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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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Form 10-K

|                                                |  |                                                                                             
|----------------------------------------------- |  | --------------------------------------------------------------------------------------------
|þ                                               |  | 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
|                                               
|For the transition period
    from           to

Commission file number 0-27607

Cysive, Inc.


(Exact name of registrant as specified in its
charter)


|                                                                                                  |  |                                         
|------------------------------------------------------------------------------------------------- |  | ----------------------------------------
|Delaware                                                                                          |  | 54-1698017                              
|(State or other jurisdiction of
    incorporation or organization)                                |  | (I.R.S. Employer
    Identification No.)
|10780 Parkridge Blvd., Suite 400
    Reston, VA 20191(Address of principal executive
    offices) |  | 20191(Zip Code)                         

Registrants telephone number, including
area code:

(703) 259-2300


Securities Registered Pursuant to
Section 12(b) of the Act:

None


Securities Registered Pursuant to
Section 12(g) of the Act:

Common Stock, $.01 Par Value Per
Share


(Title of Class)


Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports) and
(2) has been subject to such filing requirements for the
past
90 days.     Yes þ     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
amendments to this
Form 10-K.     o

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

As of March 13, 2003, there were 28,436,538
shares of common stock outstanding. The aggregate market value
of the common stock held by nonaffiliates of the Registrant
computed by reference to the price at which the common stock was
last sold as of June 28, 2002 was $44,409,425 (the
characterization of officers and directors of the Registrant as
affiliates for purposes of this calculation should not be
construed as an admission for any other purpose that any such
person is in fact an affiliate of the Registrant).

DOCUMENTS INCORPORATED BY REFERENCE

List hereunder the following documents
incorporated by reference and the Part of the Form 10-K
into which the document is incorporated:

(1) Portions of the definitive Proxy
Statement for the Annual Meeting of the Stockholders to be held
on May 14, 2003 are incorporated by reference into
Part III, Items 10-13 of this Form 10-K.



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ANNUAL REPORT ON FORM 10-K

For the Fiscal Year Ended December 31,
2002


TABLE OF CONTENTS

|           |  |                                                                                           |    |      |    | 
|---------- |  | ----------------------------------------------------------------------------------------- | -- | ---- | -- | 
|           |  |                                                                                           |    | Page
|           |  |                                                                                           |    |     
|PART I    
|Item 1.    |  | Business                                                                                  |    |      | 1  | 
|Item 2.    |  | Properties                                                                                |    |      | 10 | 
|Item 3.    |  | Legal Proceedings                                                                         |    |      | 10 | 
|Item 4.    |  | Submission of Matters to a Vote of Security
    Holders                                   |    |      | 10 | 
|PART II   
|Item 5.    |  | Market for Registrants Common Equity and
    Related Stockholder Matters                 |    |      | 11 | 
|Item 6.    |  | Selected Financial Data                                                                   |    |      | 11 | 
|Item 7.    |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations |    |      | 13 | 
|Item 7A.   |  | Quantitative and Qualitative Disclosures About
    Market Risk                            |    |      | 21 | 
|Item 8.    |  | Financial Statements and Supplementary Data                                               |    |      | 23 | 
|Item 9.    |  | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure  |    |      | 41 | 
|PART III  
|Item 10.   |  | Directors and Executive Officers of the Registrant                                        |    |      | 42 | 
|Item 11.   |  | Executive Compensation                                                                    |    |      | 44 | 
|Item 12.   |  | Security Ownership of Certain Beneficial Owners
    and Management                        |    |      | 44 | 
|Item 13.   |  | Certain Relationships and Related Transactions                                            |    |      | 44 | 
|Item 14.   |  | Controls and Procedures                                                                   |    |      | 44 | 
|PART IV   
|Item 15.   |  | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K                       |    |      | 45 | 
|Signatures |  |                                                                                           | 47 |     

SPECIAL NOTE REGARDING FORWARD-LOOKING
INFORMATION

Certain statements contained in this Annual
Report on Form 10-K, including information with respect to
Cysive, Inc.s, or the Companys, future business
plans, constitute forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933
and Section 21E of the Securities Exchange Act of 1934. For
this purpose, any statements contained herein that are not
statements of historical fact may be deemed to be
forward-looking statements. Without limiting the foregoing, the
words may, will, should,
expects, plans, anticipates,
could, believes, estimates,
predicts, potential or
continue or the negative of these terms or other
comparable terminology are intended to identify forward-looking
statements. There are a number of important factors that could
cause the results of the Company to differ materially from those
indicated by such forward-looking statements. These factors
include those set forth in Part I
Business  Risk Factors and actual results
could differ materially from a forward-looking statement. We
undertake no obligation to update or revise publicly any
forward-looking statements, whether as a result of new
information, future events or otherwise, until the effective
date of our future reports required by applicable security laws.

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PART I

Item 1.     Business

Overview

Cysive, Inc. is a provider of interaction server
technology through our software product, Cysive Cymbio
Interaction ServerTM, or Cysive CymbioTM.
We develop and deliver software that enables users to interact
with enterprises over multiple communications channels and
devices such as Web browsers, Web Services, rich client
applications, mobile phones, PDAs, and voice. Our software
product creates a seamless user experience for interactions that
range from simple requests for information, to complex,
multi-step business processes and long-running transactions that
interact with many enterprise systems.

Since commencing operations in 1994, we have used
advanced technologies to build our customers software
systems. Given our technology expertise, we target corporate
customers who require highly complex systems to meet their
growth strategies. For example, our software engineers, in
collaboration with Cisco Systems, Inc. (Cisco), built
Ciscos Internetworking Products Center, or IPC, one of the
worlds largest Internet commerce sites. In addition to
Cisco, we have built advanced business systems for customers
including Chrysler Corporation, Equifax Secure, Inc., First
Union Corporation, Philips Medical Systems, N.A., Schneider
Logistics, Inc., Tribune Interactive, Inc., and UUNet
Technologies, Inc.

Historically, all of our revenue has resulted
from the delivery of custom software and services solutions to
our customers. Due to increasing competition, declining margins,
and business volatility, in 2001 we began the transition of our
business model from a software engineering services model to a
software product model. Accordingly, during 2001 we developed
and introduced the Cysive Cymbio Interaction Server, a
multi-channel, enterprise software product that uses widely
supported technologies and open standards to enable users to
interact with enterprises over multiple communications channels
and devices. The Cysive Cymbio Interaction Server enhances a
users experience, improves return on existing information
technology investments, and increases software developer
productivity. At the conclusion of the calendar year ended
December 31, 2002, our business model transition was
complete.

We believe that after spending several years, and
expending significant resources, implementing numerous
non-integrated and often incompatible software products, such as
application servers, portals, enterprise application integration
tools, business process management suites and Web Services
platforms, enterprises continue to face key challenges in
handling multi-channel interactions involving complex,
multi-stage transactions, with intermittently connected users
employing a myriad of access devices. Technology advances, such
as the Cysive Cymbio Interaction Server, enable companies to
integrate complex interactions between users and enterprises via
multiple channels and devices more quickly and inexpensively.

Cysive Cymbio Interaction
ServerTM

The Cysive Cymbio Interaction Server provides a
single solution for coordinating users demands for access
and interactions with enterprise systems and applications. Our
software product rationalizes the complexity of existing
enterprise applications and resources, enabling an enterprise to
combine them in new ways to adapt to business needs, and to make
them available to users over a variety of devices and
communications channels.

Cysive Cymbio is multi-channel software that
enables users to interact with enterprise applications and data
on any of the necessary channels and devices required to
transact business. Cysive Cymbio features advanced support for
multi-channel interactions, orchestration of long running
transactions via patent-pending Follow-OnTM
technology, enterprise integration using enterprise resource
adaptors based on optimized Web Services, and a full-featured
environment for developing, deploying and managing adaptive,
scalable, enterprise solutions.

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Interactions

Users and customers expect to be able to interact
with an enterprise via multiple channels and devices, including
web, voice and wireless or handheld devices. Multi-channel
interactions are seamless user experiences that access business
logic and data residing in applications, legacy systems and
enterprise data sources. An interaction implements a single
entry point with either a user or a system. Interaction
scenarios are sequences of interactions that implement specific,
long-running transactions involving multiple user and systems
entry points. Cysive Cymbio manages long-running, complex
transactions that may take place over hours, days, weeks, and
months.

Follow-On

Cysive Cymbios patent-pending Follow-On
technology orchestrates asynchronous, long-running interactions,
preserving business and user information across time and
devices. It allows tasks to continue independent of resource
availability, connectivity issues or changes in the users
preferred mode of operation. Cysive Cymbio coordinates
interactions with users and systems, including periods of
suspension while waiting for additional input from a user or an
asynchronous response from a system, or when a user moves
between devices/channels. Cysive Cymbio also automatically
detects the device and channel involved in an interaction, using
information about device capabilities and connection quality to
create the proper device-specific response.

Integration

Cysive Cymbio integrates back-end enterprise
systems using Web Services Definition Language, which provides a
uniform, standards-based means to access services and data in a
consistent and reliable manner. This approach increases
developer productivity by reducing the developers need to
understand multiple integration technologies. Where Web Services
interfaces are not available, Cysive Cymbio can generate them,
directly invoking the underlying software component.

Development
Lifecycle

Cysive Cymbio enables multiple concurrent
versions of the same interaction scenario to execute,
eliminating the need for system migrations and associated system
outages. New or changed scenarios can be deployed while Cysive
Cymbio is running without interrupting the processing of
existing scenarios.

Maintenance and Support Services

Cysive Cymbio is backed by a support program that
provides our customers with responsive, high-quality care. Our
support team is staffed by the engineers who build and maintain
Cysive Cymbio, which ensures that our customers receive the
benefit of a high level of product-specific technical expertise.
Support is also available 24 hours per day through our
online support center, The Cysive Developer Zone. Our support
team has comprehensive product knowledge and extensive resources
available through this resource to address customer issues in a
timely and effective manner. As part of our renewable
maintenance and support services, customers are also entitled to
certain upgrades to the licensed product.

Product Development

We believe that our success will depend, in part,
on our ability to enhance our existing software product and
develop or acquire new products that meet the needs of a rapidly
evolving marketplace and increasingly sophisticated and
demanding customers. Maintaining a leadership position in
understanding and integrating the latest technologies into our
software product is critical to our growth, and we will continue
to dedicate significant resources to this pursuit.

Historically, our research and development
activities have been targeted at incorporating new technologies
into customized solutions for our customers. Currently, our
product engineering group is focused on identifying new
technologies that increase or improve the functionality of our
software product. This group

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also works closely with our product management
organization to ensure that appropriate enhancements from
customer feedback are integrated in future releases of our
software product.


Sales and Marketing

We currently market and sell our software product
through a direct sales organization and expect to expand our
sales strategy with indirect sales channels. Our sales efforts
are targeted at corporate customers who are investing
significant resources in their business strategies, and
consequently require complex technology systems to meet the
growth of these strategies. Our sales force consists of teams
made up of a sales manager and a technical director. In working
with our customers, we employ a collaborative sales approach
that combines the business and technical knowledge of our
software engineers and sales professionals.

We utilize a wide variety of programs that are
intended to attract prospective customers. Our sales force
actively generates leads through a combination of targeted
events with industry leaders, cooperative marketing with
industry partners and direct mail. In support of our sales
efforts, we have a marketing group focused on developing and
cultivating sales leads, and on building brand recognition. To
achieve these objectives, we utilize, among other things:



| |   |                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a downloadable evaluation copy of the product;                                                                                                                    
|
| |  | a public relations program focused on building
    awareness and recognition through industry and business press,
    industry analysts and major industry forums;
|
| |  | a comprehensive Web site which includes customer
    case studies and technical white papers;                                                                     
|
| |  | national and regional advertising;                                                                                                                                
|
| |  | seminars to increase the visibility of our
    executives and provide lead generation opportunities;                                                              
|
| |  | business executive roundtable events; and                                                                                                                         
|
| |  | trade shows.                                                                                                                                                      

Partner Program

As part of our ongoing effort to deliver
comprehensive and cost effective business solutions to our
customers, we partner with industry leading hardware, software
and service providers. We are committed to developing and
supporting our partners with a robust program that delivers
value to both our partners and, ultimately, our end users.
Examples of our strategic partnerships include software and
hardware platform companies such as BEA Systems, Inc.,
Macromedia, Sun Microsystems and Intel, and strategy consulting
firms such as Bain & Company.

Customers

Our approach is to offer and sell Cysive Cymbio
primarily to Global 2000 companies. We sold five software
licenses (with related services) for our product in 2002, three
of which were to Global 2000 companies. We also entered into one
royalty-based OEM relationship with another software distributor
in 2002; however, the distributor changed its product direction
and terminated the relationship in February 2003. In addition,
we provided custom development services to a total of eight
customers in 2002. Our objective is to provide value to these
customers through our leading edge products and services. Prior
to introducing Cysive Cymbio in 2001, our offering was
restricted to customized software development. With the
elimination of our custom software engineering services business
in late 2002, all of our future revenue will consist of product
sales and related services. Our product is not currently
marketed to specific vertical market sectors.

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Competition

The market for our product is intensely
competitive and faces rapid technological change. We expect the
competition to continue and intensify, which could result in
price reductions, increased losses and loss of current or future
customers. Our competitors generally fall into the following
categories:



| |   |                                                                                            
| | - | -------------------------------------------------------------------------------------------
| |  | internal information technology departments of
    current and potential customers;        
|
| |  | early-stage, venture-capital backed, private
    software vendors;                         
|
| |  | application server vendors such as BEA Systems,
    Inc.;                                  
|
| |  | operating system vendors such as International
    Business Machines Corporation (IBM); and
|
| |  | database vendors such as Oracle.                                                           

A number of our competitors and potential
competitors have longer operating histories, significantly
greater financial, technical, marketing and other resources,
greater name recognition and a larger installed base of
customers than we have.

We believe that the principal competitive factors
in our business are:



| |   |                                                                
| | - | ---------------------------------------------------------------
| |  | corporate and product reputation;                              
|
| |  | product architecture, functionality and features;              
|
| |  | unproven market demand for our particular product;             
|
| |  | interoperability of our product with existing
    applications;
|
| |  | product innovation with frequent enhancement;                  
|
| |  | customer value and quality of support services;
    and        
|
| |  | price.                                                         

Culture

We continue to build our corporate culture around
a common set of values based on excellence, discipline and
results. Our employees understand that we hire only high caliber
technical people because our customers demand a high level of
execution. We believe we have instilled in our software
engineers the sense of challenge as well as pride in having
helped to build some of the most technically complex systems in
todays business environment. By growing our business
organically we have been able to instill this value set in our
professionals on an individual basis.

While we focus on excellence and quality, we also
foster and maintain a culture based on innovation, challenge and
teamwork to attract and retain the level of software engineers
we demand. To ensure continued development of our technical
staff, we place a high priority on training. We conduct training
in a number of important ways by:



| |   |                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------
| |  | sending our software engineers to industry
    conferences;                                                    
|
| |  | encouraging our software engineers to author
    bylined articles for publication in technical trade journals; 
|
| |  | purchasing reference materials for our software
    engineers who in return write reviews of the materials; and
|
| |  | offering ongoing internal technology seminars.                                                                 

Employees

As of March 1, 2003, we had
60 employees, of whom 29 were software engineers. Of these
29 software engineers, one is working in the United States
under an H-1B visa. Of these 29 software engineers, 22 are

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assigned to the product engineering group. We
believe our relationship with our employees is good. None of our
employees are represented by a union.


Intellectual Property Rights

Our software products, our proprietary knowledge
base, and other intellectual property rights that we develop for
our customers are an integral part of our business. We retain
ownership of our software products, which we license to our
customers. While ownership of custom work product is generally
retained by the customer, we retain a royalty-free license to
use some or all of the applications, processes and intellectual
property developed in connection with customer projects. This
information is accessible on our knowledge base only to our
employees via our secure corporate intranet. We enter into
confidentiality agreements with our employees, generally require
that our software engineers and customers enter into similar
agreements and limit access to, and distribution of, our
knowledge base. We also require our employees to assign any
rights they may have to any intellectual property developed for
us.

On December 11, 2001, we filed a patent
application for our Follow-On universal session management
technology, which is part of Cysive Cymbio. The application
seeks a patent for an invention described as an Apparatus
and Method of Using Session State Data Across Sessions. We
cannot be certain that the patent will be granted, that the
patent application will not be successfully challenged, or that
we will realize any competitive advantage from the patent if it
is granted.

Risk Factors

An investment in our Common Stock involves
risks. You should carefully consider the risks described below
and the other information in this Annual Report on
Form 10-K including our financial statements and the
related notes. The trading price of our Common Stock could
decline due to any of these risks.



| |                                                                                        
| | ---------------------------------------------------------------------------------------
| | We expect to continue to incur significant
    losses at least through the end of 2003.

Since the third quarter of fiscal 2000, we have
incurred losses. We incurred cumulative net losses of
$64.7 million from the fiscal quarter ended
September 30, 2000 through the fiscal quarter ended
December 31, 2002. We expect losses to continue through at
least the fourth quarter of 2003. However, there can be no
assurance that we will be profitable thereafter. If we do
achieve profitability, there can be no assurances that we will
be able to sustain or improve upon it on a quarterly or annual
basis for future periods.



| |                                                                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We are implementing a new business model
    that is evolving and unproven since we have migrated from
    offering a software engineering services model to a software
    products model.

We decided at the beginning of 2001 to change our
business strategy from a software engineering services model to
a software products model. Accordingly, our business model is
new and unproven and we will need to continue to develop it as
we implement our new business strategy. Our ability to generate
significant revenues with our new business model will depend, in
large part, on our ability to successfully develop our software
products and to effectively market them to existing and
potential clients. We intend to continue to develop our business
model as the demand for our software products evolves. We expect
that our financial model and results of operations will change
as a result of our transition from a software engineering
services model to a software products model. We do not have
sufficient experience with the sale and support of our products
to determine all of the effects this transition will have on our
financial model and results of operations. Our new business
strategy may not be successful and we may need to restructure or
revise our business model.



| |                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------
| | Demand for our product is uncertain and we
    may not be able to develop a sustainable market for our
    product.

Cysive Cymbio is a new product for which demand
is uncertain. Our marketing and sales activities may not be
successful in developing customer interest and in generating
sales of our product and related services. We also have not yet
sold enough of our product to determine whether we can
effectively develop a market for

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our product. We may not be able to sell
sufficient products and related services to offset our costs,
which may result in continuing losses.


If the market for multi-channel interaction
server software does not continue to grow or grows more slowly
than expected, the need for our product could decline,
negatively impacting future revenues. Consumers and businesses
may reject our software for a number of reasons, including:



| |   |                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------
| |  | lack of a perceived need to embrace interaction
    server technology or our solution;                             
|
| |  | actual or perceived lack of security of
    information;                                                           
|
| |  | lack of access and ease of use;                                                                                    
|
| |  | congestion of Internet traffic or other usage
    delays;                                                          
|
| |  | inconsistent quality of support and services;                                                                      
|
| |  | increases in access costs to the Internet;                                                                         
|
| |  | evolving government regulation;                                                                                    
|
| |  | uncertainty regarding intellectual property
    ownership;                                                         
|
| |  | costs associated with licensing and implementing
    multi-channel interaction server technology;                  
|
| |  | costs associated with the obsolescence of the
    multi-channel interaction server and existing infrastructure; and
|
| |  | our economic viability and the economic viability
    of our competitors.                                          



| |                                                                                                             
| | ------------------------------------------------------------------------------------------------------------
| | The lengthy sales cycle for our products
    makes our revenues susceptible to substantial
    fluctuations.

Our customers typically use our product and
services to implement large, sophisticated applications that are
critical to their business, and their purchases are often part
of their implementation of a distributed or Web-based computing
environment. Customers evaluating our software products face
complex decisions regarding alternative approaches to the
integration of enterprise applications, competitive product
offerings, rapidly changing software technologies and standards
and limited internal resources due to other information systems
requirements. For these and other reasons, the sales cycle for
our products is lengthy and is subject to delays or cancellation
over which we have little or no control. The recent economic
downturn has also contributed to increasing the length of our
sales cycle, and there is a risk this will continue or worsen.
This delay or failure to complete large orders and sales in a
particular quarter could significantly reduce revenue that
quarter, as well as subsequent quarters over which revenue for
the sale would likely be recognized.



| |                                                                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Because we rely on highly trained and
    experienced personnel to design and build complex products and
    systems for our customers, our inability to attract and retain
    qualified employees would impair our ability to provide our
    products to existing and new customers.

Our future success depends in large part on our
ability to attract and retain highly trained and experienced
software engineers as well as other technical personnel and
sales and marketing professionals of various levels with
experience in software products and related solutions. If we
fail to attract and retain these personnel, we may be unable to
timely develop new products and enhancements to our existing
products, and to complete existing projects or bid for new
projects of similar size, which could reduce our revenues. While
attracting and retaining experienced software engineers is
critical to our business and growth strategy, maintaining our
current level of software engineer experience, averaging more
than ten years, may also be particularly difficult. Skilled
software engineers are in short supply, and this shortage is
likely to continue for some time. As a result, competition for
these people is intense, and the industry attrition rate for
them is high.

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| |                                                                                                                                                                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In 2002, we derived 82.0% of our revenues
    from our five largest customers, and we expect to continue to
    rely on a limited number of customers for a significant portion
    of our revenues; as a result, the loss of a customer could
    result in reduced revenues and earnings.

We currently derive and expect to continue to
derive a significant portion of our revenues from a limited
number of customers. As a result, the net loss of customers
could reduce our revenues. In 2002, our five largest customers
represented 82.0% of our revenues: Manheim Auctions, 34.6%;
Charles Machine Works, Inc., 18.3%; Jeppesen Sanderson, Inc.,
11.0%; Philips Medical Systems, N.A., 9.8%; and Green Mountain
Energy Company, 8.3%. Many of these customers have completed the
related software engineering services projects or Cysive Cymbio
installations, and therefore, there is not a significant
expected future revenue stream from these customers. In
addition, a failure to collect a large account receivable could
significantly reduce our assets and profitability.



| |                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our revenues are derived primarily from a
    single software product and related services, and a decline in
    demand or prices for this product and services could adversely
    affect our business, operating results and financial
    condition.

We currently derive the majority of our revenue
from Cysive Cymbio and from related products and services. We
expect this product and services to continue to account for the
majority of our revenues in the immediate future. As a result,
factors adversely affecting the pricing of or demand for Cysive
Cymbio or related services, such as a continued or worsened
general economic slowdown, future terrorist activities or
military actions, competition, product performance or
technological change, could have an adverse effect on our
business, operating results and financial condition. In
addition, as we introduce new versions of Cysive Cymbio, any
delay or failure of these new versions to gain market acceptance
among new and existing customers would have an adverse affect on
our business, operating results and financial condition.



| |                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------
| | Our quarterly revenues and operating
    results are likely to fluctuate significantly, causing our stock
    price to decline.

