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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, 2002
|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. ý

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

Aggregate
market value of the voting stock held by non-affiliates of the registrant as of March 28, 2003 was: $145,869,433 based on the closing sale price on the
Nasdaq National Market on that date.

Number
of shares of Common Stock outstanding as of March 28, 2003 was: 27,030,780 shares.

Documents Incorporated By Reference:

Part IIIProxy Statement for the 2003 Annual Meeting of Stockholders on May 21, 2003. 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, 2002.

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FORM 10-K  INDEX

|         |  |                                                                                       |  | Page
|-------- |  | ------------------------------------------------------------------------------------- |  | ----
|PART I  
|ITEM 1   |  | Business                                                                              |  | 2   
|ITEM 2   |  | Properties                                                                            |  | 16  
|ITEM 3   |  | Legal Proceedings                                                                     |  | 16  
|ITEM 4   |  | Submission Of Matters To a Vote of Security Holders                                   |  | 16  
|PART II 
|ITEM 5   |  | Market for the Company's Common Equity and Related Stockholder Matters                |  | 17  
|ITEM 6   |  | Selected Financial Data                                                               |  | 18  
|ITEM 7   |  | Management's Discussion and Analysis of Financial Condition and Results of Operations |  | 18  
|ITEM 7A  |  | Quantitative and Qualitative Disclosures about Market Risk                            |  | 25  
|ITEM 8   |  | Financial Statements and Supplementary Data                                           |  | 25  
|ITEM 9   |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure  |  | 25  
|PART III
|ITEM 10  |  | Directors and Executive Officers of the Company                                       |  | 26  
|ITEM 11  |  | Executive Compensation                                                                |  | 26  
|ITEM 12  |  | Security Ownership of Certain Beneficial Owners and Management                        |  | 26  
|ITEM 13  |  | Certain Relationships and Related Transactions                                        |  | 26  
|ITEM 14  |  | Controls and Procedures                                                               |  | 26  
|PART IV 
|ITEM 15  |  | Exhibits, Financial Statement Schedules, and Reports on Form 8-K                      |  |     
|         |  | Signatures                                                                            |  | 27  

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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 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 EDS, the prime contractor for the Navy Marine Corps Intranet ("NMCI") program,
the Drug Enforcement Administration, 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 1998, we have provided more than $454 million of services in the government market and have increased revenues at approximately a 45%
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 Government's 2003 approved budget allocates
$52 billion for information technology spending, the largest increase in history. According to INPUT, a research firm that tracks Federal government spending trends, the government is the
fastest growing vertical for technology spending. INPUT projects the Federal government will spend $28 billion on information technology services by 2007, up from $16.4 billion in 2003.
This represents a 5-year compound annual growth rate of 17.6 percent.

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

Recent
changes 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

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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.

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 and homeland defense. The President's 2003 budget provides the largest increase in Federal information technology spending in history, more than doubling last
year's growth rate. Much of the spending will focus 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 law enforcement, intelligence and defense, could experience strong increases in demand as the Federal market moves forward.

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 eGovernment 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 eGovernment 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 in emerging technologies and web-enabling tools from vendors such as Microsoft,
Oracle, Cisco, IBM/Lotus, IBM/Tivoli and Entrust.

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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 eGovernment 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 eGovernment 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 also intend 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 intend 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 intend to
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 eGovernment solutions. We
also intend 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 intend 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 will maintain an active internal communications program to promote a team culture and foster high employee morale.
We will 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 intend to leverage our domain expertise and deep technology skills for providing services to state and local governments. We also intend 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 plan 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 eGovernment 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

We were engaged as a subcontractor to work for an undisclosed federal government client (non-releasable per contractual restrictions) for a biometric
identification system, representing 13 percent of 2002 revenue. The program was unexpectedly curtailed late in 2002. We expect activities related to this program or similar programs to be
undertaken again in 2003 for which we believe we have a unique solution that should result in our resumption of this program. The Navy Marine Corps Intranet (NMCI) program was our leading source of
revenue for us in 2002, representing 16 percent of total revenues. We are a subcontractor to EDS for the NMCI program and this program will continue in 2003.

Sales and Marketing

Our marketing efforts are focused on creating awareness of opportunities in eGovernment 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, 2002, we had 1,340 personnel. Of our total personnel, 1,217 were consulting and service delivery professionals, and 123 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 28, 2003 comparative numbers were 1,321, 1,197 and 124, 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 $60 million dollars. 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 civilian budget normally is signed before the end of the
calendar year. The 2003 civilian budget was not signed until the end of February 2003, 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 could decline substantially, and our business could be seriously harmed. During 2002, contracts with the federal government and contracts with
prime contractors of the federal government accounted for approximately 97% of our revenues. During that same period, our ten largest clients, all agencies of the federal government, generated
approximately 66% of our revenues, with the top five clients accounting for 48% 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.

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 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.

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

We derived approximately 40% of our revenues during 2002 through our relationships with prime contractors, which, in turn, have contractual relationships with
end-clients. One of our prime contractors, EDS (NMCI), accounted for 16% of our revenues during 2002. 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 21% of our revenues in 2002 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 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

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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. We have key man life insurance policies that cover Messrs. Karlgaard and Rice up to $1 million and
Mr. Harbitter up to $500,000. 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. 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

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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.

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 won't 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.

13

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A war with 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, a war could change the federal government's spending 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 eGovernment Solutions Market

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

Competition in the market for eGovernment 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 eGovernment 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.

14

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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 beneficially own 54.5% of our stock and could control matters submitted to stockholders for their approval

Our directors and executive officers beneficially own, in the aggregate, 54.5% 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:



15

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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 PEC Solutions from engaging in a business
combination with an interested stockholder for a period of three years after the person becomes an interested stockholder.

Item 2. Properties

Our operations occupy approximately 363,000 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, Trevose, Pennsylvania and Honolulu, Hawaii. 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 14 to 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, VA. Based on
contracts, it may be necessary in the future to lease additional office space in other cities located in the United States.

Item 3. Legal Proceedings

On March 18, 2003, a purported class action complaint was filed against us and certain of our officers in the United States District Court for the Eastern
District of Virginia. The complaint alleges 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 complaint does not specify the amount of damages sought. We believe
that the plaintiffs' claims are without merit and we intend to defend the case vigorously.

