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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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Form 10-K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT


TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934


|                                             |  |                                                                                          
|-------------------------------------------- |  | -----------------------------------------------------------------------------------------
|þ                                            |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
	OF THE SECURITIES EXCHANGE ACT OF 1934    
|                                            
|For the Fiscal Year Ended December 31,
	2001
|                                            
|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


As of March 14, 2002, there were
30,098,996 shares of Common Stock outstanding. The
aggregate value of the shares of Common Stock of the Registrant
issued and outstanding on such date, excluding
11,019,984 shares held by all affiliates of the Registrant,
was approximately $53.8 million.


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 15, 2002 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,
2001


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                                                                |    |      | 12 | 
|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                                            |    |      | 22 | 
|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 | 
|PART IV   
|Item 14.   |  | 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. These factors may cause our actual results to differ
materially from a forward-looking statement. 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. 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 multi-channel
enterprise software and services that allow companies to
integrate Web, wireless, voice-activated systems, and Web
services across an enterprise. Since commencing operations in
1994, we have used advanced Internet 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 products and engineering services model. Accordingly,
during 2001 we developed Cysive CymbioTM, a software
product that uses widely supported technologies and open
standards to ensure seamless interoperability between multiple
channels such as the Web, wireless, voice, or Web services, and
databases or applications. Cysive Cymbios architecture
reduces a customers development time and costs and creates
efficiencies by incorporating on a single code base all of the
components required for developing applications that operate
across multiple channels. We introduced Cysive Cymbio in the
fourth quarter of 2001.

We believe that companies are moving to a
multi-channel approach using Web, wireless, voice-activated
systems, and Web services to interact with their employees,
customers, suppliers, partners and distributors. Technology
advances, like Cysive Cymbio which incorporates our
patent-pending Follow-OnTM technology, enable
companies to implement multi-channel solutions faster and more
effectively across the enterprise. In this environment,
companies are exploring opportunities on a return-on-investment
basis, and are pursuing projects that have the potential to
create efficiencies within information technology investments
previously made and to reduce costs. We believe that our new
business model better positions us to meet the evolving needs of
our existing and potential customers.

The Cysive Solution

Our product and services provide a single
solution for building and integrating Web, wireless,
voice-activated systems, and Web services applications across a
customers enterprise. Our solution enables employees,
customers and partners of a business to connect with its
enterprise applications and data via the Web, devices such as
cell phones or Personal Digital Assistants (PDAs), and Web
services. Our solution consists of Cysive Cymbio, consulting,
maintenance and support, and training services.



| |                 
| | ----------------
| | Cysive
	CymbioTM

Cysive Cymbio is a multi-channel platform that
delivers enterprise applications beyond the browser. Cysive
Cymbio is based on open standards and widely accepted and
supported technologies such as Extensible Markup Language (XML),
Java, Java Version 2.0 Enterprise Edition (J2EE), Hyper Text
Transfer Protocol (HTTP), Wireless Markup Language (WML), Simple
Object Access Protocol (SOAP), and others, making Cysive Cymbio
open, flexible and dynamic. Cysive Cymbio places a
customers existing Web, enterprise, and legacy
applications onto a single platform with the ability to add a
new channel such as wireless, voice, or Web services without
requiring extensive integration and custom coding efforts.
Cysive Cymbio automatically recognizes the users specific
device type and channel being used, and delivers the content to
the users device so that it is displayed appropriately.
Through Cysives patent-pending universal session
management technology, Follow-OnTM, Cysive Cymbio
allows the user to maintain session integrity across multiple
devices and channels permitting sessions to begin on one
device/channel, end on such device/channel, and resume on

1



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another device/channel at the point in the
transaction where the user terminated the previous session. In
addition, Cysive Cymbio provides business and integration
functionality. The Cysive Cymbio workflow and rules engine
enables the rapid development of new applications, while the
Cysive Cymbio integration feature facilitates access to data in
legacy enterprise information systems. Product-related revenue
from the sale of Cysive Cymbio, which was introduced in the
fourth quarter of 2001, represented less than 1% of
Cysives total revenues in 2001. However, with the offering
of Cysive Cymbio we expect product-related revenue to be an
increasing and significant component of future revenue.




| |                    
| | -------------------
| | Consulting Services

We offer our customers the benefits of
Cysives staff of experienced software engineers to provide
Cysive Cymbios installation and integration, and to
provide custom software and services solutions. These services
are delivered by software engineers with an average of more than
nine years of experience, more than half of whom hold advanced
technical degrees. Our delivery process follow a rigorous,
milestone-based project approach drawn from our track record of
over eight years of successful software system development and
implementation experience. A well-defined process helps us to
mitigate risk, ensure consistent quality and successfully deploy
our product more rapidly. By streamlining our processes and
producing noticeable efficiencies, we believe our process will
help build customer confidence and consequently generate greater
repeat business.



| |                                  
| | ---------------------------------
| | 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 product engineers, many of who were
on the original development teams that built 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. Our Cysive support team has comprehensive product
knowledge and extensive resources available through our Support
Center to address customer issues timely and effectively. As
part of our renewable maintenance and support services,
customers are also entitled to certain upgrades to the licensed
product.



| |                  
| | -----------------
| | Training Services

We provide our customers with technical product
training related to Cysive Cymbio through our Cysive Institute
in-house training team. Cysive Institute training is conducted
in our clients facilities, commercial-training facilities,
or our own training center located in Reston, Virginia. The
Cysive Institute also provides customized training to meet the
specific needs of individual customers.

