`UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q

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

                For the quarterly period ended: October 31, 2002


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


                        Commission file number: 000-20688

                              Datatec Systems, Inc.
                              ---------------------
             (Exact name of Registrant as specified in its charter)

            Delaware                                     94-2914253
-------------------------------                  -------------------------------
(State or other jurisdiction of                       (I.R.S. Employer
incorporation or organization)                        Identification No.)


23 Madison Road, Fairfield, NJ                               07004
-------------------------------                  -------------------------------
(Address of principal executive                           (Zip Code)
offices)

                                 (973) 808-4000
                           ---------------------------
               Registrant's telephone number, including area code


Check 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 past 12
months (or for such shorter period that the Registrant was required to file such
reports) and (2) has been subjected to such filing  requirements for the past 90
days. Yes /X/ No / /.

The number of shares of  Registrant's  Common Stock  outstanding  on October 31,
2002 was 35,838,258.






                              DATATEC SYSTEMS, INC.
                                    FORM 10-Q
                       THREE MONTHS ENDED OCTOBER 31, 2002

                                      INDEX

PART I:     FINANCIAL INFORMATION
                                                                            Page
            Item 1: Condensed Consolidated Financial Statements

                    Balance Sheets at April 30, 2002 and
                    October 31, 2002                                         3

                    Statements of Operations for the three and six
                    months ended October 31, 2001 (as restated) and 2002     4

                    Statements of Comprehensive Income
                    (Loss) for the three and six months ended
                    October 31, 2001 (as restated) and 2002                  5

                    Statements of Cash Flows for the six months ended
                    October 31, 2001 (as restated) and 2002                  6

                    Notes to Unaudited Condensed Consolidated Financial
                    Statements                                               7 - 12

            Item 2: Management's Discussion and Analysis of Financial
                    Condition and Results of Operations                     13 - 22

            Item 3: Quantitative and Qualitative Disclosure
                    About Market Risk                                       22

            Item 4: Controls and Procedures                                 22

PART II:    OTHER INFORMATION

            Item 6: Exhibits and Reports on Form 8-K                        23

            Signature Page                                                  24

            Certifications                                                  25-26

                                       2





                         PART I - FINANCIAL INFORMATION
Item 1:     Condensed Consolidated Financial Statements

                      CONDENSED CONSOLIDATED BALANCE SHEETS
                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
                                   (unaudited)

                                                                             April 30, 2002     October  31, 2002
                                                                             --------------     -----------------

ASSETS

CURRENT ASSETS:

   Cash and cash equivalents                                                     $     49           $     65
   Receivables, net                                                                21,803             41,867
   Inventory                                                                        3,176              2,946
   Prepaid expenses and other current assets                                          724              1,361
                                                                                 --------           --------

               Total current assets                                                25,752             46,239

Property and equipment, net                                                         3,259              3,351
Goodwill, net                                                                       2,665              2,665
Other assets                                                                        4,170              3,427
                                                                                 --------           --------

               TOTAL ASSETS                                                      $ 35,846           $ 55,682
                                                                                 ========           ========

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:

   Short-term borrowings                                                         $ 17,464           $ 22,705
   Accounts payable                                                                 7,789             13,250
   Accrued and other liabilities                                                    3,742             10,139
   Subordinated secured convertible debentures, net of
     unamortized discount                                                            --                1,690
                                                                                 --------           --------
                                                                                   28,995             47,784
               Total current liabilities
                                                                                 --------           --------
LONG-TERM DEBT:
   Due to related parties                                                           1,414              1,414
   Capital lease obligation                                                             2               --
   Subordinated secured convertible debentures, net of
     unamortized discount                                                           1,457               --
                                                                                 --------           --------

               Total long-term debt                                                 2,873              1,414
                                                                                 --------           --------

STOCKHOLDERS' EQUITY:
Common stock, $0.001 par value (authorized 75,000,000
  shares; issued and outstanding 35,591,000 shares and
  35,838,000 shares as of April 30, 2002 and October
  31, 2002, respectively)                                                              36                 36
   Additional paid-in capital                                                      53,531             53,690
   Accumulated deficit                                                            (49,239)           (46,890)
   Accumulated other comprehensive loss                                              (350)              (352)
                                                                                 --------           --------

      Total stockholders' equity                                                    3,978              6,484
                                                                                 --------           --------

TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY                                                                           $ 35,846           $ 55,682
                                                                                 ========           ========
The accompanying notes to unaudited condensed consolidated financial statements
are an integral part of these condensed consolidated financial statements.

                                       3





                              DATATEC SYSTEMS, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
              (IN THOUSANDS EXCEPT FOR SHARE AND PER SHARE AMOUNTS)
                                   (unaudited)

                                          For The Three Months Ended        For The Six Months Ended
                                                 October, 31                       October, 31
                                          --------------------------        ------------------------
                                             2001              2002          2001              2002
                                             (As                             (As
                                          Restated)                       Restated)
                                          ---------           -------     ---------           -------

Revenue                                  $     19,598    $     33,203    $     37,660    $     56,275
Cost of revenue                                13,090          25,445          25,406          41,991
                                         ------------    ------------    ------------    ------------
Gross profit                                    6,508           7,758          12,254          14,284
Selling, general and
administrative expenses                         5,954           5,211          12,134          10,265
                                         ------------    ------------    ------------    ------------
Operating income                                  554           2,547             120           4,019
Interest expense                                 (468)           (930)         (1,050)         (1,670)
                                         ------------    ------------    ------------    ------------
Income (loss) before minority interest             86           1,617            (930)          2,349
Minority interest                                (148)           --              (318)           --
                                         ------------    ------------    ------------    ------------
Net income (loss)                        ($        62)   $      1,617    ($     1,248)   $      2,349
                                         ============    ============    ============    ============


Earnings (loss) per common
share -

   Basic                                 ($      0.00)   $       0.05    ($      0.04)   $       0.07
                                         ============    ============    ============    ============
   Diluted                               ($      0.00)   $       0.05    ($      0.04)   $       0.07
                                         ============    ============    ============    ============

Weighted average common
shares outstanding -
   Basic                                   33,862,000      35,793,000      33,853,000      35,738,000
                                         ============    ============    ============    ============

   Diluted                                 33,862,000      35,954,000      33,853,000      35,858,000
                                         ============    ============    ============    ============

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

                                       4





                              DATATEC SYSTEMS, INC.
                      CONDENSED CONSOLIDATED STATEMENTS OF
                           COMPREHENSIVE INCOME (LOSS)
                                 (IN THOUSANDS)
                                   (unaudited)

                            For The Three Months Ended   For The Six Months Ended
                                    October, 31                   October, 31
                            --------------------------   ------------------------
                                   2001          2002     2001         2002
                                   (As                     (As
                                  Restated)              Restated)
                                  ---------     -----    --------    ------

Net income (loss)                  ($   62)   $ 1,617    ($1,248)   $ 2,349
Other comprehensive income
(loss) -
   Foreign currency  translation
   adjustment                         --         --            4         (2)
                                   -------    -------    -------    -------
Comprehensive income (loss)        ($   62)   $ 1,617    ($1,244)   $ 2,347
                                   =======    =======    =======    =======


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

                                       5






                              DATATEC SYSTEMS, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
                                   (unaudited)
                                                                    For the Six Months Ended
                                                                          October 31,
                                                                    ------------------------
                                                                          2001        2002
                                                                     (As Restated)
                                                                     -------------   --------

   CASH FLOWS FROM OPERATING ACTIVITIES:

  Net income (loss)                                                    ($ 1,248)   $  2,349

    Adjustments to reconcile net income (loss) to net cash used
    in operating activities --

       Depreciation and amortization                                      2,373       2,061

       Accretion of preferred stock discount                                 38         233

       Changes in operating assets and liabilities:

           Increase in accounts receivable                                 (871)    (20,065)

           Decrease in inventory                                            954         230

           Decrease (increase) in prepaid expenses and other assets         288        (630)

           (Decrease) increase in accounts payable, accrued and
           other liabilities                                             (5,840)     11,900
                                                                       --------    --------

                Net cash (used) in operating activities                  (4,306)     (3,922)
                                                                       --------    --------

CASH FLOWS FROM INVESTING ACTIVITIES:

       Purchases of property and equipment                                 (215)       (970)

       Investment in software development                                  (414)       (446)
                                                                       --------    --------

                Net cash used in investing activities                      (629)     (1,416)
                                                                       --------    --------
CASH FLOWS FROM FINANCING ACTIVITIES:

        Net increase in short-term borrowings                             4,457       5,223

        Payments of indebtedness                                           (110)        (26)

        Net proceeds from issuance of common stock and warrant              118         159
                                                                       --------    --------

                  Net cash provided by financing activities               4,465       5,356
                                                                       --------    --------

                  Net effect of foreign currency translation on cash          4          (2)
                                                                       --------    --------

Net increase (decrease) in cash and cash equivalents                       (466)         16

Cash and cash equivalents at beginning of period                            571          49
                                                                       --------    --------

Cash and cash equivalents at end of period                             $    105    $     65
                                                                       ========    ========

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

                                       6





                              DATATEC SYSTEMS, INC.
                    NOTES TO UNAUDITED CONDENSED CONSOLIDATED
                              FINANCIAL STATEMENTS
(1)         Business

Datatec Systems,  Inc. and its subsidiaries  (the "Company" or "Datatec") are in
the business of providing rapid and accurate technology  deployment services and
licensing  software  tools to support  enterprises in the delivery of complex IT
solutions.