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

None

16

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PART II

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

At March 18, 2003, we had approximately 8,190 holders of record of our common stock. We had 27,029,465 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

LowFiscal 2002 Quarter Ended:December 31

$
38.250

$
21.940September 30

$
27.690

$
17.050June 30

$
28.690

$
18.750March 31

$
44.440

$
22.050Fiscal 2001 Quarter Ended:December 31

$
40.240

$
15.940September 30

$
27.450

$
12.500June 30

$
25.500

$
9.375March 31

$
15.375

$
7.625


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.

The
primary purposes of this offering was to create a public market for our common stock, to improve the incentive mechanism for our professionals through stock options, to obtain
additional equity capital and to facilitate future access to public markets. We expect to use the net proceeds from this offering for general corporate purposes, including working capital. We may also
use a portion of the net proceeds to acquire businesses that are complementary to ours.

On
August 28, 2000, we acquired all of the outstanding capital stock of Viking Technology, Inc. ("Viking") for $2 million cash plus the assumption of debt in a
business combination accounted for as a purchase. Viking is a provider of integrated software and advanced technology solutions for state and local law enforcement, fire and emergency medical service
agencies. On November 20, 2001, we acquired all of the outstanding capital stock of Troy Systems, Inc. ("Troy") for $15.3 million cash plus common stock valued at
$3.0 million (103,065 shares). Troy derives revenue from system development, networking, engineering, integration services, and information systems security and its primary customer is the
federal government. On June 14, 2002, we 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. Vector was a provider of technology development and engineering services to the federal government.

Management
will have broad discretion in the allocation of the net proceeds from the sale of common stock. We have no current plans, agreements or commitments for, and are not currently
engaged in any negotiations with respect to, any other acquisition transaction. Pending their use, the proceeds of this offering have been invested in investment grade, interest-bearing securities.

17

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

Recent Sales of Unregistered Securities

None

Item 6. Selected Financial Data

Our selected consolidated financial data for the years ended December 31, 2002, 2001, 2000, 1999 and 1998 have been derived from our audited consolidated
financial statements. This information should be read in conjunction with the 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 the December 31, 2002 consolidated
financial statements.

|                                                                    |         | 1998 |        | 1999 |   | 2000   |      | 2001 |        | 2002
|------------------------------------------------------------------- | ------- | ---- | ------ | ---- | - | ------ | ---- | ---- | ------ | ----
|
|Operating Results:                                                  |         |      |        |      |   |        |      |      |        |     
|Revenues                                                            |         | $    | 41,457 |      | $ | 53,202 |      | $    | 68,305 |     
|Gross profit (a)                                                    |         |      | 17,942 |      |   | 22,793 |      |      | 30,996 |     
|Operating income                                                    |         |      | 6,891  |      |   | 8,975  |      |      | 10,211 |     
|Net income                                                          |         |      | 4,455  |      |   | 5,639  |      |      | 7,272  |     
|Earnings per share                                                  |         |      |        |      |   |        |      |      |        |     
|                                                                    | Basic   |      |        | 0.26 |   |        | 0.33 |      |        | 0.34
|                                                                    | Diluted |      |        | 0.20 |   |        | 0.24 |      |        | 0.30
|Financial Position:                                                 |         |      |        |      |   |        |      |      |        |     
|Cash and cash equivalents                                           |         | $    | 5,367  |      | $ | 7,981  |      | $    | 14,656 |     
|Working capital                                                     |         |      | 9,309  |      |   | 13,311 |      |      | 43,182 |     
|Total assets                                                        |         |      | 18,271 |      |   | 24,400 |      |      | 61,400 |     
|Long-term obligations (including long-term debt and capital leases) |         |      |       |      |   |       |      |      |       |     
|Total stockholders' equity                                          |         |      | 10,677 |      |   | 15,283 |      |      | 50,700 |     
|Cash dividends declared per common share                            |         | $    | 0.020  |      | $ | 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,

18

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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 our registration statement on
Form S-3, (SEC File No. 333-62042). 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".

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 2002, revenues from these contract types were approximately 62%, 21% and 17%, respectively, of total revenues. We
expect this approximate mix of business to continue in 2003. 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. 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. We have historically recovered all of our costs on cost-reimbursable contracts, which means we have lower risk
and our margins are lower on these contracts.

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 86% of our revenues in 2002, approximately 71% of our revenues in 2001 and approximately 92% of our revenues in 2000. We manage our client development
efforts through each of our strategic service groups, each having specific client responsibility and focus. As of December 31, 2002, we had 1,340 personnel and on March 21, 2003 we had
1,320 personnel.

In
2002, we derived approximately 40% 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
2002 we had two customers that each accounted for more than 10% of our total revenue. EDS (NMCI) accounted for 16% of the revenue and our biometric identification system through a
subcontract with an undisclosed federal agency (non-releasable per contractual restrictions) accounted for 13%.

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

19

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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.

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 is 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 derives revenue from system development, networking, engineering, integration services, and information systems security and its primary customer is 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 measurements that are most affected by management's estimates of future events are:



20

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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 31,2000

2001

2002Statement of Operations Data:Revenues

100.0
%
100.0
%
100.0
%Direct costs

54.6

55.3

58.9Gross profit (a)

45.4

44.7

41.1Operating costs and expenses:General and administrative expenses

26.0

22.3

18.6Sales and marketing expenses

4.1

4.0

3.0Amortization of goodwill and intangibles

0.4

0.7

0.4Total operating costs and expenses

30.5

27.0

22.0Operating income

14.9

17.7

19.1Other income, net

2.8

1.9

0.7Income before income taxes

17.7

19.6

19.8Provision for income taxes

7.1

7.6

7.6Net income

10.6
%
12.0
%
12.2
%


---



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. Approximately 47% of the increase was related to the Troy and Vector acquisitions. Services to new clients represent
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.

21

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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
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.

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

2001 Compared with 2000

Revenues.Revenues increased 59.9% to $109.2 million for 2001 from $68.3 million for 2000. The increase in
revenue primarily reflects increases in the amount of services to existing clients and the addition of the EDS (NMCI) subcontract which accounted for 26.0% of revenue.

Direct Costs.Direct costs increased 61.9% to $60.4 million for 2001 from $37.3 million for 2000. The increase
was due primarily to an increase in project personnel to 1,140 as of December 31, 2001, as compared to 513 as of December 31, 2000. As a service provider, our direct costs increase in
conjunction with our increased revenues. Direct costs increased as a percentage of revenues to 55.3%
for 2001, from 54.6% for 2000. The decrease was principally related to normal fluctuations in labor and other direct costs.