Our quarterly revenues and operating results have
varied in the past and are likely to vary significantly from
quarter to quarter. This fluctuation may cause our operating
results to be below the expectations of securities analysts and
investors, and the price of our stock may fall. Factors that
could cause quarterly fluctuations include:



| |   |                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the lengthy sales cycle for our products and our
    level of product sales;                                                                        
|
| |  | the loss of a significant customer;                                                                                                                 
|
| |  | financial difficulty encountered by a significant
    customer;                                                                                     
|
| |  | the introduction of new products or changes in
    pricing policies by us or our competitors;                                                       
|
| |  | any increased price sensitivity by our customers,
    particularly in the face of current adverse economic conditions
    and increased competition;
|
| |  | our ability to manage costs, including employee
    costs and support services costs; and                                                           
|
| |  | costs related to restructurings and the
    under-utilization or closing of our offices.                                                            

In any given quarter, most of our revenues have
been attributable to a limited number of customers and we expect
this to continue. As a result, the cancellation or deferral of
any product orders in a particular quarter could significantly
reduce our revenues, which would hurt our quarterly financial
performance. In addition, a substantial portion of our costs are
relatively fixed and a failure to book an expected order in a
given quarter would not be offset by a corresponding reduction
in costs. As a result of these factors, we believe that
period-to-period comparisons of our revenues and operating
results are not necessarily meaningful.

7



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##### 





| |                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------
| | We may not be able to enhance our existing
    product or develop or acquire new products, which could
    adversely affect our business.

We believe that our success will depend, in part,
on our ability to enhance existing products and develop new
products that meet the needs of a rapidly evolving marketplace
and increasingly sophisticated and demanding customers. However,
enhancement and development of products is a complex process
involving several risks. Hiring and retaining highly qualified
technical employees is critical to the success of our
development efforts, and we face intense competition for these
employees. Launches of products can be delayed for a variety of
reasons, including the typically long development and testing
periods. Further, new or improved products may also have
bugs that hinder performance, or third party
products we incorporate in, or use to build and support, our
products, may contain defects that impair performance. These
problems can be expensive to fix and can also result in higher
technical support costs and lost customers. In addition, new
products or features are sometimes built on top of older
architectures or infrastructures, which can take longer to get
to market, make quality assurance and support more difficult,
and lead to complexity in supporting future functionality.
Significant delays in new product enhancements or significant
problems in creating new products may give competitors
opportunities to improve their competitive position at our
expense and result in declines in our revenues and earnings.



| |                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------
| | We may not be able to provide adequate
    customer service, which could adversely affect our customer
    relationships and financial performance.

If we are unable to meet customer expectations,
we could lose customers and/or receive negative publicity, which
could have a significant negative impact on the financial and
market success of our products. In addition, despite our efforts
to maintain continuous and reliable product support and customer
service, we may occasionally experience unplanned outages or
technical difficulties. Lengthy and/or frequent service
disruptions, particularly for services that customers consider
time-sensitive, can result in negative publicity, damage to our
reputation and loss of customers. This could adversely affect
customer relationships and our financial performance.



| |                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Competition from larger, more established
    competitors with greater financial resources and from new
    entrants could result in price reductions and loss of current or
    future customers.

The software products market is intensely
competitive and faces rapid technological change. We expect
competition to continue and intensify, which could result in
price reductions and the loss of current or future customers.
Many of our competitors have longer operating histories and
customer relationships, greater financial, technical, marketing
and public relations resources, larger customer bases and
greater brand or name recognition than we have. Our competitors
may be able to respond more quickly to technological
developments and changes in customer needs. This ability may
place us at a disadvantage in responding to our
competitors pricing strategies, technological advances,
advertising campaigns, strategic partnerships and other
initiatives. In addition, there are low barriers to entry into
our business because the costs to develop new products and to
provide information technology services are relatively low. We
do not own any technologies that preclude or inhibit competitors
from entering our industry. We have filed a patent application
for our Follow-On universal session management technology, which
is part of Cysive Cymbio. We cannot be certain that the patent
will be granted, that the patent application will not be
successfully challenged or that we will realize any competitive
advantage from the patent if it is granted. Therefore, we expect
to continue to face additional competition from new entrants
into our industry.



| |                                                                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our business is technology driven, and if
    we have difficulty responding to changing technology, industry
    standards and customer preferences, we could lose current and
    potential customers, which would reduce our
    revenues.

We expect to derive a substantial portion of our
revenues from creating software products that are based upon the
latest, most advanced technologies and are capable of adapting
to future technologies. Our success depends on our ability to
offer products that stay at the forefront of continuing changes
in technology, evolving industry standards and changing customer
preferences. Our failure to create products that use these

8



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##### 



technologies could cause us to lose current and
potential business opportunities, resulting in reduced revenues.
Additionally, to the extent technology becomes standardized or
simplified, there may be less demand for our products.




| |                                                                                                          
| | ---------------------------------------------------------------------------------------------------------
| | If our products contain software defects,
    it could harm our revenues and expose us to
    litigation.

The software product we offer is internally
complex and, despite extensive testing and quality control, may
contain errors or defects. We may need to issue corrective
releases of our software product to fix any defects or errors.
Any defects or errors could also cause damage to our reputation
or suits for damages and result in loss of revenues, product
returns or order cancellations, or lack of market acceptance of
our product. Accordingly, any defects or errors could have an
adverse affect on our business, results of operations and
financial condition.

Our license agreements with our customers
typically contain provisions designed to limit our exposure to
potential product liability claims. It is possible, however,
that the limitation of liability provisions contained in our
license agreements may not be effective as a result of existing
or future federal, state or local laws or ordinances or
unfavorable judicial decisions. Although we have not experienced
any product liability claims to date, sale and support of our
products entails the risk of such claims, which could be
substantial in light of customers use of such products in
mission-critical applications. If a claimant brings a product
liability claim against us, it could have a material adverse
effect on our business, results of operations and financial
condition. Our products interoperate with many parts of
complicated computer systems, such as mainframes, servers,
personal computers, application software, databases, operating
systems and data transformation software. Failure of any one of
these parts could cause all or large parts of computer systems
to fail. In such circumstances, it may be difficult to determine
which part failed, and it is likely that customers will bring a
lawsuit against several suppliers. Even if our software is not
at fault, we could suffer material expense and material
diversion of management time in defending any such lawsuits.

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.



| |                                                                                           
| | ------------------------------------------------------------------------------------------
| | A general decline in economic conditions
    could lead to reduced demand for our product.

The continuing downturn in general economic
conditions and specific declines in the technology sector has
led to reduced demand for a variety of goods and services,
including many technology products. If conditions continue to
decline, or fail to improve, in geographic areas that are
significant to us, we could see a decrease in the overall demand
for our products that could negatively impact our operating
results.



| |                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Because our business of software products
    involves creating and using intellectual property,
    misappropriation of and disputes regarding intellectual property
    could harm our reputation, adversely affect our competitive
    position and cost us money.

If third parties infringe or misappropriate our
products, trade secrets, trademarks or other proprietary
information, or if disputes arise with customers or suppliers
concerning intellectual property we create for them and/or
license from them, our reputation, competitive position and
relationships with customers could be damaged. We could be
required to spend significant amounts of time and financial
resources to defend our company, and our managerial resources
could be diverted.



| |                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------
| | We entered into non-compete agreements with
    some of our customers, which reduces the number of our potential
    customers and sources of revenues.

A substantial portion of our custom software
engineering services business involved the development of
software applications for specific projects. Ownership of
customer-specific software was generally retained by the
customer, although we retained rights to some of the
applications, processes and other intellectual property
developed in connection with projects. We sometimes agreed,
however, not to reuse this customer-specific software when
building systems for a customers competitors. In addition,
we occasionally agreed not to build

9



---



##### 



any type of system for a customers
competitors for limited periods of time, which have been as long
as three years. These non-compete agreements reduce the number
of our potential customers and our sources of revenues. We may
enter into such non-compete agreements in the future.




| |                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We depend on our Chief Executive Officer,
    and his loss may adversely affect our ability to attract and
    retain customers, maintain a cohesive culture and compete
    effectively.

We believe that our success depends on the
continued employment of our Chief Executive Officer, Nelson A.
Carbonell, Jr. If Mr. Carbonell were unable or unwilling to
continue in his present position, he would be very difficult to
replace and our business could be adversely affected.
Mr. Carbonell is particularly important to our business in
providing strategic direction, managing our operations and
creating and maintaining a cohesive culture. He has also been
involved in establishing and expanding customer relationships.

Available Information

Our Internet address is http://www.Cysive.com.
The contents of our website are not part of this Annual Report
on Form 10-K, and our Internet address is included in this
document as an inactive textual reference only. We make our
Annual Reports on Form 10-K, Quarterly Reports on
Form 10-Q, Current Reports on Form 8-K and all
amendments to those reports available free of charge through our
website as soon as reasonably practicable after we file such
reports with, or furnish such reports to, the Securities and
Exchange Commission.

Item 2.     Properties

Our principal headquarters are in Reston, VA
under a lease that expires in April 2010. We also have offices
in the metropolitan areas of, Atlanta, GA; Chicago, IL; and New
York, NY. We are actively attempting to sublease our Waltham,
MA; Dallas, TX; and Irvine, CA offices, and a portion of our
Reston, VA; Chicago, IL; and New York, NY offices as part of the
restructuring plans we previously announced. We do not own any
real estate. Other than our headquarters in Reston, VA, we do
not consider any specific leased location to be material to our
operations and believe that equally suitable alternative
locations are available in all areas where we currently do
business.



|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings

Cysive is not a party to any material legal
proceedings.



|        |                                                        
|------- | -------------------------------------------------------
|Item 4. | Submission of Matters to a Vote of Security
    Holders

No matters were submitted to a vote of security
holders during the fourth quarter of 2002.

10



---



##### 



PART II



|        |                                                                          
|------- | -------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity
    and Related Stockholder Matters

Market Price of Common Stock

Our common stock has been quoted on the Nasdaq
National Market under the symbol CYSV since our
initial public offering on October 15, 1999. The following
table sets forth for the period indicated the high and low sale
prices for our common stock on the Nasdaq National Market (as
adjusted for our two-for-one stock split effected on May 9,
2000).

|               |  |      |      |     |  |   |      | 
|-------------- |  | ---- | ---- | --- |  | - | ---- | 
|2002           |  | High |      | Low
|               |  |      |      |    
|First Quarter  |  | $    | 3.65 |     |  | $ | 2.00 | 
|Second Quarter |  | $    | 2.85 |     |  | $ | 2.10 | 
|Third Quarter  |  | $    | 2.48 |     |  | $ | 2.01 | 
|Fourth Quarter |  | $    | 2.88 |     |  | $ | 2.07 | 

|               |  |      |      |     |  |   |      | 
|-------------- |  | ---- | ---- | --- |  | - | ---- | 
|2001           |  | High |      | Low
|               |  |      |      |    
|First Quarter  |  | $    | 7.50 |     |  | $ | 3.06 | 
|Second Quarter |  | $    | 4.13 |     |  | $ | 2.80 | 
|Third Quarter  |  | $    | 3.25 |     |  | $ | 1.93 | 
|Fourth Quarter |  | $    | 3.44 |     |  | $ | 2.08 | 

On March 13, 2003, the last reported sale
price of our common stock was $2.49 per share. As of
March 13, 2003, there were approximately 161 holders
of record of our common stock.

Recent Sales of Unregistered
Securities

From October 1, 2002 through
December 31, 2002, we granted to certain of our employees
options to purchase a total of 399,000 shares of our common
stock under and pursuant to our Second Amended and Restated 1994
Stock Option Plan.

No underwriters were involved in any of the
foregoing distributions of securities. Such distributions were
made in reliance upon an exemption from the registration
provisions of the Securities Act set forth in Rule 701 of
the Securities Act relative to options to purchase common stock.
All of the foregoing options are deemed restricted securities
for the purposes of the Securities Act.

Dividend Policy

We have never declared or paid any cash dividends
on our capital stock. We anticipate that all of our earnings in
the foreseeable future will be retained to finance the continued
growth and development of our business, and we have no current
intention to pay cash dividends. Our future dividend and
distribution policy will depend on earnings, capital
requirements and financial condition, requirements of the
financing agreements to which the Company is then a party and
other factors considered relevant by the Board of Directors.

Registration of Securities

None.



|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data

The following selected financial data should be
read together with the financial statements and the related
notes and Managements Discussion and Analysis of Financial
Condition and Results of Operations included elsewhere in this
Annual Report on Form 10-K. The balance sheet data at
December 31, 2002, 2001, 2000, 1999, 1998 and the
statements of operations data for each of the years in the
five-year period ended

11



---



##### 



December 31, 2002 have been derived from
Cysives financial statements for these years, which have
been audited by Ernst & Young LLP, independent auditors.


Through September 30, 1999, we operated as
an S corporation under the Internal Revenue Code. Under the
provisions of the Internal Revenue Code, our stockholders
included their pro rata share of our income in their personal
income tax returns. Accordingly, we were not subject to federal
and most state income taxes through September 30, 1999. In
connection with our initial public offering, our stockholders
elected to rescind the S corporation election effective on
October 1, 1999, and we are now subject to federal and
state income taxes.

|                                                                     |                            |                                                 |            |       |        |      |            |        |        |      |            |        |        |   |            |        |        |   |            |       |       | 
|-------------------------------------------------------------------- | -------------------------- | ----------------------------------------------- | ---------- | ----- | ------ | ---- | ---------- | ------ | ------ | ---- | ---------- | ------ | ------ | - | ---------- | ------ | ------ | - | ---------- | ----- | ----- | 
|                                                                     |                            |                                                
|                                                                     |                            | Year Ended December 31,                        
|                                                                     |                            |                                                
|                                                                     |                            | 2002                                            |            | 2001  |        | 2000 |            | 1999   |        | 1998
|                                                                     |                            |                                                 |            |       |        |      |            |        |        |     
|                                                                     |                            |                                                
|                                                                     |                            | (In thousands, except share and per share data)
|Statements of Operations Data                                        |                            |                                                 |            |       |        |      |            |        |        |      |            |        |        |   |            |        |        |   |            |      
|Revenues:                                                            |                            |                                                 |            |       |        |      |            |        |        |      |            |        |        |   |            |        |        |   |            |      
|                                                                     | Services                   |                                                 | $          | 4,004 |        |      | $          | 14,691 |        |      | $          | 50,287 |        |   | $          | 25,265 |        |   | $          | 9,142 |      
|                                                                     | Software license           |                                                 |            | 205   |        |      |            |       |        |      |            |       |        |   |            |       |        |   |            |      |      
|                                                                     |                            |                                                 |            |       |        |      |            |        |        |      |            |        |        |   |            |        |        |   |            |      
|                                                                     |                            | Total revenues                                  |            |       | 4,209  |      |            |        | 14,691 |      |            |        | 50,287 |   |            |        | 25,265 |   |            |       | 9,142 | 
|Direct costs:                                                        |                            |                                                 |            |       |        |      |            |        |        |      |            |        |        |   |            |        |        |   |            |      
|                                                                     | Services                   |                                                 |            | 3,360 |        |      |            | 13,739 |        |      |            | 22,851 |        |   |            | 8,899  |        |   |            | 3,742 |      
|                                                                     | Software license           |                                                 |            | 147   |        |      |            |       |        |      |            |       |        |   |            |       |        |   |            |      |      
|                                                                     |                            |                                                 |            |       |        |      |            |        |        |      |            |        |        |   |            |        |        |   |            |      
|                                                                     |                            | Total direct costs                              |            |       | 3,507  |      |            |        | 13,739 |      |            |        | 22,851 |   |            |        | 8,899  |   |            |       | 3,742 | 
|                                                                     |                            |                                                 |            |       |        |      |            |        |        |      |            |        |        |   |            |        |        |   |            |      
|Gross profit                                                         |                            |                                                 | 702        |       |        |      | 952        |        |        |      | 27,436     |        |        |   | 16,366     |        |        |   | 5,400      |      
|Operating expenses:                                                  |                            |                                                 |            |       |        |      |            |        |        |      |            |        |        |   |            |        |        |   |            |      
|                                                                     | Sales and marketing        |                                                 |            | 8,767 |        |      |            | 9,529  |        |      |            | 10,773 |        |   |            | 5,491  |        |   |            | 1,824 |      
|                                                                     | General and administrative |                                                 |            | 9,257 |        |      |            | 12,330 |        |      |            | 23,848 |        |   |            | 7,228  |        |   |            | 2,725 |      
|                                                                     | Research and development   |                                                 |            | 3,494 |        |      |            | 3,789  |        |      |            |       |        |   |            |       |        |   |            |      |      
|                                                                     | Stock compensation         |                                                 |            | 4,561 |        |      |            | 3,143  |        |      |            | 5,843  |        |   |            | 14,851 |        |   |            | 69    |      
|                                                                     | Restructuring              |                                                 |            | 5,945 |        |      |            | 2,098  |        |      |            | 4,710  |        |   |            |       |        |   |            |      |      
|                                                                     |                            |                                                 |            |       |        |      |            |        |        |      |            |        |        |   |            |        |        |   |            |      
|                                                                     |                            | Total operating expenses                        |            |       | 32,024 |      |            |        | 30,889 |      |            |        | 45,174 |   |            |        | 27,570 |   |            |       | 4,618 | 
|Operating (loss) income                                              |                            |                                                 | (31,322    | )     |        |      | (29,937    | )      |        |      | (17,738    | )      |        |   | (11,204    | )      |        |   | 782        |      
|Investment income, net                                               |                            |                                                 | 5,196      |       |        |      | 8,064      |        |        |      | 7,770      |        |        |   | 432        |        |        |   | 14         |      
|                                                                     |                            |                                                 |            |       |        |      |            |        |        |      |            |        |        |   |            |        |        |   |            |      
|(Loss) income before taxes                                           |                            |                                                 | (26,126    | )     |        |      | (21,873    | )      |        |      | (9,968     | )      |        |   | (10,772    | )      |        |   | 796        |      
|Income tax expense (benefit)                                         |                            |                                                 | 19         |       |        |      | 55         |        |        |      | 4,360      |        |        |   | (4,369     | )      |        |   |           |      
|                                                                     |                            |                                                 |            |       |        |      |            |        |        |      |            |        |        |   |            |        |        |   |            |      
|Net (loss) income                                                    |                            | $                                               | (26,145    | )     |        | $    | (21,928    | )      |        | $    | (14,328    | )      |        | $ | (6,403     | )      |        | $ | 796        |      
|                                                                     |                            |                                                 |            |       |        |      |            |        |        |      |            |        |        |   |            |        |        |   |            |      
|Weighted average shares outstanding                                  |                            |                                                 | 29,008,503 |       |        |      | 29,521,894 |        |        |      | 26,438,946 |        |        |   | 17,629,932 |        |        |   | 13,554,000 |      
|Weighted average shares outstanding and common
    share equivalents |                            |                                                 | 29,008,503 |       |        |      | 29,521,894 |        |        |      | 26,438,946 |        |        |   | 17,629,932 |        |        |   | 15,987,318 |      
|(Loss) earnings per share:                                           |                            |                                                 |            |       |        |      |            |        |        |      |            |        |        |   |            |        |        |   |            |      
|                                                                     | Basic                      |                                                 | $          | (0.90 | )      |      | $          | (0.74  | )      |      | $          | (0.54  | )      |   | $          | (0.36  | )      |   | $          | 0.06  |      
|                                                                     | Diluted                    |                                                 | $          | (0.90 | )      |      | $          | (0.74  | )      |      | $          | (0.54  | )      |   | $          | (0.36  | )      |   | $          | 0.05  |      

12



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##### 



|                             |  |                |         |      |  |      |         |      |  |      |         |  |  |   |        |  |  |   |       | 
|---------------------------- |  | -------------- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- |  |  | - | ------ |  |  | - | ----- | 
|                             |  |               
|                             |  | December 31,  
|                             |  |               
|                             |  | 2002           |         | 2001 |  | 2000 |         | 1999 |  | 1998
|                             |  |                |         |      |  |      |         |      |  |     
|                             |  |               
|                             |  | (In thousands)
|Balance Sheet Data           |  |                |         |      |  |      |         |      |  |      |         |  |  |   |        |  |  |   |       | 
|Cash and cash equivalents    |  | $              | 8,460   |      |  | $    | 1,484   |      |  | $    | 20,674  |  |  | $ | 2,433  |  |  | $ | 612   | 
|Interest-bearing investments |  |                | 123,436 |      |  |      | 149,802 |      |  |      | 148,538 |  |  |   | 45,039 |  |  |   |      | 
|Working capital              |  |                | 68,434  |      |  |      | 117,934 |      |  |      | 112,735 |  |  |   | 51,989 |  |  |   | 2,150 | 
|Total assets                 |  |                | 137,931 |      |  |      | 161,134 |      |  |      | 186,080 |  |  |   | 61,354 |  |  |   | 3,163 | 
|Total liabilities            |  |                | 6,747   |      |  |      | 4,900   |      |  |      | 12,235  |  |  |   | 3,675  |  |  |   | 644   | 
|Stockholders equity         |  |                | 131,184 |      |  |      | 156,234 |      |  |      | 173,845 |  |  |   | 57,679 |  |  |   | 2,519 | 



|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations

You should read the following discussion
together with Selected Financial Data and our
financial statements and the related notes included elsewhere in
this Annual Report on Form 10-K.

Overview

Cysive, Inc. is a provider of interaction server
technology through our software product, Cysive Cymbio
Interaction Server, or Cysive Cymbio. We develop and deliver
software that enables users to interact with enterprises over
multiple communications channels and devices such as Web
browsers, Web Services, rich client applications, mobile phones,
PDAs, and voice. Our software product creates a seamless user
experience for interactions that range from simple requests for
information, to complex, multi-step business processes and
long-running transactions that interact with many enterprise
systems.

Since commencing operations in 1994, we have used
advanced technologies to build our customers software
systems. Given our technology expertise, we target corporate
customers who require highly complex systems to meet their
growth strategies. For example, our software engineers, in
collaboration with Cisco Systems, Inc. (Cisco), built
Ciscos Internetworking Products Center, or IPC, one of the
worlds largest Internet commerce sites. In addition to
Cisco, we have built advanced business systems for customers
including Chrysler Corporation, Equifax Secure, Inc., First
Union Corporation, Philips Medical Systems, N.A., Schneider
Logistics, Inc., Tribune Interactive, Inc., and UUNet
Technologies, Inc.