(2)         Basis of Presentation

The  condensed  consolidated  financial  statements  include the accounts of the
Company and its  subsidiaries.  All intercompany  accounts and transactions have
been eliminated.

The accompanying unaudited condensed consolidated financial statements have been
prepared in conformity with generally accepted accounting  principles applicable
to interim  financial  information  and with the  instructions  to Form 10-Q and
Article  10 of  Securities  and  Exchange  Commission  ("SEC")  Regulation  S-X.
Accordingly,  they do not include all of the information and footnotes  required
by accounting  principles generally accepted in the United States of America for
complete  financial  statements.  In the opinion of management,  all adjustments
(consisting  of normal  recurring  adjustments)  considered  necessary  for fair
presentation have been included.  Operating results for the three and six months
ended October 31, 2002 are not necessarily indicative of the results that may be
expected for a full year. The accompanying  financial  statements should be read
in  conjunction  with the  consolidated  financial  statements and notes thereto
included in  Datatec's  annual  report on Form 10-K for the year ended April 30,
2002.

Change In Accounting

The Company has changed its method of estimating  progress toward  completion of
its  contracts.  Under its  previous  method,  the  percentage  of direct  labor
incurred to date to total estimated direct labor to be incurred on a project was
used to determine a contract's  percentage  of  completion,  while under the new
method,  the percentage of total costs incurred to date to total estimated costs
to be incurred  on a project is used to  determine a  contract's  percentage  of
completion.  The change was made to reflect the impact of non-labor  charges and
to  more  accurately  measure  a  contract's  progress  towards  completion.  In
accordance  with  Accounting   Principles  Board  Opinion  No.  20,  "Accounting
Changes,"  paragraph  27, the  financial  statements  of prior periods have been
adjusted to apply the new method  retroactively.  The effects of the  accounting
change applied  retroactively to the Company's restated results (See Note 9) are
shown below:

                                                      Effect Of
                                                      Change In            As
Three months ended                  As Restated       Accounting      Retroactively
October 31, 2001:                  (See Note 9)        Principle        Adjusted
-----------------                  ------------        ---------        --------

Net loss                            ($761,000)          $699,000         ($62,000)
Net loss per share - basic            ($0.02)             $0.02           ($0.00)
Net loss per share - diluted          ($0.02)             $0.02           ($0.00)

Six months ended October
31, 2001:
------------------------

Net loss                          ($2,875,000)        $1,627,000      ($1,248,000)
Net loss per share - basic           ($0.09)             $0.05           ($0.04)
Net loss per share - diluted         ($0.09)             $0.05           ($0.04)

                                       7





The balance of  accumulated  deficit at April 30, 2002 has been adjusted for the
effect of applying  retroactively  the new method of accounting,  as follows (in
thousands):

                                                            April 30, 2002
                                                         ---------------------
       Accumulated deficit, as previously reported            ($50,938)
       Accumulated deficit, as retroactively adjusted         ($49,239)

(3) Earnings Per Share

Basic  earnings per share is  calculated  using the weighted  average  number of
shares outstanding for the three and six months ended October 31, 2001 and 2002.
Diluted  earnings per share is calculated  using the weighted  average number of
shares outstanding plus the incremental potentially dilutive shares from assumed
conversions  of options,  debt and preferred  stock for the three and six months
ended  October 31, 2001 and 2002.  Outstanding  options and  warrants  have been
excluded for the three and six months ended October 31, 2001 as their  inclusion
would  have  been  anti-dilutive  for these  periods.  Outstanding  options  and
warrants of 4,386,000  and  4,492,000  have been  excluded for the three and six
months ended October 31, 2002, respectively,  as their inclusion would have been
anti-dilutive for these periods.

In accordance with SFAS No. 128, the following table reconciles net loss and net
loss per share amounts used to calculate basic and diluted loss per share:

                             For The Three Months Ended   For The Six Months Ended
                                     October, 31                October, 31
                             --------------------------   ------------------------
                                   2001         2002          2001          2002
                                   (As                        (As
                                Restated)                  Restated)
                                ---------     ---------    ----------      ---------

Numerator:
   Net income (loss)           ($  62,000)   $1,617,000   ($1,248,000)   $ 2,349,000
                               ==========    ==========   ===========    ===========

Denominator:
   Weighted average
   common shares
   outstanding -
         Basic                 33,862,000    35,793,000    33,853,000     35,738,000
                               ==========    ==========   ===========    ===========

         Diluted               33,862,000    35,954,000    33,853,000     35,858,000
                               ==========    ==========   ===========    ===========

Net income (loss) per share:
         Basic                 ($    0.00)   $     0.05   ($     0.04)   $      0.07
                               ==========    ==========   ===========    ===========

         Diluted               ($    0.00)   $     0.05   ($     0.04)   $      0.07
                               ==========    ==========   ===========    ===========

(4) Short-term Borrowings

In November  2000,  the Company  replaced its current  lender and entered into a
credit line with IBM Credit Corporation.  Under the credit line, the Company has
a revolving loan that provides for maximum  borrowings of $16.0 million that was
increased from $14.0 million on July 25, 2001.  Availability under the revolving
loan  is  calculated  as the  sum of 85% of  eligible  accounts  receivable,  as
defined,   and  35%  and  25%  of  cable  and  non-cable   eligible   inventory,

                                       8





respectively,  as defined.  The amounts  outstanding under the credit line as of
April 30,  2002 and  October  31,  2002 were $14.5  million  and $20.3  million,
respectively.  There were no additional available borrowings,  as defined, as of
October 31, 2002. Since October 31, 2002, IBM Credit Corporation has granted the
Company  additional  availability  as  the  Company's  accounts  receivable  and
inventory have  increased.  The maximum amount  eligible to be borrowed has been
temporarily  increased to $21.0  million.  This  increase in the maximum  amount
eligible to be borrowed is available to the Company  through  December 31, 2002,
at which time, if necessary,  the Company will request and, as has been the case
in the past,  expects to receive sufficient  borrowing  availability to meet its
then current needs.  The revolving loan accrues  interest at the prime rate plus
4.25% and matures in November 2003. However, IBM Credit Corporation has notified
the Company that it does not intend to renew its working capital  financing line
and term loan  beyond  August 1, 2003.  As a result,  the  Company  is  actively
seeking replacement financing.

The Company also has a $3.0 million term loan with IBM Credit  Corporation  that
is due in February  2003 but repayment has been extended to no later than August
1, 2003. The full amount of the term loan was  outstanding as of April 30, 2002.
The term loan  accrues  interest at the prime rate plus 4.25% and,  beginning in
August 2002 is payable in monthly  installments  of  principal  and  interest of
$300,000.  The  balance  of the term loan  outstanding  as of October  31,  2002
amounted to $2.4 million and is included in short-term borrowings on the balance
sheet.

The Company was not in compliance with one or more of the financial covenants of
its credit  facility as of the quarter ended  October 31, 2002.  The Company and
IBM Credit Corporation  entered into an Acknowledgment,  Waiver and Amendment to
the  Inventory  and Working  Capital  Financing  Agreement for the quarter ended
October 31, 2002.

(5) Subordinated Secured Convertible Debentures.