Gross Profit.Gross profit increased 57.4% to $48.8 million for 2001 from $31.0 million for 2000. Gross profit
as a percentage of revenues decreased to 44.7% for 2001 from 45.4% for 2000 because direct costs grew at a faster rate than revenues. This decrease was principally related to normal fluctuations in
labor and other direct costs.

General and Administrative Expenses.General and administrative expenses increased 37.5% to $24.4 million for 2001
from $17.7 million for 2000. 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 2001 due to the opening of our new offices in Fairfax am Norfolk, Virginia, San Antonio, Texas, San Diego, California and Honolulu, Hawaii. Our total general and
administrative headcount increased to 134 employees as of December 31, 2001, compared to 75 employees as of December 31, 2000, consistent with our plans.

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Sales and Marketing.Sales and marketing expenses increased 55.4% to $4.4 million in 2001 from $2.8 million in
2000. This increase was due to an increase in our marketing efforts.

Amortization of Goodwill.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 compared with $0.2 million in 2000.

Amortization of Intangibles.For 2001, we incurred $0.1 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 88.6% to $19.3 million for 2001 from $10.2 million for 2000.

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. Net cash provided by operating activities was $12.6 million for the year ended December 31, 2002. Cash provided by operating activities was primarily from net income, adjusted
downward for increased working capital levels, which were principally caused by increases in accounts receivable.

Net
cash used by investing activities was $26.4 million for 2002. During 2002, we purchased $2.9 million of property and equipment and incurred $0.2 million for
capitalized software development costs. We had $4.4 million of net purchases of short-term investments and $11.6 million of net purchases of long-term
investments. We also purchased the assets of Vector for $5.7 million in cash plus approximately $0.2 million in acquisition costs. At December 31, 2002, funds of
$0.2 million were held back in the transaction, of which $0.2 million of escrow funds related to the acquisition were included in other current assets with a corresponding liability in
other current liabilities.

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

Due
to the equity involvement in LLC, we were 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 we are not
obligated to guarantee the non-recourse mortgage obligation, nor were we involved in the management of the LLC. Accordingly, through December 1, 2002, we recorded total construction
costs totaling $23.0 million with an offsetting long-term lease obligation. Due to the fact that we were considered the owner of the building during the construction period, then
effectively a sale and leaseback of the building occurs when construction is complete and the lease term begins. As a result of our continued involvement in the LLC, we are unable to use
sale-leaseback accounting under FAS 98,Accounting for Leases,and the building, and offsetting long-term lease obligation, must
remain on our financial records.

EITF
97-10 specifically excludes land acquisition costs from total project costs; therefore, the value of the land was not recorded on PEC's accounting records during the
construction phase. Therefore, for consistency, since we are unable to use sale-leaseback accounting and land is excluded from this transaction, we are required to bifurcate the lease payments 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

23

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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.

Net
cash provided by financing activities was $4.6 million for 2002. During 2002, we sold $1.9 million of common stock through the exercise of employee stock options. We
also sold $2.7 million of common stock through the employee stock purchase plan.

Although
dividends have been paid prior to 2000, we expect to retain future earnings, if any, for use in the operation and expansion of our business and do not anticipate paying any
further cash dividends in the foreseeable future. We believe that our current cash position is adequate for our short-term and long-term working capital and capital expenditure
needs.

We
maintain a $6.0 million line of credit with Bank of America, which bears interest at the one-month LIBOR rate plus 250 basis points per annum and expires on
April 30, 2003, and is in the process of being renewed. As of December 31, 2002, we had no borrowings outstanding under the line of credit. We did have outstanding $2.98 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. By December 31, 2002, 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, 2002, and the effect such obligations are expected to have on our liquidity
and cash flow in future periods (in thousands):

Total

Less Than
One Year

One to Three
Years

After Three
YearsOperating leases

$
78,334,031

$
6,753,785

$
13,084,105

$
58,496,141Capital leases


50,128,813


2,434,216


5,027,978


42,666,619Total

$
128,462,844

$
9,188,001

$
18,112,083

$
101,162,760


As
described above, we have entered into a lease for a build-to-suit facility, which was occupied December 1, 2002, and the lease term will expire
December 31, 2018.

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 have already adopted the provisions of EITF 00-21 and the adoption has not
had a material impact on our financial position, results of operations, or cash flows.

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 methods of transition for a voluntary change to the fair market value based method of accounting for stock-based compensation. We do 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-

24

---

based employee compensation and the effect of the method used on reported results. These amended disclosure requirements are applicable for financial statements issued for interim periods beginning
after December 15, 2002.

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 December 31, 2002 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. Management believes that the initial recognition and measurement provisions under
FIN 45 will not have a material impact on its financial statements.

On
January 17, 2003, the Financial Accounting Standards Board (FASB or the "Board") 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, the Company does not have any entities that qualify 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.

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

25

---



PART III

Item 10. Directors and Executive Officers of the Registrant

The section entitled "Election of Directors" and "Executive Officers" appearing in the Registrant's proxy statement for the annual meeting of stockholders to be
held on May 21, 2003, sets forth certain information with respect to the directors and executive officers of the Registrant and are incorporated herein by reference.

Item 11. Executive Compensation

The section entitled "Executive Compensation" appearing in the Registrant's proxy statement for the annual meeting of stockholders to be held on May 21,
2003, sets forth certain information with respect to the compensation of management of the Registrant and is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management

The section entitled "Stock Ownership" appearing in the Registrant's proxy statement for the annual meeting of stockholders to be held on May 21, 2003,
sets forth information concerning shares of our common stock beneficially owned by management and others and is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions

The section entitled "Certain Relationships and Related Transactions" appearing in the Registrant's proxy statement for the annual meeting of stockholders to be
held on May 21, 2003, sets forth
information concerning certain relationships and transactions with the Company and others and is incorporated herein by reference.

Item 14. Controls and Procedures

Our management under the supervision 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 within 90 days of the filing of this report. Based on that evaluation, Messers. Karlgaard and Lloyd concluded that 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 this
evaluation.