Historically, all of our revenue has resulted
from the delivery of custom software and services solutions to
our customers. Due to increasing competition, declining margins,
and business volatility, in 2001 we began the transition of our
business model from a software engineering services model to a
software product model. Accordingly, during 2001 we developed
and introduced the Cysive Cymbio Interaction Server, a
multi-channel, enterprise software product that uses widely
supported technologies and open standards to enable users to
interact with enterprises over multiple communications channels
and devices. The Cysive Cymbio Interaction Server enhances a
users experience, improves return on existing information
technology investments, and increases software developer
productivity. At the conclusion of the calendar year ended
December 31, 2002, our business model transition was
complete.

We believe that after spending several years, and
expending significant resources implementing numerous
non-integrated and often incompatible software products, such as
application servers, portals, enterprise application integration
tools, business process management suites and Web Services
platforms, enterprises continue to face key challenges in
handling multi-channel interactions involving complex,
multi-stage transactions, with intermittently connected users
employing a myriad of access devices. Technology advances, such
as the Cysive Cymbio Interaction Server, enable companies to
integrate complex interactions between users and enterprises via
multiple channels and devices more quickly and inexpensively.

We currently operate in one business segment and
only market our product to companies with operations in the
United States.

13



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##### 



Application of Critical Accounting
Policies

Our financial statements and accompanying notes
are prepared in accordance with accounting principles generally
accepted in the United States. Preparing financial statements
requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues,
and expenses. These estimates and assumptions are affected by
managements application of accounting policies. Critical
accounting policies for us include revenue recognition,
accounting for research and development costs, accounting for
stock-based compensation, accounting for restructuring costs,
and accounting for income taxes.

We account for the licensing of software in
accordance with the American Institute of Certified Public
Accountants (AICPA) Statement of Position (SOP) 97-2
Software Revenue Recognition (as amended by
SOP 98-4 and SOP 98-9) and related interpretations.
The application of SOP 97-2 requires judgment, including
whether a software arrangement includes multiple elements, and
if so, whether vendor-specific objective evidence (VSOE) of fair
value exists for those elements, and whether significant
customization to a product is required, and if so, whether
long-term contract accounting principles apply. End users
receive certain benefits of our product license over time,
including maintenance. To date we have not established a VSOE
fair value for maintenance of our product and, therefore, to
date, in those cases where long-term contract accounting
principles do not apply, we have generally recognized the
combined value of the product license fee and maintenance
ratably over the initial maintenance period, typically one year.
Changes to the elements in a software arrangement, the ability
to identify VSOE fair values for those elements, and the fair
value of the respective elements could materially impact the
amount of earned and deferred revenue recognizable at a
particular point in time. For example, once the VSOE value of
maintenance is established, and assuming all other revenue
recognition criteria are met, then the value of the software
license revenue component of perpetual license sales will be
recognized at the time of sale and previously deferred software
license revenue related to earlier perpetual license sales would
be recognized.

We account for research and development costs in
accordance with several accounting pronouncements, including
Statement of Financial Accounting Standards (SFAS) No. 2
Accounting for Research and Development Costsand SFAS No. 86 Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise
Marketed.SFAS No. 86 specifies that costs
incurred internally for creating a computer software product
should be charged to expense when incurred as research and
development until technological feasibility has been established
for the product. Once technological feasibility is established,
all software costs should be capitalized until the product is
available for general release to customers. Judgment is required
in determining when the technological feasibility of a product
is established. We have determined that technological
feasibility for our products is reached shortly before the
products are released for sale. Costs incurred after
technological feasibility is established are not material, and
accordingly, we expense all research and development costs when
incurred.

We account for stock-based compensation in
accordance with Accounting Principles Board Opinion (APB)
No. 25 Accounting for Stock Issued to
Employeesusing the intrinsic value method.
Accordingly, we do not recognize any stock compensation expense
related to the granting of stock options with an exercise price
equal to the fair value of our stock. We do recognize stock
compensation expense related to the granting of stock options
when the exercise price is deemed to be less than the fair
market value of our stock and, also, when we issue restricted
stock to employees. In our financial statements we have made pro
forma disclosures required by SFAS No. 148
Accounting for Stock-Based Compensation 
Transition and Disclosureusing the fair value method.

We account for restructuring expense in
accordance with Financial Accounting Standards Board (FASB)
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)(Issue 94-3).
In June 2002, the FASB adopted SFAS No. 146
Accounting for Costs Associated with Exit or Disposal
Activities,which requires restructurings initiated
after December 31, 2002 to be accounted for using the
provisions therein, with earlier application encouraged. SFAS
No. 146 specifies that an exit cost only be recognized when
a liability is incurred, whereas under Issue 94-3 an exit
cost (as defined therein) is recognized at the date of an
entitys commitment to an exit plan. We chose to apply the
accounting provisions of Issue 94-3 to account for the
restructuring we initiated in the third quarter of 2002. As a
result we

14



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##### 



recognized approximately $0.9 million of
additional costs, on an accelerated basis, related to office
space no longer used by us. Under SFAS No. 146 the
accounting provisions of Issue 94-3 will continue to apply
to the restructurings we initiated prior to December 31,
2002.


We account for income taxes in accordance with
SFAS No. 109 Accounting for Income
Taxes. Because we incurred losses recently and the
realization of tax benefits related to our net deferred tax
asset is uncertain we have provided a full valuation allowance
against our net deferred tax asset. We currently do not
recognize any tax benefit on a net basis from losses we incur.

Description of Results of
Operations Components

Through 2002, we generated nearly all of our
revenues from software engineering services that were provided
primarily on a time and materials basis. Services revenue was
recognized and billed monthly by multiplying the number of hours
expended by our software engineers in the performance of each
contract by the established billing rates. Our customers
reimbursed us for direct expenses allocated to a project such as
airfare, lodging and meals. Consequently, these direct
reimbursements were excluded from revenues. Software license
revenues consist of software license fees. Software license fees
are typically recognized ratably over the initial maintenance
period, or, if significant customization is performed, over the
installation and customization period. Maintenance fees are
recognized ratably over the maintenance term and are included in
services revenue.

Direct costs for services consist primarily of
compensation and benefits for our software engineers and the
non-billable portion of other direct project costs. Allocated
costs related to specific employees performing quality assurance
reviews for customers are also included in direct costs for
services. Direct costs for software license consists primarily
of software license fees paid to third parties related to
software integrated into, or packaged with, our products.

General and administrative expenses consist
primarily of compensation and benefits for our management,
finance, administration, human resources, information technology
and recruiting personnel. In addition, general and
administrative expenses include: depreciation and amortization
and general operating expenses such as telephones, office
supplies, travel, outside professional services and facilities
costs.

Research and development expenses include
compensation and benefits for technical staff assigned to
product engineering and related support and travel expenses.

Sales and marketing expenses consist primarily of
salaries, commissions, benefits, marketing programs and travel
costs associated with our sales and marketing efforts. We sell
our products through a direct sales force organized by
geographic region.

Restructuring expenses consist primarily of
severance costs of salaries and benefits for a certain period of
time for those employees identified in restructuring plans and
facilities costs as approved by the board of directors.

Stock compensation expense relates to grants of
options during the years 1997 through 2000 to purchase
11,388,410 shares of common stock at an exercise price below the
fair market value of the common stock on the date of grant and
to the issuance of 228,000 shares of restricted stock to
employees in 2001.

15



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##### 



Results of Operations

The following table presents, for the periods
indicated, the relative composition of revenues and selected
statements of operations data as a percentage of revenues:

|                         |                            |                          |        |       |       |      |        |       |       |  |       |       |       | 
|------------------------ | -------------------------- | ------------------------ | ------ | ----- | ----- | ---- | ------ | ----- | ----- |  | ----- | ----- | ----- | 
|                         |                            |                         
|                         |                            | Year Ended December 31, 
|                         |                            |                         
|                         |                            | 2002                     |        | 2001  |       | 2000
|                         |                            |                          |        |       |       |     
|Revenues:                |                            |                          |        |       |       |      |        |       |       |  |       |      
|                         | Services                   |                          |        | 95.1  | %     |      |        | 100.0 | %     |  |       | 100.0 | %    
|                         | Software license           |                          |        | 4.9   |       |      |        |      |       |  |       |      |      
|                         |                            |                          |        |       |       |      |        |       |       |  |       |      
|                         |                            | Total revenues           |        |       | 100.0 |      |        |       | 100.0 |  |       |       | 100.0 | 
|Direct costs:            |                            |                          |        |       |       |      |        |       |       |  |       |      
|                         | Services (1)               |                          |        | 83.9  |       |      |        | 93.5  |       |  |       | 45.4  |      
|                         | Software license (1)       |                          |        | 71.7  |       |      |        |      |       |  |       |      |      
|                         |                            |                          |        |       |       |      |        |       |       |  |       |      
|                         |                            | Total direct costs       |        |       | 83.3  |      |        |       | 93.5  |  |       |       | 45.4  | 
|                         |                            |                          |        |       |       |      |        |       |       |  |       |      
|Gross margin             |                            |                          | 16.7   |       |       |      | 6.5    |       |       |  | 54.6  |      
|Operating expenses:      |                            |                          |        |       |       |      |        |       |       |  |       |      
|                         | Sales and marketing        |                          |        | 208.3 |       |      |        | 64.9  |       |  |       | 21.4  |      
|                         | General and administrative |                          |        | 219.9 |       |      |        | 83.9  |       |  |       | 47.5  |      
|                         | Research and development   |                          |        | 83.0  |       |      |        | 25.8  |       |  |       |      |      
|                         | Stock compensation         |                          |        | 108.4 |       |      |        | 21.4  |       |  |       | 11.6  |      
|                         | Restructuring              |                          |        | 141.3 |       |      |        | 14.3  |       |  |       | 9.4   |      
|                         |                            |                          |        |       |       |      |        |       |       |  |       |      
|                         |                            | Total operating expenses |        |       | 760.9 |      |        |       | 210.3 |  |       |       | 89.9  | 
|Operating loss           |                            |                          | (744.2 | )     |       |      | (203.8 | )     |       |  | (35.3 | )    
|Investment income, net   |                            |                          | 123.5  |       |       |      | 54.9   |       |       |  | 15.5  |      
|                         |                            |                          |        |       |       |      |        |       |       |  |       |      
|Loss before income taxes |                            |                          | (620.7 | )     |       |      | (148.9 | )     |       |  | (19.8 | )    
|Income tax expense       |                            |                          | 0.4    |       |       |      | 0.4    |       |       |  | 8.7   |      
|                         |                            |                          |        |       |       |      |        |       |       |  |       |      
|Net loss                 |                            |                          | (621.1 | )%    |       |      | (149.3 | )%    |       |  | (28.5 | )%   
|                         |                            |                          |        |       |       |      |        |       |       |  |       |      



---



|    |                                                                                                                                           
|--- | ------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Direct costs of services and software license are
    stated as a percentage of services and software licenses
    revenues, respectively.



| |                         
| | ------------------------
| | Revenues (in thousands):

|                 |                |                         |       |                   |  |             |        |          |  |          |        |        |  |  |       |       |    |  |       |       |   
|---------------- | -------------- | ----------------------- | ----- | ----------------- |  | ----------- | ------ | -------- |  | -------- | ------ | ------ |  |  | ----- | ----- | -- |  | ----- | ----- | --
|                 |                |                         |       |                   |  |             |        |         
|                 |                |                         |       | Percentage Change
|                 |                | Year Ended December 31, |       |                  
|                 |                |                         |       | Fiscal 2002       |  | Fiscal 2001
|                 |                | 2002                    |       | 2001              |  | 2000        |        | vs. 2001 |  | vs. 2000
|                 |                |                         |       |                   |  |             |        |          |  |         
|Services         |                | $                       | 4,004 |                   |  | $           | 14,691 |          |  | $        | 50,287 |        |  |  | (72.7 | )%    |    |  | (70.8 | )%   
|Software license |                |                         | 205   |                   |  |             |       |          |  |          |       |        |  |  | NM    |       |    |  |      |      
|                 |                |                         |       |                   |  |             |        |          |  |          |        |        |  |  |       |       |    |  |       |      
|                 | Total revenues |                         | $     | 4,209             |  |             | $      | 14,691   |  |          | $      | 50,287 |  |  |       | (71.4 | )% |  |       | (70.8 | )%
|                 |                |                         |       |                   |  |             |        |          |  |          |        |        |  |  |       |       |    |  |       |      

The decline in services revenue since 2000 was
primarily the result of reduced demand for custom application
development services, and a corresponding reduction in both
billable hours and hourly billing rates for our software
engineering services. The decline in services revenue between
2001 and 2002 also reflected our shift in emphasis to software
license sales in our marketing and sales efforts as we completed
the transition of our business model from a software engineering
services model to a software product model. Services revenues
represented 95.1%, 100.0% and 100.0% of total revenues in 2002,
2001 and 2000, respectively. As of December 31, 2002 we
exited the custom software engineering services business and are
concentrating our efforts on software license sales and related
maintenance and support services. As of December 31, 2002 we

16



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##### 



had four billable software engineers as compared
with 222 as of December 31, 2000. The number of active
customers decreased to 16 in 2002 from 53 in 2000.


Beginning in 2002, we recognized software license
revenue resulting from the licensing of our product, Cysive
Cymbio. As of December 31, 2002 there were five active
customers using Cysive Cymbio, and deferred revenue from these
customers totaled $114,000. Demand for our product, Cysive
Cymbio, is uncertain and, therefore, the revenue stream from
future license sales is also uncertain. Additionally, the timing
of revenue recognition related to future software license sales
is uncertain, as it is, in part, dependent on when vendor
specific objective evidence for the value of maintenance
services, included as a part of these sales, is established.

Direct costs (in thousands):

|                 |                    |                         |       |                   |  |             |        |          |  |          |        |        |  |  |       |       |    |  |       |       |   
|---------------- | ------------------ | ----------------------- | ----- | ----------------- |  | ----------- | ------ | -------- |  | -------- | ------ | ------ |  |  | ----- | ----- | -- |  | ----- | ----- | --
|                 |                    |                         |       |                   |  |             |        |         
|                 |                    |                         |       | Percentage Change
|                 |                    | Year Ended December 31, |       |                  
|                 |                    |                         |       | Fiscal 2002       |  | Fiscal 2001
|                 |                    | 2002                    |       | 2001              |  | 2000        |        | vs. 2001 |  | vs. 2000
|                 |                    |                         |       |                   |  |             |        |          |  |         
|Services         |                    | $                       | 3,360 |                   |  | $           | 13,739 |          |  | $        | 22,851 |        |  |  | (75.6 | )%    |    |  | (39.9 | )%   
|Software license |                    |                         | 147   |                   |  |             |       |          |  |          |       |        |  |  | NM    |       |    |  |      |      
|                 |                    |                         |       |                   |  |             |        |          |  |          |        |        |  |  |       |       |    |  |       |      
|                 | Total direct costs |                         | $     | 3,507             |  |             | $      | 13,739   |  |          | $      | 22,851 |  |  |       | (74.5 | )% |  |       | (39.9 | )%
|                 |                    |                         |       |                   |  |             |        |          |  |          |        |        |  |  |       |       |    |  |       |      

The decrease in direct costs from services since
2000 primarily resulted from multiple restructurings beginning
in the fourth quarter of 2000 and continuing through the third
quarter of 2002, which resulted in a lower number of software
engineers and lower direct costs. As noted above, the number of
billable software engineers fell from 222 as of
December 31, 2000 to four as of December 31, 2002. As
a percentage of revenues, direct costs from services were 83.9%,
93.5%, and 45.4% in 2002, 2001, and 2000, respectively. These
varying percentages reflect different average utilization rates
for our software engineers in each year. In 2001, we experienced
a dramatic decrease in our average utilization rate as personnel
reductions lagged falling service revenues. A relatively low
utilization rate continued in 2002 as we continued with
personnel reductions in response to further declines in services
revenues.

Direct costs from software licenses in 2002
represented third party technology license fees and product
packaging. Third party license fees are generally amortized on a
straight-line basis over the term of each license.



| |                                       
| | --------------------------------------
| | Operating expenses (in
    thousands):

|                           |                          |                         |       |                   |  |             |        |          |  |          |        |        |  |  |       |     |   |  |       |       |   
|-------------------------- | ------------------------ | ----------------------- | ----- | ----------------- |  | ----------- | ------ | -------- |  | -------- | ------ | ------ |  |  | ----- | --- | - |  | ----- | ----- | --
|                           |                          |                         |       |                   |  |             |        |         
|                           |                          |                         |       | Percentage Change
|                           |                          | Year Ended December 31, |       |                  
|                           |                          |                         |       | Fiscal 2002       |  | Fiscal 2001
|                           |                          | 2002                    |       | 2001              |  | 2000        |        | vs. 2001 |  | vs. 2000
|                           |                          |                         |       |                   |  |             |        |          |  |         
|Sales and marketing        |                          | $                       | 8,767 |                   |  | $           | 9,529  |          |  | $        | 10,773 |        |  |  | (8.0  | )%  |   |  | (11.5 | )%   
|General and administrative |                          |                         | 9,257 |                   |  |             | 12,330 |          |  |          | 23,848 |        |  |  | (24.9 | )   |   |  | (48.3 | )    
|Research and development   |                          |                         | 3,494 |                   |  |             | 3,789  |          |  |          |       |        |  |  | (7.8  | )   |   |  | NM    |      
|Stock compensation         |                          |                         | 4,561 |                   |  |             | 3,143  |          |  |          | 5,843  |        |  |  | 45.1  |     |   |  | (46.2 | )    
|Restructuring              |                          |                         | 5,945 |                   |  |             | 2,098  |          |  |          | 4,710  |        |  |  | 183.4 |     |   |  | (55.5 | )    
|                           |                          |                         |       |                   |  |             |        |          |  |          |        |        |  |  |       |     |   |  |       |      
|                           | Total operating expenses |                         | $     | 32,024            |  |             | $      | 30,889   |  |          | $      | 45,174 |  |  |       | 3.7 | % |  |       | (31.6 | )%
|                           |                          |                         |       |                   |  |             |        |          |  |          |        |        |  |  |       |     |   |  |       |      

Sales and Marketing.Sales and marketing expenses have
decreased since 2000 primarily due to a reduction in sales staff
headcount and lower variable compensation as sales have
declined. Spending on advertising has also declined. As of
December 31, 2002 we had 18 sales and marketing staff,
including three technical support personnel who conduct product
demonstrations and address technical issues regarding our
product. We expect sales and marketing expenses to increase as
we expand our direct sales force and marketing programs.

General and Administrative.General and administrative expenses
have decreased substantially since 2000 primarily due to lower
support staff headcount, and also reductions in facilities
costs, office and

17



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##### 



equipment expense, meeting costs, legal fees,
travel expenses, recruiting costs, and bad debt expense. As a
result of the restructuring in the third quarter of 2002, we
expect this trend of declining general and administrative
expense to continue in 2003.


Research and Development.Research and development costs relate
to the salaries and related support costs of our product
engineering team, which was established in 2000 and which
develops and supports our product. The slight decrease in costs
between 2001 and 2002 was primarily due to a decrease in office
and travel expenses for our product engineering team. As of
December 31, 2002, we had 24 personnel assigned to the
product engineering team, equal to the average of 24 during the
year.

Stock Compensation.The decrease in stock compensation
expense in 2001, as compared with 2000, was primarily due to the
cancellation of unvested options granted to employees who are no
longer employed by us, the cancellation of certain restricted
shares and a reduction in fair value of outstanding restricted
shares originally expensed in 2000. The increase in stock
compensation expense in 2002, as compared with 2001, was
primarily the result of recognizing, on an accelerated basis,
$2.0 million of expense related to the cancellation of
certain officer and employee-held stock options during the first
quarter of 2002. The amount of deferred stock compensation
included as a component of stockholders equity as of
December 31, 2002 was $0.4 million. This balance will
be fully amortized by September 30, 2003.