Product Development

We believe that our success will depend, in part,
on our ability to enhance existing products 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 product, such
as wireless, voice, and Web services technologies, 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
products. This group also works closely with our product
management and pre-sales organizations to ensure that
appropriate enhancements from customer feedback are integrated
in future releases of our products.

Sales and Marketing

We currently market and sell our products and
services 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

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technology systems to meet the growth of these
strategies. We have a sales force of professionals who cover the
east and west geographic regions. In each region, we have a
senior regional sales manager, software engineers, a team of
account managers, and technical pre-sales specialists supporting
sales efforts. 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 direct mail,
targeted events with industry thought leaders and cooperative
marketing with industry partners. 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 public relations program focused on building
	awareness and recognition through industry and business press,
	industry analysts and major industry forums;
|
| |  | a comprehensive Web site focused on customer case
	studies and testimonials;                                                                                
|
| |  | national and regional advertising;                                                                                                                          
|
| |  | on-site marketing programs at customer projects
	to enhance visibility within the customer environment;                                                     
|
| |  | 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. By
partnering with a select few technology firms, we are able to
deliver our depth of expertise, obtained through extensive
training and evaluation of their technologies, and rapid
deployment of the optimum solution for our customers
business problems. Our partnerships allow us to provide an
end-to-end solution from business consulting to solution
hosting. Examples of our strategic partnerships include software
companies such as BEA Systems, Inc. and Vitria Technology, Inc.;
hardware platform companies such as Intel and Sun Microsystems;
and strategy consulting firms such as Bain & Company.

Customers

The following is a representative list of our
customers during the fiscal year ended December 31, 2001:

|                                                                                                                                                                                                                              |  |                                                                                                                                                                                                            
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Agris Corporation
	Ball Corporation
	Chase Manhattan Mortgage
	Credit Suisse First Boston Corporation
	DHL Systems, Inc.
	Eagle Global Logistics, LP
	Georgia-Pacific Corporation
	Jeppesen Sanderson, Inc.
	Manheim Auctions |  | NetDecide Corporation
	Philips Medical Systems, N.A.
	Schneider Logistics, Inc.
	Schneider National, Inc.
	Thomas Weisel Partners LLC
	Thomson Financial
	UPS Logistics Group
	Western Union Holdings, Inc.

Our approach is to offer and sell multi-channel
products and services primarily to global 2000 companies. Our
objective is to provide value to these customers through our
leading edge products and services, ultimately developing
lasting relationships with these customers and providing a base
of recurring revenue. Historically, our offering has been
restricted to customized software development. With the offering
of Cysive Cymbio, we expect to incorporate a product component
into an increasing number of our customer engagements. Our

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product offering is not currently marketed to
specific vertical market sectors. We anticipate tailoring and
marketing our product to specific vertical markets as we begin
gaining experience selling into these markets.


Competition

The market for our products and services is
intensely competitive and faces rapid technological change. We
expect the competition to continue and intensify, which could
result in price reductions, reduced profitability 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);                                                            
|
| |  | database vendors such as Oracle; and                                                                                                            
|
| |  | large information technology consulting services
	providers, such as Accenture, KPMG Consulting, Inc., and
	Electronic Data Systems Corporation.

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;        
|
| |  | interoperability of solution 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 to all
of 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:



| |   |                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------
| |  | requiring time for training, so that our software
	engineers have the opportunity to assess and master emerging
	technologies;
|
| |  | conducting an initial two-week boot camp for new
	software engineers;                                                         
|
| |  | sending our software engineers to conferences
	after which they are required to write white papers for internal
	distribution;

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| |   |                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------
| |  | providing training in preparation for three
	levels of technical product certification;                     
|
| |  | 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, 2002, we had 123 employees,
of whom 66 were software engineers. Of these 66 software
engineers, one is working in the United States under an H-1B
visa. Of these 66 software engineers, 22 are 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 2002.

Since the third quarter of fiscal 2000, we have
incurred losses. We incurred net losses of $1.9 million,
$14.6 million, $6.8 million, $3.1 million,
$5.3 million and $6.8 million for the fiscal quarters
ended September 30, 2000, December 31, 2000,
March 31, 2001, June 30, 2001, September 30, 2001
and December 31, 2001, respectively. We expect losses to
continue through at least the fourth quarter of 2002. However,
there can be no assurance that we will be profitable thereafter.
If we do achieve profitability, we cannot assure you that we
will be able to sustain or improve upon it on a quarterly or
annual basis for future periods.



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

The recent 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 significant decrease in the
overall demand for our products and services that could harm our
operating results.

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| |                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We are implementing a new business model
	that is evolving and unproved as we migrate from offering a
	software engineering services model to a software products and
	engineering services model.

We decided at the beginning of 2001 to expand our
business strategy from a software engineering services model to
a software products and engineering services 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 solutions 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 solutions evolves. We expect that our financial model
and results of operations may change if we are successful in
migrating from a software engineering services model to a
software products and engineering services model. We do not have
sufficient experience with the sale and support of our products,
nor can we be certain about the relative mix between products
and services, to determine what effects, if any, such migration
may have on our financial model and results of operations. Our
new business strategy may not be successful or as successful as
we anticipate and we may need to revise our business model.



| |                                                                                     
| | ------------------------------------------------------------------------------------
| | The impact of our restructuring efforts may
	adversely affect our operating results.