26

---

PART IV

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

|   |  |                                                                                                                                                                      |  | Page
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|1. |  | Consolidated Financial Statements of PEC Solutions, Inc. and Subsidiaries                                                                                            |  |     
|a. |  | Report of Independent Accountants                                                                                                                                    |  | F-1 
|b. |  | Consolidated Balance Sheets as of December 31, 2001 and December 31, 2002                                                                                            |  | F-2 
|c. |  | Consolidated Statements of Income for the years ended December 31, 2000, 2001 and 2002                                                                               |  | F-3 
|d. |  | Consolidated Statements of Cash Flows for the years ended December 31, 2000, 2001 and 2002                                                                           |  | F-4 
|e. |  | Consolidated Statements of Stockholders' Equity and Comprehensive Income for the years ended December 31, 2000, 2001 and 2002                                        |  | F-5 
|f. |  | Notes to Consolidated Financial Statements                                                                                                                           |  | F-6 
|2. |  | Supplemental Schedule Relating to the Consolidated Financial Statements of PEC Solutions, Inc. and Subsidiaries for the years ended December 31, 2000, 2001 and 2002 |  |     
|a. |  | Report of Independent Accounts                                                                                                                                       |  | S-1 
|b. |  | Schedule II: Valuation and Qualifying Accounts                                                                                                                       |  | S-2 

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.

27

---

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        
|10.5*          |  | Employment Agreement between PEC Solutions, Inc. and Paul G. Rice, dated January 1, 2000               
|10.6*          |  | Employment Agreement between PEC Solutions, Inc. and Alan H. Harbitter, dated January 1, 2000          
|10.7*          |  | Employment Agreement between PEC Solutions, Inc. and Stuart R. Lloyd, dated December 31, 1998          
|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                                                       
|               |  |                                                                                                        

28

---

|10.22*** |  | Bank of America Promissory Note                                        
|-------- |  | -----------------------------------------------------------------------
|10.23*** |  | Bank of America Revolving Note                                         
|21.1**** |  | Subsidiaries of PEC Solutions, Inc.                                    
|23.1     |  | Consent of PricewaterhouseCoopers LLP                                  
|99.1     |  | Certification of Principal Executive Officer Pursuant to 18 U.S.C. 1350
|99.2     |  | Certification of Principal Financial Officer Pursuant to 18 U.S.C. 1350

---

29

---





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 28, 2003
|/s/STUART R. LLOYDStuart R. Lloyd               |  | Senior Vice President and Chief Financial Officer and Director (Principal Financial and Accounting Officer) |  | March 28, 2003
|/s/PAUL G. RICEPaul G. Rice                     |  | Chief Operating Officer and Director                                                                        |  | March 28, 2003
|/s/ALAN H. HARBITTERAlan H. Harbitter, Ph. D.   |  | Chief Technology Officer and Director                                                                       |  | March 28, 2003
|/s/FRANK J. CARRFrank J. Carr                   |  | Director                                                                                                    |  | March 28, 2003
|/s/R. JERRY GROSSMANR. Jerry Grossman           |  | Director                                                                                                    |  | March 28, 2003
|/s/ZIMRI C. PUTNEYZimri C. Putney               |  | Director                                                                                                    |  | March 28, 2003
|/s/JOHN W. MELCHNERJohn W. Melchner             |  | Director                                                                                                    |  | March 28, 2003
|/s/B. GARY DANDOB. Gary Dando                   |  | Director                                                                                                    |  | March 28, 2003

30

---

Certifications

I, David C. Karlgaard, certify that:





|March 28, 2003 |  | By: |  | Name: David C. Karlgaard
Title: President, Chief Executive Officer and Chairman (Principal Executive Officer)
|-------------- |  | --- |  | -------------------------------------------------------------------------------------------------------------

---

I, Stuart R. Lloyd, certify that:





|March 28, 2003 |  | By: |  | Name: Stuart R. Lloyd
Title: Chief Financial Officer, Senior Vice President and Director (Principal Financial and Accounting Officer)
|-------------- |  | --- |  | -------------------------------------------------------------------------------------------------------------------------------------

---



Report of Independent Accountants

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 at December 31, 2001 and 2002, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2002, 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.

As
discussed in Notes 1 and 4 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standard No. 142, "Goodwill and Other Intangible Assets,"
effective January 1, 2002.

