  |     
|Earnings per share (b)(c)                                           |         |      |        |      |   |        |      |      |         |     
|                                                                    | Basic   |      |        | 0.33 |   |        | 0.34 |      |         | 0.54
|                                                                    | Diluted |      |        | 0.24 |   |        | 0.30 |      |         | 0.47
|Financial Position:                                                 |         |      |        |      |   |        |      |      |         |     
|Cash and cash equivalents                                           |         | $    | 7,981  |      | $ | 14,656 |      | $    | 30,436  |     
|Working capital                                                     |         |      | 13,311 |      |   | 43,182 |      |      | 83,627  |     
|Total assets                                                        |         |      | 24,400 |      |   | 61,400 |      |      | 141,707 |     
|Long-term obligations (including long-term debt and capital leases) |         |      |       |      |   |       |      |      | 2,937   |     
|Total stockholders' equity                                          |         |      | 15,283 |      |   | 50,700 |      |      | 118,428 |     
|Cash dividends declared per common share                            |         | $    | 0.023  |      |   |       |      |      |        |     

---

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

This Management's Discussion and Analysis of Financial Condition and Results of Operation section includes "forward-looking statements," within the meaning of the
Federal Private Securities Litigation Reform Act of 1995. While forward-looking statements sometimes are presented with numerical specificity, they are based on various assumptions made by management
regarding future circumstances over many of which we have little or no control. Forward-looking statements may be identified by words including "anticipate," "believe," "estimate," "expect" and
similar expressions. We caution readers that forward-looking statements, including without limitation, those relating to future business prospects, revenues, working capital, liquidity, and income,
are subject to certain risks and uncertainties that would cause actual results to differ materially from those indicated in the forward-looking statements. Factors that could cause actual results to
differ from forward-looking statements include the concentration of our revenues from the U.S. Government and its agencies and departments (the "Government"), risks involved in contracting with the
government, difficulties we may have in attracting, retaining and managing professional and administrative staff, fluctuations in quarterly results,

19

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risks
related to acquisitions, risks related to competition and our ability to continue to win and perform efficiently on Government contracts, and other risks and factors identified from time to time
in the reports we file with the U.S. Securities and Exchange Commission ("SEC"), including those identified under the caption "Risk Factors" in this Annual Report on Form 10-K.
Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected.

Overview

We are a professional services firm specializing in high-end solutions that help government organizations capitalize on the Internet and other
advanced technologies. We migrate paper-intensive procedures to web-enabled processes using eGovernment solutions that help our clients enhance their productivity and improve the services
they offer to the public. As a total solutions provider, we address the full technology lifecycle, including formulating technology strategies, creating business solutions, performing
long-term operational management and continuing enhancement of the solution.

As
part of our growth strategy, we have completed acquisitions of Viking Technology, Inc. ("Viking") on August 28, 2000, Troy Systems, Inc. ("Troy") on
November 20, 2001 and the contracts and employees of Vector Research, Inc. ("Vector") on June 14, 2002. These business combinations were accounted for as purchases. See
"Acquisitions".

In
2003, our revenues were adversely affected by the late passage and signing of both the 2003 and 2004 federal civilian budgets.

We
derive substantially all of our revenues from fees for consulting services. We generate these fees from contracts with various payment arrangements, including time and materials
contracts, fixed-price contracts and cost-reimbursable contracts. During 2003, revenues from these contract types were approximately 58%, 24% and 18%, respectively, of total revenues. We
expect this approximate mix of business to continue in 2004. We typically issue invoices monthly to manage outstanding accounts receivable balances. We recognize revenues on time and materials
contracts as the services are provided. We recognize revenues on fixed-price contracts using the percentage of completion method as services are performed over the life of the contract, based on the
costs we incur in relation to the total estimated costs. We recognize and make provisions for any anticipated contract losses. However, if the contract has a service element, revenues are recognized
on a straight-line basis over the term of the contract. In certain arrangements, we enter into contracts that include the delivery of a combination of two or more of our service offerings.
Typically, such multiple-element arrangements incorporate the design, development or modification of systems and an ongoing obligation to manage, staff, maintain, host or otherwise run solutions and
systems provided to the client. Such contracts are divided into separate units of accounting and the total arrangement fee is allocated to each unit based on its relative fair value. Revenue is
recognized separately, and in accordance with our revenue recognition policy, for each element. Fixed- price contracts are attractive to clients, and while subject to increased risks, provide
opportunities for increased margins. We recognize revenue on cost-reimbursable contracts as services are provided. These revenues are equal to the costs incurred in providing these
services plus a proportionate amount of the fee earned. While our margins are lower on cost-reimbursable contracts we have historically recovered all of our costs on these contracts, which means we
have lower risk.

Our
historical revenue growth is attributable to various factors, including an increase in the size and number of projects for existing and new clients. Existing clients from the
previous fiscal year generated approximately 93% of our revenues in 2003, approximately 86% of our revenues in 2002 and approximately 71% of our revenues in 2001. We manage our client development
efforts through each of our strategic service groups, each having specific client responsibility and focus. As of December 31, 2003, we had 1,223 personnel and on February 27, 2004 we
had xx personnel.

20

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In
2003, we derived approximately 23% of our revenue through relationships with prime contractors, which contract directly with the end-client and subcontract with us. With
the exception of the EDS (NMCI) subcontract, in most of these engagements, we retain full responsibility for the end-client relationship and direct and manage the activities of our
contract staff.

During
2003, we had one customer that accounted for more than 10% of our total revenue. The Drug Enforcement Agency (DEA) Special Projects Division accounted for 11% of the revenue.

Our
most significant expense is direct costs, which consist primarily of project personnel salaries and benefits, and direct expenses incurred to complete projects. Our direct costs as a
percentage of revenues are also related to the utilization rate of our consulting employees. We manage utilization by frequently monitoring project requirements and timetables. The number of
consulting employees assigned to a project will vary according to the size, complexity, duration and demands of the project.

General
and administrative expenses consist primarily of costs associated with our executive management, finance and administrative groups, human resources, unassigned consulting
employees, employee training, occupancy costs, depreciation and amortization, travel and all other branch and corporate costs.

Sales
and marketing expenses include the costs of sales and marketing personnel and costs associated with marketing and bidding on future projects.

Other
income consists primarily of interest income earned on our cash, cash equivalents and marketable securities and income from our investment in our corporate headquarters building.

Acquisitions

On August 28, 2000, we acquired all of the outstanding capital stock of Viking for $2.0 million cash plus the assumption of debt in a business
combination accounted for as a purchase. Viking was a provider of integrated software and advanced technology solutions to state and local law enforcement, fire, and emergency medical service
agencies. The excess of purchase price over the fair value of the net assets was approximately $3.6 million. At the time of the acquisition, Viking had 20 personnel.

On
November 20, 2001, we acquired all of the outstanding common shares of Troy for $15.3 million of cash and common stock valued at $3.0 million in a business
combination accounted for as a purchase. Troy derived revenue from system development, networking, engineering, integration services, and information systems security and its primary customer was the
federal government. The excess of purchase price over the fair value of the net assets was approximately $9.9 million. At the time of the acquisition, Troy had 354 personnel.

On
June 14, 2002, we acquired the contracts and employees of Vector for $5.7 million cash plus the assumption of $0.1 million in accrued liabilities. Vector was a
provider of technology development and engineering services to the federal government. The excess of purchase price over fair value of the net assets was approximately $4.3 million. At the time
of the acquisition, Vector had 41 personnel.

Critical Accounting Policies and Significant Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires that management make estimates and assumptions
affecting the assets and liabilities (including contingent assets and liabilities) reported at the date of the consolidated financial statements and the revenues and expenses reported for the periods
presented. Actual amounts could differ from those estimates. Management bases its estimates on historical experience, current data, information related to performance and on various other assumptions
that are believed to be reasonable under the

21

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circumstances.
Those measurements that are most affected by management's estimates of future events are:



22

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Results of Operations

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

|                              |                                          | Year Ended December 31, |     
|----------------------------- | ---------------------------------------- | ----------------------- | ----
|
|Statement of Operations Data: |                                          |                         |     
|Revenues                      |                                          | 100.0%                  |     
|Direct costs                  |                                          | 55.3                    |     
|                              |                                          |                         |     
|                              | Gross profit (a)                         |                         | 44.7
|                              |                                          |                         |     
|Operating costs and expenses: |                                          |                         |     
|                              | General and administrative expenses      |                         | 22.3
|                              | Sales and marketing expenses             |                         | 4.0 
|                              | Amortization of goodwill and intangibles |                         | 0.7 
|                              |                                          |                         |     
|                              | Total operating costs and expenses       |                         | 27.0
|                              |                                          |                         |     
|Operating income              |                                          | 17.7                    |     
|Investment and other income   |                                          | 1.9                     |     
|Interest expense              |                                          |                        |     
|                              |                                          |                         |     
|Income before income taxes    |                                          | 19.6                    |     
|Provision for income taxes    |                                          | 7.6                     |     
|                              |                                          |                         |     
|Net income                    |                                          | 12.0%                   |     
|                              |                                          |                         |     

---

2003 Compared with 2002

Revenues.Revenues decreased 5.6% to $172.0 million for 2003 from $182.2 million for 2002. Services to new
clients represented approximately 7% of revenues, down from 14% in 2002. Revenues were adversely impacted by the late passage and signing of both the 2003 and 2004 federal civilian agency budgets. We
also saw approximately a $13 million reduction in revenue from the EDS (Navy Marine Corps Intranet) subcontract during 2003 as compared to the prior year, as the program went from its initial
engineering phase into a production phase. In addition, we saw a reduction of revenue of approximately $20 million related to our mobile biometric solutions work for the hiring of airport
security personnel, as the program went from the full implementation phase to the sustaining phase.

Direct Costs.Direct costs decreased 4.6% to $102.4 million for 2003 from $107.3 million for 2002. Direct costs
increased as a percentage of revenues to 59.5% for 2003, from 58.9% for 2002. This increase was attributable primarily to the delays related to the passage and signing of the federal civilian budgets
and the associated delay of new project startups. New project startups normally allow for the recovery of increases in labor costs, which for us goes into effect on January 1 of each year.

Gross Profit.Gross profit decreased 7.0% to $69.7 million for 2003 from $74.9 million for 2002. Gross profit
as a percentage of revenues decreased to 40.5% for 2003 from 41.1% for 2002, because direct costs grew at a faster rate than revenues. As previously indicated, revenues were negatively affected by the
late passage and signing of the federal civilian budgets.

23

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General and Administrative Expenses.General and administrative expenses increased 4.9% to $35.5 million for 2003 from
$33.9 million for 2002. Facilities costs increased for 2003 over 2002 due to the opening of our new headquarters in Fairfax, VA and an office in Washington, DC. Our total general and
administrative headcount decreased to 116 employees as of December 31, 2003, compared to 123 employees as of December 31, 2002.

Sales and Marketing.Sales and marketing expenses were approximately $5.4 million in both 2003 and 2002.