In response to the recent decline in demand for
our services and the resulting decline in our net revenue in the
past several quarters, we implemented the reduction of our
headcount by 42 persons in the quarter ended
December 31, 2000, 95 persons in the quarter ended
March 30, 2001, 22 persons in the quarter ended
September 30, 2001 and 65 persons in the quarter ended
December 31, 2001 to reduce overcapacity in geographic
areas and markets where demand for our services did not support
our staffing levels. We also implemented a plan to close, divest
or reduce the size of our offices. As a result of the closing of
our office in Boston, we continue to pay for office space that
we are not currently using. Certain of these excess obligations
extend for a four-year period and are secured by a letter of
credit in the amount of $103,656. Our ability to sublease,
assign or otherwise divest this surplus office space could be
adversely affected by depressed real estate market conditions in
Boston.



| |                                                                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Because we rely on highly trained and
	experienced personnel to design and build complex systems for
	our customers, our inability to attract and retain qualified
	employees would impair our ability to provide our services 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 recruiters, other technical
personnel and sales and marketing professionals of various
levels with experience in software product and related
solutions. If we fail to attract and retain these personnel, we
may be unable 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 nine 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.



| |                                                                                                                                                                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In 2001, we derived 71.0% 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 or a significant
	reduction in the work performed for any of them 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 loss of or significant
reduction in the work performed for any significant customer
could reduce our revenues. In 2001, our five largest customers
represented 71.0% of our revenues: Schneider Logistics, Inc.,
29.6%; Jeppesen Sanderson, Inc., 16.6%; Corpay Solutions, Inc.,
9.7%; Manheim Auctions, 8.4%; and Thomas Weisel Partners LLC,
6.7%. The volume of work that we perform for a specific customer
is likely to vary from period to period, and a significant
customer in one period may not use our

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services in a subsequent period. In addition, a
failure to collect a large account receivable from any of these
customers could significantly reduce our assets and
profitability.




| |                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Because our customers retain us on a
	project-by-project basis, rather than under long-term contracts,
	we may be unable to accurately predict our revenues, which may
	adversely affect our operating margins.

Our operating expenses, including employee
salaries, rent and administrative expenses, are relatively fixed
and cannot be reduced on short notice to compensate for
unanticipated variations in the number or size of projects in
progress or the number of product sales. Because we incur costs
based on our expectations of future revenues, our failure to
predict our revenues accurately may result in our costs becoming
a larger percentage of our revenues that would reduce our
margins. If a customer defers, modifies or cancels a project or
a product sale, we may be unable to rapidly re-deploy our
employees to other projects to minimize underutilization of
employees and avoid a negative impact to our operating results.



| |                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------
| | 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 loss of a significant customer or project;                                                                                               
|
| |  | financial difficulty encountered by a significant
	customer;                                                                                 
|
| |  | our level of product sales;                                                                                                                  
|
| |  | our employee utilization rate, including our
	ability to transition employees quickly from completed or
	terminated projects to new projects;
|
| |  | the introduction of new products or services or
	changes in pricing policies by us or our competitors;                                       
|
| |  | our ability to manage costs, including employee
	costs and support services costs; and                                                       
|
| |  | costs related to the opening, expansion 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
even a small number of projects 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 based upon
anticipated revenues. A failure to book an expected order in a
given quarter or the need to provide training to our employees
on new technologies would not be offset by a corresponding
reduction in costs and could adversely affect our operating
results. As a result of these factors, we believe that
period-to-period comparisons of our revenues and operating
results are not necessarily meaningful.



| |                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------
| | We may not be able to enhance our existing
	products 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 and services 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 and services can be
delayed for a variety of reasons, including the typically long
development and testing periods. Further, new or improved
products and services may also have bugs that hinder
performance, or third party products we incorporate in, or use
to build and support, our products and services, may contain
defects that impair performance. These problems can be expensive
to fix and can also result in higher technical support

7



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##### 



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,
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 and services. In addition,
despite our efforts to maintain continuous and reliable 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.



| |                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.



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

The e-business engineering market and the
software product market are intensely competitive and face rapid
technological change. We expect competition to continue and
intensify, which could result in price reductions, reduced
profitability 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.



| |                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------
| | We enter 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 business involves
the development of software applications for specific projects.
Ownership of customer-specific software is generally retained by
the customer, although we retain rights to some of the
applications, processes and other intellectual property
developed in connection with projects. We sometimes agree,
however, not to reuse this customer-specific software when
building systems for a customers competitors. In addition,
we occasionally agree not to build any type of system for a
customers

8



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##### 



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.




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

We have derived and expect to continue to derive
a substantial portion of our revenues from creating e-business
systems 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 and
services that stay at the forefront of continuing changes in
technology, evolving industry standards and changing customer
preferences. Our failure to create products and e-business
systems that use these 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 and services.



| |                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------
| | We are focusing on the sale and marketing
	of our software product, which may affect our ability to
	generate services revenue.

Our sales and marketing efforts are focused on
selling Cysive Cymbio and services related to the software
product. We may not be able to successfully sell other custom
software development projects, since we may not actively seek
such projects. In addition, we may not be able to sell
sufficient software products or related services to offset our
costs, which may result in increased losses.



| |                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------
| | If we fail to meet our customers
	expectations, we could damage our reputation and have difficulty
	attracting new business or be sued.