/s/
PricewaterhouseCoopers LLP

February 11,
2003, except for the last paragraphs of Notes 5 
and 16, as to which the date is March 19, 2003
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                      
|Property and equipment, net               |                                                                                                                                    |                    | 6,496,610                                 
|Investments                               |                                                                                                                                    |                    | 13,761,908                                
|Goodwill                                  |                                                                                                                                    |                    | 12,565,363                                
|Intangibles, net                          |                                                                                                                                    |                    | 2,968,981                                 
|Other assets                              |                                                                                                                                    |                    | 3,816,506                                 
|                                          |                                                                                                                                    |                    |                                           
|                                          |                                                                                                                                    |                    | Total assets                              
|                                          |                                                                                                                                    |                    |                                           
|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                 
|                                          |                                                                                                                                    |                    |                                           
|Supplemental retirement program liability |                                                                                                                                    |                    | 949,087                                   
|Deferred rent                             |                                                                                                                                    |                    | 923,378                                   
|Long-term lease obligations               |                                                                                                                                    |                    | 2,883,164                                 
|Other long-term liabilities               |                                                                                                                                    |                    | 53,613                                    
|                                          |                                                                                                                                    |                    |                                           
|                                          |                                                                                                                                    |                    | Total long-term liabilities               
|                                          |                                                                                                                                    |                    |                                           
|                                          |                                                                                                                                    |                    | Total liabilities                         
|                                          |                                                                                                                                    |                    |                                           
|Commitments and contingencies             |                                                                                                                                    |                    |                                           
|Stockholders' equity:                     |                                                                                                                                    |                    |                                           
|                                          | Undesignated capital stock, 10,000,000 shares authorized                                                                           |                    |                                           
|                                          | Common stock, $0.01 par value, 75,000,000 shares authorized, 26,109,649 and 26,792,565 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                      |                                      | $                      
|                              |                                      |                        
|Operating costs and expenses: |                                      |                        
|                              | Direct costs                         |                        
|                              | General and administrative expenses  |                        
|                              | Sales and marketing expenses         |                        
|                              | Goodwill and intangible amortization |                        
|                              |                                      |                        
|                              |                                      |                        
|                              |                                      |                        
|                              | Operating income                     |                        
|Other income, net             |                                      |                        
|                              |                                      |                        
|                              | Income before income taxes           |                        
|Provision for income taxes    |                                      |                        
|                              |                                      |                        
|                              | 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                                                                                        |                                   | $                                                                     
|                                                 | Adjustments to reconcile net income to net cash provided by operating activities:                 |                                   |                                                                       
|                                                 |                                                                                                   | Depreciation and amortization     |                                                                       
|                                                 |                                                                                                   | Amortization of goodwill          |                                                                       
|                                                 |                                                                                                   | Amortization of intangibles       |                                                                       
|                                                 |                                                                                                   | Write-off of capitalized software |                                                                       
|                                                 |                                                                                                   | Deferred rent                     |                                                                       
|                                                 |                                                                                                   | Deferred income taxes             |                                                                       
|                                                 |                                                                                                   | Loss from investment in building  |                                                                       
|                                                 |                                                                                                   | Other                             |                                                                       
|                                                 |                                                                                                   |                                   | Changes in operating assets and liabilities, excluding those acquired:
|                                                 |                                                                                                   |                                   |                                                                       
|                                                 |                                                                                                   |                                   |                                                                       
|                                                 |                                                                                                   |                                   |                                                                       
|                                                 |                                                                                                   |                                   |                                                                       
|                                                 |                                                                                                   |                                   |                                                                       
|                                                 |                                                                                                   |                                   |                                                                       
|                                                 |                                                                                                   |                                   |                                                                       
|                                                 |                                                                                                   |                                   |                                                                       
|                                                 |                                                                                                   |                                   |                                                                       
|                                                 |                                                                                                   |                                   |                                                                       
|                                                 |                                                                                                   |                                   |                                                                       
|                                                 |                                                                                                   |                                   |                                                                       
|                                                 |                                                                                                   |                                   |                                                                       
|                                                 |                                                                                                   |                                   |                                                                       
|Cash flows from investing activities:            |                                                                                                   |                                   |                                                                       
|                                                 | Purchases of property and equipment                                                               |                                   |                                                                       
|                                                 | Purchases of short-term investments                                                               |                                   |                                                                       
|                                                 | Proceeds from sale of short-term investments                                                      |                                   |                                                                       
|                                                 | Investment in affiliate                                                                           |                                   |                                                                       
|                                                 | Purchase of subsidiary, net of cash acquired                                                      |                                   |                                                                       
|                                                 | Purchase of assets                                                                                |                                   |                                                                       
|                                                 | Capitalized software                                                                              |                                   |                                                                       
|                                                 | Purchases of long-term investments                                                                |                                   |                                                                       
|                                                 | Proceeds from sale of long-term investments                                                       |                                   |                                                                       
|                                                 | Other                                                                                             |                                   |                                                                       
|                                                 |                                                                                                   |                                   |                                                                       
|                                                 |                                                                                                   |                                   |                                                                       
|                                                 |                                                                                                   |                                   |                                                                       
|Cash flows from financing activities:            |                                                                                                   |                                   |                                                                       
|                                                 | Dividends paid                                                                                    |                                   |                                                                       
|                                                 | Proceeds from the issuance of common stock                                                        |                                   |                                                                       
|                                                 | Payments on note payable and capital lease obligations                                            |                                   |                                                                       
|                                                 | Common stock offering costs                                                                       |                                   |                                                                       
|                                                 |                                                                                                   |                                   |                                                                       
|                                                 |                                                                                                   |                                   |                                                                       
|                                                 |                                                                                                   |                                   |                                                                       
|Net increase (decrease) in cash                  |                                                                                                   |                                   | 6,674,875                                                             
|Cash and cash equivalents at beginning of period |                                                                                                   |                                   | 7,980,635                                                             
|                                                 |                                                                                                   |                                   |                                                                       
|Cash and cash equivalents at end of period       |                                                                                                   | $                                 | 14,655,510                                                            
|                                                 |                                                                                                   |                                   |                                                                       
|Income taxes paid                                |                                                                                                   | $                                 | 4,762,550                                                             
|                                                 |                                                                                                   |                                   |                                                                       
|Interest paid                                    |                                                                                                   | $                                 | 141,525                                                               
|                                                 |                                                                                                   |                                   |                                                                       
|Non-cash transactions:                           |                                                                                                   |                                   |                                                                       
|                                                 | Common stock repurchased and retired in exchange for shares in cashless exercise of stock options |                                   | $                                                                     
|                                                 |                                                                                                   |                                   |                                                                       

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, 1999                                                     |                                             | 17,706,372   |   | $ | 177,064 |                                               | $ | 600,996    |   | $ |       
|Issuance of common stock in initial public offering, net of offering costs     |                                             | 3,000,000    |   |   | 30,000  |                                               |   | 25,590,215 |   |   |       
|Issuance of common stock and tax impact on exercise of stock options           |                                             | 1,639,068    |   |   | 16,390  |                                               |   | 2,501,075  |   |   |       
|Comprehensive income:                                                          |                                             |              |   |   |         |                                               |   |            |   |   |        
|                                                                               | Net income                                  |              |  |   |         |                                              |   |            |  |   |        
|                                                                               | Unrealized gain on securities, net of taxes |              |  |   |         |                                              |   |            |  |   |        
|                                                                               | Total comprehensive income                  |              |   |   |         |                                               |   |            |   |   |        
|                                                                               |                                             |              |   |   |         |                                               |   |            |   |   |        
|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
|                                                                               |                                             |              |   |   |         |                                               |   |            |   |   |        

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. (PEC Solutions or the 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 29% of the Company's revenue during 2002. For 2000, the Company's contracts and subcontracts were time and materials contracts (66%), fixed-price contracts (22%), and
cost reimbursable contracts (12%). For 2001, these contracts and subcontracts were time and materials contracts (71%), fixed-priced 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%).

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. Revenue on cost-type contracts is recognized to the extent of costs incurred plus a proportionate amount of fee earned.
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, 2001 and 2002, cash equivalents included money market funds of approximately $5,593,048 and $4,633,903, respectively, and commercial paper,
United States Treasuries bills and municipal bonds of approximately $13,496,454 and $0, respectively.

F-6

---

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 $5,593,048 and $4,633,903 held in money market funds at local financial institutions as of
December 31, 2001 and 2002, respectively. The Company also held commercial paper, United States Treasury bills and municipal bonds in the amount of $55,619,459 and $57,887,857 as of
December 31, 2001 and 2002, 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.