Restructuring.The
combination of a slow economy, declining demand for custom
application development and the transition of our business model
required us to undertake multiple restructurings during 2000
through 2002. We initially restructured our company in the
fourth quarter of 2000 and recognized $4.7 million of
expense for severance-related costs and also estimated real
estate costs associated with closing some satellite offices. In
2001, we incurred a net restructuring expense of
$2.1 million. This included all severance-related costs due
to reductions in headcount resulting from restructurings during
2001, offset by a reduction of $850,000 of the initial
restructuring accrual resulting from the 2000 restructuring plan
due to a revision of estimates for future expected costs. In
2002, we recorded $5.9 million in restructuring for
severance-related costs, future rent expense of office space no
longer used, and other associated costs. The number of employees
decreased from 338 at December 1, 2000 to 124 at
December 31, 2001 to 61 at December 31, 2002. The need
for additional restructurings is uncertain.



| |                                           
| | ------------------------------------------
| | Investment income, net (in
    thousands):

|                       |  |                         |       |                   |  |             |       |          |  |          |       |  |  |  |       |    |  |  |     |  
|---------------------- |  | ----------------------- | ----- | ----------------- |  | ----------- | ----- | -------- |  | -------- | ----- |  |  |  | ----- | -- |  |  | --- | -
|                       |  |                         |       |                   |  |             |       |         
|                       |  |                         |       | Percentage Change
|                       |  | Year Ended December 31, |       |                  
|                       |  |                         |       | Fiscal 2002       |  | Fiscal 2001
|                       |  | 2002                    |       | 2001              |  | 2000        |       | vs. 2001 |  | vs. 2000
|                       |  |                         |       |                   |  |             |       |          |  |         
|Investment income, net |  | $                       | 5,196 |                   |  | $           | 8,064 |          |  | $        | 7,770 |  |  |  | (35.6 | )% |  |  | 3.8 | %

Net investment income increased in 2001, as
compared with 2000, primarily due to a higher average level of
invested capital between periods. The decrease in net investment
income in 2002, as compared with 2001, was the result of a
combination of lower average invested capital and lower interest
rates between periods. We expect that our average invested
capital will continue to trend downward during 2003, as we
continue to use cash and investment proceeds to finance our
operations.



| |                                       
| | --------------------------------------
| | Income tax expense (in
    thousands):

|                   |  |                         |    |                   |  |             |    |          |  |          |       |  |  |  |       |    |  |  |       |   
|------------------ |  | ----------------------- | -- | ----------------- |  | ----------- | -- | -------- |  | -------- | ----- |  |  |  | ----- | -- |  |  | ----- | --
|                   |  |                         |    |                   |  |             |    |         
|                   |  |                         |    | Percentage Change
|                   |  | Year Ended December 31, |    |                  
|                   |  |                         |    | Fiscal 2002       |  | Fiscal 2001
|                   |  | 2002                    |    | 2001              |  | 2000        |    | vs. 2001 |  | vs. 2000
|                   |  |                         |    |                   |  |             |    |          |  |         
|Income tax expense |  | $                       | 19 |                   |  | $           | 55 |          |  | $        | 4,360 |  |  |  | (65.5 | )% |  |  | (98.7 | )%

In 2000, because of uncertainty regarding the
realization of the deferred tax benefit associated with our net
deferred tax asset, we provided a full valuation allowance on
the net deferred tax asset. This resulted in a net income tax
expense for the year, despite having incurred a loss before
taxes that year. In 2001 and 2002, we recorded income tax
expense in each year as a result of reductions in expected state
tax refunds from the use of loss carrybacks. As of
December 31, 2002 we have collected all of our expected tax
refunds, and we

18



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##### 



have no net tax asset or liability, current or
deferred. We do not expect to incur any significant net income
tax expense or benefit in 2003.




| |                                    
| | -----------------------------------
| | Quarterly Results of
    Operations

The following table presents unaudited quarterly
financial data for the periods indicated. We derived this data
from our unaudited financial statements, and in our opinion,
they include all adjustments, which consist only of normal
recurring adjustments, necessary to present fairly the financial
results for the periods. Our quarterly operating results have
varied significantly in the past and will continue to do so in
the future due to a number of factors including, but not limited
to, the volume of software license sales, changes in average
billing rates, utilization rates and personnel additions or
reductions, as well as the timing of expenses. Accordingly, our
results for any given quarter or series of quarters are not
necessarily indicative of our results for any future period.
However, our quarterly operating results may represent trends
that aid in understanding our business, but may be limited due
to the changing of our business model.

|                                 |                            |                                       |        |          |   |          |         |          |   |          |        |          |   |          |        |          |   |   |        |       |   |   |        |       |   |   |        |       |   |   |        |       |  
|-------------------------------- | -------------------------- | ------------------------------------- | ------ | -------- | - | -------- | ------- | -------- | - | -------- | ------ | -------- | - | -------- | ------ | -------- | - | - | ------ | ----- | - | - | ------ | ----- | - | - | ------ | ----- | - | - | ------ | ----- | -
|                                 |                            |                                      
|                                 |                            | Quarter Ended                        
|                                 |                            |                                      
|                                 |                            | Dec. 31,                              |        | Sep. 30, |   | June 30, |         | Mar. 31, |   | Dec. 31, |        | Sep. 30, |   | June 30, |        | Mar. 31,
|                                 |                            | 2002                                  |        | 2002     |   | 2002     |         | 2002     |   | 2001     |        | 2001     |   | 2001     |        | 2001    
|                                 |                            |                                       |        |          |   |          |         |          |   |          |        |          |   |          |        |         
|                                 |                            |                                      
|                                 |                            | (In thousands, except per share data)
|Statements of Operation Data     |                            |                                       |        |          |   |          |         |          |   |          |        |          |   |          |        |          |   |   |        |       |   |   |        |       |   |   |        |       |   |   |        |      
|Revenues:                        |                            |                                       |        |          |   |          |         |          |   |          |        |          |   |          |        |          |   |   |        |       |   |   |        |       |   |   |        |       |   |   |        |      
|                                 | Services                   |                                       | $      | 401      |   |          | $       | 1,044    |   |          | $      | 1,186    |   |          | $      | 1,373    |   |   | $      | 1,445 |   |   | $      | 2,571 |   |   | $      | 5,145 |   |   | $      | 5,530 |  
|                                 | Software license           |                                       |        | 38       |   |          |         | 70       |   |          |        | 96       |   |          |        | 1        |   |   |        |      |   |   |        |      |   |   |        |      |   |   |        |      |  
|Gross profit (loss)              |                            |                                       | 187    |          |   |          | 252     |          |   |          | 198    |          |   |          | 65     |          |   |   | 38     |       |   |   | (544   | )     |   |   | 1,792  |       |   |   | (334   | )    
|Operating expenses:              |                            |                                       |        |          |   |          |         |          |   |          |        |          |   |          |        |          |   |   |        |       |   |   |        |       |   |   |        |       |   |   |        |      
|                                 | Sales and marketing        |                                       |        | 1,580    |   |          |         | 1,660    |   |          |        | 2,562    |   |          |        | 2,965    |   |   |        | 3,264 |   |   |        | 2,318 |   |   |        | 2,016 |   |   |        | 1,931 |  
|                                 | General and administrative |                                       |        | 1,343    |   |          |         | 2,388    |   |          |        | 2,704    |   |          |        | 2,822    |   |   |        | 2,134 |   |   |        | 2,786 |   |   |        | 3,171 |   |   |        | 4,239 |  
|                                 | Research and development   |                                       |        | 827      |   |          |         | 1,009    |   |          |        | 883      |   |          |        | 775      |   |   |        | 913   |   |   |        | 1,210 |   |   |        | 1,053 |   |   |        | 613   |  
|                                 | Stock compensation         |                                       |        | 360      |   |          |         | 211      |   |          |        | 776      |   |          |        | 3,214    |   |   |        | 912   |   |   |        | 1,120 |   |   |        | 747   |   |   |        | 364   |  
|                                 | Restructuring              |                                       |        |         |   |          |         | 5,945    |   |          |        |         |   |          |        |         |   |   |        | 1,259 |   |   |        | (850  | ) |   |        |      |   |   |        | 1,689 |  
|Operating loss                   |                            |                                       | (3,923 | )        |   |          | (10,961 | )        |   |          | (6,727 | )        |   |          | (9,711 | )        |   |   | (8,444 | )     |   |   | (7,128 | )     |   |   | (5,195 | )     |   |   | (9,170 | )    
|Loss before income taxes         |                            |                                       | (2,841 | )        |   |          | (9,497  | )        |   |          | (5,530 | )        |   |          | (8,258 | )        |   |   | (6,809 | )     |   |   | (5,226 | )     |   |   | (3,065 | )     |   |   | (6,773 | )    
|Net loss                         |                            |                                       | (2,860 | )        |   |          | (9,497  | )        |   |          | (5,530 | )        |   |          | (8,258 | )        |   |   | (6,809 | )     |   |   | (5,281 | )     |   |   | (3,065 | )     |   |   | (6,773 | )    
|Basic and diluted loss per share |                            | $                                     | (0.10  | )        |   | $        | (0.33   | )        |   | $        | (0.19  | )        |   | $        | (0.28  | )        |   | $ | (0.23  | )     |   | $ | (0.18  | )     |   | $ | (0.10  | )     |   | $ | (0.23  | )    
|As a Percentage of Revenues      |                            |                                       |        |          |   |          |         |          |   |          |        |          |   |          |        |          |   |   |        |       |   |   |        |       |   |   |        |       |   |   |        |      
|Revenues:                        |                            |                                       |        |          |   |          |         |          |   |          |        |          |   |          |        |          |   |   |        |       |   |   |        |       |   |   |        |       |   |   |        |      
|                                 | Services                   |                                       |        | 91.3     | % |          |         | 93.7     | % |          |        | 92.5     | % |          |        | 100.0    | % |   |        | 100.0 | % |   |        | 100.0 | % |   |        | 100.0 | % |   |        | 100.0 | %
|                                 | Software license           |                                       |        | 8.7      |   |          |         | 6.3      |   |          |        | 7.5      |   |          |        |         |   |   |        |      |   |   |        |      |   |   |        |      |   |   |        |      |  
|Gross margin                     |                            |                                       | 42.6   |          |   |          | 22.6    |          |   |          | 15.4   |          |   |          | 4.7    |          |   |   | 2.6    |       |   |   | (21.2  | )     |   |   | 34.8   |       |   |   | (6.0   | )    
|Operating expenses:              |                            |                                       |        |          |   |          |         |          |   |          |        |          |   |          |        |          |   |   |        |       |   |   |        |       |   |   |        |       |   |   |        |      
|                                 | Sales and marketing        |                                       |        | 359.8    |   |          |         | 149.0    |   |          |        | 199.9    |   |          |        | 215.8    |   |   |        | 225.9 |   |   |        | 90.2  |   |   |        | 39.2  |   |   |        | 34.9  |  
|                                 | General and administrative |                                       |        | 305.8    |   |          |         | 214.5    |   |          |        | 210.9    |   |          |        | 205.3    |   |   |        | 147.7 |   |   |        | 108.4 |   |   |        | 61.6  |   |   |        | 76.6  |  
|                                 | Research and development   |                                       |        | 188.4    |   |          |         | 90.6     |   |          |        | 68.9     |   |          |        | 56.4     |   |   |        | 63.2  |   |   |        | 47.0  |   |   |        | 20.5  |   |   |        | 11.1  |  
|                                 | Stock compensation         |                                       |        | 82.0     |   |          |         | 18.9     |   |          |        | 60.5     |   |          |        | 233.9    |   |   |        | 63.1  |   |   |        | 43.6  |   |   |        | 14.5  |   |   |        | 6.7   |  
|                                 | Restructuring              |                                       |        |         |   |          |         | 533.9    |   |          |        |         |   |          |        |         |   |   |        | 87.1  |   |   |        | (33.1 | ) |   |        |      |   |   |        | 30.5  |  
|Operating loss                   |                            |                                       | (893.4 | )        |   |          | (984.3  | )        |   |          | (524.8 | )        |   |          | (706.7 | )        |   |   | (584.4 | )     |   |   | (277.3 | )     |   |   | (101.0 | )     |   |   | (165.8 | )    
|Loss before income taxes         |                            |                                       | (646.9 | )        |   |          | (852.8  | )        |   |          | (431.4 | )        |   |          | (601.0 | )        |   |   | (471.2 | )     |   |   | (203.3 | )     |   |   | (59.6  | )     |   |   | (122.5 | )    
|Net loss                         |                            |                                       | (651.2 | )        |   |          | (852.8  | )        |   |          | (431.4 | )        |   |          | (601.0 | )        |   |   | (471.2 | )     |   |   | (205.4 | )     |   |   | (59.6  | )     |   |   | (122.5 | )    

Revenues.Revenues
decreased from the quarter ended March 31, 2001 through the
quarter ended December 31, 2002 primarily due to a general
economic slowdown and reduced demand for custom application
development, and a corresponding reduction in both billable
hours and hourly billing rates for our

19



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software engineering services. The decrease also
reflects our emphasis on software license sales in our marketing
and sales efforts as we completed the transition of our business
model from a software engineering services model to a software
product model. The decline in software license revenues from the
quarter ended June 30, 2002 through the quarter ended
December 31, 2002 is primarily due to revenue being
recognized using long-term contract accounting and no new
software license sales in the fourth quarter of 2002. The number
of active customers decreased to eight in the quarter ended
December 31, 2002 from 16 in the quarter ended
March 31, 2001.


Gross Margin.Gross
margin improved from (6.0)% in the quarter ended March 31,
2001 to 34.8% in the quarter ended June 30, 2001 as a
result of technical staff reductions. In the third quarter of
2001 gross margin dropped to (21.2)% as a result of a continuing
decline in revenues. Gross margin increased from 2.6% to 42.6%
during the quarter ended December 31, 2001 though the
quarter ended December 31, 2002 primarily due to the
benefit of additional technical staff reductions more than
offsetting a further decline in revenues.

Sales and marketing.Sales and marketing costs as a
percentage of revenues increased in the first three quarters of
2001 primarily due to the decrease in revenue growth for those
periods offset by a slight increase in the overall sales and
marketing expense. The significant increase in sales and
marketing costs in the fourth quarter of 2001 was primarily due
to an increase in marketing advertising and public relations
expense related to branding initiatives and the launch of Cysive
Cymbio in October 2001. The first through third quarters of 2002
showed a decrease in sales and marketing costs as a percentage
of revenues due to the restructuring in the fourth quarter of
2001, which resulted in lower marketing and sales staff costs.
The significant increase in sales and marketing costs as a
percentage of revenues in the fourth quarter of 2002 was
primarily due to significantly lower revenues generated in the
fourth quarter of 2002 compared to prior quarters.

General and administrative.General and administrative costs
decreased from the quarter ended March 31, 2001 through the
quarter ended December 31, 2001. General and administrative
costs increased slightly in the quarter ended March 31,
2002, and continued to decrease through the quarter ended
December 31, 2002. This was primarily due to the
restructuring plans in 2000, 2001 and 2002, which resulted in
lower support staff costs. The gradual decline in general and
administrative costs was also due to decreases in bad debt
expense, office and equipment expense, facilities costs and
meeting costs. As a percentage of revenues, general and
administrative costs increased to 205.3%, 210.9%, 214.5% and
305.8% in the first, second, third and fourth quarters of 2002,
respectively, due to lower revenues generated in the four
quarters.

Research and development.Research and development costs relate
to the salaries and other costs of our product engineering team
who have been developing our product offerings. These costs have
been relatively stable from quarter to quarter. The decrease in
research and development costs from the quarter ended
September 30, 2001 to the quarter ended December 31,
2001 was primarily due to the restructuring in the fourth
quarter of 2001. The increase in research and development costs
in the quarter ended September 30, 2002 was due to
professional fees paid for the customization and integration of
a third partys product into the development tools used to
design the presentation features of applications implemented on
Cysive Cymbio.

Stock compensation.Stock compensation expense for all
quarters presented includes the expense related to options
granted at a value below fair market value. The periods shown
represent the straight-line amortization of the deferred portion
of the stock compensation expense. The first quarter of 2002
includes compensation expense related to the recognition, on an
accelerated basis, of $2.0 million of expense resulting
from the cancellation of certain officer and employee-held stock
options. Decreases in stock compensation expense are due to the
reversal of previously amortized deferred stock expense for
unvested options granted to employees who are no longer employed
by us, cancellations of certain restricted stock shares and the
adjustment of fair value of the outstanding restricted shares.

Restructuring.In
the first quarter of 2001, we recorded a restructuring charge
related to the severance of technical, recruiting, sales and
general and administrative personnel. We recognized a net credit
to restructuring in the third quarter of 2001 due to the
reevaluation of the restructuring accrual after a decision not
to close some satellite offices as originally intended. The
resulting credit was partially offset by a provision for
severance related to the termination of technical employees in
the quarter. In the fourth quarter of 2001, we recorded an
additional restructuring charge related to the severance of
employees. In the third quarter of

20



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2002, we recorded a restructuring charge related
to the severance of additional employees, the closing of
satellite offices and the impairment of certain assets related
to the offices.


Liquidity and Capital Resources

On October 15, 1999, we completed an initial
public offering of 6,000,000 shares of our common stock.
After deducting expenses, we received approximately
$46.3 million in proceeds from this transaction. On
October 22, 1999, we received an additional
$4.0 million in proceeds when the underwriters exercised
their over-allotment option for an additional
505,000 shares of our common stock. On March 16, 2000,
we completed a secondary public offering of
3,000,000 shares of our common stock. After deducting
expenses, we received approximately $123.2 million in
proceeds from this transaction.

In June 2002, we renewed and renegotiated the
terms on our line of credit with Merrill Lynch Business
Financial Services Inc. We are entitled to draw up to an amount
equal to the lesser of $900,000 or eighty percent of our
outstanding trade receivables less amounts greater than
90 days past due. At December 31, 2002, approximately
$114,000 was available for borrowing due to the reduction in our
trade receivables balance. If necessary, we intend to use any
borrowings under the line of credit for working capital
purposes. The interest rate on amounts borrowed under the line
of credit is calculated using the 30-day dealer commercial paper
rate as quoted in The Wall Street Journal, plus 2.65% per annum.
The credit facility expires in September 2003. Any borrowings
under the line of credit will be secured by our trade
receivables. At December 31, 2002, we had no outstanding
borrowings under the line of credit.

Cash and cash equivalents were $8.5 million
at December 31, 2002. Investments, which reflect the
application of our net proceeds from our public offerings, were
$123.4 million at December 31, 2002. Net cash used in
operating activities was $16.0 million for the year ended
December 31, 2002. Capital expenditures of $145,000 for the
year ended December 31, 2002 were used primarily for
computer equipment and office equipment.

Through September 30, 1999, we operated as
an S corporation. Accordingly, our stockholders included
their pro rata share of our income in their personal income tax
returns, and we were not subject to federal and most state
income taxes during the periods prior to that time. Our
stockholders elected to rescind the S corporation election
effective on October 1, 1999. We paid $2.8 million to
our stockholders on December 30, 1999 as an
S corporation distribution, and this distribution was
funded through operating income.

We anticipate that the remaining net proceeds
from our public offerings, existing sources of liquidity and
funds generated from revenues and interest income, should be
adequate to fund our currently anticipated cash needs through at
least the next 18 months. We anticipate that we will spend
$8.0-$12.0 million over the next six months and exit the
quarter ending June 30, 2003 with cash, cash equivalents
and interest-bearing investments of $120.0-$124.0 million.
To the extent we may need to obtain financing from external
sources in the form of either additional equity or indebtedness,
there can be no assurance that additional financing will be
available at all, or that, if available, the financing will be
obtainable on favorable terms.

In December 2000, our Board of Directors
authorized us to repurchase up to $25 million of our
outstanding common stock at the discretion of our executive
officers. As of December 31, 2002 and 2001, we had
repurchased 2,721,432 and 644,406 shares of common stock at
an average price of $2.31 and $2.46 per share, respectively. In
December 2002, our Board of Directors extended our repurchase
program through December 2004.

Item 7A.     Quantitative
and Qualitative Disclosures About Market Risk.

We are exposed to interest rate risk related to
our cash, cash equivalents and interest-bearing investments. Our
interest-bearing investments are generally comprised of variable
rate securities that provide for optional or early redemption
within twelve months, and the contractual maturities are
generally greater than twelve months. As of December 31,
2002, we had total cash, cash equivalents and interest-bearing
investments of $131.9 million, and this balance is expected
to decline to between $120.0-$124.0 million by

21



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##### 



June 30, 2003. We believe that a change in
interest rates of 100 basis points or more could have a material
impact on our investment income and cash flows.


We are potentially exposed to interest rate risk
related to our borrowings under our credit facility with Merrill
Lynch & Co., Inc. We had no borrowings outstanding
under our credit facility during the fiscal year ended
December 31, 2002.

22



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##### 



Item 8.     Financial
Statements and Supplementary Data.

INDEX TO FINANCIAL STATEMENTS

|                                                      |  |  |    | 
|----------------------------------------------------- |  |  | -- | 
|Report of Ernst & Young LLP, Independent
    Auditors |  |  | 24 | 
|Balance Sheets                                        |  |  | 25 | 
|Statements of Operations                              |  |  | 26 | 
|Statements of Stockholders Equity                    |  |  | 27 | 
|Statements of Cash Flows                              |  |  | 28 | 
|Notes to Financial Statements                         |  |  | 29 | 

23



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##### 



REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS

Board of Directors

Cysive, Inc.


We have audited the accompanying balance sheets
of Cysive, Inc. as of December 31, 2002 and 2001, and the
related statements of operations, stockholders equity, and
cash flows for each of the three years in the period ended
December 31, 2002. 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 in accordance with
auditing standards generally accepted in the United States.
Those standards 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. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the financial statements referred
to above present fairly, in all material respects, the financial
position of Cysive, Inc. at December 31, 2002 and 2001, and
the results of its operations and its 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.



| |                       
| | ----------------------
| | /s/  ERNST & YOUNG LLP

McLean, Virginia

February 7, 2003


24



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CYSIVE, INC.

BALANCE SHEETS

|                                         |                                                                                                                                                                                                                                                    |                                            |   |         |         |  |   |         |         | 
|---------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | - | ------- | ------- |  | - | ------- | ------- | 
|                                         |                                                                                                                                                                                                                                                    |                                           
|                                         |                                                                                                                                                                                                                                                    | December 31,                              
|                                         |                                                                                                                                                                                                                                                    |                                           
|                                         |                                                                                                                                                                                                                                                    | 2002                                       |   | 2001   
|                                         |                                                                                                                                                                                                                                                    |                                            |   |        
|                                         |                                                                                                                                                                                                                                                    |                                           
|                                         |                                                                                                                                                                                                                                                    | (In thousands, except                     
|                                         |                                                                                                                                                                                                                                                    | share data)                               
|ASSETS                                  
|                                        
|Current assets:                          |                                                                                                                                                                                                                                                    |                                            |   |         |         |  |   |        
|                                         | Cash and cash equivalents                                                                                                                                                                                                                          |                                            | $ | 8,460   |         |  | $ | 1,484   |        
|                                         | Investments                                                                                                                                                                                                                                        |                                            |   | 60,460  |         |  |   | 117,459 |        
|                                         | Accounts receivable, less allowance of $98 and
    $125 at December 31, 2002 and 2001, respectively                                                                                                                                                |                                            |   | 133     |         |  |   | 555     |        
|                                         | Prepaid expenses and other current assets                                                                                                                                                                                                          |                                            |   | 2,291   |         |  |   | 2,381   |        
|                                         | Income tax receivable                                                                                                                                                                                                                              |                                            |   |        |         |  |   | 126     |        
|                                         |                                                                                                                                                                                                                                                    |                                            |   |         |         |  |   |        
|                                         |                                                                                                                                                                                                                                                    | Total current assets                       |   |         | 71,344  |  |   |         | 122,005 | 
|                                         | Furniture, fixtures and equipment, net                                                                                                                                                                                                             |                                            |   | 2,714   |         |  |   | 5,791   |        
|                                         | Investments                                                                                                                                                                                                                                        |                                            |   | 62,976  |         |  |   | 32,343  |        
|                                         | Other assets                                                                                                                                                                                                                                       |                                            |   | 897     |         |  |   | 995     |        
|                                         |                                                                                                                                                                                                                                                    |                                            |   |         |         |  |   |        
|                                         |                                                                                                                                                                                                                                                    | Total assets                               |   | $       | 137,931 |  |   | $       | 161,134 | 
|                                         |                                                                                                                                                                                                                                                    |                                            |   |         |         |  |   |        
|                                        
|LIABILITIES AND STOCKHOLDERS
    EQUITY
|                                        
|Current liabilities:                     |                                                                                                                                                                                                                                                    |                                            |   |         |         |  |   |        
|                                         | Accounts payable                                                                                                                                                                                                                                   |                                            | $ | 164     |         |  | $ | 303     |        
|                                         | Accrued liabilities                                                                                                                                                                                                                                |                                            |   | 1,708   |         |  |   | 2,671   |        
|                                         | Deferred revenue                                                                                                                                                                                                                                   |                                            |   | 114     |         |  |   | 62      |        
|                                         | Accrued restructuring                                                                                                                                                                                                                              |                                            |   | 924     |         |  |   | 1,035   |        
|                                         |                                                                                                                                                                                                                                                    |                                            |   |         |         |  |   |        
|                                         |                                                                                                                                                                                                                                                    | Total current liabilities                  |   |         | 2,910   |  |   |         | 4,071   | 
|                                         | Accrued restructuring                                                                                                                                                                                                                              |                                            |   | 3,837   |         |  |   | 829     |        
|                                         |                                                                                                                                                                                                                                                    |                                            |   |         |         |  |   |        
|                                         |                                                                                                                                                                                                                                                    | Total liabilities                          |   |         | 6,747   |  |   |         | 4,900   | 
|                                         | Commitments and contingencies                                                                                                                                                                                                                      |                                            |   |        |         |  |   |        |        
|Stockholders equity:                    |                                                                                                                                                                                                                                                    |                                            |   |         |         |  |   |        
|                                         | Preferred stock, $0.01 par value; 10,000,000
    shares authorized; no shares issued or outstanding                                                                                                                                                |                                            |   |        |         |  |   |        |        
|                                         | Common stock, $0.01 par value; 500,000,000 shares
    authorized; 31,140,477 shares issued and 28,419,045 shares
    outstanding at December 31, 2002 and 29,936,316 shares
    issued and 29,291,910 shares outstanding at December 31,
    2001. |                                            |   | 311     |         |  |   | 299     |        
|                                         | Treasury stock, 2,721,432 and 644,406 shares
    repurchased at December 31, 2002 and 2001, respectively                                                                                                                                           |                                            |   | (27     | )       |  |   | (6      | )      
|                                         | Additional paid-in capital                                                                                                                                                                                                                         |                                            |   | 201,579 |         |  |   | 205,195 |        
|                                         | Deferred stock compensation                                                                                                                                                                                                                        |                                            |   | (360    | )       |  |   | (5,002  | )      
|                                         | Unrealized gain on investments                                                                                                                                                                                                                     |                                            |   | 1,205   |         |  |   | 1,090   |        
|                                         | Accumulated deficit                                                                                                                                                                                                                                |                                            |   | (71,524 | )       |  |   | (45,342 | )      
|                                         |                                                                                                                                                                                                                                                    |                                            |   |         |         |  |   |        
|                                         |                                                                                                                                                                                                                                                    | Total stockholders equity                 |   |         | 131,184 |  |   |         | 156,234 | 
|                                         |                                                                                                                                                                                                                                                    |                                            |   |         |         |  |   |        
|                                         |                                                                                                                                                                                                                                                    | Total liabilities and stockholders equity |   | $       | 137,931 |  |   | $       | 161,134 | 
|                                         |                                                                                                                                                                                                                                                    |                                            |   |         |         |  |   |        

See accompanying notes.