Our products and projects are complex and
critical to our customers. As a result, if we fail or are unable
to meet a customers expectations, we could damage our
reputation. This could adversely affect our ability to attract
new business from that customer or others. If we fail to perform
adequately on a project, or if our product fails to adequately
meet a customers expectations, a customer could sue us for
damages. Our contracts generally limit our liability for damages
that may arise from negligent acts, errors, mistakes or
omissions in selling products or rendering services to our
customers. However, we cannot be sure that these contractual
provisions will protect us from liability for damages if we are
sued. Furthermore, our general liability insurance coverage may
not continue to be available on reasonable terms or in
sufficient amounts to cover one or more large claims, or the
insurer may disclaim coverage as to any future claim.



| |                                                                                                                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Currently, our business depends on
	integrating our multi-channel enterprise software and services
	into our customers businesses, and, as a result, our
	business will suffer if use of such software declines or if the
	market for such software does not develop
	sufficiently.

If the market for multi-channel enterprise
software does not continue to grow or grows slower than
expected, the need for our product and services could decline,
resulting in fewer projects and reduced revenues. Consumers and
businesses may reject our software or services for a number of
reasons, including:



| |   |                                                                                       
| | - | --------------------------------------------------------------------------------------
| |  | 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 service;                                                      
|
| |  | increases in access costs to the Internet;                                            
|
| |  | evolving government regulation;                                                       
|
| |  | uncertainty regarding intellectual property
	ownership;                               
|
| |  | costs associated with licensing and implementing
	multi-channel enterprise technology;

9



---



##### 





| |   |                                                                                              
| | - | ---------------------------------------------------------------------------------------------
| |  | costs associated with the obsolescence of the
	multi-channel and existing infrastructure; and
|
| |  | our economic viability and the economic viability
	of our competitors.                       



| |                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------
| | Some of our customers are small or have
	little or no operating history, raising the possibility that
	they may lack sufficient cash flow to pay our
	fees.

We believe that a portion of our future revenues
could be derived from emerging companies formed specifically to
conduct business over the Internet. These companies often have
little or no earnings or cash flow, and their businesses are
more likely to fail than those of more mature companies. As a
result, they may be unable to pay our fees in a timely fashion
or at all.



| |                                                                                                                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Because our business of software
	engineering 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 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.

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 Los Angeles, CA, San Jose, CA,
Atlanta, GA, Chicago, IL, New York, NY and Dallas, TX. We are
actively attempting to sublease our Waltham, MA office as part
of the restructuring plan announced in December of 2000. 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 2001.

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).

|               |  |      |      |     |  |   |      | 
|-------------- |  | ---- | ---- | --- |  | - | ---- | 
|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 | 

|               |  |      |       |     |  |   |       | 
|-------------- |  | ---- | ----- | --- |  | - | ----- | 
|2000           |  | High |       | Low
|               |  |      |       |    
|First Quarter  |  | $    | 63.00 |     |  | $ | 28.69 | 
|Second Quarter |  | $    | 37.56 |     |  | $ | 21.13 | 
|Third Quarter  |  | $    | 29.63 |     |  | $ | 6.88  | 
|Fourth Quarter |  | $    | 8.25  |     |  | $ | 3.50  | 

On March 14, 2002, the last reported sale
price of our Common Stock was $2.82 per share. As of
March 14, 2002, there were approximately 175 holders of
record of our Common Stock.

Recent Sales of Unregistered
Securities

From October 1, 2001 through
December 31, 2001, we granted to certain of our employees
options to purchase a total of 33,000 shares of our Common
Stock under and pursuant to our Second Amended and Restated 1994
Stock Option Plan.

From October 1, 2001 through
December 31, 2001, we issued and sold to certain of our
employees an aggregate of 108,176 shares of our Common
Stock for aggregate consideration of approximately $86,000
pursuant to the exercise of stock options granted under our
Second Amended and Restated 1994 Stock Incentive Plan.

No underwriters were involved in any of the
foregoing sales of securities. Such sales 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 securities 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 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

On December 26, 2001, we filed a
Form S-8 and registered 33,995,963 shares of our
common stock which had previously been issued, or could be
issued in the future, as restricted stock grants or upon the
exercise of stock options granted under our Second Amended and
Restated 1994 Stock Option Plan.