Amortization of Intangibles.For 2003, we incurred $851,000 of amortization expense related to the $4.5 million of
intangibles we recorded in connection with the value of contracts and customer relationships acquired in the November 2001 acquisition of Troy, and the June 2002 acquisition of Vector.
This compares to $769,000 of amortization expense in 2002.

Operating Income.Operating income decreased 19.9% to $27.9 million for 2003 from $34.9 million for 2002, due
to the factors discussed above.

Investment and Other Income.For 2003, we earned $1.4 million of interest income and net gains on sales of securities.
We also had $953,000 of income from our investment in our corporate headquarters building. For 2002, we had $1.6 million of interest income and net losses on sales of securities. We also had an
$85,000 loss from the investment in our corporate headquarters building. The increase in the gain form the investment in our corporate headquarters was a result of the building going into operation in
December 2002.

Interest Expense.For 2003 and 2002, we incurred interest expense of $2.7 million and $227,000, respectively,
principally related to our corporate headquarters building.

Environmental Costs.We have not incurred any costs in association with environmental issues.

2002 Compared with 2001

Revenues.Revenues increased 66.8% to $182.2 million for 2002 from $109.2 million for 2001. The increase in
revenue primarily reflects increases in the amount of services to existing clients and the mobile biometric solutions work. Approximately 47% of the increase was related to the Troy and Vector
acquisitions. Services to new clients represented approximately 14% of revenues.

Direct Costs.Direct costs increased 77.6% to $107.3 million for 2002 from $60.4 million for 2001. The increase
was due primarily to an increase in project personnel to 1,219 as of December 31, 2002, as
compared to 1,140 as of December 31, 2001. We added 301 personnel related to the Troy acquisition at the end of November 2001. Direct costs increased as a percentage of revenues to 58.9%
for 2002, from 55.3% for 2001. The increase was principally related to normal fluctuations in labor, increases in other direct costs and the impact of the Troy and Vector acquisitions.

Gross Profit.Gross profit increased 53.5% to $74.9 million for 2002 from $48.8 million for 2001. Gross profit
as a percentage of revenues decreased to 41.1% for 2002 from 44.7% for 2001 because direct costs grew at a faster rate than revenues. This decrease was principally related to normal fluctuations in
labor, increase in other direct costs and the impact of the Troy and Vector acquisitions.

General and Administrative Expenses.General and administrative expenses increased 39.3% to $34.0 million for 2002
from $24.4 million for 2001. These costs, such as rent and other facility costs, recruiting expenses and depreciation of equipment purchased, were related to the increase in project personnel.
Facilities costs increased for 2002 due to the opening of our new offices in Fairfax, Virginia, Columbia, Maryland and Washington, D.C. Our total general and administrative headcount decreased

24

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to
123 employees as of December 31, 2002, compared to 134 employees as of December 31, 2001, consistent with our plans.

Sales and Marketing.Sales and marketing expenses increased 22.9% to $5.4 million in 2002 from $4.4 million in
2001. This increase was due to an increase in our marketing efforts

Amortization of Goodwill.As a result of the adoption of FAS 142, effective January 1, 2002, we incurred no
goodwill amortization expense for 2002. For 2001, we incurred $0.7 million of amortization expense related to the $3.6 million of goodwill we recorded in connection with the acquisition
of Viking.

Amortization of Intangibles.For 2002, we incurred $0.8 million of amortization of expense related to the
$3.0 million of intangibles we recorded in connection with the value of contracts and customer relationships acquired in the November 2001 acquisition of Troy, and $1.5 million of
intangibles recorded in connection with the value of contracts and customer relationships acquired in the June 2002 acquisition of Vector. For 2001, we incurred $0.1 million of
amortization expense related to the $3.0 million of intangibles we recorded in connection with the value of contracts and customer relationships acquired in the acquisition of Troy.

Operating Income.Operating income increased 80.6% to $34.8 million for 2002 from $19.3 million for 2001. This
increase was due primarily to increased revenues and the impact of the Troy and Vector acquisitions.

Investment and Other Income.For 2002, we earned $1.3 million of interest income and net gains on sales of securities.
We also had a $85,000 loss from our investment in our corporate headquarters building. For 2001, we had $2.2 million of interest income and net losses on sales of securities. There was no
income or loss related to the corporate headquarters building in 2001, since the building was under construction. The decrease in interest income was related to the decreases in interest rates, and
the conversion of investments from taxable securities to tax-exempt securities.

Interest Expense.For 2002 and 2001, we incurred interest expense of $227,000 and $4,000, respectively. Interest expense in
2002 was principally related to our corporate headquarters building.

Environmental Costs.We have not incurred any costs in association with environmental issues.

Liquidity and Capital Resources

Prior to our IPO and follow-on offering, we funded our operations primarily through cash generated from operations and the sale of common stock to
employees. We currently expect to meet our short-term and long-term cash requirements through funds generated from operations. Net cash provided by operating activities was
$23.0 million for the year ended December 31, 2003. Cash provided by operating activities is primarily driven by net income, adjusted for working capital changes, which are principally
changes in accounts receivable.

Net
cash used by investing activities was $14.8 million for 2003. During 2003, we had $1.3 million of net purchases of property and equipment, $2.9 million of
short-term investments and $10.8 million of long-term investments, invested $0.6 million in capitalized software, while receiving $0.8 million of
distributions from the investment in the entity that owns our headquarters building. Investing activity is primarily driven by investments in short and long-term securities.

Net
cash provided by financing activities was $4.0 million and is primarily driven by proceeds from the sale of common stock to employees upon the exercise of their stock options
and purchase of stock through the employee stock purchase plan during 2003.

25

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We
expect to retain future earnings, if any, for use in the operation of our business and at this time do not anticipate paying any cash dividends.

We
maintain a $10.0 million line of credit with Bank of America, bearing interest at the one-month LIBOR rate plus 250 basis points per annum, which expires on
June 30, 2005. As of December 31, 2003, we had no borrowings outstanding under the line of credit. As of December 31, 2003, we had outstanding $2.8 million in letters of
credit in lieu of rent deposits.

Under
some of our fixed-price contracts, we receive advance payments for work to be performed in future months. If we do not perform the work, the unearned portion of these advances will
be returned to our clients. At December 31, 2003, our accounts receivable turnover rate, net of advance payments on contracts, was approximately four times a year.

The
following summarizes our obligations associated with leases and other commitments at December 31, 2003, and the effect such obligations are expected to have on our liquidity
and cash flow in future periods:

|                 |  | Total |             | Less Than
One Year |   | One to Three
Years |  | Three to Five
Years |            | More Than
Five Years
|---------------- |  | ----- | ----------- | ------------------ | - | ------------------ |  | ------------------- | ---------- | --------------------
|Operating leases |  | $     | 75,083,400  |                    | $ | 7,127,779          |  | $                   | 13,913,387 |                     
|Capital leases   |  |       | 47,674,818  |                    |   | 2,470,751          |  |                     | 5,203,957  |                     
|                 |  |       |             |                    |   |                    |  |                     |            |                     
|Total            |  | $     | 122,758,218 |                    | $ | 9,598,530          |  | $                   | 19,117,344 |                     
|                 |  |       |             |                    |   |                    |  |                     |            |                     

26

---



Recent Accounting Pronouncements

In November 2002, the FASB's Emerging Issues Task Force, or EITF, finalized EITF Issue 00-21,Revenue Arrangements with
Multiple Deliverables. EITF 00-21 addresses how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting. It
also addresses how arrangement consideration should be measured and allocated to the separate units of accounting in an arrangement. EITF 00-21 does not apply to deliverables in
arrangements to the extent the accounting for such deliverables are within the scope of other existing higher-level authoritative accounting literature. We adopted the provisions of EITF
00-21 for new contracts entered into on or after July 1, 2003 with no material impact on our financial position, results of operations or cash flows, nor would there have been a
material impact on prior years. On December 17, 2003, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 104 ("SAB 104"),Revenue
Recognition, which supercedes SAB 101,Revenue Recognition in Financial Statements. SAB 104's primary purpose is to rescind
accounting guidance contained in SAB 101 related to multiple revenue arrangements, superceded as a result of the issuance of EITF 00-21,Accounting for Revenue
Arrangements with Multiple Deliverables. As we had already adopted EITF 00-21, the change has no effect on our financial position.

In
November 2002, FASB Interpretation No. 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 FASB Interpretation No. 34, (FIN 45) was issued. FIN 45
clarifies the requirements of SFAS No. 5,Accounting for Contingencies, relating to guarantors' accounting for, and disclosure of, the issuance
of certain types of guarantees. The disclosure provisions of FIN 45 are applicable to interim or annual periods that end after December 15, 2002, and did not have an impact on the
September 30, 2003 financial statements. The provisions for initial recognition and measurement under FIN 45 are effective on a prospective basis for guarantees that are issued or modified
after December 31, 2002. The initial recognition and measurement provisions under FIN 45 did not have any impact on our financial statements.

On
January 17, 2003, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 46, ("FIN 46"),Consolidation of Variable
Interest Entities. The provisions will be the guidance that determines (1) whether consolidation is required under the "controlling financial interest" model of
Accounting Research Bulletin No. 51 (ARB 51),Consolidated Financial Statements51 (or other existing authoritative guidance) or, alternatively,
(2) whether the variable interest model under FIN 46 should be used to account for existing and new entities. At this time, we do not have any entities that would be covered under FIN 46.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

We invest our cash in a variety of financial instruments, including U.S. Treasury and agency obligations, money market instruments of domestic and foreign issuers
denominated in U.S. dollars of commercial paper, bankers' acceptances, certificates of deposit, euro-dollar time deposits and variable rate issues, corporate note and bonds, asset-backed
securities, repurchase agreements, municipal notes and bonds and auction rate preferred securities.

Investments
in both fixed and floating rate interest earning instruments carry a degree of risk. Fixed securities may have their fair market value adversely impacted because of a rise in
interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our Company's future investment income may fall short of
expectations because of changes in interest rates or we may suffer losses in principal if forced to sell securities which have seen a decline in market value because of changes in interest rates. A
10% change in interest rates could have approximately a $150,000 impact on our interest income.

27

---

Our
investments are made in accordance with an investment policy approved by the Board of Directors. Under this policy no investment securities can have maturities exceeding two years
and the average duration of the portfolio cannot exceed 12 months.

Item 8. Financial Statements and Supplementary Data

The information required by Item 5 of Part II is incorporated herein by reference to the consolidated financial statements and financial statement
schedules filed with this report: see Item 15 of Part IV.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

Our management under the direction and with the participation of David Karlgaard, our Chief Executive Officer, and Stuart Lloyd, our Chief Financial Officer,
performed an evaluation of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15 under the Securities Exchange Act of 1934). Based on that evaluation,
Messers. Karlgaard and Lloyd concluded that as of December 31, 2003, our disclosure controls and procedures are effective. There have been no significant changes in our internal control or in
factors that could significantly affect internal controls subsequent to the date we carried out this evaluation.