25



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##### 



CYSIVE, INC.

STATEMENTS OF OPERATIONS

|                                    |                            |                                                 |            |       |        |      |            |        |        |   |            |        |        | 
|----------------------------------- | -------------------------- | ----------------------------------------------- | ---------- | ----- | ------ | ---- | ---------- | ------ | ------ | - | ---------- | ------ | ------ | 
|                                    |                            |                                                
|                                    |                            | Year Ended December 31,                        
|                                    |                            |                                                
|                                    |                            | 2002                                            |            | 2001  |        | 2000
|                                    |                            |                                                 |            |       |        |     
|                                    |                            |                                                
|                                    |                            | (In thousands, except share and per share data)
|Revenues:                           |                            |                                                 |            |       |        |      |            |        |        |   |            |       
|                                    | Services                   |                                                 | $          | 4,004 |        |      | $          | 14,691 |        |   | $          | 50,287 |       
|                                    | Software license           |                                                 |            | 205   |        |      |            |       |        |   |            |       |       
|                                    |                            |                                                 |            |       |        |      |            |        |        |   |            |       
|                                    |                            | Total revenues                                  |            |       | 4,209  |      |            |        | 14,691 |   |            |        | 50,287 | 
|Direct costs:                       |                            |                                                 |            |       |        |      |            |        |        |   |            |       
|                                    | Services                   |                                                 |            | 3,360 |        |      |            | 13,739 |        |   |            | 22,851 |       
|                                    | Software license           |                                                 |            | 147   |        |      |            |       |        |   |            |       |       
|                                    |                            |                                                 |            |       |        |      |            |        |        |   |            |       
|                                    |                            | Total direct costs                              |            |       | 3,507  |      |            |        | 13,739 |   |            |        | 22,851 | 
|                                    |                            |                                                 |            |       |        |      |            |        |        |   |            |       
|Gross profit                        |                            |                                                 | 702        |       |        |      | 952        |        |        |   | 27,436     |       
|Operating expenses:                 |                            |                                                 |            |       |        |      |            |        |        |   |            |       
|                                    | Sales and marketing        |                                                 |            | 8,767 |        |      |            | 9,529  |        |   |            | 10,773 |       
|                                    | General and administrative |                                                 |            | 9,257 |        |      |            | 12,330 |        |   |            | 23,848 |       
|                                    | Research and development   |                                                 |            | 3,494 |        |      |            | 3,789  |        |   |            |       |       
|                                    | Stock compensation         |                                                 |            | 4,561 |        |      |            | 3,143  |        |   |            | 5,843  |       
|                                    | Restructuring              |                                                 |            | 5,945 |        |      |            | 2,098  |        |   |            | 4,710  |       
|                                    |                            |                                                 |            |       |        |      |            |        |        |   |            |       
|                                    |                            | Total operating expenses                        |            |       | 32,024 |      |            |        | 30,889 |   |            |        | 45,174 | 
|Operating loss                      |                            |                                                 | (31,322    | )     |        |      | (29,937    | )      |        |   | (17,738    | )     
|Investment income, net              |                            |                                                 | 5,196      |       |        |      | 8,064      |        |        |   | 7,770      |       
|                                    |                            |                                                 |            |       |        |      |            |        |        |   |            |       
|Loss before income taxes            |                            |                                                 | (26,126    | )     |        |      | (21,873    | )      |        |   | (9,968     | )     
|Income tax expense                  |                            |                                                 | 19         |       |        |      | 55         |        |        |   | 4,360      |       
|                                    |                            |                                                 |            |       |        |      |            |        |        |   |            |       
|Net loss                            |                            | $                                               | (26,145    | )     |        | $    | (21,928    | )      |        | $ | (14,328    | )     
|                                    |                            |                                                 |            |       |        |      |            |        |        |   |            |       
|Basic and diluted loss per share    |                            | $                                               | (0.90      | )     |        | $    | (0.74      | )      |        | $ | (0.54      | )     
|Weighted average shares outstanding |                            |                                                 | 29,008,503 |       |        |      | 29,521,894 |        |        |   | 26,438,946 |       

See accompanying notes.

26



---



##### 



CYSIVE, INC.

STATEMENTS OF STOCKHOLDERS
EQUITY

|                                                               |  |                                   |            |                |  |            |     |          |  |            |            |              |  |               |     |               |  |        |         |        |  |   |         |   |  |   |       |  |  |   |         |   |  |   |         |   |  |   |         |  
|-------------------------------------------------------------- |  | --------------------------------- | ---------- | -------------- |  | ---------- | --- | -------- |  | ---------- | ---------- | ------------ |  | ------------- | --- | ------------- |  | ------ | ------- | ------ |  | - | ------- | - |  | - | ----- |  |  | - | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                                               |  |                                   |            |                |  |            |     |          |  |            |            |              |  |               |     |              
|                                                               |  | Common Stock                      |            | Treasury Stock |  | Additional |     | Deferred |  | Unrealized |            |              |  | Total         |     | Comprehensive
|                                                               |  |                                   |            |                |  | Paid-In    |     | Stock    |  | Gain on    |            | Accumulated  |  | Stockholders |     | Income       
|                                                               |  | Shares                            |            | Amount         |  | Shares     |     | Amount   |  | Capital    |            | Compensation |  | Investments   |     | Deficit       |  | Equity |         | (Loss)
|                                                               |  |                                   |            |                |  |            |     |          |  |            |            |              |  |               |     |               |  |        |         |       
|                                                               |  |                                  
|                                                               |  | (In thousands, except share data)
|Balance at December 31, 1999.                                  |  |                                   | 22,818,596 |                |  | $          | 229 |          |  |            |           |              |  | $             |    |               |  | $      | 79,767  |        |  | $ | (13,572 | ) |  | $ |      |  |  | $ | (8,744  | ) |  | $ | 57,680  |   |  | $ | (6,403  | )
|Common stock issued upon exercise of options                   |  |                                   | 2,945,936  |                |  |            | 29  |          |  |            |           |              |  |               |    |               |  |        | 1,771   |        |  |   |        |   |  |   |      |  |  |   |        |   |  |   | 1,800   |   |  |   |        |  
|Issuance of common stock in secondary public
    offering      |  |                                   | 3,000,000  |                |  |            | 30  |          |  |            |           |              |  |               |    |               |  |        | 123,159 |        |  |   |        |   |  |   |      |  |  |   |        |   |  |   | 123,189 |   |  |   |        |  
|Issuance of common stock from employee stock
    purchase plan |  |                                   | 40,007     |                |  |            |    |          |  |            |           |              |  |               |    |               |  |        | 271     |        |  |   |        |   |  |   |      |  |  |   |        |   |  |   | 271     |   |  |   |        |  
|Issuance of compensatory stock options                         |  |                                   |           |                |  |            |    |          |  |            |           |              |  |               |    |               |  |        | 3,903   |        |  |   | (3,903  | ) |  |   |      |  |  |   |        |   |  |   |        |   |  |   |        |  
|Unrealized gain                                                |  |                                   |           |                |  |            |    |          |  |            |           |              |  |               |    |               |  |        |        |        |  |   |        |   |  |   | 501   |  |  |   |        |   |  |   | 501     |   |  |   | 501     |  
|Amortization of deferred stock compensation                    |  |                                   |           |                |  |            |    |          |  |            |           |              |  |               |    |               |  |        |        |        |  |   | 4,732   |   |  |   |      |  |  |   |        |   |  |   | 4,732   |   |  |   |        |  
|Net loss                                                       |  |                                   |           |                |  |            |    |          |  |            |           |              |  |               |    |               |  |        |        |        |  |   |        |   |  |   |      |  |  |   | (14,328 | ) |  |   | (14,328 | ) |  |   | (14,328 | )
|                                                               |  |                                   |            |                |  |            |     |          |  |            |            |              |  |               |     |               |  |        |         |        |  |   |         |   |  |   |       |  |  |   |         |   |  |   |         |   |  |   |         |  
|Balance at December 31, 2000                                   |  |                                   | 28,804,539 |                |  |            | 288 |          |  |            |           |              |  |               |    |               |  |        | 208,871 |        |  |   | (12,743 | ) |  |   | 501   |  |  |   | (23,072 | ) |  |   | 173,845 |   |  |   | (13,827 | )
|Common stock issued upon exercise of options                   |  |                                   | 800,686    |                |  |            | 8   |          |  |            |           |              |  |               |    |               |  |        | 511     |        |  |   |        |   |  |   |      |  |  |   |        |   |  |   | 519     |   |  |   |        |  
|Issuance of restricted stock, net                              |  |                                   | 152,770    |                |  |            | 1   |          |  |            |           |              |  |               |    |               |  |        | 428     |        |  |   |        |   |  |   |      |  |  |   |        |   |  |   | 429     |   |  |   |        |  
|Issuance of common stock from employee stock
    purchase plan |  |                                   | 178,321    |                |  |            | 2   |          |  |            |           |              |  |               |    |               |  |        | 536     |        |  |   |        |   |  |   |      |  |  |   |        |   |  |   | 538     |   |  |   |        |  
|Purchase of treasury stock                                     |  |                                   |           |                |  |            |    |          |  |            | (644,406   | )            |  |               | (6  | )             |  |        | (1,235  | )      |  |   |        |   |  |   |      |  |  |   | (342    | ) |  |   | (1,583  | ) |  |   |        |  
|Unrealized gain                                                |  |                                   |           |                |  |            |    |          |  |            |           |              |  |               |    |               |  |        |        |        |  |   |        |   |  |   | 589   |  |  |   |        |   |  |   | 589     |   |  |   | 589     |  
|Amortization of deferred stock compensation                    |  |                                   |           |                |  |            |    |          |  |            |           |              |  |               |    |               |  |        | (3,916  | )      |  |   | 7,741   |   |  |   |      |  |  |   |        |   |  |   | 3,825   |   |  |   |        |  
|Net loss                                                       |  |                                   |           |                |  |            |    |          |  |            |           |              |  |               |    |               |  |        |        |        |  |   |        |   |  |   |      |  |  |   | (21,928 | ) |  |   | (21,928 | ) |  |   | (21,928 | )
|                                                               |  |                                   |            |                |  |            |     |          |  |            |            |              |  |               |     |               |  |        |         |        |  |   |         |   |  |   |       |  |  |   |         |   |  |   |         |   |  |   |         |  
|Balance at December 31, 2001                                   |  |                                   | 29,936,316 |                |  |            | 299 |          |  |            | (644,406   | )            |  |               | (6  | )             |  |        | 205,195 |        |  |   | (5,002  | ) |  |   | 1,090 |  |  |   | (45,342 | ) |  |   | 156,234 |   |  |   | (21,339 | )
|                                                               |  |                                   |            |                |  |            |     |          |  |            |            |              |  |               |     |               |  |        |         |        |  |   |         |   |  |   |       |  |  |   |         |   |  |   |         |   |  |   |         |  
|Common stock issued upon exercise of options                   |  |                                   | 1,085,317  |                |  |            | 11  |          |  |            |           |              |  |               |    |               |  |        | 852     |        |  |   |        |   |  |   |      |  |  |   |        |   |  |   | 863     |   |  |   |        |  
|Cancellation of restricted stock                               |  |                                   | (820       | )              |  |            |    |          |  |            |           |              |  |               |    |               |  |        | 42      |        |  |   |        |   |  |   |      |  |  |   |        |   |  |   | 42      |   |  |   |        |  
|Issuance of common stock from employee stock
    purchase plan |  |                                   | 119,664    |                |  |            | 1   |          |  |            |           |              |  |               |    |               |  |        | 247     |        |  |   |        |   |  |   |      |  |  |   |        |   |  |   | 248     |   |  |   |        |  
|Purchase of treasury stock                                     |  |                                   |           |                |  |            |    |          |  |            | (2,077,026 | )            |  |               | (21 | )             |  |        | (4,503  | )      |  |   |        |   |  |   |      |  |  |   | (37     | ) |  |   | (4,561  | ) |  |   |        |  
|Unrealized gain                                                |  |                                   |           |                |  |            |    |          |  |            |           |              |  |               |    |               |  |        |        |        |  |   |        |   |  |   | 115   |  |  |   |        |   |  |   | 115     |   |  |   | 115     |  
|Amortization of deferred stock compensation                    |  |                                   |           |                |  |            |    |          |  |            |           |              |  |               |    |               |  |        | (254    | )      |  |   | 4,642   |   |  |   |      |  |  |   |        |   |  |   | 4,388   |   |  |   |        |  
|Net loss                                                       |  |                                   |           |                |  |            |    |          |  |            |           |              |  |               |    |               |  |        |        |        |  |   |        |   |  |   |      |  |  |   | (26,145 | ) |  |   | (26,145 | ) |  |   | (26,145 | )
|                                                               |  |                                   |            |                |  |            |     |          |  |            |            |              |  |               |     |               |  |        |         |        |  |   |         |   |  |   |       |  |  |   |         |   |  |   |         |   |  |   |         |  
|Balance at December 31, 2002                                   |  |                                   | 31,140,477 |                |  | $          | 311 |          |  |            | (2,721,432 | )            |  | $             | (27 | )             |  | $      | 201,579 |        |  | $ | (360    | ) |  | $ | 1,205 |  |  | $ | (71,524 | ) |  | $ | 131,184 |   |  | $ | (26,030 | )
|                                                               |  |                                   |            |                |  |            |     |          |  |            |            |              |  |               |     |               |  |        |         |        |  |   |         |   |  |   |       |  |  |   |         |   |  |   |         |   |  |   |         |  

See accompanying notes.

27



---



##### 



CYSIVE, INC.

STATEMENTS OF CASH FLOWS

|                                                                                              |                                                            |                                           |         |          |      |      |         |          |        |   |          |            |        |  
|--------------------------------------------------------------------------------------------- | ---------------------------------------------------------- | ----------------------------------------- | ------- | -------- | ---- | ---- | ------- | -------- | ------ | - | -------- | ---------- | ------ | -
|                                                                                              |                                                            |                                          
|                                                                                              |                                                            | Year Ended December 31,                  
|                                                                                              |                                                            |                                          
|                                                                                              |                                                            | 2002                                      |         | 2001     |      | 2000
|                                                                                              |                                                            |                                           |         |          |      |     
|                                                                                              |                                                            |                                          
|                                                                                              |                                                            | (In thousands)                           
|Cash flows from operating activities:                                                         |                                                            |                                           |         |          |      |      |         |          |        |   |          |           
|Net loss                                                                                      |                                                            | $                                         | (26,145 | )        |      | $    | (21,928 | )        |        | $ | (14,328  | )         
|Adjustments to reconcile net loss to net cash
    (used in) provided by operating activities: |                                                            |                                           |         |          |      |      |         |          |        |   |          |           
|                                                                                              | Depreciation                                               |                                           |         | 1,604    |      |      |         | 1,725    |        |   |          | 1,098      |       
|                                                                                              | Amortization                                               |                                           |         | 395      |      |      |         | 333      |        |   |          | 78         |       
|                                                                                              | Stock compensation                                         |                                           |         | 4,561    |      |      |         | 3,143    |        |   |          | 5,843      |       
|                                                                                              | Restructuring charges, net                                 |                                           |         | 5,945    |      |      |         | 2,098    |        |   |          | 4,710      |       
|                                                                                              | Restructuring spending                                     |                                           |         | (2,343   | )    |      |         | (4,305   | )      |   |          | (639       | )     
|                                                                                              | Deferred income taxes                                      |                                           |         |         |      |      |         |         |        |   |          | 4,766      |       
|                                                                                              | Loss on sale of furniture, fixtures and
    equipment, net |                                           |         | 50       |      |      |         | 1        |        |   |          | 102        |       
|                                                                                              | (Benefit) provision for doubtful accounts                  |                                           |         | (27      | )    |      |         | (1,475   | )      |   |          | 949        |       
|                                                                                              | Changes in operating assets and liabilities:               |                                           |         |          |      |      |         |          |        |   |          |            |       
|                                                                                              |                                                            | Accounts receivable                       |         |          | 449  |      |         |          | 7,543  |   |          |            | (1,007 | )
|                                                                                              |                                                            | Prepaid expenses and other current assets |         |          | 169  |      |         |          | (87    | ) |          |            | (1,051 | )
|                                                                                              |                                                            | Income tax receivable                     |         |          | 126  |      |         |          | 685    |   |          |            | (428   | )
|                                                                                              |                                                            | Other assets                              |         |          | 98   |      |         |          | (9     | ) |          |            | (703   | )
|                                                                                              |                                                            | Accounts payable                          |         |          | (139 | )    |         |          | (811   | ) |          |            | 769    |  
|                                                                                              |                                                            | Accrued liabilities                       |         |          | (820 | )    |         |          | (3,268 | ) |          |            | 2,609  |  
|                                                                                              |                                                            | Deferred revenue                          |         |          | 52   |      |         |          | 62     |   |          |            |       |  
|                                                                                              |                                                            |                                           |         |          |      |      |         |          |        |   |          |           
|Net cash (used in) provided by operating
    activities                                       |                                                            |                                           | (16,025 | )        |      |      | (16,293 | )        |        |   | 2,768    |           
|Cash flows from investing activities:                                                         |                                                            |                                           |         |          |      |      |         |          |        |   |          |           
|                                                                                              | Purchase of investments                                    |                                           |         | (550,590 | )    |      |         | (583,175 | )      |   |          | (1,453,558 | )     
|                                                                                              | Sale of investments                                        |                                           |         | 577,071  |      |      |         | 582,500  |        |   |          | 1,350,560  |       
|                                                                                              | Capital expenditures                                       |                                           |         | (145     | )    |      |         | (1,696   | )      |   |          | (6,790     | )     
|                                                                                              | Rebates on prior period capital expenditures               |                                           |         | 103      |      |      |         |         |        |   |          |           |       
|                                                                                              | Proceeds from sale of fixed assets                         |                                           |         | 144      |      |      |         |         |        |   |          |           |       
|                                                                                              |                                                            |                                           |         |          |      |      |         |          |        |   |          |           
|Net cash provided by (used in) investing
    activities                                       |                                                            |                                           | 26,583  |          |      |      | (2,371  | )        |        |   | (109,788 | )         
|Cash flows from financing activities:                                                         |                                                            |                                           |         |          |      |      |         |          |        |   |          |           
|                                                                                              | Proceeds from sale of common stock                         |                                           |         | 248      |      |      |         | 538      |        |   |          | 123,189    |       
|                                                                                              | Exercise of common stock options                           |                                           |         | 863      |      |      |         | 519      |        |   |          | 2,072      |       
|                                                                                              | Repurchase of treasury stock                               |                                           |         | (4,693   | )    |      |         | (1,583   | )      |   |          |           |       
|                                                                                              |                                                            |                                           |         |          |      |      |         |          |        |   |          |           
|Net cash (used in) provided by financing
    activities                                       |                                                            |                                           | (3,582  | )        |      |      | (526    | )        |        |   | 125,261  |           
|Increase (decrease) in cash and cash
    equivalents                                          |                                                            |                                           | 6,976   |          |      |      | (19,190 | )        |        |   | 18,241   |           
|Cash and cash equivalents at beginning of year                                                |                                                            |                                           | 1,484   |          |      |      | 20,674  |          |        |   | 2,433    |           
|                                                                                              |                                                            |                                           |         |          |      |      |         |          |        |   |          |           
|Cash and cash equivalents at end of year                                                      |                                                            | $                                         | 8,460   |          |      | $    | 1,484   |          |        | $ | 20,674   |           
|                                                                                              |                                                            |                                           |         |          |      |      |         |          |        |   |          |           

See accompanying notes.

28



---



##### 



CYSIVE, INC.

NOTES TO FINANCIAL STATEMENTS

Note 1  Organization

Cysive, Inc. (Cysive or the Company) is a
provider of interaction server technology through a software
product, Cysive Cymbio. The Company develops and delivers
software that enables users to interact with enterprises over
multiple communications channels and devices such as Web
browsers, Web Services, rich client applications, mobile phones,
PDAs, and voice. Historically, all of the Companys
revenues had resulted from the delivery of custom software and
services solutions. Due to increasing competition, declining
margins, and business volatility, in 2001 the Company began the
transition of its business model from a software engineering
services model to a software product model. Accordingly, during
2001 the Company developed Cysive Cymbio, a multi-channel,
enterprise software product that uses widely supported
technologies and open standards to enable users to interact with
enterprises over multiple communications channels and devices.
The Company operates in one business segment.

Note 2  Summary of Significant
Accounting Policies



| |                 
| | ----------------
| | Use of Estimates

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



| |                    
| | -------------------
| | Revenue Recognition

Through December 31, 2002 the Company has
derived nearly all of its revenues from time and materials
contracts. On these contracts, revenues are computed by
multiplying the number of project personnel hours expended in
the performance of the contract by the contract billing rates
plus other directly billable costs. Reserves for possible losses
on contracts, if any, are recognized in full when determined.
Any prepayments by customers are recorded as deferred revenue
and are recognized as services are provided. Reimbursable
project costs are excluded from revenue as the Company incurs
these costs on behalf of its customers.