11



---



##### 



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, 2001, 2000, 1999, 1998, 1997 and the statement
of operations data for each of the years in the five-year period
ended December 31, 2001 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,                        
|                                                                  |                            |                                                
|                                                                  |                            | 2001                                            |            | 2000   |        | 1999 |            | 1998   |        | 1997
|                                                                  |                            |                                                 |            |        |        |      |            |        |        |     
|                                                                  |                            |                                                
|                                                                  |                            | (In thousands, except share and per share data)
|Statement of Operations Data                                      |                            |                                                 |            |        |        |      |            |        |        |      |            |        |        |   |            |       |       |   |            |      
|Revenues                                                          |                            | $                                               | 14,691     |        |        | $    | 50,287     |        |        | $    | 25,265     |        |        | $ | 9,142      |       |       | $ | 7,711      |      
|                                                                  | Direct costs               |                                                 |            | 13,739 |        |      |            | 22,851 |        |      |            | 8,899  |        |   |            | 3,742 |       |   |            | 2,798 |      
|                                                                  |                            |                                                 |            |        |        |      |            |        |        |      |            |        |        |   |            |       |       |   |            |      
|Gross profit                                                      |                            |                                                 | 952        |        |        |      | 27,436     |        |        |      | 16,366     |        |        |   | 5,400      |       |       |   | 4,913      |      
|Operating expenses:                                               |                            |                                                 |            |        |        |      |            |        |        |      |            |        |        |   |            |       |       |   |            |      
|                                                                  | General and administrative |                                                 |            | 12,330 |        |      |            | 23,848 |        |      |            | 7,228  |        |   |            | 2,725 |       |   |            | 2,754 |      
|                                                                  | Research and development   |                                                 |            | 3,789  |        |      |            |       |        |      |            |       |        |   |            |      |       |   |            |      |      
|                                                                  | Sales and marketing        |                                                 |            | 9,529  |        |      |            | 10,773 |        |      |            | 5,491  |        |   |            | 1,824 |       |   |            | 760   |      
|                                                                  | Restructuring              |                                                 |            | 2,098  |        |      |            | 4,710  |        |      |            |       |        |   |            |      |       |   |            |      |      
|                                                                  | Stock compensation         |                                                 |            | 3,143  |        |      |            | 5,843  |        |      |            | 14,851 |        |   |            | 69    |       |   |            |      |      
|                                                                  |                            |                                                 |            |        |        |      |            |        |        |      |            |        |        |   |            |       |       |   |            |      
|                                                                  |                            | Total operating expenses                        |            |        | 30,889 |      |            |        | 45,174 |      |            |        | 27,570 |   |            |       | 4,618 |   |            |       | 3,514 | 
|Operating income (loss)                                           |                            |                                                 | (29,937    | )      |        |      | (17,738    | )      |        |      | (11,204    | )      |        |   | 782        |       |       |   | 1,399      |      
|Investment income, net                                            |                            |                                                 | 8,064      |        |        |      | 7,770      |        |        |      | 432        |        |        |   | 14         |       |       |   | 23         |      
|                                                                  |                            |                                                 |            |        |        |      |            |        |        |      |            |        |        |   |            |       |       |   |            |      
|Income (loss) before taxes                                        |                            |                                                 | (21,873    | )      |        |      | (9,968     | )      |        |      | (10,772    | )      |        |   | 796        |       |       |   | 1,422      |      
|Income tax benefit (expense)                                      |                            |                                                 | (55        | )      |        |      | (4,360     | )      |        |      | 4,369      |        |        |   |           |       |       |   |           |      
|                                                                  |                            |                                                 |            |        |        |      |            |        |        |      |            |        |        |   |            |       |       |   |            |      
|Net income (loss)                                                 |                            | $                                               | (21,928    | )      |        | $    | (14,328    | )      |        | $    | (6,403     | )      |        | $ | 796        |       |       | $ | 1,422      |      
|                                                                  |                            |                                                 |            |        |        |      |            |        |        |      |            |        |        |   |            |       |       |   |            |      
|Weighted average shares outstanding                               |                            |                                                 | 29,521,894 |        |        |      | 26,438,946 |        |        |      | 17,629,932 |        |        |   | 13,554,000 |       |       |   | 13,554,000 |      
|Weighted average shares outstanding and common
	share equivalents |                            |                                                 | 29,521,894 |        |        |      | 26,438,946 |        |        |      | 17,629,932 |        |        |   | 15,987,318 |       |       |   | 15,532,422 |      
|Earnings (loss) per share:                                        |                            |                                                 |            |        |        |      |            |        |        |      |            |        |        |   |            |       |       |   |            |      
|                                                                  | Basic                      |                                                 | $          | (0.74  | )      |      | $          | (0.54  | )      |      | $          | (0.36  | )      |   | $          | 0.06  |       |   | $          | 0.10  |      
|                                                                  | Diluted                    |                                                 | $          | (0.74  | )      |      | $          | (0.54  | )      |      | $          | (0.36  | )      |   | $          | 0.05  |       |   | $          | 0.09  |      

12



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##### 



|                          |  |                |         |      |  |      |         |      |  |      |        |  |  |   |       |  |  |   |       | 
|------------------------- |  | -------------- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------ |  |  | - | ----- |  |  | - | ----- | 
|                          |  |               
|                          |  | December 31,  
|                          |  |               
|                          |  | 2001           |         | 2000 |  | 1999 |         | 1998 |  | 1997
|                          |  |                |         |      |  |      |         |      |  |     
|                          |  |               
|                          |  | (In thousands)
|Balance Sheet Data        |  |                |         |      |  |      |         |      |  |      |        |  |  |   |       |  |  |   |       | 
|Cash and cash equivalents |  | $              | 1,484   |      |  | $    | 20,674  |      |  | $    | 2,433  |  |  | $ | 612   |  |  | $ | 690   | 
|Working capital           |  |                | 117,105 |      |  |      | 112,735 |      |  |      | 51,989 |  |  |   | 2,150 |  |  |   | 1,948 | 
|Total assets              |  |                | 161,134 |      |  |      | 186,080 |      |  |      | 61,354 |  |  |   | 3,163 |  |  |   | 2,422 | 
|Total liabilities         |  |                | 4,900   |      |  |      | 12,235  |      |  |      | 3,675  |  |  |   | 644   |  |  |   | 208   | 
|Stockholders equity      |  |                | 156,234 |      |  |      | 173,845 |      |  |      | 57,679 |  |  |   | 2,519 |  |  |   | 2,214 | 

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 multi-channel
enterprise software and services that allow companies to
integrate Web, wireless, voice-activated systems, and Web
services across an enterprise. 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 products and engineering services
model. Accordingly, during 2001 we developed Cysive
CymbioTM, a software product that uses widely
supported technologies and open standards to ensure seamless
interoperability between multiple channels such as the Web,
wireless, voice, or Web services, and databases or applications.
Cysive Cymbios architecture reduces a customers
development time and costs and creates efficiencies by
incorporating on a single code base all of the components
required for developing applications that operate across
multiple channels. We introduced Cysive Cymbio in the fourth
quarter of 2001.