28

---

PART III

Item 10. Directors and Executive Officers of the Registrant

The information required by this item will be included in our proxy statement for the annual meeting of stockholders to be held on May 19, 2004 (the "Proxy
Statement") under the sections entitled "Election of Directors," "The Board of Directors and Committees," "Executive Officers," "Audit Committee Report," "Section 16(a) Beneficial Ownership Reporting
Compliance," and "Code of Ethics," and is incorporated herein by reference. The Proxy Statement will be filed with the SEC no later than 120 days afer December 31, 2003.

Item 11. Executive Compensation

The information required by this item will be included in the Proxy Statement under the sections entitled "Executive Compensation," "Employment Arrangements" and
"Compensation Committee Report" and is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management

The information required by this item will be included in our Proxy Statement under the section entitled "Principal Stockholders" and is incorporated herein by
reference.

Item 13. Certain Relationships and Related Transactions

The information required by this item will be included in our Proxy Statement under the section entitled "Certain Relationships and Related Transactions" and is
incorporated herein by reference.

Item 14. Principal Accounting Fees and Services

The information required by this item will be included in our Proxy Statement under the section entitled "Principal Accounting Fees and Services" and is
incorporated herein by reference.

29

---



PART IV

Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

|   |  |    |  |                                                                                                                                                                     
|-- |  | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1. |  |    |  | Consolidated Financial Statements of PEC Solutions, Inc. and Subsidiaries                                                                                           
|   |  | a. |  | Report of Independent Auditors                                                                                                                                      
|   |  | b. |  | Consolidated Balance Sheets as of December 31, 2002 and December 31, 2003                                                                                           
|   |  | c. |  | Consolidated Statements of Income for the years ended December 31, 2001,
2002 and 2003                                                                              
|   |  | d. |  | Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2002 and 2003                                                                          
|   |  | e. |  | Consolidated Statements of Stockholders' Equity and Comprehensive Income for the years ended December 31, 2001, 2002 and 2003                                       
|   |  | f. |  | Notes to Consolidated Financial Statements                                                                                                                          
|2. |  |    |  | Supplemental Schedule Relating to the Consolidated Financial Statements of PEC Solutions, Inc. and Subsidiaries for the years ended December 31, 2001, 2002 and 2003
|   |  | a. |  | Report of Independent Auditors on Financial Statement Schedule                                                                                                      
|   |  | b. |  | Schedule II: Valuation and Qualifying Accounts                                                                                                                      

All
schedules except the one listed above have been omitted because they are not applicable or not required or because the required information is included elsewhere in the financial
statements in this filing.

30

---



The
following exhibits are filed or incorporated by reference, as state below:

|Exhibit
Number |  | Description                                                                                            
|-------------- |  | -------------------------------------------------------------------------------------------------------
|3.1*           |  | Certificate of Incorporation of PEC Solutions, Inc.                                                    
|3.2*           |  | By-Laws                                                                                                
|10.1*          |  | Office Lease Agreement between Building IV Associates L.P. and PEC Solutions, Inc.                     
|10.2*          |  | Amendment No. 1 to Office Lease Agreement between Building IV Associates L.P. and PEC Solutions, Inc.  
|10.3*          |  | Office Lease Agreement between Building V Associates L.P. and PEC Solutions, Inc.                      
|10.4*          |  | Employment Agreement between PEC Solutions, Inc. and David C. Karlgaard., dated January 1, 2000        
|10.4.1******   |  | Key Executive Severance Plan between Registrant and David C. Karlgaard, dated July 23, 2003            
|10.5*          |  | Employment Agreement between PEC Solutions, Inc. and Paul G. Rice, dated January 1, 2000               
|10.5.1******   |  | Key Executive Severance Plan between Registrant and Paul G. Rice, dated July 23, 2003                  
|10.6*          |  | Employment Agreement between PEC Solutions, Inc. and Alan H. Harbitter, dated January 1, 2000          
|10.6.1******   |  | Key Executive Severance Plan between Registrant and Alan H. Harbitter, dated July 23, 2003             
|10.7*          |  | Employment Agreement between PEC Solutions, Inc. and Stuart R. Lloyd, dated December 31, 1998          
|10.7.1*******  |  | Amendment to Employment Agreement between the Registrant and Stuart R. Lloyd, dated September 30, 2003 
|10.8*          |  | 2000 Stock Incentive Plan                                                                              
|10.9*          |  | 1995 Nonqualified Stock Option Plan                                                                    
|10.10*         |  | 1987 Stock Option Agreement, as amended                                                                
|10.11*         |  | Nonqualified Executive Supplemental Retirement Program Agreement dated December 1998                   
|10.12*         |  | 2000 Employee Stock Option Plan                                                                        
|10.13*         |  | Amended and Restated Loan Agreement between PEC Solutions, Inc. and NationsBank, N.A. (Bank of America)
|10.14**        |  | Amendment No. 2 to Office Lease Agreement between Building IV Associates L.P. and PEC Solutions, Inc.  
|10.15**        |  | Amendment No. 3 to Office Lease Agreement between Building IV Associates L.P. and PEC Solutions, Inc.  
|10.16**        |  | Office Lease Agreement between Building VI L.C. and PEC Solutions, Inc.                                
|10.17***       |  | First Amendment to Lease Agreement between Building VI L.C. and PEC Solutions, Inc.                    
|10.18***       |  | Second Amendment to Lease Agreement between Building VI L.C. and PEC Solutions, Inc.                   
|10.19***       |  | Operating Agreement between Building VI Investment L.C. and PEC Solutions, Inc.                        
|10.20***       |  | First Amendment to Operating Agreement between Building VI L.C. and PEC Solutions, Inc.                
|10.21***       |  | Bank of America Financing and Security Agreement                                                       
|10.22***       |  | Bank of America Promissory Note                                                                        
|10.23***       |  | Bank of America Revolving Note                                                                         
|10.24*****     |  | Amendment to Bank of America Promissory Note                                                           
|               |  |                                                                                                        

31

---

|10.25*****   |  | Amendment to Bank of America Revolving Note                                                
|------------ |  | -------------------------------------------------------------------------------------------
|10.26******  |  | Amended and Restated Bank of America Revolving Credit Note                                 
|10.27******  |  | Amended and Restate Bank of America Financing and Security Agreement                       
|10.28******  |  | Key Executive Severance Plan between Registrant and Christos Bratiotis, dated July 23, 2003
|10.29******  |  | Key Executive Severance Plan between Registrant and John T. Forbus, dated July 23, 2003    
|10.30******* |  | Key Executive Severance Plan between Registrant and Charles E. Owlett, dated July 23, 2003 
|21.1****     |  | Subsidiaries of PEC Solutions, Inc.                                                        
|23.1         |  | Consent of PricewaterhouseCoopers LLP                                                      
|31.1         |  | Section 302 Certification of Chief Executive Officer                                       
|31.2         |  | Section 302 Certification of Chief Financial Officer                                       
|32.1         |  | Section 906 Certification of Chief Executive Officer                                       
|32.2         |  | Section 906 Certification of Chief Financial Officer                                       

---

|*       |  | Incorporated herein by reference to the Company's Registration Statement on Form S-1. No. 333-95331.                                          
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------
|**      |  | Incorporated herein by reference to the Company's Annual Report on Form 10-K/A filed April 19, 2001.                                          
|***     |  | Incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30,    2001, filed August 13, 2001.
|****    |  | Incorporated herein by reference to the Company's Annual Report on Form 10-K filed on March 29, 2002.                                         
|*****   |  | Incorporated herein by reference to the Company's Quarterly Report on Form 10-Q/A filed on May 14, 2003.                                      
|******  |  | Incorporated herein by reference to the Company's Quarterly Report filed on Form 10-Q filed on August 14,2003.                                
|******* |  | Incorporated herein by reference to the Company's Quarterly Report filed on Form 10-Q filed on November 14, 2003.                             

See (a) (3) above.

See
(a) (1) and (a) (2) above.

32

---



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.

| |  | PEC SOLUTIONS, INC.
| |  | -------------------
| |  | By:                
| |  | Date:              

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, each person whose signature appears below in so signing also makes, constitutes and appoints David C. Karlgaard and Nancy A.
Spangler, and each of
them acting alone, his true and lawful attorney-in-fact, with full power of substitution, for him in any and all capacities, to execute and cause to be filed with the
Securities and Exchange Commission any and all amendments to this Report, with exhibits thereto and other documents in connection therewith, and hereby ratifies and confirms all that said
attorney-in-fact or his substitute or substitutes may do or cause to be done by virtue hereof

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

|Name                                            |  | Title                                                                                                       |  | Date          
|----------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------- |  | --------------
|                                                |  |                                                                                                             |  |               
|/s/DAVID C. KARLGAARDDavid C. Karlgaard, Ph. D. |  | Chief Executive Officer, President and Chairman of the Board of Directors (Principal Executive Officer)     |  | March 15, 2004
|/s/STUART R. LLOYDStuart R. Lloyd               |  | Senior Vice President and Chief Financial Officer and Director (Principal Financial and Accounting Officer) |  | March 15, 2004
|/s/PAUL G. RICEPaul G. Rice                     |  | Chief Operating Officer and Director                                                                        |  | March 15, 2004
|/s/ALAN H. HARBITTERAlan H. Harbitter, Ph. D.   |  | Chief Technology Officer and Director                                                                       |  | March 15, 2004
|                                                |  |                                                                                                             |  |               

33

---

|/s/FRANK J. CARRFrank J. Carr         |  | Director |  | March 15, 2004
|------------------------------------- |  | -------- |  | --------------
|/s/R. JERRY GROSSMANR. Jerry Grossman |  | Director |  | March 15, 2004
|/s/ZIMRI C. PUTNEYZimri C. Putney     |  | Director |  | March 15, 2004
|/s/JOHN W. MELCHNERJohn W. Melchner   |  | Director |  | March 15, 2004
|/s/B. GARY DANDOB. Gary Dando         |  | Director |  | March 15, 2004

34

---



Report of Independent Auditors

To
the Board of Directors and Stockholders of
PEC Solutions, Inc.

In
our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of cash flows and of stockholders' equity and comprehensive income present
fairly, in all material respects, the financial position of PEC Solutions, Inc. (the "Company") and subsidiaries as of December 31, 2002 and 2003, and the results of their operations and
their cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements 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.