On  April  3,  2002  the  Company   raised  $2.0  million  of  financing   (less
out-of-pocket  transaction  costs of  $0.170  million)  to be used  for  working
capital  purposes by issuing an aggregate of $2.0  million  principal  amount of
Subordinated  Secured  Convertible   Debentures  and  Warrants  to  purchase  an
aggregate of 270,000  shares of the Company's  Common Stock at $1.416 per share.
The  debentures  mature  on July 2, 2003 and bear  interest  at a rate of 5% per
annum.  The interest is due  quarterly on March 31, June 30,  September  30, and
December  31 of each year (with the first  interest  payment  due and payable on
September  30,  2002) and is  payable in cash or Common  Stock at the  Company's
option.  The Company  recorded a discount of  $582,000  in  connection  with the
issuance of the  Debentures.  The  warrants  have been  valued at  approximately
$291,000,  based on the Black  Scholes  Pricing  Model  utilizing  the following
assumptions:  expected life of 5.0 years;  volatility  of 119 percent,  and risk
free  borrowing  rate of 4.405  percent.  This  amount  has been  recorded  as a
discount  against the debt and will be accreted  as  interest  expense  over the
remaining life of the debt. In addition, in accordance with Emerging Issues Task
Force Issue No. 98-5, an embedded beneficial conversion feature of approximately
$291,000 has been recognized as additional  paid-in-capital and will be accreted
as  additional  interest  expense over the remaining  life of the debt.  Through
October  31,  2002,  $272,000  of the above  discounts  has been  accreted.  The
Debentures are secured by all assets of the Company,  which security interest is
junior to the security interest granted to the Company's existing senior lender.

The holder of each Debenture is entitled,  at its option, to convert at any time
the  principal  amount of the  Debenture or any portion  thereof,  together with
accrued but unpaid  interest,  into shares of the  Company's  Common  Stock at a
conversion  price for each share of Common Stock equal to the lower of (a) $1.16
or (b) 100% of the  average of the two lowest  closing  bid prices of the Common
Stock on the principal market during the twenty consecutive  trading days ending
with the last trading day prior to the date of conversion.  The conversion price

                                       9





may not be less than the floor  price of $0.65,  except to the  extent  that the
Company does not exercise its right to redeem the Debentures.

The agreement with the investors  contains a requirement for the Company to have
effected the  registration of a sufficient  number of shares of its Common Stock
by July 2, 2002 or incur penalties  equal to: (1) 2% of the product  obtained by
multiplying the average closing sale price for the immediately  preceding 30-day
period times the number of  registrable  securities  the  investor  holds or may
acquire pursuant to conversion of the Convertible  Debenture and the exercise of
Warrants on the last day of the applicable  30-day period (without giving effect
to any  limitation  on conversion or exercise) and (2) 3% of the product for all
continuing or subsequent registration defaults.

Although  the  Company  filed  the  required  registration  statement  with  the
Securities  and  Exchange  Commission  within the  required  time  period,  such
registration  statement  has not yet been declared  effective  and as such,  the
Company is currently in default of its  Registration  Rights  Agreement with the
Debenture holders and is incurring the penalties  described herein.  Pursuant to
an agreement dated September 27, 2002, the Company issued an aggregate of 60,736
shares of Common  Stock to the  investors in exchange  for the  cancellation  of
penalties  incurred  through  August 1, 2002. As of October 31, 2002,  penalties
under this default amounted to approximately $282,000.

Also, the Debentures  contain a provision which reduces the conversion  price by
five percent  (5%) if the  Company's  Common  Stock into which the  Debenture is
converted is not listed on NASDAQ  National  Market or NASDAQ Smallcap Market on
the  conversion  date and will be reduced by an additional  five percent (5%) on
such  date if the  Common  Stock  is also  not  listed  on the  Over-The-Counter
Bulletin Board (without,  in either such case,  regard to the Floor Price).  The
conversion price is subject to further  reduction in the event the Company sells
Common Stock below the applicable conversion price.


(6) RECENT ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," and
SFAS  No.  142,  "Goodwill  and  Other  Intangible  Assets"  (collectively  "the
Standards").  The Standards  require all business  combinations  initiated after
June 30, 2001 to be accounted for using the purchase method of accounting,  that
goodwill  no  longer  be  subject  to   amortization   but  rather  be  reviewed
periodically for impairment and that other identifiable intangibles be separated
and those with finite lives be amortized  over their useful lives.  Goodwill and
intangible  assets  with  indefinite  lives  must be  assessed  once a year  for
impairment and more frequently if circumstances  indicate a possible impairment.
The  first  step of the  two-step  impairment  assessment  identifies  potential
impairment and compares the fair value of the applicable reporting unit with its
carrying  amount,  including  goodwill.  If the fair value of the reporting unit
exceeds its carrying  value,  goodwill of the reporting  unit is not  considered
impaired,  and the second step of the impairment  test is not necessary.  If the
carrying value of the reporting unit exceeds its fair value,  the second step of
the impairment test shall be performed to measure the amount of impairment loss,
if any.  The Company was  required  to adopt  these  provisions  on May 1, 2002;
however, it elected to early adopt the Standards on May 1, 2001 as permitted and
evaluated the carrying value of its goodwill and other intangible assets.  Based
on its evaluation,  which, in part, was based on certain fair value assumptions,
the Company  determined  that there is no  impairment  to its goodwill and other
intangible assets.  Subsequent impairment tests will be performed, at a minimum,
in the fourth  quarter of each fiscal year,  in  conjunction  with the Company's
annual planning process.

                                       10





The Company  was  assisted in its  measurement  of fair value by an  independent
valuation  firm.  The  measurement  of fair value was based on an  evaluation of
future  discounted cash flows,  public company trading  multiples and merger and
acquisition transaction multiples. The Company's discounted cash flow evaluation
used a range of  discount  rates  that  corresponds  to the  Company's  weighted
average cost of capital.  This discount  range is consistent  with that used for
investment  decisions and takes into account the specific and detailed operating
plans and strategies of the reporting unit.

Goodwill is no longer amortized under SFAS No. 142.

In June 2001,  the FASB issued SFAS No. 143,  "Accounting  for Asset  Retirement
Obligations," which addresses financial accounting and reporting for obligations
associated with the retirement of tangible  long-lived assets and the associated
retirement costs. SFAS No. 143 applies to legal obligations  associated with the
retirement of long-lived assets that result from the acquisition,  construction,
development  and normal  operation  of  long-lived  assets  except  for  certain
obligations  of lessees.  The  provisions  of this  Statement are required to be
applied  starting with fiscal years  beginning  after June 15, 2001. The Company
adopted the new  accounting  standard on existing  long-lived  assets during the
quarter  ended July 31,  2002.  There was no impact on the  Company's  financial
position or results of  operations  for the quarter as a result of adopting this
standard.

In August 2001, the FASB issued SFAS No. 144,  "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 addresses financial  accounting and
reporting  for the  impairment or disposal of  long-lived  assets.  SFAS No. 144
supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
Long-Lived  Assets  to  Be  Disposed  Of,"  and  the  accounting  and  reporting
provisions of Accounting Principles Board ("APB") Opinion No. 30, "Reporting the
Results of  Operations  -  Reporting  the  Effects of Disposal of a Segment of a
Business,  and  Extraordinary,  Unusual and  Infrequently  Occurring  Events and
Transactions," for the disposal of a segment of a business.  This Statement also
amends Accounting Research Bulletin No. 51, "Consolidated Financial Statements,"
to eliminate the exception to  consolidation  for a subsidiary for which control
is likely to be temporary.  The Company  adopted the new accounting  standard on
existing  long-lived assets during the quarter ended July 31, 2002. There was no
impact on the  Company's  financial  position or results of  operations  for the
quarter as a result of adopting this standard.

In April 2002, the FASB issued SFAS No. 145,  "Rescission of FASB Statements No.
4, 44 and 64,  Amendment of FASB  Statement No. 13, and Technical  Corrections."
This  Statement  eliminates  the  automatic  classification  of  gain or loss on
extinguishment of debt as an extraordinary item of income and requires that such
gain or loss be evaluated for extraordinary classification under the criteria of
APB Opinion No. 30. This Statement also requires  sale-leaseback  accounting for
certain  lease  modifications  that have  economic  effects  that are similar to
sale-leaseback  transactions  and makes various other  technical  corrections to
existing  pronouncements.  This  Statement will be effective for the Company for
the fiscal year  ending  April 30,  2004.  The  Company  does not  believe  that
adoption of this Statement will have a material effect on the Company's  results
of operations or financial position.

In July 2002,  the FASB issued SFAS No. 146,  "Accounting  for Costs  Associated
with Exit or Disposal  Activities." SFAS No. 146 will supercede  Emerging Issues
Task  Force  Issue  No.  94-3,  "Liability   Recognition  for  Certain  Employee
Termination  Benefits  and Other  Costs to Exit an Activity  (including  Certain
Costs Incurred in a Restructuring)." SFAS No. 146 requires that costs associated
with an exit or disposal  plan be recognized  when  incurred  rather than at the
date of a commitment to an exit or disposal plan.  SFAS No. 146 is to be applied
prospectively to exit or disposal activities  initiated after December 31, 2002.
The  Company  does not  believe  that  adoption  of this  Statement  will have a
material effect on the Company's results of operations or financial position.