We believe companies are moving to a
multi-channel approach using Web, wireless, voice-activated
systems, and Web services to interact with their employees,
customers, suppliers, partners and distributors. Technology
advances, like Cysive Cymbio which incorporates our
patent-pending Follow-OnTM technology, enable
companies to implement multi-channel solutions faster and more
effectively across the enterprise. In this environment,
companies are exploring opportunities on a return-on-investment
basis, and are pursuing projects that have the potential to
create efficiencies within information technology investments
previously made and to reduce costs.

Since commencing operations in 1994, we have used
advanced Internet 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. We design software systems that can handle
high volumes of customer transactions, operate reliably
24 hours per day, seven days per week and expand to meet
the growth requirements of large-scale businesses that are
broadening the methods they use to communicate and process
information with internal and external users. Due to the
advanced technologies necessary to complete our projects, we
employ software engineers with an average of more than nine
years of experience who use a well-defined process to deliver
reliable and secure custom systems on a timely basis.

Prior to 1997, we built large scale, distributed
systems using approaches and technologies that are the
foundations for current Internet applications. In late 1996 and
early 1997, our technology group evaluated and developed
software prototypes using key Internet technologies such as
Java, XML and CORBA. After successfully deploying our first
e-business system in mid-1997, we began to target customers who
were making

13



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##### 



significant investments in their e-business
applications. As a result, there was a fundamental shift in our
business strategy away from general purpose distributed systems
to customized e-business applications. As part of this strategy,
in the fourth quarter of 1997 and the first half of 1998, we
spent considerable resources to accomplish two specific goals.
Our first goal was to train all of our software engineers with
advanced Internet technologies that had been researched and
prototyped by our technology group. Our second goal was to
deploy a direct sales force capable of selling e-business
applications. These initiatives significantly impacted our
results of operations for these three quarters. Specifically,
the generation of a sales pipeline of e-business applications
and the deployment of our sales force affected our revenues and
sales and marketing expenses. In addition, the completion of two
of our largest distributed systems combined with the extensive
training of our software engineers caused our utilization rates
and gross margins to decline during these quarters. These
investments positioned us to become a leading e-business
engineering firm during the period from the third quarter of
1998 to the second quarter of 2000.


In the second half of 2000, we identified an
emerging need for a technology solution as customers required an
integrated solution for their Web, wireless and voice-activated
systems. As a result, we began focusing our non-utilized
software engineers on solving these complex development and
integration issues. We formed our Product Engineering Group
during 2001, culminating in the release of our first product,
Cysive Cymbio, in October 2001. We anticipate that this
expansion of our business model will enable us to develop new
opportunities, creating additional future revenue streams.

We currently derive principally all of our
revenues from software engineering services that are provided
primarily on a time and materials basis. Typically, revenues are
recognized and billed monthly by multiplying the number of hours
expended by our software engineers in the performance of the
contract by the established billing rates. Our customers
typically reimburse us for direct expenses allocated to a
project such as airfare, lodging and meals. Consequently, these
direct reimbursements are excluded from revenues.

With the introduction of Cysive Cymbio, we
anticipate that future revenues will include a software
licensing and maintenance component. We further anticipate that
revenues from Cysive Cymbio sales and related consulting
services will be recognized using long-term contract accounting
principles due to the significant customization efforts required
to build new applications using Cysive Cymbio as a platform
base, and/or to integrate Cysive Cymbio with legacy applications
and data sources. Additionally, we expect that for the near
future our migration to a software products and engineering
services business model will result in significantly higher
sales and marketing expense and research and development
expense, expressed as a percentage of sales, than we have
experienced in the past. Our gross margins may also be affected
depending on the relative mix between product and service
revenue.

The number of employees decreased from 306 as of
January 1, 2001 to 124 as of December 31, 2001. 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 2001.

Direct costs 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.

General and administrative expenses consist
primarily of compensation and benefits for our management,
finance and administration, human resources, information
technology, recruiting and the non-billable portion of our
quality assurance and regional management 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. To
date, all research and development costs have been expensed.

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 services through a direct sales

14



---



##### 



force organized by geographic region. We expect
sales and marketing expenses to increase as we continue to build
a direct sales force and expand our marketing programs.


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 in 2000
and 2001.

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. The amount of deferred
stock compensation included as a component of stockholders
equity as of December 31, 2001 was $5.0 million. This
balance will be amortized as follows:

|           |  |                       |     | 
|---------- |  | --------------------- | --- | 
|           |  | Projected Gross Stock
|Year Ended |  | Compensation Expense 
|           |  |                      
|           |  | (In millions)        
|2002       |  | $                     | 3.2 | 
|2003       |  |                       | 1.6 | 
|2004       |  |                       | 0.2 | 

Stock compensation expense in these years may be
reduced by the impact of stock option cancellations.