/s/
PricewaterhouseCoopers LLP

February 10,
2004
McLean, VA

F-1

---



PEC SOLUTIONS, INC.  CONSOLIDATED BALANCE SHEETS

|                                          |                                                                                                                                     | As of December 31, |            
|----------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------- | ------------------ | -----------
|
|ASSETS                                    |                                                                                                                                    
|Current assets:                           |                                                                                                                                     |                    |            
|                                          | Cash and cash equivalents                                                                                                           |                    | $          
|                                          | Short-term investments                                                                                                              |                    |            
|                                          | Accounts receivable, net                                                                                                            |                    |            
|                                          | Other current assets                                                                                                                |                    |            
|                                          |                                                                                                                                     |                    |            
|Total current assets                      |                                                                                                                                     |                    | 113,153,143
|Property and equipment, net               |                                                                                                                                     |                    | 27,966,613 
|Investments                               |                                                                                                                                     |                    | 26,790,222 
|Goodwill                                  |                                                                                                                                     |                    | 16,932,205 
|Intangibles, net                          |                                                                                                                                     |                    | 3,700,033  
|Other assets                              |                                                                                                                                     |                    | 3,748,373  
|                                          |                                                                                                                                     |                    |            
|Total assets                              |                                                                                                                                     | $                  | 192,290,589
|                                          |                                                                                                                                     |                    |            
|LIABILITIES AND STOCKHOLDERS' EQUITY      |                                                                                                                                    
|Current liabilities:                      |                                                                                                                                     |                    |            
|                                          | Accounts payable and accrued expenses                                                                                               |                    | $          
|                                          | Advance payments on contracts                                                                                                       |                    |            
|                                          | Accrued payroll                                                                                                                     |                    |            
|                                          | Accrued vacation                                                                                                                    |                    |            
|                                          | Other current liabilities                                                                                                           |                    |            
|                                          |                                                                                                                                     |                    |            
|Total current liabilities                 |                                                                                                                                     |                    | 19,817,530 
|                                          |                                                                                                                                     |                    |            
|Supplemental retirement program liability |                                                                                                                                     |                    | 966,097    
|Deferred rent                             |                                                                                                                                     |                    | 1,340,793  
|Long-term lease obligations               |                                                                                                                                     |                    | 22,822,447 
|                                          |                                                                                                                                     |                    |            
|Total long-term liabilities               |                                                                                                                                     |                    | 25,129,337 
|                                          |                                                                                                                                     |                    |            
|Total liabilities                         |                                                                                                                                     |                    | 44,946,867 
|                                          |                                                                                                                                     |                    |            
|Commitments and contingencies             |                                                                                                                                     |                    |            
|Stockholders' equity:                     |                                                                                                                                     |                    |            
|                                          | Undesignated capital stock, 10,000,000 shares authorized                                                                            |                    |            
|                                          | Common stock, $0.01 par value, 75,000,000 shares authorized, 26,792,565 and 27, 303,041 shares issued and outstanding, respectively |                    |            
|                                          | Additional paid-in capital                                                                                                          |                    |            
|                                          | Retained earnings                                                                                                                   |                    |            
|                                          | Accumulated other comprehensive income (loss)                                                                                       |                    |            
|                                          |                                                                                                                                     |                    |            
|                                          | Total stockholders' equity                                                                                                          |                    |            
|                                          |                                                                                                                                     |                    |            
|                                          | Total liabilities and stockholders' equity                                                                                          |                    | $          
|                                          |                                                                                                                                     |                    |            

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

F-2

---



PEC SOLUTIONS, INC.  CONSOLIDATED STATEMENTS OF INCOME

|                                   |                                      | Year ended December 31, |            
|---------------------------------- | ------------------------------------ | ----------------------- | -----------
|
|Revenues                           |                                      | $                       | 109,213,147
|                                   |                                      |                         |            
|Operating costs and expenses:      |                                      |                         |            
|                                   | Direct costs                         |                         |            
|                                   | General and administrative expenses  |                         |            
|                                   | Sales and marketing expenses         |                         |            
|                                   | Goodwill and intangible amortization |                         |            
|                                   |                                      |                         |            
|Total operating costs and expenses |                                      |                         | 89,951,504 
|                                   |                                      |                         |            
|Operating income                   |                                      |                         | 19,261,643 
|Investment and other income        |                                      |                         | 2,158,100  
|Interest expense                   |                                      |                         | (4,160     
|                                   |                                      |                         |            
|Income before income taxes         |                                      |                         | 21,415,583 
|Provision for income taxes         |                                      |                         | 8,348,472  
|                                   |                                      |                         |            
|                                   | Net income                           |                         | $          
|                                   |                                      |                         |            
|Earnings per share:                |                                      |                         |            
|                                   | Basic                                |                         | $          
|                                   |                                      |                         |            
|                                   | Diluted                              |                         | $          
|                                   |                                      |                         |            

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

F-3

---



PEC SOLUTIONS, INC.  CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                 |                                                                                                          | Year ended December 31,                         |                                           |             |            
|------------------------------------------------ | -------------------------------------------------------------------------------------------------------- | ----------------------------------------------- | ----------------------------------------- | ----------- | -----------
|
|Cash flows from operating activities:            |                                                                                                          |                                                 |                                           |             |            
|                                                 | Net income                                                                                               |                                                 | $                                         | 13,067,111  |            
|                                                 | Adjustments to reconcile net income to net cash provided by operating activities:                        |                                                 |                                           |             |            
|                                                 |                                                                                                          | Depreciation and amortization                   |                                           |             | 1,077,602  
|                                                 |                                                                                                          | Amortization of goodwill                        |                                           |             | 720,954    
|                                                 |                                                                                                          | Amortization of intangibles                     |                                           |             | 56,019     
|                                                 |                                                                                                          | Amortization of bond premium and discounts, net |                                           |             | 72,598     
|                                                 |                                                                                                          | Write-off of capitalized software               |                                           |             |           
|                                                 |                                                                                                          | Deferred rent                                   |                                           |             | 464,527    
|                                                 |                                                                                                          | Deferred income taxes                           |                                           |             | (26,222    
|                                                 |                                                                                                          | Bad debt expense                                |                                           |             |           
|                                                 |                                                                                                          | (Gain) loss from investment in building         |                                           |             |           
|                                                 |                                                                                                          | Non-cash charge related to building             |                                           |             |           
|                                                 |                                                                                                          | Other                                           |                                           |             | 6,265      
|                                                 | Changes in operating assets and liabilities, excluding those acquired:                                   |                                                 |                                           |             |            
|                                                 |                                                                                                          | Accounts receivable                             |                                           |             | (12,477,244
|                                                 |                                                                                                          | Other current assets                            |                                           |             | (544,696   
|                                                 |                                                                                                          | Other assets                                    |                                           |             | (178,954   
|                                                 |                                                                                                          | Accounts payable and accrued expenses           |                                           |             | 441,505    
|                                                 |                                                                                                          | Advance payments on contracts                   |                                           |             | (483,903   
|                                                 |                                                                                                          | Retirement plan contribution payable            |                                           |             | (1,937     
|                                                 |                                                                                                          | Accrued payroll                                 |                                           |             | 1,486,400  
|                                                 |                                                                                                          | Accrued vacation                                |                                           |             | 523,449    
|                                                 |                                                                                                          | Other current liabilities                       |                                           |             | (763,894   
|                                                 |                                                                                                          | Supplemental retirement program liability       |                                           |             | 233,530    
|                                                 |                                                                                                          | Other long-term liabilities                     |                                           |             | (13,702    
|                                                 |                                                                                                          |                                                 |                                           |             |            
|                                                 |                                                                                                          |                                                 | Net cash provided by operating activities |             |            
|                                                 |                                                                                                          |                                                 |                                           |             |            
|Cash flows from investing activities:            |                                                                                                          |                                                 |                                           |             |            
|                                                 | Purchases of property and equipment                                                                      |                                                 |                                           | (1,600,368  | )          
|                                                 | Purchases of short-term investments                                                                      |                                                 |                                           | (54,728,132 | )          
|                                                 | Proceeds from sale of short-term investments                                                             |                                                 |                                           | 44,550,355  |            
|                                                 | Investment in affiliate                                                                                  |                                                 |                                           | (3,000,000  | )          
|                                                 | Purchase of subsidiary, net of cash acquired                                                             |                                                 |                                           | (13,403,772 | )          
|                                                 | Purchase of assets                                                                                       |                                                 |                                           |            |            
|                                                 | Capitalized software                                                                                     |                                                 |                                           | (679,331    | )          
|                                                 | Purchases of long-term investments                                                                       |                                                 |                                           | (19,809,738 | )          
|                                                 | Proceeds from sale of long-term investments                                                              |                                                 |                                           | 9,129,120   |            
|                                                 | Distributions from building investment                                                                   |                                                 |                                           |            |            
|                                                 | Other                                                                                                    |                                                 |                                           | 3,000       |            
|                                                 |                                                                                                          |                                                 |                                           |             |            
|                                                 |                                                                                                          |                                                 | Net cash used in investing activities     |             |            
|                                                 |                                                                                                          |                                                 |                                           |             |            
|Cash flows from financing activities:            |                                                                                                          |                                                 |                                           |             |            
|                                                 | Proceeds from the issuance of common stock                                                               |                                                 |                                           | 52,064,129  |            
|                                                 | Payments on note payable and capital lease obligations                                                   |                                                 |                                           | (7,743      | )          
|                                                 | Common stock offering costs                                                                              |                                                 |                                           | (396,673    | )          
|                                                 |                                                                                                          |                                                 |                                           |             |            
|                                                 |                                                                                                          |                                                 | Net cash provided by financing activities |             |            
|                                                 |                                                                                                          |                                                 |                                           |             |            
|Net increase (decrease) in cash                  |                                                                                                          |                                                 | 15,780,255                                |             |            
|Cash and cash equivalents at beginning of period |                                                                                                          |                                                 | 14,655,510                                |             |            
|                                                 |                                                                                                          |                                                 |                                           |             |            
|Cash and cash equivalents at end of period       |                                                                                                          | $                                               | 30,435,765                                |             | $          
|                                                 |                                                                                                          |                                                 |                                           |             |            
|Income taxes paid                                |                                                                                                          | $                                               | 7,375,475                                 |             | $          
|                                                 |                                                                                                          |                                                 |                                           |             |            
|Interest paid                                    |                                                                                                          | $                                               | 4,160                                     |             | $          
|                                                 |                                                                                                          |                                                 |                                           |             |            
|Non-cash transactions:                           |                                                                                                          |                                                 |                                           |             |            
|                                                 | Mature common stock repurchased and retired in exchange for shares in cashless exercise of stock options |                                                 | $                                         | 276,275     |            
|                                                 |                                                                                                          |                                                 |                                           |             |            