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 yearsNon-structural land improvements

15 yearsProperty and equipment

3 to 5 yearsLeasehold 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 occurs when construction is complete and the lease term begins. 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, 2002.

F-7

---

Goodwill and Intangibles

In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 141, Business
Combinationsand No. 142,Goodwill and Other Intangible Assets. SFAS No. 141
requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. 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.

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, 2002, $1,791,983 was capitalized with an accumulated amortization balance of $942,294 and is
included in other assets. Amortization expense of $68,281, $212,441, and $363,945 was recorded during 2000, 2001 and 2002 respectively. During 2002, the Company wrote-off $289,611 of
capitalized research and development costs.

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 reincorporation, 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

The Company has a Stock Option and Incentive Plan, which is described more fully in Note 8. FAS No. 123, "Accounting for Stock-Based Compensation,"
as amended by FAS No. 148, "Accounting for Stock-Based CompensationTransition and Disclosure, an Amendment of FASB Statement No. 123," requires companies to
(i) recognize as expense the fair value of stock-based awards, or (ii) continue to apply the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issues
to Employees" and related Interpretations ("APB 25"), and provide pro forma net income and earnings per share disclosures for employee stock option grants as if the fair-value-based method
defined in FAS No. 123 had been applied.

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.

F-8

---

This information and the assumptions used for 2002, 2001 and 2000 for the Company's stock option and stock purchase plans are summarized as follows:

|                                                    |  | Stock Option Plan |          | Stock Purchase Plan
|--------------------------------------------------- |  | ----------------- | -------- | -------------------
|
|Volatility                                          |  |                   | 20%      |                    
|Risk-free interest rate                             |  |                   | 5.17%    |                    
|Dividend yield                                      |  |                   | 0%       |                    
|Expected lives                                      |  |                   | 10 years |                    
|Weighted average fair value per share at grant date |  | $                 | 4.09     |                    

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                    |                     | $                        | 7,272,466 
|Pro forma compensation expense, net of tax |                     |                          | (1,102,213
|                                           |                     |                          |           
|Pro forma net income                       |                     | $                        | 6,170,253 
|                                           |                     |                          |           
|Net income (loss) per share:               |                     |                          |           
|                                           | Basicas reported   |                          |           
|                                           | Basicpro forma     |                          |           
|                                           | Dilutedas reported |                          |           
|                                           | Dilutedpro forma   |                          |           

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.

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.

F-9

---

Reclassifications

Certain reclassifications have been made to the prior-period financial statements in order to conform to the 2002 presentation.

2.    Initial Public Offering and Follow-on Offering

The Company completed an initial public offering of common stock in April 2000. The Company sold 3,000,000 shares of common stock generating
$25.6 million in proceeds, net of offering expenses. The Company completed a follow-on offering of common stock in June 2001. The Company sold 3,000,000 shares of common
stock generating $47.9 million in proceeds, net of offering expenses.

3.    Acquisitions

On August 28, 2000, the Company acquired all of the outstanding capital stock of Viking Technology, Inc. (Viking) for $2 million cash plus
the assumption of debt in a business combination accounted for as a purchase. The results of Viking's operations have been included in the consolidated financial statements since that date. Effective
January 1, 2002, Viking was fully integrated into the Company and no longer is a wholly owned subsidiary and its results are incorporated in the Company's financial statements. Viking is a
provider of integrated software and advanced technology solutions for state and local law enforcement, fire and emergency medical service agencies. Assets acquired were $2.6 million and
liabilities assumed were $4.2 million. The excess of the purchase price over the fair value of the net liabilities assumed was approximately $3.6 million, which was recorded as goodwill.

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 no longer is a wholly owned subsidiary and its results are
incorporated in the Company's financial statements. Troy derives revenue from system development, networking, engineering, integration services, and information systems security and its primary
customer is the federal government. Troy's depth of experience in the defense and health care IT sectors represents an important set of new vertical markets for the Company and has significantly
broadened its client base. 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.

F-10

---

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 expected to be deductible for tax purposes.

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,
(in thousands except per share)2000

2001Total revenue

$
104,156

$
138,524Net income

$
8,548

$
13,000Basic earnings per share

$
0.40

$
0.54Diluted earnings per share

$
0.36

$
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. Proforma results of operations of the Company would not have been materially different assuming the acquisition of Vector occurred on January 1, 2001.

4.    Goodwill and Intangibles

The Company recorded goodwill related to its acquisitions of Viking, Troy and Vector. Prior to January 1, 2002, the Company amortized goodwill related to
the Viking purchase on a straight-line

F-11

---

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 and will be evaluated on an annual basis for impairment.

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

$
16.9


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 31,2000

2001(dollars in thousands, except per share)Reported net income

$
7,272

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


144


440Adjusted net income

$
7,416

$
13,507Reported basic earnings per share

$
0.34

$
0.54Add: Goodwill amortization, net of tax


0.01


0.02Adjusted basic earnings per share

$
0.35

$
0.56Reported diluted earnings per share

$
0.30

$
0.47Add: Goodwill amortization, net of tax


0.01


0.02Adjusted diluted earnings per share

$
0.31

$
0.49


The
Company only has one reporting unit. Nonamortizable intangible assets at December 31, 2002, 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 Systems, Inc. (Troy) on November 20, 2001 and Vector Research, Inc. 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, 2001 and
2002 was $56,019 and $824,967, respectively.

Amortization
expense related to intangibles was $0, $56,019 and $768,948 for the years ended December 31, 2000, 2001 and 2002, respectively. Intangibles are amortized on a
straight-line basis.

F-12

---

Estimated amortization expense for each of the five succeeding calendar years based on the intangible assets as of December 31, 2002 is as follows in thousands:

Year ending December 31,

Amount2003

$
8512004


8512005


8512006


4582007


179


5.    Accounts Receivable

Accounts receivable consisted of the following as of:

December 31,2001

2002Billed accounts receivable

$
33,335,746

$
45,411,428Unbilled accounts receivable:Amounts currently billable


3,435,643


5,855,777Revenues recorded in excess of contract value or funding


1,265,665


3,098,543Progress payments


(1,289,588
)

(1,070,117
)36,747,466


53,295,631Allowance for doubtful accounts


(324,746
)

(322,042
)Accounts receivable, net

$
36,422,720

$
52,973,589


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 1998 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
2001 the Company had two customers that each accounted for more than 10% of revenue. For the year ended December 31, 2001, revenue from EDS (Navy Marine Corps Intranet) was
$27.3 million, and from the Special Project Division of the Drug Enforcement Agency was $12.4 million and, as of December 31, 2001, each had $7.3 million and
$1.7 million of accounts receivable, respectively.