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, 
|                             |                            |                         
|                             |                            | 2001                     |        | 2000 |       | 1999
|                             |                            |                          |        |      |       |     
|Revenues                     |                            |                          | 100.0  | %    |       |      | 100.0 | %    |      |  | 100.0 | %   
|                             | Direct costs               |                          |        | 93.5 |       |      |       | 45.4 |      |  |       | 35.2 |      
|                             |                            |                          |        |      |       |      |       |      |      |  |       |     
|Gross profit                 |                            |                          | 6.5    |      |       |      | 54.6  |      |      |  | 64.8  |     
|Operating expenses:          |                            |                          |        |      |       |      |       |      |      |  |       |     
|                             | General and administrative |                          |        | 83.9 |       |      |       | 47.5 |      |  |       | 28.6 |      
|                             | Research and development   |                          |        | 25.8 |       |      |       |     |      |  |       |     |      
|                             | Sales and marketing        |                          |        | 64.9 |       |      |       | 21.4 |      |  |       | 21.7 |      
|                             | Restructuring              |                          |        | 14.3 |       |      |       | 9.4  |      |  |       |     |      
|                             | Stock compensation         |                          |        | 21.4 |       |      |       | 11.6 |      |  |       | 58.8 |      
|                             |                            |                          |        |      |       |      |       |      |      |  |       |     
|                             |                            | Total operating expenses |        |      | 210.3 |      |       |      | 89.9 |  |       |      | 109.1 | 
|Operating loss               |                            |                          | (203.8 | )    |       |      | (35.3 | )    |      |  | (44.3 | )   
|Investment income, net       |                            |                          | 54.9   |      |       |      | 15.5  |      |      |  | 1.7   |     
|                             |                            |                          |        |      |       |      |       |      |      |  |       |     
|Loss before taxes            |                            |                          | (148.9 | )    |       |      | (19.8 | )    |      |  | (42.6 | )   
|Income tax (expense) benefit |                            |                          | (0.4   | )    |       |      | (8.7  | )    |      |  | 17.3  |     
|                             |                            |                          |        |      |       |      |       |      |      |  |       |     
|Net loss                     |                            |                          | (149.3 | )%   |       |      | (28.5 | )%   |      |  | (25.3 | )%  
|                             |                            |                          |        |      |       |      |       |      |      |  |       |     



| |                                                                       
| | ----------------------------------------------------------------------
| | Year Ended December 31, 2001 Compared
	to Year Ended December 31, 2000

Revenues.Revenues
decreased $35.6 million, or 70.8%, to $14.7 million in
2001 from $50.3 million in 2000. This decrease in revenues
was due primarily to a decrease in demand for our services as a
result of a general economic slowdown and declining demand for
custom application development, and was also impacted by
reductions in our average billing rate. The number of active
customers decreased to 28 in 2001 from 53 in 2000. Our headcount
of billable software engineers decreased to 42 at
December 31, 2001 from 222 at December 31, 2000.

15



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##### 



Direct Costs.Direct
costs decreased $9.2 million, or 39.9%, to
$13.7 million in 2001 from $22.9 million in 2000. As a
percentage of revenues, direct costs increased to 93.5% in 2001
from 45.4% in 2000. This increase in direct costs as a
percentage of revenues was primarily attributable to a decrease
in revenues and a decrease in our average utilization rate in
2001 to 37% from 64% in 2000. Our lower utilization rate in 2001
resulted primarily from a decrease in the demand for our
services as noted above, without a proportional reduction in
direct personnel. Direct costs also decreased due to a decrease
in the number of billable software engineers.

Gross Profit.Gross
profit decreased $26.4 million, or 96.5%, to
$1.0 million in 2001 from $27.4 million in 2000. The
gross margin decreased to 6.5% in 2001 from 54.6% in 2000
because, as noted above, our direct costs were not reduced in
proportion to the decline in revenues. Additionally, there was a
decline in the average billing rate per software engineer.

General and Administrative.General and administrative expenses
decreased $11.5 million, or 48.3%, to $12.3 million in
2001 from $23.8 million in 2000. This decrease was due
primarily to a decrease in support staff costs resulting from
the lower overall employee headcount, bad debt expense, meetings
and travel expenses, legal fees, recruiting costs, and office
expense. This decrease was partially offset by the inclusion of
rent for facilities opened in the latter half of 2000 and the
increase in depreciation expense. As a percentage of revenues,
general and administrative expenses increased to 83.9% in 2001
from 47.5% in 2000.

Research and Development.We incurred $3.8 million in
research and development costs for the year ended
December 31, 2001. These costs relate to the salaries and
other costs of our product engineering team who have been
developing our product offerings. As a percentage of revenues,
research and development costs were 25.8% for 2001.

Sales and Marketing.Sales and marketing expenses decreased
$1.3 million, or 11.5%, to $9.5 million in 2001 from
$10.8 million in 2000. This decrease was primarily due to a
decrease in variable compensation that resulted from the
decrease in revenues. This decrease was offset by a slight
increase in marketing advertising and public relations expense.
As a percentage of revenues, sales and marketing expenses
increased to 64.9% in 2001 from 21.4% in 2000.

Restructuring.We
incurred $2.1 million as restructuring in 2001. This
included all severance-related costs due to the reduction in
headcount during 2001 offset by the reduction of $850,000 of the
initial restructuring accrual from the 2000 restructuring plan
due to a revision of estimates for future expected costs. As a
percentage of revenues, restructuring was 14.3% in 2001.