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

F-4

---



PEC SOLUTIONS, INC.  CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY  AND COMPREHENSIVE INCOME

|                                                                               |                                             | Common Stock |   |   |         | Accumulated
Other
Comprehensive
Income (Loss) |   |            |   |   |        
|------------------------------------------------------------------------------ | ------------------------------------------- | ------------ | - | - | ------- | --------------------------------------------- | - | ---------- | - | - | -------
|
|
|Balance, December 31, 2000                                                     |                                             | 22,345,440   |   | $ | 223,454 |                                               | $ | 28,692,286 |   | $ | 6,345  
|Issuance of common stock in secondary stock offering, net of offering costs    |                                             | 3,000,000    |   |   | 30,000  |                                               |   | 47,913,327 |   |   |       
|Issuance of common stock in acquisition of Troy Systems, Inc                   |                                             | 103,065      |   |   | 1,031   |                                               |   | 2,998,985  |   |   |       
|Issuance of common stock upon exercise of stock options, including tax benefit |                                             | 551,244      |   |   | 5,512   |                                               |   | 3,116,457  |   |   |       
|Issuance of common stock through employee stock purchase plan                  |                                             | 125,725      |   |   | 1,257   |                                               |   | 877,163    |   |   |       
|Common stock repurchased and retired                                           |                                             | (15,825      | ) |   | (158    | )                                             |   | (16,330    | ) |   |       
|Comprehensive income:                                                          |                                             |              |   |   |         |                                               |   |            |   |   |        
|                                                                               | Net income                                  |              |  |   |         |                                              |   |            |  |   |        
|                                                                               | Unrealized loss on securities, net of taxes |              |  |   |         |                                              |   |            |  |   |        
|                                                                               | Total comprehensive income                  |              |   |   |         |                                               |   |            |   |   |        
|                                                                               |                                             |              |   |   |         |                                               |   |            |   |   |        
|Balance, December 31, 2001                                                     |                                             | 26,109,649   |   |   | 261,096 |                                               |   | 83,581,888 |   |   | (215   
|Issuance of common stock upon exercise of stock options, including tax benefit |                                             | 566,163      |   |   | 5,662   |                                               |   | 4,858,785  |   |   |       
|Issuance of common stock through employee stock purchase plan                  |                                             | 143,431      |   |   | 1,434   |                                               |   | 2,715,148  |   |   |       
|Common stock repurchased and retired                                           |                                             | (26,678      | ) |   | (267    | )                                             |   | (84,573    | ) |   |       
|Comprehensive income:                                                          |                                             |              |   |   |         |                                               |   |            |   |   |        
|                                                                               | Net income                                  |              |  |   |         |                                              |   |            |  |   |        
|                                                                               | Unrealized loss on securities, net of taxes |              |  |   |         |                                              |   |            |  |   |        
|                                                                               | Total comprehensive income                  |              |   |   |         |                                               |   |            |   |   |        
|                                                                               |                                             |              |   |   |         |                                               |   |            |   |   |        
|Balance, December 31, 2002                                                     |                                             | 26,792,565   |   |   | 267,925 |                                               |   | 91,071,248 |   |   | (41,094
|Issuance of common stock upon exercise of stock options, including tax benefit |                                             | 379,248      |   |   | 3,793   |                                               |   | 2,289,564  |   |   |       
|Issuance of common stock through employee stock purchase plan                  |                                             | 140,714      |   |   | 1,407   |                                               |   | 1,917,459  |   |   |       
|Common stock repurchased and retired                                           |                                             | (9,486       | ) |   | (95     | )                                             |   | (59,368    | ) |   |  -    
|Comprehensive income:                                                          |                                             |              |   |   |         |                                               |   |            |   |   |        
|                                                                               | Net income                                  |              |  |   |         |                                              |   |            |  |   |        
|                                                                               | Unrealized loss on securities, net of taxes |              |  |   |         |                                              |   |            |  |   |        
|                                                                               | Total comprehensive income                  |              |   |   |         |                                               |   |            |   |   |        
|                                                                               |                                             |              |   |   |         |                                               |   |            |   |   |        
|Balance, December 31, 2003                                                     |                                             | 27,303,041   |   | $ | 273,030 |                                               | $ | 95,218,903 |   | $ | (49,739
|                                                                               |                                             |              |   |   |         |                                               |   |            |   |   |        

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

F-5

---



PEC SOLUTIONS, INC.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.     Summary of Significant Accounting Principles

Company

Performance Engineering Corporation ("PEC") was incorporated June 25, 1985, under the laws of the Commonwealth of Virginia. On January 1, 2000, PEC
was reincorporated, under the laws of the state of Delaware, as PEC Solutions, Inc. ("Company"). The Company provides professional technology services that enable government entities to use the
Internet to enhance productivity and improve services to the public.

The
Company's primary customers are executive agencies and departments of the federal government, the federal Judiciary, and prime contractors to the United States government. Two of
these customers accounted for 20% of the Company's revenue during 2003. For 2001, the Company's contracts and subcontracts were time and materials contracts (71%), fixed-price contracts (13%), and
cost reimbursable contracts (16%). For 2002, these contracts and subcontracts were time and materials contracts (62%), fixed-priced contracts (21%), and cost-reimbursable contracts (17%).
For 2003, these contracts and subcontracts were time and materials contracts (58%), fixed-priced contracts (24%), and cost-reimbursable contracts (18%).

Principles of Consolidation

The consolidated financial statements include all majority-owned or controlled subsidiaries. All significant intercompany balances and transactions have been
eliminated. The financial statements prior to 2002 consolidated the Company's wholly owned subsidiaries Troy Systems, Inc. and Viking Technology, Inc. which were dissolved at the end of
2001 and their operations were combined with other operations of the Company.

Revenue Recognition

The Company's revenue is derived primarily from contracts with the federal government. Revenues on time and materials contracts are recognized based on actual
hours delivered at the contracted billable hourly rate plus the cost of materials incurred. Revenues on fixed-price contracts are recognized using the percentage-of-completion
method based on costs incurred in relation to total estimated costs. However, if the contract has a service element, revenues are recognized on a straight-line basis over the term of the
contract. Revenue on cost-type contracts is recognized to the extent of costs incurred plus a proportionate amount of fee earned.

In
certain arrangements, we enter into contracts that include the delivery of a combination of two or more of our service offerings. Typically, such multiple-element arrangements
incorporate the design, development or modification of systems and an ongoing obligation to manage, staff, maintain, host or otherwise run solutions and systems provided to the client. Such contracts
are divided into separate units of accounting and the total arrangement fee is allocated to each unit based on its relative fair value. Revenue is recognized separately, and in accordance with our
revenue recognition policy, for each element.

In
certain circumstances, revenues are recognized when contract amendments have not been finalized. Prior to agreeing to commence work directed by the customer and before receipt of the
written modification or amendment to the existing contract, the Company requires the completion of an internal memo that assesses the probability of the modification being executed in a timely fashion
and the Company's ability to subsequently collect payment from the customer.

F-6

---

The
fees under certain government contracts may be increased or decreased in accordance with cost or performance incentive provisions that measure actual performance against established
targets or other criteria. Such incentive fee awards or penalties are included in revenue at the time the amounts can be
reasonably determined. In certain circumstances, revenues are recognized when contract amendments have not been finalized. Provisions for anticipated contract losses are recognized at the time they
become known.

Cash and Cash Equivalents

Cash and cash equivalents include cash on hand and in banks. The Company also considers all highly liquid investments with a maturity of three months or less when
purchased to be cash equivalents. As of December 31, 2002 and 2003, cash equivalents included money market funds of approximately $4,633,903 and $13,530,203, respectively, and commercial paper,
United States Treasury bills and municipal bonds of approximately $0 and $5,700,000 respectively.

Concentration of Credit Risk

At times during the year, the Company maintains cash balances at financial institutions in excess of Federal Deposit Insurance Corporation ("FDIC") limits.
Management believes the risk in these situations to be minimal. In addition, the Company had cash balances of $4,633,903 and $13,530,203 held in money market funds at local financial institutions as
of December 31, 2002 and 2003, respectively. The Company also held commercial paper, United States Treasury bills and municipal bonds in the amount of $57,887,857 and $90,523,889 as of
December 31, 2002 and 2003, respectively. These funds are not insured by the FDIC.

Marketable Securities

The Company determines the appropriate classification of marketable securities at the time of purchase and reevaluates such designation as of each balance sheet
date. The Company's marketable securities are categorized as available-for-sale and stated at fair value, with unrealized gains and losses, net of tax, recorded in accumulated
other comprehensive income. Realized gains and losses and declines in values determined to be other than temporary, if any, will be reported in other income or expense as incurred.

Property and Equipment

Property, plant and equipment are stated at cost. Major improvements are capitalized while expenditures for maintenance, repairs and minor improvements are
charged to expense. When assets are retired or otherwise disposed of, the assets and related accumulated depreciation and amortization are eliminated from the accounts and any resulting gain or loss
is reflected in income. Depreciation expense is determined using the straight-line method based on the following useful lives:

| | Buildings                        |  | 40 years                                      
| | -------------------------------- |  | ----------------------------------------------
| | Non-structural land improvements |  | 15 years                                      
| | Property and equipment           |  | 3 to 5 years                                  
| | Leasehold improvements           |  | Shorter of estimated useful life or lease term

Emerging
Issues Task Force (EITF) Issue No. 97-10,The Effect of Lessee Involvement in Asset Construction, is
applicable to entities involved on behalf of an owner-lessor with the construction of an asset that will be leased when construction of the asset is completed. EITF Issue 97-10 requires
the Company to be considered the owner (for accounting purposes) of these types of projects during the construction period. Due to the fact that the Company was considered the owner of the building
during the construction period, then effectively a sale and leaseback of the building occurred when

F-7

---

construction
was completed and the lease term began. As a result of the Company's continued involvement in the LLC, the Company fails the sale-leaseback criteria of FAS 98, Accounting for Leases,and the building,
and offsetting long-term lease obligation, must remain on the books. The building and lease
obligation are being amortized to fair value at the end of the lease term, such that if the lease is not extended there will be no gain or loss upon lease termination.

Long-lived Assets

The Company evaluates the recoverability of its long-lived assets in accordance with Statement of Financial Accounting Standards No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets.Based on its most recent analysis, the Company believes that there was no
impairment of its long-lived assets as of December 31, 2003.

Goodwill and Intangibles

In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible
Assets. Under SFAS No. 142, goodwill and intangible assets with indefinite lives will no longer be amortized but
are reviewed annually (or more frequently if impairment indicators arise) for impairment. Separable intangible assets that are not deemed to have indefinite lives will continue to be amortized over
their useful lives but with no maximum life. The Company adopted the provisions of SFAS No. 142 effective January 1, 2002, and upon adoption ceased to amortize goodwill. The Company
completed the transitional and annual goodwill impairment test in accordance with the provisions of SFAS 142, and concluded that goodwill was not impaired.

Software Research and Development Costs

The Company capitalizes research and development costs for marketable software incurred from the time the product is determined to be technologically feasible
until it is available for sale. It has also acquired marketable software, which it has capitalized. Acquired software and software development costs are amortized and recorded as direct costs using
the straight-line method over a period not to exceed three years. As of December 31, 2003, $2,439,714 was capitalized with an accumulated amortization balance of $1,271,129 and is
included in other assets. Amortization expense of $212,441, $363,945, and $328,835 was recorded during 2001, 2002 and 2003 respectively.

Contract Advance Payments

The Company invoices the federal government for some of its contracts based on provisional indirect cost rates. These invoiced amounts are adjusted when the
actual rates have been determined by audit. Other Federal government contracts are billed periodically independent of the percentage of the contract actually completed which, in some situations,
results in funds being advanced to the Company in excess of amounts earned.