                                       11





(7) SUPPLEMENTAL DISCLOSURE OF CASH FLOWS

    Cash paid relating to interest during the three and six months ended October
    31 (in thousands):

                                 Three       Three         Six           Six
                                 Months      Months        Months        Months
                                -----------------------------------------------
                                 2001        2002          2001          2002
                                -----------------------------------------------
           Interest paid        $ 447       $ 548          $ 978       $ 1,047

(8) LEGAL PROCEEDINGS

On September 22, 2000,  Petsmart,  Inc. filed a complaint against the Company in
the Superior Court of Maricopa County, Arizona. Petsmart has alleged that it has
been  damaged  by  the  Company's  failure  to   satisfactorily   complete  work
contemplated by an agreement between the parties. Damages were unspecified. At a
settlement  meeting  held on April  17,  2002,  discussions  were  held in which
Petsmart  proposed a series of  settlement  offers under which the Company would
pay  damages  ranging  between  $7,000,000  and  $8,000,000.  In a letter to the
Company dated May 3, 2002,  Petsmart proposed  settlement offers under which the
Company would pay damages ranging between $5,000,000 and $7,000,000. The Company
believes that it has meritorious defenses to the claims and it intends to defend
this  vigorously.  Datatec  has further  counter-claimed  against  Petsmart  for
amounts owing to the Company under the contract.

(9) RESTATEMENT OF FINANCIAL STATEMENTS

During fiscal 2002, the Company determined that it should have included indirect
costs as a  component  of cost of revenue  in its  previously  issued  financial
statements. Also, the Company identified certain errors in its previously issued
financial  statements  related to total estimated  contract values,  total costs
incurred  with  certain  long term  contracts  and  certain  accrued and prepaid
expenses.  As a result, the Company has restated its previously issued financial
statements for the three and six months ended October 31, 2001.

A summary of the significant effect of the restatement is set forth below.

                                    As
Three months ended              Previously       Restatement
October 31, 2001:                Reported         Adjustment        As Restated
------------------              ----------       -----------        -----------

Gross profit                    $7,306,000       ($1,496,000)       $5,810,000
Operating income (loss)           $292,000         ($437,000)        ($145,000)
Net loss                         ($324,000)        ($437,000)        ($761,000)
Net loss per share - basic         ($0.01)            ($0.01)           ($0.02)
Net loss per share - diluted       ($0.01)            ($0.01)           ($0.02)

Six months ended October
31, 2001:
------------------------

Gross profit                   $13,680,000       ($3,052,000)       $10,628,000
Operating loss                   ($737,000)        ($770,000)       ($1,507,000)
Net loss                       ($2,105,000)        ($770,000)       ($2,875,000)
Net loss per share - basic        ($0.06)            ($0.02)           ($0.09)
Net loss per share - diluted      ($0.06)            ($0.02)           ($0.09)

                                       12





ITEM 2:     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
            RESULTS OF OPERATIONS

The following  discussion of results of  operations  and financial  condition is
based  upon  and  should  be read in  conjunction  with  Datatec's  Consolidated
Financial  Statements and Notes for the year ended April 30, 2002. The following
discussion  also  gives  effect to the  restatement  and  change  in  accounting
discussed in Notes 2 and 9 to the condensed consolidated financial statements.

FORWARD-LOOKING STATEMENTS

This quarterly report on Form 10-Q contains "forward-looking  statements" within
the  meaning of the  Private  Securities  Litigation  Reform Act of 1995.  These
statements can sometimes be identified by the use of forward-looking  words such
as "anticipate,"  "believe,"  "estimate," "expect," "intend," "may," "will," and
similar  expressions.   These  statements  are  based  on  management's  current
expectations and are subject to risks, uncertainties and assumptions. Should one
or more of  these  risks  or  uncertainties  materialize  or  should  underlying
assumptions  prove  incorrect,  actual  results may vary  materially  from those
anticipated, expected, estimated or projected.

The  following  factors,  among  others,  could cause  actual  results to differ
materially from those described in the  forward-looking  statements:  changes in
demand  for,  or  in  the  mix  of,  Datatec's   services;   project  delays  or
cancellations;  cost overruns with regard to fixed price  projects;  competitive
pressures;  general  economic  conditions;  Datatec's  inability  to replace its
current  working  capital  financing  line,  and other such  factors  related to
financing,  obtaining  new  projects  and  delivering  its  services at targeted
margins.

RESTATEMENT OF FINANCIAL STATEMENTS

During fiscal 2002, the Company determined that it should have included indirect
costs as a  component  of cost of revenue  in its  previously  issued  financial
statements. Also, the Company identified certain errors in its previously issued
financial  statements  related to total estimated  contract values,  total costs
incurred  with  certain  long term  contracts  and  certain  accrued and prepaid
expenses.  As a result, the Company has restated its previously issued financial
statements  for the three and six months ended October 31, 2001.  See discussion
in Note 9 to the condensed consolidated financial statements.

CHANGE IN ACCOUNTING

The Company has changed its method of estimating  progress toward  completion of
its  contracts.  Under its  previous  method,  the  percentage  of direct  labor
incurred to date to total estimated direct labor to be incurred on a project was
used to determine a contract's  percentage  of  completion,  while under the new
method,  the percentage of total costs incurred to date to total estimated costs
to be incurred  on a project is used to  determine a  contract's  percentage  of
completion.  The change was made to reflect the effect of non-labor  charges and
to  more  accurately  measure  a  contract's  progress  towards  completion.  In
accordance  with  Accounting   Principles  Board  Opinion  No.  20,  "Accounting
Changes,"  paragraph  27, the  financial  statements  of prior periods have been
adjusted to apply the new method retroactively.  See discussion in Note 2 to the
condensed consolidated financial statements.

RECENT DEVELOPMENTS

Subordinated Secured Convertible Debentures. On April 3, 2002 the Company raised
$2.0  million  of  financing  (less  out-of-pocket  transaction  costs of $0.170
million) to be used for working capital purposes by issuing an aggregate of $2.0
million  principal  amount of Subordinated  Secured  Convertible  Debentures and

                                       13





Warrants to purchase an  aggregate  of 270,000  shares of the  Company's  Common
Stock at  $1.416  per  share.  The  debentures  mature  on July 2, 2003 and bear
interest at a rate of 5% per annum.  The interest is due  quarterly on March 31,
June 30,  September  30, and  December 31 of each year (with the first  interest
payment due and payable on September  30, 2002) and is payable in cash or Common
Stock at the Company's  option.  The Company  recorded a discount of $582,000 in
connection with the issuance of the Debentures. The warrants have been valued at
approximately  $291,000,  based on the Black Scholes Pricing Model utilizing the
following  assumptions:  expected life of 5.0 years;  volatility of 119 percent,
and risk free borrowing rate of 4.405 percent.  This amount has been recorded as
a discount  against the debt and will be accreted as interest  expense  over the
remaining life of the debt. In addition, in accordance with Emerging Issues Task
Force Issue No. 98-5, an embedded beneficial conversion feature of approximately
$291,000 has been recognized as additional  paid-in-capital and will be accreted
as  additional  interest  expense over the remaining  life of the debt.  Through
October  31,  2002,  $272,000  of the above  discounts  has been  accreted.  The
Debentures are secured by all assets of the Company,  which security interest is
junior to the security interest granted to the Company's existing senior lender.

The holder of each Debenture is entitled,  at its option, to convert at any time
the  principal  amount of the  Debenture or any portion  thereof,  together with
accrued but unpaid  interest,  into shares of the  Company's  Common  Stock at a
conversion  price for each share of Common Stock equal to the lower of (a) $1.16
or (b) 100% of the  average of the two lowest  closing  bid prices of the Common
Stock on the principal market during the twenty consecutive  trading days ending
with the last trading day prior to the date of conversion.  The conversion price
may not be less than the floor  price of $0.65,  except to the  extent  that the
Company does not exercise its right to redeem the Debentures.

The agreement with the investors  contains a requirement for the Company to have
effected the  registration of a sufficient  number of shares of its Common Stock
by July 2, 2002 or incur penalties  equal to: (1) 2% of the product  obtained by
multiplying the average closing sale price for the immediately  preceding 30 day
period times the number of  registrable  securities  the  investor  holds or may
acquire pursuant to conversion of the Convertible  Debenture and the exercise of
Warrants on the last day of the applicable 30 day period  (without giving effect
to any  limitation  on conversion or exercise) and (2) 3% of the product for all
continuing or subsequent registration defaults.