During
2002 the Company had two customers that each accounted for more than 10% of revenue. For the year ended EDS (Navy Marine Corps Intranet) accounted for 16%, or
$29.3 million, and our biometric identification system through a subcontract with an undisclosed federal agency (non-releasable per contract restrictions) 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 our biometric identification system subcontract. Subsequent to
December 31, 2002 we received a payment of approximately $10 million of the $15.6 million accounts receivable. We are currently in discussions with the prime contractor in regard
to the collection of the balance of the receivable. The prime contractor has indicated that they would like to reduce the amount due to us by $3.7 million, but we believe there is no basis for
a reduction and expect to receive full payment.

F-13

---

6.    Property and Equipment

Property and equipment consisted of the following as of:

December 31,2001

2002Leasehold improvements

$
1,259,984

$
937,273Property and equipment


5,276,652


6,922,691Software


508,854


933,971Construction-in-process


2,883,164


Building





23,001,6009,928,654


31,795,535Less: accumulated depreciation


(3,432,044
)

(3,828,922
)$
6,496,610

$
27,966,613


Depreciation
expense was $649,713, $865,158 and $1,288,042 for the years ended December 31, 2000, 2001 and 2002, respectively.

7.    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 $1.5 million and $4.4 million at December 31, 2001 and 2002, 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):

2001

2002Current assets

$
492

$
1,244Non-current assets


8,239


29,431Current liabilities


875


717Non-current liabilities





20,500Gross revenue





275Net loss


(19
)

(178
)


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, which is included in Other income, net.

The
Company also invests in marketable securities classified as available for sale. As of December 31, 2002, the aggregate fair market value of those securities was
$58.1 million. Total gains included in other comprehensive income (loss) for 2002 were $85,622 and total losses were $36,225. Proceeds from sales of securities during 2002 were
$78.4 million with realized gains of $26,351 and losses of $23,175. The Company recognizes gains and losses on the sale of securities using the specific identity method of accounting.

8.    Line of Credit

The Company has a loan agreement with Bank of America which provides for a line of credit with a limit of $6,000,000 at the one-month LIBOR Rate plus
250 basis points per annum (4.4% and 3.9% as of December 31, 2001 and 2002, respectively). The line is collateralized by the assets of the Company. As of December 31, 2001, and 2002
there were no balances outstanding. The bank has

F-14

---

issued Letters of Credit in the amount of $2,982,009 against the line of credit in lieu of rent deposits as of December 31, 2002. The agreement expires April 30, 2003 and is in the
process of being renewed.

9.    Other current liabilities

Other liabilities consisted of the following:

December 31,2001

2002Employee stock purchase plan

$
601,128

$
8,430Amounts due related to Troy acquisition


2,582,512


Amounts due related to Vector acquisition





164,070Other


774,704


761,812$
3,958,344

$
934,312


10.  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 are available for 2000. Beginning in 2001, the number of options eligible for grant in each year will be 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 two 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 are 2,000,000 shares of common stock available for purchase under the Purchase Plan. On January 4, 2002, a total of 35,132 shares were issued under the plan at
prices ranging from $14.08 to $18.05 per share. On July 2, 2002, a total of 56,937 shares were issued under the plan at a price of $19.71 per share. On December 31, 2002, a total of
51,362 shares were issued under the plan at prices ranging from $18.82 to $19.54 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, 1999

5,668,890

$
0.63-  3.18

$
1.76Granted

647,793


6.94-12.00


8.91Exercised

(1,639,068
)

0.78-  1.68


1.21Canceled

(101,760
)

1.10-12.00


6.10Balance, 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

$
6.99


The
following table summarizes additional information about stock options outstanding as of December 31, 2002:

|                 |  | Options Outstanding |  |      |  |  
|---------------- |  | ------------------- |  | ---- |  | -
|
|
|
|$0.63 to $0.86   |  | 450,246             |  | 2.88 |  | $
|$1.21            |  | 951,564             |  | 4.00 |  |  
|$1.69 to $2.06   |  | 696,978             |  | 4.72 |  |  
|$2.84 to $3.12   |  | 1,004,700           |  | 5.02 |  |  
|$6.94 to $23.30  |  | 1,600,202           |  | 8.78 |  |  
|$23.39 to $37.61 |  | 141,621             |  | 9.09 |  |  
|                 |  |                     |  |      |  |  
|                 |  | 4,845,311           |  | 5.94 |  | $
|                 |  |                     |  |      |  |  

11.  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 2000, 2001, and 2002, were determined as follows:

Year Ended December 31, 2000Net Income

Shares

Per ShareBasic EPS

$
7,272,466

21,112,760

$
0.34Effect of dilutive options




2,784,215


(0.04
)Diluted EPS

$
7,272,466

23,896,975

$
0.30


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


For
the years ended December 31, 2000 and 2002, 168,898 and 138,316 shares, respectively, attributable to outstanding stock options were excluded from the calculation of diluted
earnings per share because the effect was antidilutive.

12.  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 $1.7 million, $2.7 million and $4.1 million for 2000, 2001 and 2002, respectively.

13.  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 $72,163, $87,045 and $109,029 in 2000, 2001 and 2002, respectively. The Company contributed $112,663, $146,639 and $164,083 to the
program in 2000, 2001 and 2002, respectively.

14.  Dividends

The Company declared dividends in the amount of $413,149 for 1999, which were paid in 2000, but did not declare any dividends for 2000, 2001 and 2002. The Company
expects to retain future earnings, if any, for use in the operation and expansion of the business and does not anticipate paying any further cash dividends in the foreseeable future.