Common Stock Splits

Effective January 1, 2000, in connection with its re-incorporation, the Company's common stock was split 3-for-1.
Effective March 1, 2000, the Company's common stock was split 2-for-1. All prior share and per share information in the financial statements have been restated to give
effect to these stock splits.

Stock-based Compensation

In December 2002, the FASB issued SFAS No. 148,Accounting for Stock-Based CompensationTransition and
Disclosure, an amendment of FASB Statement No. 123. SFAS No. 148 provides alternative

F-8

---

methods
of transition for a voluntary change to the fair market value based method of accounting for stock-based compensation. The Company does not presently expect to make such a voluntary change. In
addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting
for stock-based employee compensation and the effect of the method used on reported results. These amended disclosure requirements have been included below.

The
Company uses the Black-Scholes option-pricing model to determine the pro forma impact under SFAS No. 123 to the Company's net income and earnings per share. The model utilizes
certain information, such as the interest rate on a risk-free security maturing generally at the same time as the option being valued, and requires certain assumptions, such as the
expected amount of time an option will be outstanding until it is exercised or it expires, to calculate the fair value of stock options granted.

This
information and the assumptions used for 2003, 2002 and 2001 for the Company's stock option and stock purchase plans are summarized as follows:

|                                                    |  | Stock Option Plan |          | Stock Purchase Plan
|--------------------------------------------------- |  | ----------------- | -------- | -------------------
|
|Volatility                                          |  |                   | 57.31%   |                    
|Risk-free interest rate                             |  |                   | 5.07%    |                    
|Dividend yield                                      |  |                   | 0%       |                    
|Expected lives                                      |  |                   | 10 years |                    
|Weighted average fair value per share at grant date |  | $                 | 3.80     |                    

The
Company continues to apply the provisions of APB 25 and provide the pro forma disclosures in accordance with the provisions of FAS Nos. 123 and 148. Under APB 25, the Company has not
recorded in net income any stock-based employee compensation cost associated with the Company's stock option plan, as all options granted under the plan had an exercise price equal to the market value
of the underlying common stock on the date of grant.

The
following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to its stock
option plan:

|                                           |  | Years Ended December 31, |           
|------------------------------------------ |  | ------------------------ | ----------
|
|Net income, as reported                    |  | $                        | 13,067,111
|Pro forma compensation expense, net of tax |  |                          | (1,031,607
|                                           |  |                          |           
|Pro forma net income                       |  | $                        | 12,035,504
|                                           |  |                          |           
|Net income per share:                      |  |                          |           
|Basicas reported                          |  | $                        | 0.54      
|Basicpro forma                            |  | $                        | 0.50      
|Dilutedas reported                        |  | $                        | 0.47      
|Dilutedpro forma                          |  | $                        | 0.43      

Income Taxes

The Company accounts for deferred income taxes using the asset and liability method, under which the expected future tax consequences of differences between the
book and tax bases of assets and liabilities are recognized as deferred tax assets and liabilities.

F-9

---

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that
affect certain reported amounts and disclosures. Such estimates include reserves for doubtful accounts, valuation allowance for deferred taxes, estimates to complete for contracts, and certain accrued
expenses. Accordingly, actual results could differ from those estimates.

Segment Reporting

The Company operates as a single segment and will evaluate additional disclosure requirements as it expands its operations.

Reclassifications

Certain reclassifications have been made to the prior-period financial statements in order to conform to the 2003 presentation.

2.     Acquisitions

On November 20, 2001, the Company acquired all of the outstanding common shares of Troy Systems, Inc. (Troy). The results of Troy's operations have
been included in the consolidated financial statements since that date. Effective January 1, 2002, Troy was fully integrated into the Company and ceased to exist as a wholly owned subsidiary.
Troy derives revenue from system development, networking, engineering, integration services, and information systems security and its primary customer is the federal government. The aggregate purchase
price was $18.6 million, including acquisition costs of $0.3 million, consisting of $15.3 million of cash and common stock valued at $3.0 million (103,065 shares). The
number of shares was determined using the average closing price of the stock for the five trading days immediately prior to the acquisition.

The
following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition. Third party valuations were obtained in determining
the allocation of the purchase price for certain intangible assets.

At November 20, 2001Current assets, including cash of $1,446,775

$
9,602,232Property and equipment


333,538Intangible assets


3,025,000Goodwill


9,921,799Other assets


1,096,513Total assets acquired


23,979,082Current liabilities


(4,297,364
)Long-term liabilities, including capital leases


(1,087,965
)Total liabilities assumed


(5,385,329
)Net assets acquired

$
18,593,753


The
$3.0 million of acquired intangible assets was assigned to customer contracts and related relationships with a weighted-average useful life of 4.5 years. The
transaction resulted in $9.9 million of goodwill, all of which is deductible for tax purposes.

F-10

---

Unaudited
pro forma results of operations as if the acquisition has occurred at the beginning of each period presented are as follows:

Year ended December 31, 2001(in thousands except per share)Total revenue

$
138,524Net income

$
13,000Basic earnings per share

$
0.54Diluted earnings per share

$
0.46


The
pro forma consolidated results of operations include adjustments to give effect to amortization of goodwill and other adjustments, together with related income tax effects. The
unaudited pro forma information is not necessarily indicative of the results of operations that would have occurred had the purchase been made at the beginning of the periods presented or the future
results of the combined operations.

On
June 14, 2002, the Company acquired the contracts and employees of Vector Research Inc., ("Vector") for $5.7 million cash plus the assumption of
$0.1 million in accrued liabilities. The excess of purchase price over fair value of the nest assets was approximately $4.3 million. Vector was fully integrated into the Company and its
results are incorporated in the Company's financial statements. Vector was a provider of technology development and engineering services to the federal government. The aggregate purchase price was
$5.8 million. Pro forma results of operations of the Company would not have been materially different assuming the acquisition of Vector occurred on January 1, 2001.

3.     Goodwill and Intangibles

Prior to January 1, 2002, the Company amortized goodwill related to the Viking purchase on a straight-line basis over its estimated useful life
of 5 years. Goodwill at December 31, 2001 was net of accumulated amortization of $961,296. The Company also recognized goodwill pursuant to its acquisitions of Troy in
November 2001 and Vector in June 2002. These acquisitions have been accounted for as purchases pursuant to the guidance Statement of Financial Accounting Standards No. 141
(FAS 141), Business Combinations. Therefore, goodwill of $9.9 million and $4.3 million, respectively, are not being amortized.

The
changes in the carrying amount of goodwill for the year ended December 31, 2002 is as follows (in millions):

Balance as of December 31, 2001

$
12.6Goodwill acquired during the year


4.3Balance as of December 31, 2002 and 2003

$
16.9


F-11

---

Upon
the adoption of FAS 142, the Company discontinued the amortization of goodwill. The following table presents a reconciliation of net income and earnings per share adjusted
for the exclusion of goodwill:

Years Ended December 31, 2001(dollars in thousands, except per share)Reported net income

$
13,067Add: Goodwill amortization, net of tax


440Adjusted net income

$
13,507Reported basic earnings per share

$
0.54Add: Goodwill amortization, net of tax


0.02Adjusted basic earnings per share

$
0.56Reported diluted earnings per share

$
0.47Add: Goodwill amortization, net of tax


0.02Adjusted diluted earnings per share

$
0.49


The
Company only has one reporting unit. Non-amortizable intangible assets at December 31, 2003, consist only of goodwill of $16,932,205. The Company's amortizable
intangible assets include customer contracts and related relationships purchased in the acquisition of Troy on November 20, 2001 and Vector on June 14, 2002. The intangibles related to
the Troy acquisition totaled $3,025,000 and are amortized on a straight-line basis over a 4.5-year period. The intangibles on the Vector purchase totaled $1,500,000 and are
being amortized on a straight-line basis over an 8.4 year period. Total accumulated amortization as of December 31, 2002 and 2003 was $824,967 and $1,675,761, respectively.

Amortization
expense related to intangibles was $56,019, $768,948 and $850,794 for the years ended December 31, 2001, 2002 and 2003, respectively. Intangibles are amortized on a
straight-line basis.

Estimated
amortization expense for each of the five succeeding calendar years based on the intangible assets as of December 31, 2003 is as follows in thousands:

Year ending December 31,

Amount2004

$
8512005


8512006


4582007


1792008


179


F-12

---

4.     Accounts Receivable

Accounts receivable consisted of the following as of:

December 31,2002

2003Billed accounts receivable

$
45,411,428

$
32,099,688Unbilled accounts receivable:Amounts currently billable


5,855,777


12,033,614Revenues recorded in excess of contract value or funding


3,098,543


4,775,812Progress payments


(1,070,117
)

(438,992
)53,295,631


48,470,122Allowance for doubtful accounts


(322,042
)

(114,433
)Accounts receivable, net

$
52,973,589

$
48,355,689


Unbilled
accounts receivable currently billable consist of recognized recoverable costs and accrued profits on contracts for which billings had not been presented to clients as of the
balance sheet date. Revenues recorded in excess of contract value or funding are billable upon receipt of contractual amendments. Management anticipates the collection of these amounts within
90 days of the balance sheet date. Payments to the Company on contracts with agencies and departments of the Federal government are subject to adjustment upon audit by the Federal government.
All years subsequent to 2000 are subject to audit. Management believes that audit adjustments, if any, on periods not yet audited, will not have a material effect on the financial statements.

During
2002 the Company had two customers that each accounted for more than 10% of revenue. For the year, EDS (Navy Marine Corps Intranet) accounted for 16%, or $29.3 million, and
our biometric identification system through a subcontract with NCS Pearson, Inc. (Pearson) accounted for 13%, or $23.7 million. At December 31, 2002, there was $3.5 million
due from EDS and $15.6 million due from Pearson. Subsequent to December 31, 2002 we received a payment of approximately $10 million of the $15.6 million Pearson accounts
receivable. The Company filed a lawsuit in Federal Court against Pearson in September 2003 to recover full payment on this receivable and expects to receive full payment.

During
2003 the Company had one customer who accounted for more than 10% of revenue. For the year ended December 31, 2003, revenue from the Special Projects Division of the Drug
Enforcement Agency was $17.6 million, and as of December 31, 2003, accounts receivable were $4.0 million.

The
allowance for doubtful accounts reflects management's best estimate of probable losses based on historical experience, known troubled accounts and other currently available
information. Allowances are established for specific receivables when deemed appropriate.

F-13

---

5. Property and Equipment

Property
and equipment consisted of the following as of:

December 31,2002

2003Leasehold improvements

$
937,273

$
1,164,225Property and equipment


6,922,691


6,713,033Software


933,971


894,678Building


23,001,600


23,001,60031,795,535


31,773,536Less: accumulated depreciation


(3,828,922
)

(5,099,439
)$
27,966,613

$
26,674,097


Depreciation
expense was $865,158, $1,288,042 and $2,469,768 for the years ended December 31, 2001, 2002 and 2003, respectively.