Although  the  Company  filed  the  required  registration  statement  with  the
Securities  and  Exchange  Commission  within the  required  time  period,  such
registration  statement  has not yet been declared  effective  and as such,  the
Company is currently in default of its  Registration  Rights  Agreement with the
Debenture holders and is incurring the penalties  described herein.  Pursuant to
an agreement dated September 27, 2002, the Company issued an aggregate of 60,736
shares of Common  Stock to the  investors in exchange  for the  cancellation  of
penalties  incurred  through  August 1, 2002. As of October 31, 2002,  penalties
under this default amounted to approximately $282,000.

Also, the Debentures  contain a provision which reduces the conversion  price by
five percent  (5%) if the  Company's  Common  Stock into which the  Debenture is
converted is not listed on NASDAQ  National  Market or NASDAQ Smallcap Market on
the  conversion  date and will be reduced by an additional  five percent (5%) on
such  date if the  Common  Stock  is also  not  listed  on the  Over-The-Counter
Bulletin Board (without,  in either such case,  regard to the Floor Price).  The
conversion price is subject to further  reduction in the event the Company sells
Common Stock below the applicable conversion price.

                                       14





SENIOR CREDIT FACILITY.  The Company's  existing credit facility with IBM Credit
Corporation  consists of (i) a $16 million three-year  revolving credit facility
and (ii) a $3 million  three-year  term loan payable in monthly  installments of
principal and interest.  The  borrowings  under the revolving line of credit are
based on a  formula  of 85% of  eligible  receivables  and  25-35%  of  eligible
inventory.  Both the revolving line of credit and the term loan bear interest at
prime plus 4.25%. The amounts  outstanding under the credit line as of April 30,
2002 and October 31, 2002 were $14.5  million and $20.3  million,  respectively,
while the  amounts  outstanding  under  the term  loan as of April 30,  2002 and
October 31, 2002 were $3.0 million and $2.4 million, respectively. There were no
additional  available  borrowings,  as defined,  as of October 31,  2002.  Since
October 31,  2002,  IBM Credit  Corporation  has granted the Company  additional
availability as the Company's accounts receivables and inventory have increased.
The maximum  amount  eligible to be borrowed has been  temporarily  increased to
$21.0 million.  This increase in the maximum  amount  eligible to be borrowed is
available to the Company through December 31, 2002, at which time, if necessary,
the  Company  will  request  and,  as has been the case in the past,  expects to
receive sufficient borrowing availability to meet its then current needs.

IBM Credit Corporation has notified the Company that it does not intend to renew
the existing  revolving  credit facility or its term loan beyond August 1, 2003.
Accordingly,  the Company is in the process of seeking a  replacement  for these
facilities. Although the Company believes that it will be able to refinance this
debt, there can be no assurance that it will be able to do so.

BUSINESS DESCRIPTION

Datatec Systems,  Inc. and its subsidiaries  (the "Company" or "Datatec") are in
the business of providing rapid and accurate technology  deployment services and
licensing  software  tools,  designed  to  accelerate  the  delivery  of complex
Information   Technology   ("IT")   solutions  for   Technology   Providers  and
Enterprises.  The  Company  markets its  services  primarily  to large  Original
Equipment  Manufacturers  ("OEM"),  systems  integrators,  independent  software
vendors,   telecommunications  carriers  and  service  providers  (collectively,
"Technology  Providers")  as  well  as to a  select  number  of  "Fortune  2000"
customers in the United States and Canada.

The Company's  deployment  services  include the  following:  (i) the process of
"customizing" Internetworking devices such as routers and switches and computing
devices such as servers and  workstations to meet the specific needs of the user
(hereinafter  referred to as  "configuration"),  (ii) the process of integrating
these  hardware  devices  as well as  integrating  operational  and  application
software on a network to ensure that they are  compatible  with the  topology of
the network and all legacy systems  (hereinafter  referred to as  "integration")
and  (iii)  the  process  of  physically   installing   technology  on  networks
(hereinafter  referred to as  "installation").  Also,  the Company  licenses its
software tools through its Global Integration Services division to organizations
with their own installation forces.

The Company utilizes internally developed Web-enabled  implementation tools that
differentiate  its  deployment   services.   These  tools,   together  with  its
proprietary processes, allow the Company to rapidly and efficiently deliver high
quality and cost effective  large-scale  technology  deployment solutions to its
clients,  which  it  does  primarily  on a  fixed  time/fixed  cost  basis.  The
components of the Company's implementation model are made up of a combination of
people, processes and technology that include:

o       The utilization of eDeploy(TM),  a Web-based software tool that provides
        collaboration capabilities for remote planning and design, communication
        capabilities  through  fax,  voice,  data,  or digital  photographs  and
        monitoring  capabilities,  ensures that best  practices are employed and
        that  mission   critical   milestones  or  timelines  are  escalated  to
        supervisory levels if missed by the responsible parties.  These features
        and others are designed to enhance the speed,  accuracy and productivity
        of the deployment process.

                                       15





o       The utilization of IW2000 provides  automation and mass customization in
        the  configuration/integration  of Computing and Internetworking devices
        as  well  as  application  and  operational  software.  This  automation
        significantly  reduces  labor  costs  through  time  savings  as well as
        through reduced technical skill level requirements.

o       Two (2) staging and  configuration  centers at which the Company carries
        out most of its complex  integration  and  configuration  processes.  By
        conducting these activities at Datatec's staging centers, and utilizing,
        where applicable, its software tools, the Company is able to prepare and
        rollout  project  components so that they arrive at a customer site in a
        "plug and play" state. In this way, customers'  operations are minimally
        disrupted.

o       A field  deployment  force  capable of  delivering  all types of complex
        technologies  due  to the  "plug  and  play"  nature  of  the  Company's
        "configuration/integration" process.

The  Company  operates  out of 15  offices  and has a field  deployment  team of
approximately  585  people,  allowing  it  to  conduct  multiple,   simultaneous
large-scale  deployments  across the United  States and  Canada.  The  Company's
deployment  capabilities further enable Technology Providers to rapidly increase
the "absorption" of their products in the marketplace.

CRITICAL ACCOUNTING POLICIES

The Company's  deployment  services are generally  provided at a fixed  contract
price pursuant to purchase orders or other agreements with its customers,  while
its software  licensing is done on a "per seat" basis over a specified period of
time and its Application Service Provider ("ASP") activities are based on usage.

Services from  deployment  activities are performed  primarily  under  long-term
contracts but may be performed under short-term  workorders or time and material
arrangements.   The  Company's  typical  long-term  contract  contains  multiple
elements  designed to track the various services  required under the arrangement
with the customer.  These  elements are used to identify  components of progress
billings  but  are  combined  for  revenue  recognition  purposes.  The  Company
recognizes revenue earned under long-term  contracts utilizing the percentage of
completion  method  of  accounting  by  measuring  a  contract's  percentage  of
completion as determined  by the  percentage of total costs  incurred to date to
total  estimated  costs.  Contracts  are  reviewed  at  least  quarterly  and if
necessary,  revenue,  costs and gross  margin  are  adjusted  prospectively  for
revisions in estimated total contract value and total estimated  contract costs.
Estimated losses are recognized when identified.

In certain cases, the Company procures  materials for customers that are for use
by other service  providers.  Costs  related to these  materials are recorded as
inventory  when the goods are  received  by the  Company,  and  revenue  and the
related cost are recognized  when these goods are shipped to the customer or its
designee. Revenue and related cost of revenue for the three and six months ended
October 31, 2002 amounted to  approximately  $0.600 million and $0.459  million,
respectively. Revenue and related costs of these materials for the three and six
months ended October 31, 2001 were immaterial and not accounted for separately.

Payment  milestones  differ  according  to the  customer  and  the  type of work
performed.  Generally,  the Company invoices customers and payments are received
throughout  the  deployment  process and, in certain  cases,  in advance of work
performed  if a  substantial  amount of up front costs is  required.  In certain
cases,  payments  are  received  from  customers  after the  completion  of site
installation.  However,  revenue  and costs  are only  recognized  on  long-term
contracts to the extent of the contracts' percentage of completion. Unbilled

                                       16





revenue,  which is classified as a current asset,  is recorded for the amount of
revenue earned in excess of billings to customers.  Deferred revenue is recorded
as a current liability for the amount of billings in excess of revenue earned.