After the introduction of Cysive Cymbio, the
Companys revenues include software license and maintenance
revenue. The Company accounts for the licensing of software in
accordance with American Institute of Certified Public
Accountants (AICPA) Statement of Position (SOP) 97-2,
Software Revenue Recognition (as amended by
SOP 98-4 and SOP 98-9) and related interpretations.
The Company recognizes revenue when (i) persuasive evidence
of an arrangement exists; (ii) delivery has occurred or
services have been rendered; (iii) the sales price is fixed
or determinable; and (iv) collectibility is reasonably
assured. Maintenance and term license revenues are generally
recognized ratably over the contract period. For software
arrangements with multiple elements, revenue recognition is
dependent upon whether vendor-specific objective evidence (VSOE)
of fair value exists for each of the elements and whether or not
significant customization services are required. When
significant customization services are not required and VSOE
does not exist for all the elements of a software arrangement
and the only undelivered element is maintenance, the entire
licensing fee is recognized ratably over the contract period.
When significant customization services are required in
conjunction with software license sales, the software license
fees and the related consulting services revenues are recognized
in accordance with AICPA SOP 81-1, Accounting for
Performance of Construction-Type and Certain Production-Type
Contracts,using the percentage-of-completion method
based on hours-worked as compared with estimated total
hours-worked at completion.

29



---



##### 



CYSIVE, INC.


NOTES TO FINANCIAL
STATEMENTS  (Continued)



| |                                   
| | ----------------------------------
| | Research and Development
    Costs

Technological feasibility for the Companys
software products is reached shortly before the products are
released for sale. Costs incurred after technological
feasibility is established are not material and, accordingly,
the Company expenses all research and development costs when
incurred.



| |                         
| | ------------------------
| | Stock-Based Compensation

The Company accounts for its stock-based
compensation in accordance with Accounting Principles Board
Opinion (APB) No. 25 Accounting for Stock Issued
to Employeesusing the intrinsic value method. The
Company has made pro forma disclosures required by Statement of
Financial Accounting Standards (SFAS) No. 148
Accounting for Stock-Based Compensation 
Transition and Disclosureusing the fair value method.

Had compensation expense related to the stock
option plans been determined based on the fair value at the
grant date for options granted after 1995 consistent with the
provisions of SFAS No. 148, the Companys pro forma
net loss and loss per share would have been as follows (in
thousands, except per share data):

|                                                                     |  |                         |         |      |  |      |         |   |  |   |         |  
|-------------------------------------------------------------------- |  | ----------------------- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                                                     |  |                        
|                                                                     |  | Year Ended December 31,
|                                                                     |  |                        
|                                                                     |  | 2002                    |         | 2001 |  | 2000
|                                                                     |  |                         |         |      |  |     
|Net loss  as reported                                               |  | $                       | (26,145 | )    |  | $    | (21,928 | ) |  | $ | (14,328 | )
|Stock compensation expense, net of tax
    effects  as reported (1) |  |                         | 4,561   |      |  |      | 3,143   |   |  |   | 5,843   |  
|Stock compensation expense, net of tax
    effects  pro forma (1)   |  |                         | 27,183  |      |  |      | 16,663  |   |  |   | 24,907  |  
|Net loss  pro forma                                                 |  |                         | (48,767 | )    |  |      | (35,448 | ) |  |   | (33,392 | )
|Basic and diluted loss per share  as
    reported                   |  |                         | (0.90   | )    |  |      | (0.74   | ) |  |   | (0.54   | )
|Basic and diluted loss per share  pro
    forma                     |  | $                       | (1.68   | )    |  | $    | (1.20   | ) |  | $ | (1.26   | )



---



|    |                                                                          
|--- | -------------------------------------------------------------------------
|(1) | Because of the Companys overall tax
    position, no tax effect applies.

The effect of applying SFAS No. 148 on 2002,
2001 and 2000 pro forma net loss as stated above is not
necessarily representative of the effects on reported net loss
for future years due to, among other things, the vesting period
of the stock options and the fair value of additional stock
options in future years.

The fair value of each option grant is estimated
on the date of grant using the Black-Scholes option-pricing fair
value model with the following weighted-average assumptions:

|                            |  |                         |         |      |  |      |         |   |  |  |         |  
|--------------------------- |  | ----------------------- | ------- | ---- |  | ---- | ------- | - |  |  | ------- | -
|                            |  |                        
|                            |  | Year Ended December 31,
|                            |  |                        
|                            |  | 2002                    |         | 2001 |  | 2000
|                            |  |                         |         |      |  |     
|Volatility                  |  |                         | 0.97    |      |  |      | 1.59    |   |  |  | 1.96    |  
|Expected life of the option |  |                         | 5 years |      |  |      | 5 years |   |  |  | 5 years |  
|Risk-free interest rate     |  |                         | 3.3     | %    |  |      | 4.0     | % |  |  | 6.0     | %
|Dividend rate               |  |                         | 0.0     | %    |  |      | 0.0     | % |  |  | 0.0     | %

All options granted in 2002 and 2001 were at an
exercise price equal to the stock price. The weighted average
fair values of the options granted in 2000 with an exercise
price equal to the stock price, and with an exercise price less
than the stock price, are $10.36 and $17.49 per share,
respectively.

30



---



##### 



CYSIVE, INC.


NOTES TO FINANCIAL
STATEMENTS  (Continued)



| |              
| | -------------
| | Restructuring

The Company accounts for restructuring expense in
accordance with the accounting provisions of Emerging Issues
Task Force (EITF) 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).Under this method, certain costs are
recognized as an expense when the Company commits to a
restructuring plan, even though a liability may not have been
incurred.



| |             
| | ------------
| | Income Taxes

The Company provides for income taxes in
accordance with the liability method. Under this method,
deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets
and liabilities and are measured using the enacted tax rates and
laws that will be in effect when the differences are expected to
reverse. Because the realization of tax benefits related to the
Companys net deferred tax asset is uncertain, a full
valuation allowance has been provided against the net deferred
tax asset.



| |               
| | --------------
| | Loss Per Share

Basic loss per share is calculated using the
weighted average number of common shares outstanding during the
period. Diluted loss per share is also calculated using the
weighted average number of common shares outstanding during the
period as common stock equivalents are excluded because their
effect would be anti-dilutive.



| |                          
| | -------------------------
| | Cash and Cash Equivalents

For purposes of the statements of cash flows, the
Company considers all highly liquid investments with a maturity
of three months or less at the time of purchase to be cash
equivalents.



| |            
| | -----------
| | Investments

The Company classifies its investments as
available-for-sale. Investments in securities that are
classified as available-for-sale and have readily determinable
fair values are measured at fair market value in the balance
sheets. Any unrealized gains or losses are reported as a
separate component of stockholders equity, if deemed
material. Realized gains and losses and declines in market value
judged to be other than temporary are included in investment
income. Interest and dividends are included in investment income.

Investments are generally comprised of variable
rate securities that provide for optional or early redemption
within twelve months, and the contractual maturities are
generally greater than twelve months. Investments with effective
maturity dates of one year or less at the balance sheet date are
classified as current, and investments with effective maturity
dates of more than one year are classified as non-current. There
may be significant changes on a quarterly basis in the amounts
classified as current or non-current based on the maturity date
of the particular investments at the balance sheet dates.



| |                             
| | ----------------------------
| | Concentration of Credit Risk

Financial instruments that potentially subject
the Company to concentrations of credit risk consist primarily
of cash and cash equivalents, accounts receivable and certain
investments. Cash and cash equivalents are held by several
financial institutions. For accounts receivable, the Company
performs ongoing credit evaluations of its customers
financial condition and generally does not require collateral.
The Company maintains reserves for credit losses, which,
historically, have been less than managements
expectations. The carrying amount of the receivables
approximates fair value. Investments are evaluated to determine
whether any unrealized losses have occurred, and any losses are
recorded at the time the loss occurs.

31



---



##### 



CYSIVE, INC.


NOTES TO FINANCIAL
STATEMENTS  (Continued)



| |                      
| | ---------------------
| | Significant Customers

For the year ended December 31, 2002, three
customers individually represented 35%, 18% and 11% of the
Companys revenues. For the year ended December 31,
2001, three customers individually represented 30%, 17% and 10%
of the Companys revenues. For the year ended
December 31, 2000, no individual customer accounted for
greater than 10% of the Companys revenues.

At December 31, 2002, three customers
individually represented 48%, 20% and 16% of the Companys
accounts receivable. At December 31, 2001, three customers
individually represented 21%, 18% and 11% of the Companys
accounts receivable.



| |                                      
| | -------------------------------------
| | Furniture, Fixtures and
    Equipment

Furniture, fixtures and equipment are stated at
historical cost, net of accumulated depreciation and
amortization. Repairs and maintenance are charged to operations
as incurred, while significant improvements are capitalized.
Furniture, fixtures and equipment are depreciated or amortized
over their estimated useful life, on the straight-line basis,
using the following useful lives:

|                                |  |                                     
|------------------------------- |  | ------------------------------------
|Computers and related equipment |  | Three years                         
|Software                        |  | Three years                         
|Furniture                       |  | Five years                          
|Leasehold improvements          |  | Shorter of lease term or useful life
|Capitalized software            |  | Two years                           

The Company periodically evaluates the
recoverability of the carrying value of its long-lived assets.
The Company considers historical performance and anticipated
future results in its evaluation of potential impairment.
Accordingly, when indicators of impairment are present, the
Company evaluates the carrying value of these assets in relation
to the operating performance of the business and future
discounted and undiscounted cash flows expected to result from
the use of these assets.

Impairment losses are recognized when the sum of
the expected future cash flows are less than the assets
carrying value.



| |                  
| | -----------------
| | Reclassifications

Certain amounts in prior year financial
statements have been reclassified to conform to the current year
presentation.



| |                      
| | ---------------------
| | Recent Pronouncements

In June 2002, the FASB issued SFAS No. 146
Accounting for Costs Associated with Exit or Disposal
Activities,which requires restructurings initiated
after December 31, 2002 to be accounted for using the
provisions therein, with earlier application encouraged. The
Company accounted for a restructuring initiated in the third
quarter of 2002 using the accounting provisions of EITF
No. 94-3 Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a
Restructuring)(Issue 94-3). SFAS No. 146
specifies that an exit cost only be recognized when a liability
is incurred, whereas under Issue 94-3 an exit cost (as
defined therein) is recognized as of the date of an
entitys commitment to an exit plan. Under SFAS
No. 146 the accounting provisions of Issue 94-3 will
continue to apply to the restructurings we initiated prior to
December 31, 2002.

In December 2002, the FASB issued SFAS
No. 148 Accounting for Stock-Based
Compensation  Transition and Disclosure,which requires prominent disclosure of the effects of an
entitys accounting policy with respect to stock-based
compensation on reported net income (loss) and earnings
(loss) per share in

32



---



##### 



CYSIVE, INC.


NOTES TO FINANCIAL
STATEMENTS  (Continued)

annual and interim financial statements. The
Company continues to account for its stock-based compensation in
accordance with APB No. 25, using the intrinsic value
method and has included the pro forma disclosures required by
SFAS No. 148 in the financial statements.

Note 3  Investments

The following is a summary of the estimated fair
value of both current and long-term available-for-sale
securities at December 31, 2002 and 2001 (in thousands):

|                     |  |           |        |           |  |   |        | 
|-------------------- |  | --------- | ------ | --------- |  | - | ------ | 
|                     |  | Municipal |        | Corporate
|                     |  | Bonds     |        | Bonds    
|                     |  |           |        |          
|2002                 |  |           |        |           |  |   |        | 
|Gross amortized cost |  | $         | 47,184 |           |  | $ | 75,047 | 
|Net unrealized gain  |  |           | 508    |           |  |   | 697    | 
|                     |  |           |        |           |  |   |        | 
|Market value         |  | $         | 47,692 |           |  | $ | 75,744 | 
|                     |  |           |        |           |  |   |        | 
|2001                 |  |           |        |           |  |   |        | 
|Gross amortized cost |  | $         | 59,921 |           |  | $ | 88,791 | 
|Net unrealized gain  |  |           | 298    |           |  |   | 792    | 
|                     |  |           |        |           |  |   |        | 
|Market value         |  | $         | 60,219 |           |  | $ | 89,583 | 
|                     |  |           |        |           |  |   |        | 

Net unrealized holding gains for the years ended
December 31, 2002 and 2001 were $115,000 and $589,000,
respectively. Gross realized gains and losses for the year ended
December 31, 2002, 2001 and 2000 were not material. For
purposes of determining gross realized gains and losses, the
cost of securities sold is based upon specific identification.

Investments are generally comprised of variable
rate securities that provide for optional or early redemption
within twelve months, and the contractual maturities are
generally greater than twelve months.

Note 4  Furniture, Fixtures and
Equipment

Major classes of furniture, fixtures and
equipment consist of the following (in thousands):

|                                               |  |              |        |      |  |   |        |  
|---------------------------------------------- |  | ------------ | ------ | ---- |  | - | ------ | -
|                                               |  |             
|                                               |  | December 31,
|                                               |  |             
|                                               |  | 2002         |        | 2001
|                                               |  |              |        |     
|Computers and related equipment                |  | $            | 2,042  |      |  | $ | 3,087  |  
|Furniture                                      |  |              | 1,243  |      |  |   | 2,201  |  
|Software                                       |  |              | 1,294  |      |  |   | 1,219  |  
|Leasehold improvements                         |  |              | 1,723  |      |  |   | 2,461  |  
|Capitalized software                           |  |              | 215    |      |  |   | 215    |  
|                                               |  |              |        |      |  |   |        |  
|                                               |  |              | 6,517  |      |  |   | 9,183  |  
|Less accumulated depreciation and amortization |  |              | (3,803 | )    |  |   | (3,392 | )
|                                               |  |              |        |      |  |   |        |  
|                                               |  | $            | 2,714  |      |  | $ | 5,791  |  
|                                               |  |              |        |      |  |   |        |  

33



---



##### 



CYSIVE, INC.


NOTES TO FINANCIAL
STATEMENTS  (Continued)

Note 5  Accrued
Liabilities

Accrued liabilities consist of the following (in
thousands):

|                          |  |              |       |      |  |   |       | 
|------------------------- |  | ------------ | ----- | ---- |  | - | ----- | 
|                          |  |             
|                          |  | December 31,
|                          |  |             
|                          |  | 2002         |       | 2001
|                          |  |              |       |     
|Payroll and payroll taxes |  | $            | 370   |      |  | $ | 857   | 
|Bonuses                   |  |              | 131   |      |  |   | 142   | 
|Commissions               |  |              | 194   |      |  |   | 34    | 
|Vacation                  |  |              | 209   |      |  |   | 503   | 
|Accrued expenses          |  |              | 569   |      |  |   | 727   | 
|Other                     |  |              | 235   |      |  |   | 408   | 
|                          |  |              |       |      |  |   |       | 
|                          |  | $            | 1,708 |      |  | $ | 2,671 | 
|                          |  |              |       |      |  |   |       | 

Note 6  Accrued Restructuring
Costs

During the fourth quarter of 2000, the Company
took specific actions to reduce its overall cost structure in
anticipation of slower near-term growth rates. The Company
recorded a $4.7 million pre-tax restructuring charge in
2000 in order to better align its overall cost structure and
organization with planned revenue levels. The restructuring
charge primarily related to 1) the elimination of certain
non-technical support roles, resulting in severance costs;
2) the closing of a satellite office, resulting in the
write-down of assets; and 3) the accrual for professional
fees related to the office closings or potential claims from
severed employees. At September 30, 2001, the Company
evaluated the remaining balances of the fourth quarter 2000
restructuring accrual and reduced the restructuring accrual for
future rent expense by $850,000 and professional fees by
$347,000. As of December 31, 2002, estimated amounts
remaining to be paid total $0.9 million and are for rents
payable through August 2005.

On March 30, 2001, in anticipation of a
continued declining revenue base, the Company announced an
additional restructuring plan that included the termination of
95 employees consisting of engineering, recruiting, sales
and general and administrative employees. As a result,
approximately $1.7 million in severance-related costs was
recorded as a pre-tax restructuring expense in the first quarter
of 2001. In the third quarter of 2001, the Company increased
this reserve by $122,000 due to actual payments of the
severances exceeding the Companys original estimate. As of
December 31, 2002, the Company had made all payments
related to this restructuring.

During the third quarter of 2001, the Company
approved a third restructuring plan to include an additional 19
software engineers and three administrative personnel. As a
result, $225,000 in severance-related costs was recorded as a
pre-tax restructuring expense. As of December 31, 2002, the
Company had made all payments related to this restructuring.

During the fourth quarter of 2001, the Company
approved a restructuring plan to terminate 65 employees
consisting of engineering, sales and general and administrative
personnel. As a result, $1.3 million in severance-related
costs was recorded as a pre-tax restructuring expense. As of
December 31, 2002, the Company had made all payments
related to this restructuring.

During the third quarter of 2002, the Company
approved a restructuring plan which included the following: the
termination of 49 employees, consisting of engineering, sales
and general and administrative employees; the closing of three
satellite offices; and the intent to sublet, if possible,
significant portions of its office space. As a result, the
Company recorded a $5.9 million pre-tax restructuring
expense during the third quarter to cover severance costs
($873,000), estimated remaining lease obligations net of
anticipated sublet income ($4,241,000), the write-off of
leasehold improvements ($457,000), and the write-down of
furniture

34



---



##### 



CYSIVE, INC.


NOTES TO FINANCIAL
STATEMENTS  (Continued)

and equipment to net realizable value ($374,000).
As of December 31, 2002, estimated amounts remaining to be
paid total $3.9 million and are for rents payable through April
2010.

Note 7  Line of
Credit

In 2000, the Company entered into several leases
for office space that required security deposits. In certain
instances, the Company entered into standby letters of credit
currently with a financial institution in lieu of cash payments
of these security deposits. As of December 31, 2002, the
Company has three outstanding standby letters of credit,
totaling $551,500 in favor of the Companys various
landlords. These letters of credit will be reduced in future
periods as the Company establishes a consistent payment history.
Commitment fees for these letters of credit are immaterial.

In June 1998, the Company entered into a line of
credit with a financial institution from which the Company may
draw up to $1.0 million. In March 1999 and September 1999,
the Company increased the amount available for withdrawal to
$1.5 million and $2.5 million, respectively. In
September 2001 and June 2002, the Company renewed and
renegotiated the terms on the line of credit. Under the new
terms, the Company is entitled to draw up to an amount equal to
the lesser of $900,000 or eighty percent of the Companys
outstanding trade receivables less amounts greater than
90 days past due. Any borrowings under the line of credit
will be secured by the Companys trade receivables. At
December 31, 2002, $551,500 was allocated for letters of
credit for security deposits on three of the Companys
office leases, and approximately $114,000 was available for
borrowing due to the reduction in the Companys trade
receivables balance. The line of credit expires in September
2003. Interest accrues on outstanding balances at the 30-day
commercial paper rate as quoted in the Wall Street Journal, plus
2.65% per annum. At December 31, 2002 and 2001, there were
no outstanding borrowings. Commitment fees of 0.5% paid per
$500,000 of credit facility during 2002, 2001 and 2000 were not
material.

Note 8  Commitments and
Contingencies

The Company is obligated under various
non-cancelable leases for office facilities and equipment. These
leases generally provide for renewal options and escalation
increases. The most significant of these leases is for the
Companys principal headquarters in Reston, VA which
expires in April 2010.

Future minimum payments under non-cancelable
operating leases with initial terms of one year or more as of
December 31, 2002 are as follows:

|           |                              |               |     |      | 
|---------- | ---------------------------- | ------------- | --- | ---- | 
|           |                              | (In millions)
|2003       |                              | $             | 2.4 |     
|2004       |                              |               | 2.4 |     
|2005       |                              |               | 2.1 |     
|2006       |                              |               | 1.7 |     
|2007       |                              |               | 1.7 |     
|Thereafter |                              |               | 4.2 |     
|           |                              |               |     |     
|           | Total minimum lease payments |               | $   | 14.5 | 
|           |                              |               |     |     

Rental expense on operating leases was
$2.2 million, $2.4 million and $2.0 million for the
years ended December 31, 2002, 2001 and 2000, respectively.

35



---



##### 



CYSIVE, INC.


NOTES TO FINANCIAL
STATEMENTS  (Continued)

Note 9  Stockholders
Equity



| |            
| | -----------
| | Stock Split

In April 2000, the Companys stockholders
approved a two-for-one stock split in the form of a stock
dividend that became effective on May 8, 2000. All share
and per share amounts have been restated in these financial
statements and the accompanying notes to reflect this stock
split.



| |                    
| | -------------------
| | Equity Transactions

On March 16, 2000, the Company completed a
public offering and issued 3,000,000 shares of common stock
at $43.50 per share. An additional 3,000,000 shares were
sold by certain employees and stockholders at $43.50 per share.
Total proceeds to the Company from this public offering, net of
underwriting discounts and costs of the offering, were
approximately $123.2 million.

On April 24, 2000, the stockholders of the
Company voted in favor to amend Cysives Certificate of
Incorporation to increase the authorized shares of common stock
to 500,000,000 shares from 75,000,000 shares.

In April 2000, the Board of Directors amended the
Cysive, Inc. Employee Stock Purchase Plan (ESPP), which allows
eligible employees of the Company to purchase common stock
through payroll deductions. Employees are eligible beginning
three months from their start date and must work a minimum of
20 hours a week. A total of 2,250,000 shares of
Cysives common stock have been reserved for issuance under
the ESPP. The purchase price is the lower of 85% of the fair
market value of the common stock on the day the employee began
participating in the ESPP, or 85% of the fair market value of
the shares on the date of purchase. During the years ended
December 31, 2002, 2001, and 2000, 119,664, 178,321 and
40,007 shares, respectively, were purchased through the
ESPP.

On January 19, 2001, the Company issued
225,000 shares of restricted stock to certain employees
with a vesting period of one year. The fair value of the stock
on the date of issuance was $4.94 per share, for an aggregate
value of $1,110,938. On June 22, 2001, an additional
3,000 shares of restricted stock were issued at a fair
value of $2.80 per share for an aggregate value of $8,400. Of
the 228,000 restricted shares issued in 2001, 75,230 shares
were cancelled during the year ended December 31, 2001,
leaving a balance of 152,770 restricted shares outstanding.
During January 2002, an additional 820 shares were
cancelled. On January 19, 2002, the restrictions lapsed on
the remaining 151,950 shares.