6.     Investments

The Company has an ownership interest in an unconsolidated and affiliated company that owns an office building that the Company leases. The Company's net
investments in and advances to this entity totaled $4.4 million and $4.6 million at December 31, 2002 and 2003, respectively, which is included in Investments on the Consolidated
Balance Sheet. Summarized financial information for this entity as of December 31, was as follows (in thousands):

2002

2003Current assets

$
1,244

$
472Non-current assets


29,431


29,111Current liabilities


717


218Non-current liabilities


20,500


20,287Gross revenue


275


3,320Net gain (loss)


(178
)

1,959


The
Company has applied equity accounting to its interest in the LLC. The accounting records of the LLC are consistent with the accounting of the Company. The Company recorded equity
losses of approximately $85,000 for the year ended December 31, 2002, and equity gains of approximately $853,000 for the year ended December 31, 2003, which are included in investment
and other income.

The
Company also invests in marketable securities classified as available for sale. As of December 31, 2003, the aggregate fair market value of those securities was
$78.9 million. As of December 31, 2003, unrealized gains and losses included in other comprehensive loss were $13,662 and $77,084, respectively. Proceeds from sales of securities during
2003 were $81.1 million with realized gains of $15,032. The Company recognizes gains and losses on the sale of securities using the specific identity method of accounting.

7.     Line of Credit

The Company has a loan agreement with Bank of America which provides for a line of credit with a limit of $10,000,000 at the one-month LIBOR rate plus
250 basis points per annum (3.9% and 3.6% as of December 31, 2002 and 2003, respectively). The line is collateralized by the assets of the Company. As of December 31, 2002 and 2003,
there were no balances outstanding. The bank has

F-14

---

issued
Letters of Credit in the amount of $2,782,009 against the line of credit in lieu of rent deposits as of December 31, 2003. The agreement expires June 30, 2005.

8.     Other current liabilities

Other liabilities consisted of the following:

December 31,2002

2003Employee stock purchase plan

$
8,430

$
9,883Amounts due related to Vector acquisition


164,070


Employee benefits payable


133,378


64,424Payroll taxes payable


628,434


520,462Income taxes payable





568,636$
934,312

$
1,163,405


9.     Stock Option Plans

On February 1, 1987, the Company established an incentive stock option agreement (the "Agreement"), to attract, retain and reward employees and on
January 1, 1995 the Company established a nonqualified stock option plan (the "Plan", collectively, the "Plans") to attract, retain and reward key employees. The Plans are administered by the
Board of Directors, which has the authority to determine which officers and key employees are awarded options pursuant to the Plans and the related terms and option prices. The number of options
available for grant under the Plans is limited to the number of Company common shares authorized and available.

Each
stock option granted pursuant to the Plans has an exercise price equal to the fair market value of the underlying common stock at the date of grant. Each stock option granted under
the Agreement has a five-year term and a two-year vesting period. Each stock option granted pursuant to the Plan has a ten-year term and no vesting period.

In
January 2000, the Company established a stock plan (the "2000 Plan"), which includes both incentive and non-qualified stock options. Under the 2000 Plan, options to
purchase 1,500,000 shares of common stock were initially available. Beginning in 2001, the number of options eligible for grant in each year are equal to the sum of 6.25% of the number of outstanding
shares on January 1 of that year, plus the number of shares eligible for grant in the prior year that were not granted. No more than 15,000,000 options may be granted during the
10-year term of the 2000 Plan. Each stock option granted pursuant to the 2000 Plan has a ten-year term and a two-year vesting period for incentive options and
various vesting periods for non-qualified options ranging from immediate vesting to vesting in four years.

In
January 2000, the Company established an employee stock purchase plan (the "Purchase Plan"). Under the Purchase Plan, employees, through payroll deductions, are granted options
to purchase shares of common stock at a price no less than 85% of the fair market value of the common stock on the first or last trading day of each six month option period or the date the shares of
common stock are purchased. There initially were 2,000,000 shares of common stock available for purchase under the Purchase Plan. There currently are 1,590,130 shares of common stock available for
purchase under the Purchase Plan. On June 30, 2003, a total of 77,771 shares were issued under the plan at a prices ranging from $10.22 to $13.69 per share. On December 31, 2003, a total
of 62,943 shares were issued under the plan at prices ranging from $12.64 to $13.67 per share.

F-15

---

The following table summarizes the Company's activity for all of its stock option awards granted under the Plans and the 2000 Plan:

Number of Options

Range of
Exercise Price

Weighted
Average
Exercise
PriceBalance, December 31, 2000

4,575,855

$0.63-12.00

$
2.87Granted

359,653

7.50-22.10


8.23Exercised

(551,089
)
0.78- 7.50


2.34Canceled

(38,838
)
1.10-12.00


8.22Balance, December 31, 2001

4,345,581

0.63-22.10


3.34Granted

1,126,729

18.01-37.61


20.92Exercised

(566,163
)
1.68-37.61


4.93Canceled

(60,836
)
1.68-37.61


23.36Balance, December 31, 2002

4,845,311

0.63-37.61


6.99Granted

512,859

14.46-29.90


20.58Exercised

(379,248
)
2.04-29.90


5.23Canceled

(193,785
)
8.13-37.61


21.61Balance, December 31, 2003

4,785,137

$0.63-37.61

$
7.99


The
following table summarizes additional information about stock options outstanding as of December 31, 2003:

| |                  | Options Outstanding |           | Options Exercisable
| | ---------------- | ------------------- | --------- | -------------------
|
| | $0.63 to $0.86   |                     | 450,246   |                    
| | $1.21            |                     | 951,564   |                    
| | $1.85 to $3.12   |                     | 1,484,262 |                    
| | $6.94 to $12.00  |                     | 481,701   |                    
| | $14.46 to $20.05 |                     | 1,127,479 |                    
| | $21.97 to $37.61 |                     | 289,885   |                    
| |                  |                     |           |                    
| |                  | 4,785,137           |           | 5.42               
| |                  |                     |           |                    

10.   Basic Earnings Per Share and Diluted Earnings Per Share

Basic net income per common share is computed on the basis of the weighted-average number of common shares outstanding for the periods. Diluted net income per
common share includes the weighted-average effect of dilutive options outstanding during the periods. The weighted average number of shares issuable upon the exercise of outstanding stock options
assumes that the applicable proceeds from such exercises are used to acquire treasury shares at the average price of common stock during the periods.

F-16

---

Basic
and diluted earnings per share for 2001, 2002, and 2003, were determined as follows:

Year Ended December 31, 2001Net Income

Shares

Per ShareBasic EPS

$
13,067,111

24,257,564

$
0.54Effect of dilutive options




3,724,486


(0.07
)Diluted EPS

$
13,067,111

27,982,050

$
0.47


Year Ended December 31, 2002Net Income

Shares

Per ShareBasic EPS

$
22,253,565

26,381,131

$
0.84Effect of dilutive options




3,113,089


(0.09
)Diluted EPS

$
22,253,565

29,494,220

$
0.75


Year Ended December 31, 2003Net Income

Shares

Per ShareBasic EPS

$
17,240,777

27,085,532

$
0.64Effect of dilutive options




2,677,683


(0.06
)Diluted EPS

$
17,240,777

29,763,215

$
0.58


For
the years ended December 31, 2002 and 2003, 138,316 and 1,160,043 shares, respectively, attributable to outstanding stock options were excluded from the calculation of diluted
earnings per share because the effect was antidilutive. For 2001, shares were not antidilutive.

11.   Employee Benefit Plan

During 1985, the Company established a qualified profit sharing plan in accordance with Section 401(k) of the Internal Revenue Service Code. Under the
plan, the Company makes contributions out of profits of the Company based on an amount determined at the discretion of the Board of Directors. All employees, except interns and leased employees, are
eligible to participate in the plan. Eligibility is restricted for new employees, who are not permitted to participate until the first day of the first calendar quarter following date of hire. The
Company contributed $2.7 million, $4.1 million and $2.6 million for 2001, 2002 and 2003, respectively.

12.   Supplemental Retirement Program

In December 1998, the Company adopted a funded Executive Supplemental Retirement Program for a select group of management or highly compensated employees.
The program allows these employees to defer a portion of their salary and bonus. The Company has the option of adding additional amounts of deferred compensation at its sole discretion. The Company
contributions are vested after five years. Employee deferrals were $87,045, $109,029 and $241,586 in 2001, 2002 and 2003, respectively. The Company contributed $146,639, $164,083 to the program in
2001and 2002. There were no Company contributions to the program in 2003.

F-17

---

13.   Income Taxes

The provision for income taxes consisted of the following:

Years Ended December 31,2001

2002

2003Current:Federal

$
7,109,964

$
11,167,206

$
8,739,792State


1,300,217


2,231,229


1,803,124Total current


8,410,181


13,398,435


10,542,916Deferred:Federal


(55,314
)

344,882


(167,707
)State


(6,395
)

40,599


(19,742
)Total deferred


(61,709
)

385,481


(187,449
)Provision for income taxes

$
8,348,472

$
13,783,916

$
10,355,467


Deferred
tax assets were comprised of the following:

Years Ended December 31,2001

2002

2003Deferred tax assets (liabilities):Accrued vacation

$
566,659

$
640,924

$
738,074Allowance for doubtful accounts


69,456


2,593


44,809Property and equipment


(369,547
)

(766,167
)

(627,104
)Capital loss carryforward


8,021


7,948


Deferred rent


360,547


524,532


700,771Net operating loss carryforward from acquired company (expiring beginning in 2012)


857,607


755,112


655,175Deferred compensation


253,414


370,085


547,274Investment in building partnership





(186,794
)

(513,842
)Other





12,441


2,965Total deferred tax assets, net

$
1,746,157

$
1,360,674

$
1,548,122


A
reconciliation between the Company's statutory tax rate and the effective tax rate is as follows:

Years Ended December 31,2001

2002

2003Statutory federal rate

35
%
35
%
35
%State income taxes, net of federal benefits

4
%
4
%
4
%Federal tax-exempt interest income



(1
%)
(1
%)Effective tax rate

39
%
38
%
38
%


14.   Commitments and Contingencies

During 2001, the Company negotiated an equity position in a limited liability company (the "LLC") that constructed a build-to-suit office
building. The Company has contributed cash of $4,500,000 to the LLC and has a 48% ownership interest in the LLC. The Company also entered into a sixteen-year lease agreement for the
building that began on December 1, 2002 and is the primary occupant.

F-18

---

Due
to the equity involvement in LLC, the Company was considered to be the owner (for accounting purposes) of the property during the construction period in accordance with Emerging
Issues Task Force (EITF) Issue No. 97-10,The Effect of Lessee Involvement in Asset Construction. This is the case even though the
Company is not obligated to guarantee the non-recourse mortgage obligation, nor was it involved in the management of the LLC. Accordingly, through December 1, 2002, the Company
recorded total construction costs of $23.0 million with an offsetting long-term lease obligation. Due to the fact that the Company was considered the owner of the building during
the construction period, then effectively a sale and leaseback of the building occurs when construction was complete and the lease term began. As a result of the Company's continued involvement in the
LLC, the Company is unable to use sale-leaseback accounting under FAS 98,Accounting for Leases,and the building, and offsetting
long-term lease obligation, must remain on the Company's financial records.