F-17

---

15.  Income Taxes

The provision for income taxes consisted of the following:

Years Ended December 31,2000

2001

2002Current:Federal

$
4,270,065

$
7,109,964

$
11,167,205State


826,929


1,300,217


2,231,229Total current


5,096,994


8,410,181


13,398,434Deferred:Federal


(204,111
)

(55,314
)

344,882State


(39,063
)

(6,395
)

40,599Total deferred


(243,174
)

(61,709
)

385,481Provision for income taxes

$
4,853,820

$
8,348,472

$
13,783,915


Deferred
tax assets were comprised of the following:

Years Ended December 31,2000

2001

2002Deferred tax assets (liabilities):Accrued vacation

$
354,531

$
566,659

$
640,924Allowance for doubtful accounts


70,227


69,456


2,593Property and equipment


(3,619
)

(369,547
)

(766,167
)Capital loss carryforward


8,021


8,021


7,948Deferred rent


180,539


360,547


524,532Net operating loss carryforward from acquired company (expiring beginning in 2012)


876,761


857,607


755,112Deferred compensation


202,045


253,414


370,085Investment in building partnership








(186,794
)Other


(4,057
)




12,441Total deferred tax assets, net

$
1,684,448

$
1,746,157

$
1,360,674


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

Years Ended December 31,2000

2001

2002Statutory federal rate

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

5
%
4
%
4
%Federal tax-exempt interest income





(1
%)Effective tax rate

40
%
39
%
38
%


16.  Commitments and Contingencies

During 2001, the Company negotiated an equity position in a limited liability corporation (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

F-18

---

sixteen-year lease agreement for the building that began on December 1, 2002 and will be the primary occupant.

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 is complete and the lease term begins. 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 PEC'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 noncancelable 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, 2002, are as follows:

Years Ended December 31,2003

$
2,434,2162004


2,470,7512005


2,557,2272006


2,646,7302007


2,739,365Thereafter through December 31, 2018


37,280,524Total minimum lease payments


50,128,813Less: amount representing interest


(38,534,382
)Present value of net minimum lease payments


11,594,431Less: current portion


(46,641
)Residual value


11,274,657Long-term portion

$
22,822,447


F-19

---

At
December 31, 2002, building, leasehold improvements and equipment under capital leases of $23,130,956, net of accumulated depreciation of $140,912, is included with property
and equipment.

The
Company leases office facilities and equipment under noncancelable operating agreements, which expire in various years through 2018. Future minimum lease payments under operating
that have noncancelable lease terms in excess of one year as of December 31, 2002 are as follows:

Years Ended December 31,2003

$
6,753,7852004


6,577,7022005


6,506,4032006


6,459,9312007


5,664,920Thereafter


46,371,290$
78,334,031


The
total rental expense under operating leases was $4,267,350, $5,615,636 and $7,389,678 for the years ended December 31, 2000, 2001 and 2002, respectively.

The
Company subleases space in one of its facilities. Sublease rental income was $182,745, $315,658 and $324,736 for the years ended December 31, 2000, 2001 and 2002,
respectively.

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
March 18, 2003, a purported class action complaint was filed against the Company and certain of its officers in the United States District Court for the Eastern District of
Virginia. The complaint alleges 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 complaint does not specify the amount of damages sought. The Company believes that
the plaintiffs' claims are without merit and it intends to defend the case vigorously.

17.  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 must adopt the provisions of EITF 00-21 for new contracts entered
into on or after July 1, 2003. The Company has already adopted the provisions of EITF 00-21 and the adoption has not had a material impact on the Company's financial position,
results of operations, or cash flows.

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 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

F-20

---

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 are applicable for financial statements issued for interim periods beginning after December 15, 2002.

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 December 31, 2002 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. Management believes that the initial recognition and measurement provisions under
FIN 45 will not have a material impact on its financial statements.

On
January 17, 2003, the Financial Accounting Standards Board (FASB or the "Board") 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, the Company does not have any entities that qualify under FIN 46.

18.  Unaudited Selected Quarterly Financial Information

|2001                                                          |  | First
Quarter |        | Second
Quarter |   | Third
Quarter |  | Fourth
Quarter
|------------------------------------------------------------- |  | ------------- | ------ | -------------- | - | ------------- |  | --------------
|
|Revenues                                                      |  | $             | 21,920 |                | $ | 27,134        |  | $             
|                                                              |  |               |        |                |   |               |  |               
|Operating income                                              |  | $             | 3,680  |                | $ | 5,834         |  | $             
|                                                              |  |               |        |                |   |               |  |               
|Net income                                                    |  | $             | 2,439  |                | $ | 3,690         |  | $             
|                                                              |  |               |        |                |   |               |  |               
|Earnings per share:                                           |  |               |        |                |   |               |  |               
|Basic                                                         |  | $             | 0.11   |                | $ | 0.16          |  | $             
|                                                              |  |               |        |                |   |               |  |               
|Diluted                                                       |  | $             | 0.10   |                | $ | 0.14          |  | $             
|                                                              |  |               |        |                |   |               |  |               
|Weighted average shares used in computing earnings per share: |  |               |        |                |   |               |  |               
|Basic                                                         |  |               | 22,472 |                |   | 22,658        |  |               
|                                                              |  |               |        |                |   |               |  |               
|Diluted                                                       |  |               | 25,536 |                |   | 26,386        |  |               
|                                                              |  |               |        |                |   |               |  |               
|2002                                                          |  |               |        |                |   |               |  |               
|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        |  |               
|                                                              |  |               |        |                |   |               |  |               

F-21

---



Report of Independent Accountants 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 11, 2003, except for the last paragraphs of Notes 5 and 16, as to which the date is
March 19, 2003, 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 11, 2003

S-1

---



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

|COLUMN A                     |                                 | COLUMN B |   | COLUMN C
ADDITIONS |  | COLUMN D |   | COLUMN E
|---------------------------- | ------------------------------- | -------- | - | ------------------ |  | -------- | - | --------
|
|YEAR ENDED DECEMBER 31, 2000 |                                 |          |   |                    |  |          |   |         
|                             | Allowance for doubtful accounts |          | $ | 193,024            |  | $        |  |         
|                             |                                 |          |   |                    |  |          |   |         
|YEAR ENDED DECEMBER 31, 2001 |                                 |          |   |                    |  |          |   |         
|                             | Allowance for doubtful accounts |          | $ | 177,879            |  | $        |  |         
|                             |                                 |          |   |                    |  |          |   |         
|YEAR ENDED DECEMBER 31, 2002 |                                 |          |   |                    |  |          |   |         
|                             | Allowance for doubtful accounts |          | $ | 324,746            |  | $        |  |         
|                             |                                 |          |   |                    |  |          |   |         

---

S-2

---

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