During the years ended December 31, 2002,
2001, and 2000, certain employees of the Company exercised
options to purchase a combined total of 1,085,317; 800,686; and
2,945,936 shares, respectively, of common stock for $863,000;
$519,000; and $1,800,000, respectively, paid in cash.

During the year ended December 31, 2002, the
Company purchased a total of 2,077,026 treasury shares for a
total expense of $4.7 million. Of this amount, 65,926
shares were purchased directly from employees on January 4,
2002 at a price of $3.29 per share, and the Company recognized
$132,000 of compensation expense related to this purchase. In
addition, between June 20, 2002 and October 21, 2002,
2,011,100 shares were purchased on the open market at prices
ranging from $2.10 to $2.35 per share representing the fair
market value at the date of purchase. During the year ended
December 31, 2001, the Company purchased a total of 644,406
treasury shares for a total cost of $1.6 million. Of this
amount, 449,500 shares were purchased on the open market
between September 6, 2001 and December 10, 2001 at
prices ranging from $2.30 to $2.63 per share. In addition,
between May 4, 2001 and December 4, 2001,
194,906 shares were purchased directly from employees at
prices ranging from $2.34 to $3.62 per share representing the
fair market value at the date of purchase.

36



---



##### 



CYSIVE, INC.


NOTES TO FINANCIAL
STATEMENTS  (Continued)



| |              
| | -------------
| | Stock Options

In 1994, the Company established a stock option
plan (the 1994 Option Plan) under which
4,500,000 shares of common stock were reserved for issuance
upon exercise of options granted to employees, officers and
directors of the Company. As of January 1, 2000, the shares
of common stock reserved for issuance was 22,700,000. In April
2000, the Board of Directors recommended and the stockholders of
the Company approved an increase in the number of shares
available for issuance under the 1994 Option Plan by 12,000,000.
The amount of common shares reserved under the 1994 Option Plan
are automatically increased by 15% of any increase in the
outstanding shares of common stock (other than increases
resulting from the stock issuance under the 1994 Option Plan.)
At December 31, 2002, the number of shares of common stock
reserved for issuance upon the exercise of options was
35,200,694, of which options to purchase 19,136,788 shares
of common stock are available for grant under the 1994 Option
Plan as of December 31, 2002. The price for the incentive
stock options is to be not less than the fair market value at
the date of grant as determined by the Board of Directors. The
1994 Option Plan provides for incentive, non-qualified and
restricted stock options. Non-employees are not eligible for
incentive stock options.

In 1999, the Company granted 20% vested incentive
stock options to purchase 655,974 shares of common stock
and fully vested non-qualified options to purchase
2,561,526 shares of common stock at exercise prices of
$0.835 and $0.415 per share (each of which was considered to be
below fair market value for financial reporting purposes),
respectively. In accordance with APB 25, the Company
recorded $13.3 million in compensation expense. In
connection with the grant of other certain options to employees
during the period from April 1, 1999 through
September 30, 1999, the Company recorded deferred stock
compensation of approximately $15.1 million, based on the
difference between the exercise prices of those options at their
respective grant dates and the deemed fair value for accounting
purposes of the shares of common stock subject to such options.
The deemed fair value for accounting purposes was determined
relative to the mid-point ($5.40 per share) of the anticipated
initial public offering price range as of the date of the
initial filing. Such amounts are included as a reduction of
stockholders equity and are being amortized on a
straight-line method over the applicable vesting period, either
three or four years, less the benefit of any stock option
cancellations.

In 2000, the Company granted non-qualified
options to purchase 4,335,388 shares of common stock at exercise
prices ranging from $5.688 to $24.650 per share (which was a 15%
discount from the fair market value at the time of grant). In
accordance with APB 25, the Company recorded
$6.5 million in deferred stock compensation for the
difference between the exercise prices of those options at their
respective grant dates and the deemed fair value for accounting
purposes of the shares of common stock subject to such options.
Such amounts are included as a reduction of stockholders
equity and are being amortized on a straight-line method over
the vesting period of four years, less the benefit of any stock
option cancellations. In 2001, the Company granted non-qualified
options to purchase 3,573,000 shares of common stock at exercise
prices ranging from $2.110 to $3.906 per share, all priced at
fair value at the time of grant. In 2002, the Company granted
non-qualified options to purchase 1,235,559 shares of
common stock at exercise prices ranging from $2.10 to $2.67 per
share, all priced at fair value at the time of grant.

On January 24, 2002, the Company announced a
voluntary stock option exchange program for its employees. This
program offered eligible employees who held options with an
exercise price per share of more than $5.67 the opportunity to
cancel those options in exchange for a lesser number of options
to be granted at a future date but not less than six months and
one day from the date of cancellation. Eligible options priced
between $5.67 and $14.01 per share were exchanged for 0.5 times
the number of options cancelled, and eligible options priced
greater than $14.01 per share were exchanged for 0.25 times the
number of options cancelled. The new options vested 25% on the
date of the grant, and then will vest 25% annually on the next
three anniversaries of the date of the grant. Executive officers
and directors of the Company were not eligible to participate in
this voluntary stock option exchange program. Options for the
purchase of an aggregate of

37



---



##### 



CYSIVE, INC.


NOTES TO FINANCIAL
STATEMENTS  (Continued)

2,772,750 shares were eligible for the
exchange. Options for the purchase of an aggregate of
1,859,558 shares were tendered for exchange and were
cancelled. This cancellation resulted in an acceleration of
compensation expense of $1,960,000 related to the value of these
options, and as a result, during the quarter ended
March 31, 2002, the Company recognized a total of
$2,208,000 of expense related to these cancelled options. On
August 27, 2002, the Company issued 447,059 new options
under the program at an exercise price of $2.24 per share.

Options granted expire no more than five years
from the date of grant for individuals owning 10% or more of the
Companys outstanding common shares and 10 years from
the date of grant for all other recipients. Except as otherwise
noted above, options granted through July 19, 1999 vest in
accordance with the following schedule: one year from the date
of the grant  25%; two years from the date of the
grant  25%; and three years from the date of the
grant  the remaining 50%. Options granted subsequent
to July 19, 1999 vest 25% per year for four years.

The Company adopted the disclosure-only
provisions of SFAS No. 123. Accordingly, no compensation
cost has been recognized related to options granted to employees
at fair value during 2002, 2001 and 2000.

Common stock option activity was as follows:

|                                 |                      |           |            |            |   |   |      |       | 
|-------------------------------- | -------------------- | --------- | ---------- | ---------- | - | - | ---- | ----- | 
|                                 |                      |           |            | Weighted  
|                                 |                      |           |            | Average   
|                                 |                      | Number of |            | Exercise  
|                                 |                      | Shares    |            | Price     
|                                 |                      |           |            |           
|Outstanding at December 31, 1999 |                      |           | 13,261,848 |            |   | $ | 1.63 |      
|                                 | Granted              |           |            | 8,740,251  |   |   | $    | 12.58 | 
|                                 | Exercised            |           |            | (2,945,936 | ) |   | $    | 0.61  | 
|                                 | Cancelled or expired |           |            | (3,108,346 | ) |   | $    | 12.37 | 
|                                 |                      |           |            |            |   |   |      |      
|Outstanding at December 31, 2000 |                      |           | 15,947,817 |            |   | $ | 5.73 |      
|                                 | Granted              |           |            | 3,573,000  |   |   | $    | 3.06  | 
|                                 | Exercised            |           |            | (800,688   | ) |   | $    | 0.65  | 
|                                 | Cancelled or expired |           |            | (4,778,154 | ) |   | $    | 6.50  | 
|                                 |                      |           |            |            |   |   |      |      
|Outstanding at December 31, 2001 |                      |           | 13,941,975 |            |   | $ | 5.07 |      
|                                 | Granted              |           |            | 1,235,559  |   |   | $    | 2.25  | 
|                                 | Exercised            |           |            | (1,085,317 | ) |   | $    | 0.79  | 
|                                 | Cancelled or expired |           |            | (5,771,797 | ) |   | $    | 10.20 | 
|                                 |                      |           |            |            |   |   |      |      
|Outstanding at December 31, 2002 |                      |           | 8,320,420  |            |   | $ | 1.64 |      
|                                 |                      |           |            |            |   |   |      |      

The following table summarizes information
regarding stock options outstanding at December 31, 2002:

|                         |  |                     |           |             |  |                     |     |             |  |          |      |  |  |  |           |  |  |   |      | 
|------------------------ |  | ------------------- | --------- | ----------- |  | ------------------- | --- | ----------- |  | -------- | ---- |  |  |  | --------- |  |  | - | ---- | 
|                         |  |                     |           |             |  |                    
|                         |  | Options Outstanding |           |             |  | Options Exercisable
|                         |  |                     |           |             |  |                    
|                         |  |                     |           | Average     |  | Weighted            |     |             |  | Weighted
|                         |  |                     |           | Remaining   |  | Average             |     |             |  | Average 
|                         |  | Number              |           | Contractual |  | Exercise            |     | Number      |  | Exercise
|Range of Exercise Prices |  | Outstanding         |           | Life        |  | Price               |     | Exercisable |  | Price   
|                         |  |                     |           |             |  |                     |     |             |  |         
|$0.00 - $ 2.50           |  |                     | 6,152,154 |             |  |                     | 4.1 |             |  | $        | 0.86 |  |  |  | 5,123,976 |  |  | $ | 0.62 | 
|$2.51 - $ 5.00           |  |                     | 1,616,000 |             |  |                     | 8.2 |             |  | $        | 3.08 |  |  |  | 500,875   |  |  | $ | 3.08 | 
|$5.01 - $17.56           |  |                     | 552,266   |             |  |                     | 7.6 |             |  | $        | 6.21 |  |  |  | 282,883   |  |  | $ | 6.20 | 
|                         |  |                     |           |             |  |                     |     |             |  |          |      |  |  |  |           |  |  |   |      | 
|$0.00 - $17.56           |  |                     | 8,320,420 |             |  |                     | 5.1 |             |  | $        | 1.64 |  |  |  | 5,907,734 |  |  | $ | 1.10 | 
|                         |  |                     |           |             |  |                     |     |             |  |          |      |  |  |  |           |  |  |   |      | 

38



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##### 



CYSIVE, INC.


NOTES TO FINANCIAL
STATEMENTS  (Continued)



| |                         
| | ------------------------
| | Common Stock Equivalents

Based on the closing price of $2.70 per share for
the Companys common stock on December 31, 2002, and
using the treasury stock method for determining the amount of
common stock equivalents, the number of common stock equivalent
shares related to stock options outstanding as of
December 31, 2002 was 4,204,620.

Note 10  Employee Benefit
Plan

The Company has a 401(k) Savings Plan (the
Plan) in which employees are eligible to participate
beginning on the first day of the quarter subsequent to their
hire date and upon attaining age 21. The Plan allows
employees to contribute up to 15% of their bi-weekly
compensation, subject to the statutory limitations. The Company
matches employee contributions up to the first six percent of
each participants bi-weekly compensation, subject to
statutory limitations. The Companys contributions to the
Plan are discretionary as authorized by the Board of Directors.
Expense reflected in the Statements of Operations relating to
the Plan was $0.6 million, $1.1 million and
$1.4 million for the years ended December 31, 2002,
2001 and 2000, respectively.

Note 11  Income
Taxes

At the end of 2000, as a result of the
Companys then current and expected future operating
losses, the Company provided a full valuation allowance on all
of the Companys net deferred tax assets. Subsequent
increases in the Companys net deferred tax assets,
principally resulting from losses from continuing operations,
have been offset by corresponding increases in the valuation
allowance. Income tax expense recognized subsequent to 2000
reflects adjustments to state income taxes receivable.

During 2000 through 2002, certain grantees of
non-qualified and incentive stock options exercised their
options and periodically sold the common stock issued upon such
exercise. As of December 31, 2002 and 2001, these sales
created cumulative gross non-operational tax benefits to the
Company of $13.3 million and $13.2 million,
respectively, and are reflected on the net operating loss and
credits line in the table below.

The Company had cumulative net operating losses
at December 31, 2002, of $71.9 million. These
attributes begin to expire in 2019 if unused. Additionally, the
Company had R&D credits of $0.3 million. These credits
begin to expire in 2004. Utilization of these attributes may be
subject to limitations in the event of significant changes in
stock ownership of the Company.

Deferred income taxes also reflect the net tax
effects of temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes.

39



---



##### 



CYSIVE, INC.


NOTES TO FINANCIAL
STATEMENTS  (Continued)

Components of the Companys net deferred tax
balances are as follows:

|                                                 |                                |                                |         |        |        |   |         |        |        |  
|------------------------------------------------ | ------------------------------ | ------------------------------ | ------- | ------ | ------ | - | ------- | ------ | ------ | -
|                                                 |                                |                               
|                                                 |                                | December 31,                  
|                                                 |                                |                               
|                                                 |                                | 2002                           |         | 2001  
|                                                 |                                |                                |         |       
|                                                 |                                |                               
|                                                 |                                | (In thousands)                
|Deferred tax assets:                             |                                |                                |         |        |        |   |         |       
|                                                 | Net operating loss and credits |                                | $       | 28,397 |        |   | $       | 22,939 |       
|                                                 | Accrued expenses               |                                |         | 2,146  |        |   |         | 922    |       
|                                                 | Stock compensation             |                                |         | 4,636  |        |   |         | 5,694  |       
|                                                 | Depreciation                   |                                |         | 78     |        |   |         |       |       
|                                                 | Asset reserves                 |                                |         | 38     |        |   |         | 48     |       
|                                                 |                                |                                |         |        |        |   |         |       
|                                                 |                                | Total deferred tax assets      |         |        | 35,295 |   |         |        | 29,603 |  
|                                                 |                                |                                |         |        |        |   |         |       
|Deferred tax liabilities:                        |                                |                                |         |        |        |   |         |       
|                                                 | Depreciation                   |                                |         |       |        |   |         | (54    | )     
|                                                 |                                |                                |         |        |        |   |         |       
|                                                 |                                | Total deferred tax liabilities |         |        |       |   |         |        | (54    | )
|                                                 |                                |                                |         |        |        |   |         |       
|Net deferred tax asset                           |                                |                                | 35,295  |        |        |   | 29,549  |       
|Valuation allowance                              |                                |                                | (35,295 | )      |        |   | (29,549 | )     
|                                                 |                                |                                |         |        |        |   |         |       
|Net deferred tax asset, less valuation allowance |                                | $                              |        |        |        | $ |        |       
|                                                 |                                |                                |         |        |        |   |         |       

Because of the Companys overall tax
position, the net unrealized gain on investments included as a
component of stockholders equity of $1,205,000 and
$1,090,000 at December 31, 2002 and 2001, respectively, has
not been reduced by a potential deferred tax liability of
$467,000 and $425,000, respectively.

The components of the provision for income taxes
are as follows:

|                                 |         |                |        |        |   |      |        |        |   |   |         |         |  
|-------------------------------- | ------- | -------------- | ------ | ------ | - | ---- | ------ | ------ | - | - | ------- | ------- | -
|                                 |         |               
|                                 |         | December 31,  
|                                 |         |               
|                                 |         | 2002           |        | 2001   |   | 2000
|                                 |         |                |        |        |   |     
|                                 |         |               
|                                 |         | (In thousands)
|Current tax expense (benefit):   |         |                |        |        |   |      |        |        |   |   |         |        
|                                 | Federal |                | $      |       |   |      | $      |       |   |   | $       | (660    | )
|                                 | State   |                |        | 19     |   |      |        |       |   |   |         | (129    | )
|Deferred tax expense (benefit):  |         |                |        |        |   |      |        |        |   |   |         |        
|                                 | Federal |                |        | (7,759 | ) |      |        | (6,629 | ) |   |         | (13,091 | )
|                                 | State   |                |        | (1,756 | ) |      |        | (1,512 | ) |   |         | (2,987  | )
|                                 |         |                |        |        |   |      |        |        |   |   |         |        
|Net benefit for income taxes     |         |                | (9,496 | )      |   |      | (8,141 | )      |   |   | (16,867 | )      
|Change in valuation allowance    |         |                | 9,515  |        |   |      | 8,196  |        |   |   | 21,227  |        
|                                 |         |                |        |        |   |      |        |        |   |   |         |        
|Net income tax expense (benefit) |         | $              | 19     |        |   | $    | 55     |        |   | $ | 4,360   |        
|                                 |         |                |        |        |   |      |        |        |   |   |         |        

40



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##### 



CYSIVE, INC.


NOTES TO FINANCIAL
STATEMENTS  (Continued)

The difference between the actual income tax
provision and the federal statutory income tax benefit computed
by applying the statutory federal rate to loss before taxes was
attributable to the following:

|                                     |  |                |        |      |  |      |        |   |  |   |         |  
|------------------------------------ |  | -------------- | ------ | ---- |  | ---- | ------ | - |  | - | ------- | -
|                                     |  |               
|                                     |  | December 31,  
|                                     |  |               
|                                     |  | 2002           |        | 2001 |  | 2000
|                                     |  |                |        |      |  |     
|                                     |  |               
|                                     |  | (In thousands)
|Federal statutory income tax benefit |  | $              | (8,883 | )    |  | $    | (7,437 | ) |  | $ | (3,311  | )
|State taxes (net of federal benefit) |  |                | (1,109 | )    |  |      | (998   | ) |  |   | (409    | )
|Permanent items                      |  |                | 809    |      |  |      | 294    |   |  |   | (13,147 | )
|Tax credits                          |  |                | (63    | )    |  |      |       |   |  |   |        |  
|Effect of asset valuation allowance  |  |                | 9,265  |      |  |      | 8,196  |   |  |   | 21,227  |  
|                                     |  |                |        |      |  |      |        |   |  |   |         |  
|                                     |  | $              | 19     |      |  | $    | 55     |   |  | $ | 4,360   |  
|                                     |  |                |        |      |  |      |        |   |  |   |         |  

Note 12  Loss Per
Share

The following table summarizes the computation of
basic and diluted loss per share for the years ended
December 31, 2002, 2001 and 2000:

|                |                                                                     |                                                 |            |            |   |      |            |            |   |   |            |            |  
|--------------- | ------------------------------------------------------------------- | ----------------------------------------------- | ---------- | ---------- | - | ---- | ---------- | ---------- | - | - | ---------- | ---------- | -
|                |                                                                     |                                                
|                |                                                                     | Year Ended December 31,                        
|                |                                                                     |                                                
|                |                                                                     | 2002                                            |            | 2001       |   | 2000
|                |                                                                     |                                                 |            |            |   |     
|                |                                                                     |                                                
|                |                                                                     | (In thousands, except share and per share data)
|Numerator:      |                                                                     |                                                 |            |            |   |      |            |            |   |   |            |           
|Net loss        |                                                                     | $                                               | (26,145    | )          |   | $    | (21,928    | )          |   | $ | (14,328    | )         
|Denominator:    |                                                                     |                                                 |            |            |   |      |            |            |   |   |            |           
|                | Weighted average shares outstanding                                 |                                                 |            | 29,008,503 |   |      |            | 29,521,894 |   |   |            | 26,438,946 |  
|                | Weighted average effect of common stock
    equivalents outstanding |                                                 |            |           |   |      |            |           |   |   |            |           |  
|                |                                                                     |                                                 |            |            |   |      |            |            |   |   |            |           
|                |                                                                     |                                                 | 29,008,503 |            |   |      | 29,521,894 |            |   |   | 26,438,946 |           
|                |                                                                     |                                                 |            |            |   |      |            |            |   |   |            |           
|Loss per share: |                                                                     |                                                 |            |            |   |      |            |            |   |   |            |           
|                | Basic                                                               |                                                 | $          | (0.90      | ) |      | $          | (0.74      | ) |   | $          | (0.54      | )
|                | Diluted                                                             |                                                 | $          | (0.90      | ) |      | $          | (0.74      | ) |   | $          | (0.54      | )



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

None.

41



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##### 



PART III



|         |                                                        
|-------- | -------------------------------------------------------
|Item 10. | Directors and Executive Officers of the
    Registrant.

The following table presents information about
each of our executive officers and directors.

|                         |  |     |    |             |  |                                                                               
|------------------------ |  | --- | -- | ----------- |  | ------------------------------------------------------------------------------
|Name                     |  | Age |    | Position(s)
|                         |  |     |    |            
|Nelson A. Carbonell, Jr. |  |     | 39 |             |  | Chairman of the Board, President, Chief Executive
    Officer and Director    
|John R. Lund             |  |     | 40 |             |  | Vice President, Chief Financial Officer,
    Treasurer, Secretary and Director
|Ken R. Hargrave          |  |     | 41 |             |  | Vice President                                                                
|John N. Carbonell        |  |     | 32 |             |  | Vice President                                                                
|R. Eugene Willingham     |  |     | 36 |             |  | Vice President                                                                
|Woodrow W. Angle, Jr.    |  |     | 48 |             |  | Vice President                                                                
|Jon S. Korin             |  |     | 48 |             |  | Director                                                                      
|Daniel F. Gillis         |  |     | 56 |             |  | Director                                                                      
|Kenneth H. Holec         |  |     | 48 |             |  | Director                                                                      

Nelson A. Carbonell,
Jr.founded Cysive and has served as
President, Chief Executive Officer and Chairman of the board of
directors since we commenced operations in 1994.
Mr. Carbonell serves on the Executive Committee of the
Washington-Baltimore Young Presidents Organization, and he
is a member of the Board of Trustees of George Washington
University. Mr. Carbonell received a B.S. in Electrical
Engineering from George Washington University in 1985.
Mr. Carbonell is the brother of John N. Carbonell and is
the brother-in-law of R. Eugene Willingham.

John R. Lundhas
served as our Treasurer since December 1995, our Chief Financial
Officer since April 1997, our Secretary since April 1999 and as
a Director since April 1999. Mr. Lund received a B.S. in
Accounting from Brigham Young University in 1986.

Ken R. Hargravehas
served as our Vice President, Product Deployment since
August 2002, and manages our product implementations. From
June 2001 to July 2002, Mr. Hargrave served as
our Vice President, Services and managed our professional
services operations. From January 2001 to May 2001,
Mr. Hargrave served as our Vice President, Customer
Practice Group  West, and managed our operations in
Southern California, Mountain View, Denver and Chicago. From
June 2000 to December 2000, Mr. Hargrave served as our
Director of Operations  West, and managed our
operations in Southern California, Mountain View, Denver and
Chicago. From October 1999 to May 2000, Mr. Hargrave served
as our Regional Director of Southern California. From October
1995 to September 1999, Mr. Hargrave served as one of our
Project Managers. Mr. Hargrave received his B.S. in
Computer Science from Rochester Institute of Technology in 1985.