EITF
97-10 specifically excludes land acquisition costs from total project costs; therefore, the value of the land was not recorded on the Company's accounting records during
the construction phase. Therefore, for consistency, the land is also excluded from the failed sales-leaseback and will require that the lease payments be bifurcated between the land and the building.
The land portion of the rent is treated as an operating lease. The lease payments were allocated between the land and building based upon their relative fair values. The fair value of the land was
determined through a third party appraisal and the fair value of the building was determined based upon total construction costs. The building portion of the lease payment is recast as interest and
principal payments on the lease obligation. The building and lease obligation are being amortized to fair value at the end of the lease term, such that if the lease is not extended there will be no
gain or loss upon lease termination.

The
future minimum lease payments under operating leases includes the land portion of the rent associated with the building, while the remaining balance of the lease payments, and the
associated interest, have been included in the capital lease payment table. For purposes of the capital lease payments, payments through December 31, 2018 have been included, at which time the
depreciated value of the building and the remaining long-term lease obligation will be equivalent.

The
Company leases office facilities and equipment under non-cancelable capital lease agreements, which expire in various years through 2018. The economic substance of such
transactions is that the Company is acquiring assets using lease financing. The future minimum lease payments under capital leases as of December 31, 2003, are as follows:

Years Ended December 31,2004

$
2,470,7512005


2,557,2272006


2,646,7302007


2,739,3652008


2,835,244Thereafter through December 31, 2018


34,425,501Total minimum lease payments


47,674,818Less: amount representing interest


(35,887,235
)Present value of net minimum lease payments


11,787,583Less: current portion


Residual value


11,274,657Long-term portion

$
23,062,240


At
December 31, 2003, building, leasehold improvements and equipment under capital leases of $23,001,600, net of accumulated depreciation of $1,101,931, is included with property
and equipment.

F-19

---

The
Company leases office facilities and equipment under non-cancelable operating agreements, which expire in various years through 2018. Future minimum lease payments under
operating leases that have non-cancelable lease terms in excess of one year as of December 31, 2003 are as follows:

Years Ended December 31,2004

$
7,127,7792005


6,980,3622006


6,933,0252007


6,015,9382008


5,950,463Thereafter


42,075,833$
75,083,400


The
total rental expense under operating leases was $5,615,636, $7,389,678 and $7,482,054 for the years ended December 31, 2001, 2002 and 2003, respectively.

During
2001 and 2002, the Company subleased space in one of its facilities. Sublease rental income was $315,658 and $324,736 for the years ended December 31, 2001 and 2002,
respectively. The Company had no sublease income for 2003.

In
the ordinary course of business, the Company may be party to various legal proceedings. In the opinion of management, the Company's liability, if any, in all pending litigation or
other legal proceedings will not have a material effect upon the financial condition, results of operations or liquidity of the Company.

On
and after March 18, 2003, several purported class action complaints were filed against the Company and certain of its officers in the United States District Court for the
Eastern District of Virginia. The
complaints allege that between October 22, 2002 and March 14, 2003, the defendants made, or were aware of, false and misleading statements which had the effect of inflating the market
price of our stock, in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The complaints were consolidated into a single action on June 13, 2003. The complaint was
dismissed by the Court on January 28, 2004. Plaintiffs have filed notice of appeal. In addition, a stockholder's legal counsel sent a letter of demand that the Board of Directors investigate
the same charges addressed in the class action suit. The Board concluded after its investigation and based on its business judgement to reject the demand letter.

On
September 11, 2003, the Company instituted a lawsuit in the United States District Court of Minnesota against NCS Pearson, Inc. for improperly withholding the payment of funds
owed to the Company under a subcontract. The Company is seeking recovery of $6.3 million in unpaid receivables plus interest and costs. The proceedings are moving according to schedule.

15.   Recent Accounting Pronouncements

In November 2002, the FASB's Emerging Issues Task Force, or EITF, finalized EITF Issue 00-21,Revenue Arrangements with
Multiple Deliverables. EITF 00-21 addresses how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting. It
also addresses how arrangement consideration should be measured and allocated to the separate units of accounting in an arrangement. EITF 00-21 does not apply to deliverables in
arrangements to the extent the accounting for such deliverables are within the scope of other existing higher-level authoritative accounting literature. The Company adopted the provisions of EITF
00-21 for new contracts entered into on or after July 1, 2003 with no material impact on its financial position, results of operations or cash flows, nor would there have been a
material impact on prior years. On December 17, 2003, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 104 ("SAB 104"),Revenue

F-20

---

Recognition, which supercedes SAB 101,Revenue Recognition in Financial Statements. SAB 104's primary purpose is to rescind
accounting guidance contained in SAB 101 related to multiple revenue arrangements, superceded as a result of the issuance of EITF 00-21,Accounting for Revenue
Arrangements with Multiple Deliverables. As the Company had already adopted EITF 00-21, the change has no effect on the Company's financial position.

In
November 2002, FASB Interpretation No. 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 FASB Interpretation No. 34, (FIN 45) was issued. FIN 45
clarifies the requirements of SFAS No. 5,Accounting for Contingencies, relating to guarantors' accounting for, and disclosure of, the issuance
of certain types of guarantees. The disclosure provisions of FIN 45 are applicable to interim or annual periods that ended after December 15, 2002, and did not have an impact on the
September 30, 2003 financial statements. The provisions for initial recognition and measurement
under FIN 45 are effective on a prospective basis for guarantees that are issued or modified after December 31, 2002. The initial recognition and measurement provisions under FIN 45 did not
have any impact on the Company's financial statements.

On
January 17, 2003, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 46, (FIN 46),Consolidation of Variable
Interest Entities. The provisions will be the guidance that determines (1) whether consolidation is required under the "controlling financial interest" model of
Accounting Research Bulletin No. 51 (ARB 51),Consolidated Financial Statements(or other existing authoritative guidance) or, alternatively,
(2) whether the variable interest model under FIN 46 should be used to account for existing and new entities. At this time, the Company does not have any entities that would be covered under
FIN 46.

F-21

---

16.   Unaudited Selected Quarterly Financial Information

|2002                                                          |  | First
Quarter |        | Second
Quarter |   | Third
Quarter |  | Fourth
Quarter
|------------------------------------------------------------- |  | ------------- | ------ | -------------- | - | ------------- |  | --------------
|
|Revenues                                                      |  | $             | 38,231 |                | $ | 42,761        |  | $             
|                                                              |  |               |        |                |   |               |  |               
|Operating income                                              |  | $             | 6,135  |                | $ | 7,485         |  | $             
|                                                              |  |               |        |                |   |               |  |               
|Net income                                                    |  | $             | 4,046  |                | $ | 4,845         |  | $             
|                                                              |  |               |        |                |   |               |  |               
|Earnings per share:                                           |  |               |        |                |   |               |  |               
|Basic                                                         |  | $             | 0.15   |                | $ | 0.18          |  | $             
|                                                              |  |               |        |                |   |               |  |               
|Diluted                                                       |  | $             | 0.14   |                | $ | 0.16          |  | $             
|                                                              |  |               |        |                |   |               |  |               
|Weighted average shares used in computing earnings per share: |  |               |        |                |   |               |  |               
|Basic                                                         |  |               | 26,166 |                |   | 26,261        |  |               
|                                                              |  |               |        |                |   |               |  |               
|Diluted                                                       |  |               | 29,879 |                |   | 29,787        |  |               
|                                                              |  |               |        |                |   |               |  |               
|2003                                                          |  |               |        |                |   |               |  |               
|Revenues                                                      |  | $             | 43,466 |                | $ | 44,265        |  | $             
|                                                              |  |               |        |                |   |               |  |               
|Operating income                                              |  | $             | 5,676  |                | $ | 7,633         |  | $             
|                                                              |  |               |        |                |   |               |  |               
|Net income                                                    |  | $             | 3,491  |                | $ | 4,638         |  | $             
|                                                              |  |               |        |                |   |               |  |               
|Earnings per share:                                           |  |               |        |                |   |               |  |               
|Basic                                                         |  | $             | 0.13   |                | $ | 0.17          |  | $             
|                                                              |  |               |        |                |   |               |  |               
|Diluted                                                       |  | $             | 0.12   |                | $ | 0.16          |  | $             
|                                                              |  |               |        |                |   |               |  |               
|Weighted average shares used in computing earnings per share: |  |               |        |                |   |               |  |               
|Basic                                                         |  |               | 26,935 |                |   | 27,047        |  |               
|                                                              |  |               |        |                |   |               |  |               
|Diluted                                                       |  |               | 29,925 |                |   | 29,491        |  |               
|                                                              |  |               |        |                |   |               |  |               

F-22

---



Report of Independent Auditors on  Financial Statement Schedule

To
the Board of Directors and Stockholders of
PEC Solutions, Inc.

Our
audits of the consolidated financial statements referred to in our report dated February 10, 2004, appearing in this Annual Report on Form 10-K, also included an audit of
the financial statement schedule appearing on page S-2. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when
read in conjunction with the related consolidated financial statements.

/s/
Pricewaterhouse Coopers LLP

McLean,
Virginia
February 10, 2004

S-1

---



PEC Solutions, Inc.  SCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS

|DESCRIPTION                  |                                 | BALANCE AT
START OF
PERIOD |   | CHARGED TO
COSTS
AND EXPENSES |  | CHARGED/
CREDITED TO
OTHER ACCOUNTS |   | DEDUCTIONS |   | BALANCE AT
END OF
PERIOD
|---------------------------- | ------------------------------- | -------------------------- | - | ----------------------------- |  | ----------------------------------- | - | ---------- | - | ------------------------
|YEAR ENDED
DECEMBER 31, 2001 |                                 |                            |   |                               |  |                                     |   |            |   |                         
|                             | Allowance for doubtful accounts |                            | $ | 177,879                       |  | $                                   |  |            | $ | 146,867                 
|                             |                                 |                            |   |                               |  |                                     |   |            |   |                         
|YEAR ENDED
DECEMBER 31, 2002 |                                 |                            |   |                               |  |                                     |   |            |   |                         
|                             | Allowance for doubtful accounts |                            | $ | 324,746                       |  | $                                   |  |            | $ |                        
|                             |                                 |                            |   |                               |  |                                     |   |            |   |                         
|YEAR ENDED
DECEMBER 31, 2003 |                                 |                            |   |                               |  |                                     |   |            |   |                         
|                             | Allowance for doubtful accounts |                            | $ | 322,042                       |  | $                                   |  |            | $ |                        
|                             |                                 |                            |   |                               |  |                                     |   |            |   |                         

---

S-2

---