The Company's  cost of  deployment  services  consists of four main  categories:
labor,  materials,  project  expenses and allocated  indirect costs. The Company
estimates progress toward completion of its contracts by applying the percentage
of costs incurred to date to total  estimated costs to be incurred on a project.
Direct costs (labor,  materials,  and project  expenses) are charged directly to
projects as they are incurred. Indirect costs, which include amortization of the
eDeploy(TM)  software and various other overhead  expenses,  are then applied to
projects and a gross margin is determined.  This enables management to track all
costs associated with delivering services to its customers. Project managers and
other field  supervisors  manage and are  evaluated,  in part,  on how projects'
actual  direct  costs  compare  to  their  estimated  direct  costs.  Operations
management  manages and is evaluated,  in part,  on how  projects'  actual gross
margins compare to targeted gross margins.

Labor  consists of salaries and  benefits of the  Company's  field  installation
force as well as staging and  configuration  personnel.  The materials  category
includes all materials used in the installation process such as connectors, wall
plates, conduits, and data and electrical cable. Project expenses include travel
and living  expenses for the  installation  teams,  equipment  rentals and other
costs that are not labor or materials costs. In addition,  indirect costs,  such
as software amortization,  warehouse expense, material handling costs, etc., are
allocated to projects on bases that reflect management's  estimate of absorption
of these costs by each project (generally direct labor hours).

The Company  capitalizes  certain computer software costs incurred in accordance
with Statement of Financial  Accounting  Standards No. 86,  "Accounting  for the
Costs of Computer Software to be Sold, Leased or Otherwise  Marketed." Also, the
Company capitalizes certain costs of computer software developed or obtained for
internal use in accordance with Statement of Position No. 98-1,  "Accounting for
the Costs of Computer  Software  Developed or Obtained  for Internal  Use." Once
technological  feasibility has been established,  software development costs are
captured in the Company's job costing system under specific  projects related to
the development effort. Costs related to software developed for external use are
amortized  using the  greater  of the ratio that  current  gross  revenue  for a
product bears to the total of current and anticipated  future gross revenues for
the  product,  or a  maximum  of three  years  using  the  straight-line  method
beginning  when the products are  available  for general  release to  customers.
Amortization of the costs of software used in delivery of the Company's services
is charged  to cost of  revenue as  incurred.  Costs  related  to  internal  use
software are amortized over a period not to exceed three years.

In June 2001, the FASB issued  Statement of Financial  Accounting  Standards No.
142, "Goodwill and Other Intangible Assets." With the adoption of Statement 142,
goodwill is no longer subject to  amortization  over its estimated  useful life.
Rather, goodwill will be subject to at least an annual assessment for impairment
by applying a  fair-value-based  test.  Although the new rules are effective for
fiscal years beginning after December 15, 2001,  early adoption is allowed if an
entity's  fiscal year begins after March 15, 2001. The Company has elected early
adoption of SFAS No. 142 and based on its evaluation,  which, in part, was based
on certain  fair value  assumptions,  the  Company  determined  that there is no
impairment to its goodwill and other intangible  assets.  Had early adoption not
been elected, the amortization of goodwill would have been $109,000 and $218,000
for each of the three and six months ended October 31, 2001 and 2002.

                                       17





RESULTS OF OPERATIONS

The consolidated  statements of operations for the Company for the three and six
months ended October 31 are summarized below (in thousands):


                                           Three Months           Three Months
                                        Ended October 31,      Ended October 31,
                                               2001                  2002
                                     ----------------------   --------------------

                                          $            %         $            %
                                     ---------------------------------------------

Revenue                               $ 19,598       100.0%  $ 33,203       100.0%

Cost of revenues                        13,090        66.8%    25,445        76.6%
                                      --------     --------  --------     --------

Gross profit                             6,508        33.2%     7,758        23.4%

Selling, general and administrative
 expenses                                5,954        30.4%     5,211        15.7%
                                      --------     --------  --------     --------

Operating income                           554         2.8%     2,547         7.7%

Interest expense                          (468)       (2.4%)     (930)       (2.8%)
                                      --------     --------  --------     --------
 Income before minority interest            86         0.4%     1,617         4.9%

Minority interest                         (148)       (0.7%)     --            --
                                      --------     --------  --------     --------
 Net (loss) income
                                      ($    62)       (0.3%) $  1,617         4.9%
                                      ========     ========  ========     ========


                                       Six Months Ended       Six Months Ended
                                       October 31, 2001       October 31, 2002
                                     -------------------   --------------------

                                         $             %        $            %
                                     ------------------------------------------

Revenue                              $ 37,660        100.0%  $ 56,275       100.0%

Cost of revenues                       25,406         67.5%    41,991        74.6%
                                     --------      -------   --------     -------

Gross profit                           12,254         32.5%    14,284        25.4%

Selling, general and
  administrative expenses              12,134         32.2%    10,265        18.2%
                                     --------      -------   --------     -------

Operating income                          120          0.3%     4,019         7.2%

Interest expense                       (1,050)        (2.8%)   (1,670)       (3.0%)
                                     --------      -------   --------     -------
Income (loss) before minority
 interest                                (930)        (2.5%)    2,349         4.2%

Minority interest                        (318)        (0.8%)     --            --
                                     --------      --------  --------     -------
Net (loss) income                    ($ 1,248)        (3.3%) $  2,349         4.2%
                                     ========      ========  ========     =======

                                       18





REVENUE.  Revenue for the three months ended October 31, 2002 and 2001 was $33.2
million  and $19.6  million,  respectively,  representing  an increase of 69.4%,
while  revenue  for the six months  ended  October  31,  2002 and 2001 was $56.3
million and $37.7 million, respectively,  representing an increase of 49.3%. The
increase in revenue for the three and six months is attributable primarily to an
increase in work performed on long-term contracts entered into during the fourth
quarter  of  fiscal  2002 and the  first  quarter  of  fiscal  2003 and  related
materials requirements,  which comprised a greater portion of the total contract
value than in the prior periods.

GROSS PROFIT.  Gross profit for the three months ended October 31, 2002 and 2001
amounted  to $7.8  million  and  $6.5  million,  respectively,  representing  an
increase of 20.0%,  while gross profit for the six months ended October 31, 2002
and 2001 was $14.3  million and $12.3  million,  respectively,  representing  an
increase of 16.3%.  Gross profit as a percentage  of revenue was 23.4% and 33.2%
for the three months ended  October 31, 2002 and 2001,  respectively,  and 25.4%
and 32.5% for the six months ended October 31, 2002 and 2001, respectively.  The
decreases in the gross  margins are  attributed  to an increase in the materials
component of revenue and a substantial increase in the number of field personnel
(585 field  deployment  personnel at October 31, 2002 from 280 field  deployment
personnel at July 31, 2002),  which  resulted in increased down time while these
new employees were being trained and greater than anticipated  labor and related
costs  incurred  on  certain  projects.  Materials  typically  are sold at gross
margins that are lower than the gross margins realized on the service  component
of revenue.

SELLING,   GENERAL   AND   ADMINISTRATIVE   EXPENSES.   Selling,   general   and
administrative  expenses for the three  months ended  October 31, 2002 were $5.2
million  compared to $6.0 million for the three  months ended  October 31, 2001,
while  selling,  general and  administrative  expenses  for the six months ended
October 31, 2002 were $10.3 million compared to $12.1 million for the six months
ended  October  31,  2001.  As a  percentage  of  sales,  selling,  general  and
administrative  expenses  were 15.7% for the three months ended October 31, 2002
compared to 30.4% for the three months ended October 31, 2001, while for the six
months  ended  October 31,  2002 and 2001  selling,  general and  administrative
expenses  as a  percentage  of sales  were 18.2% and  32.2%,  respectively.  The
decreases in selling,  general and  administrative  expenses as a percentage  of
revenue are  attributable to a cost reduction  program  initiated by the Company
during the fiscal year ended April 30, 2001 which  carried into the period ended
October 31, 2002.

INTEREST  EXPENSE.  Net  interest  expense  for the three and six  months  ended
October 31, 2002 were $0.930 million and $1.67 million,  respectively,  compared
to $0.468  million and $1.050 million for the three and six months ended October
31, 2001, respectively.

LIQUIDITY AND CAPITAL RESOURCES

CHANGES IN MAJOR BALANCE SHEET CLASSIFICATIONS

CURRENT  ASSETS.  Current  assets as of  October  31,  2002 and  April 30,  2002
amounted to  approximately  $46.2 million and $25.8 million,  respectively.  The
increase  of  approximately  $20.4  million  is the  result of higher  billings,
primarily for materials revenue,  generated during the quarter ended October 31,
2002 and deferred  materials cost related to certain  materials that were billed
but not shipped to certain customers.