John N. Carbonellhas served as our Vice President,
Operations since June 2001, and manages our sales and recruiting
operations. From January 2001 to May 2001, Mr. Carbonell
served as our Vice President, Customer Practice
Group  East, and managed our operations in New York,
Reston, Atlanta and Dallas. From June 2000 to December 2000,
Mr. Carbonell served as our Director of
Operations  East, and managed our operations in New
York, Reston, Atlanta and Dallas. From January 2000 to May 2000,
Mr. Carbonell served as our Director of Operations for
Reston. From August 1998 to December 1999, Mr. Carbonell
served as one of our Project Managers. From July 1995 to August
1998, Mr. Carbonell served as one of our Senior Developers.
Mr. Carbonell received his B.S. in Electrical Engineering
from the University of Pennsylvania in 1992. Mr. Carbonell is
the brother of Nelson A. Carbonell, Jr.

R. Eugene Willinghamhas served as our Vice President,
Product Engineering since January 2001. From June 2000 to
December 2000, Mr. Willingham served as our Director of
Operations for New Office Development. From January 2000 to May
2000, Mr. Willingham served as the Director of Operations
for our New York office. From June 1997 to December 1999,
Mr. Willingham served as our Director of Operations

42



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##### 



for the East. From September 1996 to June 1997,
Mr. Willingham served as one of our Project Managers.
Mr. Willingham received his B.S. in Aerospace Engineering
from the University of Maryland in 1989. Mr. Willingham is
the brother-in-law of Nelson A. Carbonell, Jr.


Woodrow W. Angle,
Jr.has served as our Vice President,
Strategic Alliances since June 2002. Prior to joining Cysive,
Mr. Angle served as Vice President, Strategic Alliances at
Clarus Corporation from September 2001 to May 2002, Vice
President, Key Account Sales at Manugistics Group, Inc. from
July 2000 to August 2001, Vice President, Sales at ProcureNet,
Inc. from January 2000 to June 2000, Vice President, Sales at
3-G International, Inc. from January 1999 to December 1999, and
Vice President, Sales at NEC Computer Systems, Inc. from April
1995 to October 1998. Mr. Angle received his B.A. in
Marketing from Virginia Tech in 1976.

Jon S. Korinhas
served as a Director since April 1997. Since April 2001,
Mr. Korin has served as Executive Director, Strategic
Development for Northrop Grumman Information Technology, a
$4 billion sector of Northrop Grumman Corporation. Since
1993, he served in a similar role for Litton PRC, Inc., a
provider of information technology and systems-based solutions
for the U.S. government and commercial customers. Litton PRC was
acquired by Northrop Grumman in April 2001. Mr. Korin
received a B.S. from The Wharton School of the University of
Pennsylvania in May 1976.

Daniel F. Gillishas
served as a Director since June 2001. Mr. Gillis formerly
served as President, Chief Executive Officer and Director of
SAGA Systems, Inc. from May 1996 until its purchase by Software
AG in February 2001. Mr. Gillis received a BS degree in
Management from the University of Rhode Island in 1968.

Kenneth H. Holechas
served as a Director since May 2001. He has served as the
interim CEO and a director of PeopleClick, Inc. since January
2002. He served as President, Chief Executive Officer and
Director of ShowCase, Inc., a worldwide provider of enterprise
intelligence software solutions, from November 1993 until
February 2002 at which time ShowCase, Inc. was acquired by SPSS,
Inc. Mr. Holec has served as a Director of Stellent
Corporation (formerly IntraNet Solutions, Inc.) since January
1998 and as a Director of SPSS, Inc. since February 2002.
Mr. Holec received a B.S. in Business Administration from
the University of Minnesota in 1977.

Board Composition

We currently have five directors whose terms of
office are divided into three classes: Class I, whose term
will expire at the annual meeting of stockholders to be held in
May 2003; Class II, whose term will expire at the annual
meeting of stockholders to be held in 2004; and Class III,
whose term will expire at the annual meeting of stockholders to
be held in 2005. The Class I directors are
Messrs. Carbonell and Gillis, the Class II directors
are Messrs. Lund and Holec, and the Class III director
is Mr. Korin. At each annual meeting of stockholders after
the initial classification or special meeting held in place of
an annual meeting, the successors to directors whose terms will
then expire will be elected to serve from the time of election
and qualification until the third annual meeting following
election or similar special meeting. If the board of directors
increases the number of directors, the newly created
directorships will be distributed among the three classes so
that each class of directors will, as nearly as possible,
consist of one-third of the directors. This classification of
our board of directors may delay or prevent changes in control
or management of Cysive.

Board Committees

Our board of directors has established an audit
committee, a compensation committee and an executive committee.

The audit committee consists of
Messrs. Gillis, Holec and Korin and assists the board of
directors in fulfilling its responsibilities of ensuring that
management maintains an adequate system of internal controls.
The audit committee also reviews, acts on and reports to the
board of directors with respect to various auditing and
accounting matters. These matters include the selection of our
auditors, the scope of the annual audits, fees to be paid to the
auditors, the performance of our independent auditors and our
accounting practices.

43



---



##### 



The compensation committee determines the
salaries and incentive compensation of Cysives officers
and provides recommendations for the salaries and incentive
compensation of other employees and software engineers. The
compensation committee also administers Cysives various
incentive compensation, stock and benefit plans. The
compensation committee consists of Messrs. Gillis, Holec
and Korin.

The executive committee determines the objectives
and performance criteria of each member of Cysives
management team. The executive committee consists of
Messrs. Carbonell and Lund.

The nominating committee recommends to the Board
of Directors those persons deemed by the committee to be
suitable for nomination as the Board nominees for election to
the Board of Directors. The nominating committee was disbanded
after the appointment of Mr. Gillis to the Board.

Director Compensation

Each non-employee director currently receives an
annual retainer of $12,000 and cash compensation of $1,000 and
reimbursement for reasonable travel expenses for each board
meeting attended. In addition, upon their first election and
each re-election to office, each director receives an option to
purchase 60,000 shares of our common stock that will vest
equally over the three-year term of each director.



|         |                        
|-------- | -----------------------
|Item 11. | Executive Compensation.

The information is incorporated herein by
reference to our definitive 2003 Proxy Statement.



|         |                                                                    
|-------- | -------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management.

The following table provides certain information
with respect to equity awards under the 1994 Option Plan as of
December 31, 2002.

|                                                           |  |                            |           |                               |  |                           |      |  |  |  |            | 
|---------------------------------------------------------- |  | -------------------------- | --------- | ----------------------------- |  | ------------------------- | ---- |  |  |  | ---------- | 
|                                                           |  |                            |           |                               |  | Number of securities     
|                                                           |  |                            |           |                               |  | remaining available for  
|                                                           |  | Number of securities to be |           |                               |  | future issuance under    
|                                                           |  | issued upon exercise of    |           | Weight-average exercise price |  | equity compensation plans
|                                                           |  | outstanding options,       |           | of outstanding options,       |  | (excluding securities    
|                                                           |  | warrants and rights        |           | warrants and rights           |  | reflected in column (a)) 
|Plan Category                                              |  | (a)                        |           | (b)                           |  | (c)                      
|                                                           |  |                            |           |                               |  |                          
|Equity compensation plans approved by stockholders         |  |                            | 8,320,420 |                               |  | $                         | 1.64 |  |  |  | 19,136,788 | 
|Equity compensation plans not approved by
    stockholders |  |                            |          |                               |  |                           |     |  |  |  |           | 
|                                                           |  |                            |           |                               |  |                           |      |  |  |  |            | 
|Total                                                      |  |                            | 8,320,420 |                               |  | $                         | 1.64 |  |  |  | 19,136,788 | 

Additional information is incorporated herein by
reference to our definitive 2003 Proxy Statement.



|         |                                                    
|-------- | ---------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions.

The information is incorporated herein by
reference to our definitive 2003 Proxy Statement.



|         |                         
|-------- | ------------------------
|Item 14. | Controls and Procedures.

(a) Evaluation of Disclosure Controls and
Procedures. Our Chief Executive Officer and Chief Financial
Officer have evaluated the effectiveness of our disclosure
controls and procedures (as such term is defined in
Rules 13a-14(c) and 15d-14(c) under the Securities Exchange
Act of 1934, as amended (the Exchange Act)) as of a
date within 90 days prior to the filing date of this annual
report (the Evaluation Date). Based on such
evaluation, such officers have concluded that, as of the
Evaluation Date, our disclosure controls and procedures are
effective in alerting them on a timely basis to material
information relating to our company required to be included in
our reports filed or submitted under the Exchange Act.

(b) Changes in Internal Controls. Since the
Evaluation Date, there have not been any significant changes in
our internal controls or in other factors that could
significantly affect such controls.

44



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##### 



PART IV

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

(a)(1) The following financial statements
of Cysive, Inc. and report of independent auditors are included
in Item 8 of this Form 10-K:



| |   |                                                                                             
| | - | --------------------------------------------------------------------------------------------
| |  | Report of Ernst & Young, LLP,
    Independent Auditors.                                     
|
| |  | Balance Sheets as of December 31, 2002 and
    2001.                                        
|
| |  | Statements of Operations for the years ended
    December 31, 2002, 2001 and 2000.          
|
| |  | Statements of Stockholders Equity for the
    years ended December 31, 2002, 2001 and 2000.
|
| |  | Statements of Cash Flows for the years ended
    December 31, 2002, 2001 and 2000.          
|
| |  | Notes to Financial Statements.                                                              



|       |                                                                                                                                
|------ | -------------------------------------------------------------------------------------------------------------------------------
|(a)(2) | The following financial statement schedule is
    filed as part of this report and is attached hereto as
    pages S-1 and S-2:



| |   |                                                                        
| | - | -----------------------------------------------------------------------
| |  | Report of Independent Auditors on the Financial
    Statement Schedule.
|
| |  | Schedule II  Valuation and
    Qualifying Accounts.                   

All other schedules for which provision is made
in the applicable accounting regulations of the Commission
either have been included in our financial statements or the
notes thereto, are not required under the related instructions
or are inapplicable and therefore have been omitted.



|       |                                                                                                             
|------ | ------------------------------------------------------------------------------------------------------------
|(a)(3) | The following exhibits are either provided
    with this report or are incorporated herein by
    reference:



EXHIBIT INDEX


|        |       |             |  |                                                                                                               
|------- | ----- | ----------- |  | --------------------------------------------------------------------------------------------------------------
|Exhibit |       |            
|No.     |       | Description
|        |       |            
|        | 3.1   |             |  | Amended and Restated Certificate of
    Incorporation(1)                                                      
|        | 3.2   |             |  | Amended and Restated Bylaws(1)                                                                                
|        | 4.1   |             |  | Form of Common Stock Certificate(1)                                                                           
|        | 10.1  |             |  | Second Amended and Restated 1994 Stock Option
    Plan(2)                                                     
|        | 10.2  |             |  | Amended and Restated Stock Option Plan(1)                                                                     
|        | 10.3  |             |  | Employee Stock Purchase Plan(3)                                                                               
|        | 10.4  |             |  | 401(k) Plan(1)                                                                                                
|        | 10.5  |             |  | Employment Agreement between Cysive, Inc. and
    Nelson A. Carbonell, Jr.(1)                                 
|        | 10.6  |             |  | Employment Agreement between Cysive, Inc. and
    John R. Lund(1)                                             
|        | 10.16 |             |  | Revolving Credit Agreement between Cysive, Inc.
    and Merrill Lynch & Co.(1)                                
|        | 10.17 |             |  | Letter Agreement between Cysive, Inc. and Merrill
    Lynch & Co.(3)                                          
|        | 10.18 |             |  | Lease Agreement by and between Cysive, Inc. and
    Parkridge Five Associates Limited Partnership(1)          
|        | 10.22 |             |  | Amendment No. 1 to Executive Employment
    Agreement between Cysive, Inc. and Nelson A.
    Carbonell, Jr.(3)
|        | 10.23 |             |  | Amendment No. 1 to Executive Employment
    Agreement between Cysive, Inc. and John R. Lund(3)                
|        | 10.24 |             |  | Employment Agreement between Cysive, Inc. and
    John N. Carbonell(4)                                        
|        | 10.25 |             |  | Employment Agreement between Cysive, Inc. and Ken
    R. Hargrave(4)                                          
|        | 10.26 |             |  | Employment Agreement between Cysive, Inc. and
    R. Eugene Willingham(4)                                     
|        | 10.27 |             |  | Employment Agreement between Cysive, Inc. and
    Woodrow Angle(5)                                            

45



---



##### 



|        |      |             |  |                                                                                                                                  
|------- | ---- | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------
|Exhibit |      |            
|No.     |      | Description
|        |      |            
|        | 23.1 |             |  | Consent of Ernst & Young LLP(6)                                                                                                  
|        | 99.1 |             |  | Certification Pursuant to 18 U.S.C.
    Section 1350, as Adopted Pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002(6)
|        | 99.2 |             |  | Certification Pursuant to 18 U.S.C.
    Section 1350, as Adopted Pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002(6)



---



|    |                                                                                                                                
|--- | -------------------------------------------------------------------------------------------------------------------------------
|(1) | Incorporated by reference to our Registration
    Statement on Form S-1 (File No. 333-85651).                                  
|   
|(2) | Incorporated by reference to our 2001 Definitive
    Proxy Statement on Form DEF 14A (File
    No. 000-27607).                 
|   
|(3) | Incorporated by reference to our 2000 Annual
    Report on Form 10K (File No. 000-27607).                                      
|   
|(4) | Incorporated by reference to our 2002 Definitive
    Proxy Statement on Form DEF 14A (File
    No. 000-27607).                 
|   
|(5) | Incorporated by reference to our Quarterly Report
    for the period ending June 30, 2002 on Form 10-Q (File
    No. 000-27607)
|   
|(6) | Filed herewith                                                                                                                 

(b) Reports on Form 8-K.



| |   |                                                                                
| | - | -------------------------------------------------------------------------------
| |  | Current Report on Form 8-K, filed with the
    Commission on November 14, 2002.
|
| |  | Current Report on Form 8-K, filed with the
    Commission on December 23, 2002.

(d) The following financial statement
schedule is filed herewith:



| |   |                                                     
| | - | ----------------------------------------------------
| |  | Schedule II  Valuation and
    Qualifying Accounts.

Schedules not listed above have been omitted
because they are inapplicable or the information required to be
set forth therein is provided in our financial statements or
notes thereto.

46



---



##### 



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, in the city of Reston,
Commonwealth of Virginia, on March 19, 2003.



| |             
| | ------------
| | CYSIVE, INC.



| |     |                             
| | --- | ----------------------------
| | By: | /s/ NELSON A. CARBONELL, JR.

| |                                                    
| | ---------------------------------------------------
| |                                                    
| | Nelson A. Carbonell, Jr.                           
| | Chairman, President and Chief Executive
    Officer

Pursuant to the requirements of the Securities
Act of 1934, this Form 10-K has been signed by the
following persons in the capacities indicated on March 19,
2003.

|                                                    |  |                                                                                                             |  | 
|--------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------- |  | 
|                                                    |  |                                                                                                            
|Name                                                |  | Title                                                                                                      
|                                                    |  |                                                                                                            
|                                                   
|/s/ NELSON A. CARBONELL, JRNelson A. Carbonell, Jr. |  | Chairman, President and Chief Executive Officer
    (Principal Executive Officer)                          
|                                                   
|/s/ JOHN R. LUNDJohn R. Lund                        |  | Chief Financial Officer, Treasurer, Secretary and
    Director (Principal Financial and Accounting Officer)
|                                                   
|/s/ JON KORINJon Korin                              |  | Director                                                                                                   
|                                                   
|/s/ KENNETH HOLECKenneth Holec                      |  | Director                                                                                                   
|                                                   
|/s/ DANIEL GILLISDaniel Gillis                      |  | Director                                                                                                   

47



---



##### 



CERTIFICATION

Each of the undersigned, in his capacity as the
Chief Executive Officer and Chief Financial Officer of Cysive,
Inc., as the case may be, provides the following certifications
required by 18 U.S.C. Section 1350, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Certification of Chief Executive
Officer

I, Nelson A. Carbonell, Jr., hereby certify
that:

1.     I have reviewed
this annual report on Form 10-K of Cysive, Inc., a Delaware
corporation (the Company);

2.     Based on my
knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this annual
report; and

3.     Based on my
knowledge, the financial statements, and other financial
information included in this annual report, fairly present in
all material respects the financial condition, results of
operations and cash flows of the Company as of, and for, the
periods presented in this annual report.

4.     The
Companys other certifying officer and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Rules 13a-14 and 15d-14 of the
Securities Exchange Act of 1934, as amended) for the Company and
we have:



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

5.     The
Companys other certifying officer and I have disclosed,
based on our most recent evaluation, to the Companys
auditors and the audit committee of the Company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 Companys ability to record, process, summarize
    and report financial data and have identified for the
    Company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 Companys internal controls.                                                                                                                                                     

6.     The
Companys other certifying officer and I have indicated in
this annual 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.



| |                             
| | ----------------------------
| | /s/ NELSON A. CARBONELL, JR.
| |                             
| | Nelson A. Carbonell, Jr.    
| | Chief Executive Officer     

March 19, 2003

48



---



##### 



Certification of Chief Financial
Officer

I, John R. Lund, hereby certify that:

1.     I have reviewed
this annual report on Form 10-K of Cysive, Inc., a Delaware
corporation (the Company);

2.     Based on my
knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this annual
report; and

3.     Based on my
knowledge, the financial statements, and other financial
information included in this annual report, fairly present in
all material respects the financial condition, results of
operations and cash flows of the Company as of, and for, the
periods presented in this annual report.

4.     The
Companys other certifying officer and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Rules 13a-14 and 15d-14 of the
Securities Exchange Act of 1934, as amended) for the Company and
we have:



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

5.     The
Companys other certifying officer and I have disclosed,
based on our most recent evaluation, to the Companys
auditors and the audit committee of the Company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 Companys ability to record, process, summarize
    and report financial data and have identified for the
    Company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 Companys internal controls                                                                                                                                                      

6.     The
Companys other certifying officer and I have indicated in
this annual 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.



| |                        
| | -----------------------
| | /s/ JOHN R. LUND       
| |                        
| | John R. Lund           
| | Chief Financial Officer

March 19, 2003

49



---



##### 



REPORT OF INDEPENDENT AUDITORS ON FINANCIAL
STATEMENT SCHEDULE

We have audited the financial statements of
Cysive, Inc. as of December 31, 2002 and 2001, and for each
of the three years in the period ended December 31, 2002,
and have issued our report thereon dated February 7, 2003
(included elsewhere in the Annual Report on Form 10-K). Our
audits also included the financial statement schedule listed in
Item 14(a)(2) of the Form 10-K. This schedule is the
responsibility of the Companys management. Our
responsibility is to express an opinion on this schedule based
on our audits.

In our opinion, the financial statement schedule
referred to above, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.



| |                              
| | -----------------------------
| | /s/     ERNST &
    YOUNG LLP

McLean, Virginia

February 7, 2003


S-1



---



##### 



VALUATION AND QUALIFYING ACCOUNTS AND
RESERVES

ALLOWANCE FOR DOUBTFUL ACCOUNTS


Years Ended December 31, 2002, 2001,
2000


|                                 |                              |                |   |            |  |            |  |            |   |  |   |        |   |  |   |       | 
|-------------------------------- | ---------------------------- | -------------- | - | ---------- |  | ---------- |  | ---------- | - |  | - | ------ | - |  | - | ----- | 
|                                 |                              | Balance at     |   | Charged to |  | Charged to |  | Balance at
|                                 |                              | Beginning of   |   | Costs and  |  | Other      |  | End of    
|Description                      |                              | Period         |   | Expenses   |  | Accounts   |  | Period    
|                                 |                              |                |   |            |  |            |  |           
|                                 |                              |               
|                                 |                              | (In Thousands)
|Allowance for doubtful accounts: |                              |                |   |            |  |            |  |            |   |  |   |        |   |  |   |      
|                                 | Year ended December 31, 2002 |                | $ | 125        |  |            |  |           |   |  | $ | (27    | ) |  | $ | 98    | 
|                                 | Year ended December 31, 2001 |                |   | 1,600      |  |            |  | (1,257     | ) |  |   | (218   | ) |  |   | 125   | 
|                                 | Year ended December 31, 2000 |                |   | 651        |  |            |  | 2,359      |   |  |   | (1,410 | ) |  |   | 1,600 | 

RESTRUCTURING RESERVE

Years Ended December 31, 2002, 2001,
2000


|                       |                              |                |   |            |  |            |   |            |  |  |   |        |   |  |   |       | 
|---------------------- | ---------------------------- | -------------- | - | ---------- |  | ---------- | - | ---------- |  |  | - | ------ | - |  | - | ----- | 
|                       |                              | Balance at     |   | Charged to |  | Charged to |   | Balance at
|                       |                              | Beginning of   |   | Costs and  |  | Other      |   | End of    
|Description            |                              | Period         |   | Expenses   |  | Accounts   |   | Period    
|                       |                              |                |   |            |  |            |   |           
|                       |                              |               
|                       |                              | (In Thousands)
|Restructuring Reserve: |                              |                |   |            |  |            |   |            |  |  |   |        |   |  |   |      
|                       | Year ended December 31, 2002 |                | $ | 1,864      |  |            | $ | 5,945      |  |  | $ | (3,048 | ) |  | $ | 4,761 | 
|                       | Year ended December 31, 2001 |                |   | 4,071      |  |            |   | 2,098      |  |  |   | (4,305 | ) |  |   | 1,864 | 
|                       | Year ended December 31, 2000 |                |   |           |  |            |   | 4,710      |  |  |   | (639   | ) |  |   | 4,071 | 

ALLOWANCE FOR DEFERRED TAX ASSET

Years Ended December 31, 2002, 2001,
2000


|                                  |                              |                |   |            |  |            |   |            |  |  |   |        |   |  |   |        | 
|--------------------------------- | ---------------------------- | -------------- | - | ---------- |  | ---------- | - | ---------- |  |  | - | ------ | - |  | - | ------ | 
|                                  |                              | Balance at     |   | Charged to |  | Charged to |   | Balance at
|                                  |                              | Beginning of   |   | Costs and  |  | Other      |   | End of    
|Description                       |                              | Period         |   | Expenses   |  | Accounts   |   | Period    
|                                  |                              |                |   |            |  |            |   |           
|                                  |                              |               
|                                  |                              | (In Thousands)
|Allowance for deferred tax asset: |                              |                |   |            |  |            |   |            |  |  |   |        |   |  |   |       
|                                  | Year ended December 31, 2002 |                | $ | 29,549     |  |            | $ | 9,515      |  |  | $ | (3,769 | ) |  | $ | 35,295 | 
|                                  | Year ended December 31, 2001 |                |   | 21,227     |  |            |   | 8,196      |  |  |   | 126    |   |  |   | 29,549 | 
|                                  | Year ended December 31, 2000 |                |   |           |  |            |   | 21,227     |  |  |   |       |   |  |   | 21,227 | 

S-2