CURRENT  LIABILITIES.  Current  liabilities as of October 31, 2002 and April 30,
2002 amounted to  approximately  $47.8 million and $29.0 million,  respectively.
The increase of  approximately  $18.8  million is  attributable  primarily to an
increase in short-term  borrowing of approximately $5.2 million,  an increase in
accounts payable of approximately $5.5 million, an increase in accrued and other
liabilities  of  approximately   $6.4  million  and  the   reclassification   of
approximately  $1.7  million  subordinated  secured  convertible  debentures  to

                                       19





current  liabilities  as they are due in July 2003.  The increases in short-term
borrowings  and  accounts  payable  are  related  to  funding  requirements  for
expenditures  related to the Company's growth in revenue,  while the increase in
accrued and other  liabilities  is related to an  increase  in deferred  revenue
related to advanced billings on contracts in progress.

CASH FLOW. Cash used in operating  activities  decreased to $3.9 million for the
six months ended October 31, 2002 as compared to $4.3 million for the six months
ended  October 31, 2001.  Cash used in operating  activities  for the six months
ended  October 31,  2002 is  primarily  attributable  to  increases  in unbilled
revenue  offset by  increases  in  accounts  payable,  accrued  liabilities  and
deferred  revenue,  while cash used in operating  activities  for the six months
ended October 31, 2001 is primarily  attributable to the net loss for the period
and a decrease in accounts payable, accrued liabilities and deferred revenue.

Short-term  borrowings  increased by approximately $5.2 million and $4.5 million
for the six months ended October 31, 2002 and 2001,  respectively.  The borrowed
funds were used  primarily to fund the  increased  expenditures  required by the
increased revenues.

LIQUIDITY

Although  the  Company  realized  net income of $2.4  million for the six months
ended  October 31, 2002,  took  dramatic  measures to cut costs and continues to
manage its cash  aggressively,  it is still experiencing a significant strain on
its cash  resources.  The  primary  reason  for the strain on  resources  is the
increased  requirements for  expenditures for field personnel,  job expenses and
materials related to the increased  revenue.  As a result, the Company's working
capital  financing line regularly  remains at or close to its maximum  allowable
levels and the average days  outstanding  on its trade  payables  have  extended
beyond  normal  credit  terms  granted  by  vendors.   Furthermore,  IBM  Credit
Corporation, the Company's working capital lender, has notified the Company that
it does not intend to renew its  working  capital  financing  line and term loan
beyond August 1, 2003. As a result, the Company is actively seeking  replacement
financing.

Achievement of its fiscal 2003 operating plan,  including  maintaining  adequate
capital  resources,  depends upon the timing of work performed by the Company on
existing  projects,  the ability of the Company to gain and perform  work on new
projects, the ability of the Company to maintain positive relations with its key
vendors and the ability of the  Company to raise  permanent  capital and replace
its current working capital financing line within the timeframe required to meet
its spending requirements.  Multiple project cancellations, delays in the timing
of work  performed  by the Company on existing  projects,  the  inability of the
Company  to gain and  perform  work on new  projects,  or the  inability  of the
Company to raise  permanent  capital and replace  its  current  working  capital
financing line in a timely fashion could have an adverse impact on the Company's
liquidity and on its ability to execute its operating plan.

The Company has taken a variety of actions to ensure its continuation as a going
concern.  A summary of recent  events  and the  Company's  completed  or planned
actions are as follows:

     Demand  for the  Company's  services  has  increased  dramatically  and the
     backlog of contracted  business as of December 2, 2002 was at $77.4 million
     and its sales pipeline stood at $199.7 million as of that date.

     The Company initiated and completed substantial cost saving measures during
     the fiscal years ended April 30, 2001 and 2002 and now has a cost structure
     in line with its expected revenue.

     As a result of the  increase in demand for the  Company's  services and the
     cost  reduction  measures  initiated  over the past two years,  the Company
     achieved  profitability during the fourth quarter of fiscal 2002 and during

                                       20





     each of the first two  quarters  of fiscal  2003.  It expects  to  maintain
     profitability throughout fiscal 2003.

     Management has been seeking to replace its working  capital  financing line
     and raise additional  permanent  capital to support its growth in business.
     It is  encouraged  by the  preliminary  response it has  received  from the
     financial  community  and it  believes  that it will be able to  raise  the
     necessary  financing,  although  there can be no assurance  that it will be
     able to do so.

The Company was not in compliance with one or more of the financial covenants of
its credit  facility as of the quarter ended  October 31, 2002.  The Company and
IBM Credit Corporation  entered into an Acknowledgment,  Waiver and Amendment to
the  Inventory  and Working  Capital  Financing  Agreement for the quarter ended
October 31, 2002.

IBM Credit Corporation has notified the Company that it does not intend to renew
its working  capital  financing  line and term loan beyond  August 1, 2003. As a
result, the Company is actively seeking replacement financing.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial  Accounting Standards Board ("FASB") issued SFAS No.
141,  "Business  Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets"  (collectively  "the  Standards").  The  Standards  require all business
combinations  initiated  after  June 30,  2001 to be  accounted  for  using  the
purchase   method  of  accounting,   that  goodwill  no  longer  be  subject  to
amortization  but rather be reviewed  periodically for impairment and that other
identifiable  intangibles  be separated and those with finite lives be amortized
over their useful lives.  Goodwill and intangible  assets with indefinite  lives
must be assessed once a year for impairment and more frequently if circumstances
indicate  a  possible  impairment.  The first  step of the  two-step  impairment
assessment  identifies  potential  impairment and compares the fair value of the
applicable reporting unit with its carrying amount,  including goodwill.  If the
fair value of the  reporting  unit exceeds its carrying  value,  goodwill of the
reporting unit is not considered impaired, and the second step of the impairment
test is not  necessary.  If the carrying value of the reporting unit exceeds its
fair value,  the second step of the impairment test must be performed to measure
the amount of  impairment  loss, if any. The Company was required to adopt these
provisions on May 1, 2002;  however,  it elected to early adopt the Standards on
May 1, 2001 as permitted and  evaluated  the carrying  value of its goodwill and
other intangible assets.  Based on its evaluation,  which, in part, was based on
certain  fair  value  assumptions,  the  Company  determined  that  there  is no
impairment to its goodwill and other intangible  assets.  Subsequent  impairment
tests will be  performed,  at a minimum,  in the fourth  quarter of each  fiscal
year, in conjunction with the Company's annual planning process.

The Company  was  assisted in its  measurement  of fair value by an  independent
valuation  firm.  The  measurement  of fair value was based on an  evaluation of
future  discounted cash flows,  public company trading  multiples and merger and
acquisition transaction multiples. The Company's discounted cash flow evaluation
used a range of  discount  rates  that  corresponds  to the  Company's  weighted
average cost of capital.  This discount  range is consistent  with that used for
investment  decisions and takes into account the specific and detailed operating
plans and strategies of the reporting unit.

Goodwill is no longer amortized under SFAS No. 142.

In June 2001,  the FASB issued SFAS No. 143,  "Accounting  for Asset  Retirement
Obligations," which addresses financial accounting and reporting for obligations
associated with the retirement of tangible  long-lived assets and the associated
retirement costs. SFAS No. 143 applies to legal obligations  associated with the
retirement of long-lived assets that result from the acquisition,  construction,

                                       21





development  and normal  operation  of  long-lived  assets  except  for  certain
obligations  of lessees.  The  provisions  of this  Statement are required to be
applied  starting with fiscal years  beginning  after June 15, 2001. The Company
adopted the new  accounting  standard on existing  long-lived  assets during the
quarter  ended July 31,  2002.  There was no impact on the  Company's  financial
position or results of  operations  for the quarter as a result of adopting this
standard.

In August 2001, the FASB issued SFAS No. 144,  "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 addresses financial  accounting and
reporting  for the  impairment or disposal of  long-lived  assets.  SFAS No. 144
supercedes SFAS Statement No. 121,  "Accounting for the Impairment of Long-Lived
Assets  and  Long-Lived  Assets  to Be  Disposed  Of,"  and the  accounting  and
reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations
-  Reporting  the  Effects  of  Disposal  of  a  Segment  of  a  Business,   and
Extraordinary,  Unusual and Infrequently Occurring Events and Transactions," for
the disposal of a segment of a business.  This Statement also amends  Accounting
Research Bulletin No. 51, "Consolidated  Financial Statements," to eliminate the
exception to  consolidation  for a subsidiary  for which control is likely to be
temporary.   The  Company  adopted  the  new  accounting  standard  on  existing
long-lived assets during the quarter ended July 31, 2002. There was no impact on
the Company's  financial  position or results of operations for the quarter as a
result of adopting this standard.

In April 2002, the FASB issued SFAS No. 145,  "Rescission of FASB Statements No.
4, 44 and 64,  Amendment of FASB  Statement No. 13, and Technical  Corrections."
This  Statement  eliminates  the  automatic  classification  of  gain or loss on
extinguishment of debt as an extraordinary item of income and requires that such
gain or loss be evaluated for extraordinary classification under the criteria of
APB Opinion No. 30. This Statement also requires  sale-leaseback  accounting for
certain  lease  modifications  that have  economic  effects  that are similar to
sale-leaseback  transactions  and makes various other  technical  corrections to
existing  pronouncements.  This  Statement will be effective for the Company for
the fiscal year  ending  April 30,  2004.  The  Company  does not  believe  that
adoption of this Statement will have a material effect on the Company's  results
of operations or financial position.

In July 2002,  the FASB issued SFAS No. 146,  "Accounting  for Costs  Associated
with Exit or Disposal  Activities." SFAS No. 146 will supercede  Emerging Issues
Task  Force  Issue  No.  94-3,  "Liability   Recognition  for  Certain  Employee
Termination  Benefits  and Other  Costs to Exit an Activity  (including  Certain
Costs Incurred in a Restructuring)." SFAS No. 146 requires that costs associated
with an exit or disposal  plan be recognized  when  incurred  rather than at the
date of a commitment to an exit or disposal plan.  SFAS No. 146 is to be applied
prospectively to exit or disposal activities  initiated after December 31, 2002.
The  Company  does not  believe  that  adoption  of this  Statement  will have a
material effect on the Company's results of operations or financial position.

ITEM 3:     QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

There has been no material  change in the market risk of  financial  instruments
since the Company filed its annual report on Form 10-K for the fiscal year ended
April 30, 2002.

ITEM 4:     CONTROLS AND PROCEDURES

Based on their  evaluation,  as of a date  within 90 days of the  filing of this
Form 10-Q, the Company's  Chief Executive  Officer and Chief  Financial  Officer
have concluded the Company's  disclosure  controls and procedures (as defined in
Rules  13a-14  and  15d-14  under  the  Securities  Exchange  Act of  1934)  are
effective.  There have been no  significant  changes in internal  controls or in
other factors that could  significantly  affect these controls subsequent to the
date of their  evaluation,  including  any  corrective  actions  with  regard to
significant deficiencies and material weaknesses.

                                       22





                           PART II - OTHER INFORMATION

ITEM 6:     EXHIBITS AND REPORTS ON FORM 8-K

a)   Exhibits

     Exhibit No.             Exhibits

        10.1        Acknowledgment,  Waiver and Amendment to Financing Agreement
                    dated December 12, 2002 by and between the Company and IBM
                    Credit Corporation.
        99.1        Certification of Chief Executive Officer.
        99.2        Certification of Chief Financial Officer.

b)   Reports on Form 8-K

     None.


                                       23





                                   SIGNATURES


Pursuant  to the  requirements  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.

                                               DATATEC SYSTEMS, INC.




Date: December 13, 2002                  By:   /s/ Albert G. Pastino
                                               ---------------------------------
                                               Albert G. Pastino
                                               Chief Financial Officer

                                       24





                  CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
                            Section 302 Certification

I, Isaac J. Gaon, certify that:

     1.    I have  reviewed  this  quarterly  report  on Form  10-Q  of  Datatec
           Systems, Inc.;
     2.    Based on my  knowledge,  this  quarterly  report does not contain any
           untrue  statement of a material fact or omit to state a material fact
           necessary to make the statements made, in light of the  circumstances
           under which such statements were made, not misleading with respect to
           the period covered by this quarterly report;
     3.    Based on my knowledge, the financial statements,  and other financial
           information included in this quarterly report,  fairly present in all
           material respects the financial condition,  results of operations and
           cash flows of the registrant as of, and for, the periods presented in
           this quarterly report;
     4.    The registrant's other certifying  officers and I are responsible for
           establishing and maintaining  disclosure  controls and procedures (as
           defined in Exchange Act Rules  13a-14 and 15d-14) for the  registrant
           and we have:
           a)   designed such disclosure  controls and procedures to ensure that
                material information  relating to the registrant,  including its
                consolidated subsidiaries,  is made known to us by others within
                those  entities,  particularly  during  the period in which this
                quarterly report is being prepared;
           b)   evaluated  the  effectiveness  of  the  registrant's  disclosure
                controls and procedures as of a date within 90 days prior to the
                filing date of this quarterly  report (the  "Evaluation  Date");
                and
           c)   presented in this  quarterly  report our  conclusions  about the
                effectiveness of the disclosure controls and procedures based on
                our evaluation as of the Evaluation Date;
     5.    The  registrant's  other  certifying  officers and I have  disclosed,
           based on our most recent evaluation, to the registrant's auditors and
           the audit  committee of  registrant's  board of directors (or persons
           performing the equivalent function):
           a)   all  significant  deficiencies  in the  design or  operation  of
                internal  controls which could adversely affect the registrant's
                ability to record, process,  summarize and report financial data
                and have identified for the  registrant's  auditors any material
                weaknesses in internal controls; and
           b)   any fraud, whether or not material,  that involves management or
                other employees who have a significant  role in the registrant's
                internal controls; and
     6.    The registrant's  other  certifying  officers and I have indicated in
           this quarterly report whether or not there were  significant  changes
           in internal  controls or in other  factors  that could  significantly
           affect  internal  controls  subsequent to the date of our most recent
           evaluation,   including  any   corrective   actions  with  regard  to
           significant deficiencies and material weaknesses.


           Date:  December  13, 2002
                  -----------------------

                  /s/ Isaac J. Gaon
                  -----------------------
                      Isaac J. Gaon
                  Chief Executive Officer

                                       25





                  CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
                            Section 302 Certification

I, Albert G. Pastino, certify that:

     1.    I have  reviewed  this  quarterly  report  on Form  10-Q  of  Datatec
           Systems, Inc.;
     2.    Based on my  knowledge,  this  quarterly  report does not contain any
           untrue  statement of a material fact or omit to state a material fact
           necessary to make the statements made, in light of the  circumstances
           under which such statements were made, not misleading with respect to
           the period covered by this quarterly report;
     3.    Based on my knowledge, the financial statements,  and other financial
           information included in this quarterly report,  fairly present in all
           material respects the financial condition,  results of operations and
           cash flows of the registrant as of, and for, the periods presented in
           this quarterly report;
     4.    The registrant's other certifying  officers and I are responsible for
           establishing and maintaining  disclosure  controls and procedures (as
           defined in Exchange Act Rules  13a-14 and 15d-14) for the  registrant
           and we have:
           a)   designed such disclosure  controls and procedures to ensure that
                material information  relating to the registrant,  including its
                consolidated subsidiaries,  is made known to us by others within
                those  entities,  particularly  during  the period in which this
                quarterly report is being prepared;
           b)   evaluated  the  effectiveness  of  the  registrant's  disclosure
                controls and procedures as of a date within 90 days prior to the
                filing date of this quarterly  report (the  "Evaluation  Date");
                and
           c)   presented in this  quarterly  report our  conclusions  about the
                effectiveness of the disclosure controls and procedures based on
                our evaluation as of the Evaluation Date;
     5.    The  registrant's  other  certifying  officers and I have  disclosed,
           based on our most recent evaluation, to the registrant's auditors and
           the audit  committee of  registrant's  board of directors (or persons
           performing the equivalent function):
            a)  all  significant  deficiencies  in the  design or  operation  of
                internal  controls which could adversely affect the registrant's
                ability to record, process,  summarize and report financial data
                and have identified for the  registrant's  auditors any material
                weaknesses in internal controls; and
            b)  any fraud, whether or not material,  that involves management or
                other employees who have a significant  role in the registrant's
                internal controls; and
     6.    The registrant's  other  certifying  officers and I have indicated in
           this quarterly report whether or not there were  significant  changes
           in internal  controls or in other  factors  that could  significantly
           affect  internal  controls  subsequent to the date of our most recent
           evaluation,   including  any   corrective   actions  with  regard  to
           significant deficiencies and material weaknesses.


           Date:  December 13, 2002
                  -----------------------

                  /s/ Albert G. Pastino
                  -----------------------
                      Albert G. Pastino
                  Chief Financial Officer

                                       26`