Stock Compensation.Stock compensation expense decreased
$2.7 million, or 46.2%, to $3.1 million in 2001 from
$5.8 million in 2000. The expense in 2000 included the
amortization of deferred stock compensation related to stock
option grants from 1997 through 2000. The expense in 2000 also
included compensation expense related to the issuance of
restricted common stock to employees. The expense in 2001
included the amortization of deferred stock compensation related
to the 1997 through 2000 stock option grants. The decrease in
stock compensation expense was due to cancellation of unvested
options granted to employees who are no longer employed by us,
the cancellation of certain restricted shares and the adjustment
of the fair value of outstanding restricted shares as of
December 31, 2001.

Operating Loss.Operating loss increased
$12.2 million, or 68.8% to a loss of $29.9 million in
2001 from a loss of $17.7 million in 2000. The operating
loss margin increased to 203.8% in 2001 from 35.3% in 2000.

Investment Income, Net.Net investment income increased
$294,000 to $8.1 million in 2001 from $7.8 million in
2000 primarily due to a higher average level of cash and
investments in 2001 as compared with 2000.

Loss before Taxes.Loss before taxes increased
$11.9 million to a loss of $21.9 million in 2001 from
a loss of $10.0 million in 2000. This increase was
primarily due to lower revenues generated in 2001 as a result of
a general economic slowdown and declining demand for custom
application development.

Income Tax Expense.We recorded $55,000 of income tax
expense in 2001 as compared to a $4.4 million net income
tax expense in 2000. In 2000, we provided a full valuation
allowance on the net

16



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##### 



deferred tax asset, creating a net income tax
expense for the year because of the uncertainty of the
realization of the deferred tax benefit. In 2001, we recorded
income tax expense for the year as a result of a reduction in
expected tax refunds from the use of loss carrybacks.


Net Loss.Net loss
increased $7.6 million to a loss of $21.9 million in
2001 from a loss of $14.3 million in 2000. This change is
due primarily to lower revenues generated in 2001 as a result of
a general economic slowdown partially offset by a decrease in
operating expenses and income tax expense.



| |                                                                       
| | ----------------------------------------------------------------------
| | Year Ended December 31, 2000 Compared
	to Year Ended December 31, 1999

Revenues.Revenues
increased $25.0 million, or 99.0%, to $50.3 million in
2000 from $25.3 million in 1999. This increase in revenues
was due primarily to an increase in the number of software
engineers, an increase in customers and an increase in our
billable rates. As a result of our direct sales model, our
number of active customers increased to 53 in 2000 from 14 in
1999. Our headcount of billable software engineers increased to
222 at December 31, 2000 from 102 at December 31, 1999.

Direct Costs.Direct
costs increased $14.0 million, or 156.8%, to
$22.9 million in 2000 from $8.9 million in 1999. As a
percentage of revenues, direct costs increased to 45.4% in 2000
from 35.2% in 1999. This increase in direct costs as a
percentage of revenues was primarily attributable to a decrease
in our average utilization rate in 2000 to 64% from 88% in 1999.
Our lower utilization rate in 2000 resulted primarily from a
decrease in the demand for our services as a result of a general
economic slow-down, reducing the urgency for Internet based
solutions in the latter half of the year. Direct costs also
increased due to an increase in our wage rates.

Gross Profit.Gross
profit increased $11.0 million, or 67.6%, to
$27.4 million in 2000 from $16.4 million in 1999. The
gross margin decreased to 54.6% in 2000 from 64.8% in 1999
because our direct costs exceeded the rate of increase in
revenue growth.

General and Administrative.General and administrative expenses
increased $16.6 million, or 229.9%, to $23.8 million
in 2000 from $7.2 million in 1999. This increase was due
primarily to the addition and expansion of office space, an
increase in legal fees related to our litigation support, an
increase in bad debt expense, the inclusion of certain costs
incurred as a publicly traded company, an increase in our
recruiting and corporate administrative staffs and the addition
of general infrastructure to support our increased headcount. As
a percentage of revenues, general and administrative expenses
increased to 47.5% in 2000 from 28.6% in 1999.

Sales and Marketing.Sales and marketing expenses increased
$5.3 million, or 96.2%, to $10.8 million in 2000 from
$5.5 million in 1999. This increase was primarily due to
the expansion of our marketing and sales departments as well as
an increase in variable compensation linked to the increase in
sales and billing rates in 2000. Additionally, we expanded our
marketing programs directed at building brand recognition. As a
percentage of revenues, sales and marketing expenses decreased
to 21.4% in 2000 from 21.7% in 1999.

Restructuring.We
recorded $4.7 million as restructuring in 2000.
Restructuring represented the amount of severance expense
related to the lay-off of certain non-technical employees and
real estate costs associated with the closing of some of our
satellite offices. As a percentage of revenues, restructuring
was 9.4% in 2000.

Stock Compensation.Stock compensation expense decreased
$9.0 million, or 60.7%, to $5.8 million in 2000 from
$14.8 million in 1999. The expense in 1999 was primarily
related to a revaluation of our deemed fair market value in
conjunction with our initial public offering in which certain
options were fully vested and we recorded the stock compensation
expense in full. In addition, the 1999 expense included the
amortization of the deferred stock compensation related to
options granted between 1997 and 1999 at prices deemed below
fair market value, which vest over a period of time. The expense
in 2000 included similar amortization of deferred stock
compensation related to the 1997 through 1999 grants. In
addition, we granted certain non-qualified stock options at a
discounted price from the fair market value in 2000 resulting in
additional deferred stock compensation that will be amortized
over a four-year period. The expense in 2000 also included
compensation expense related to the issuance of restricted
common stock to employees in lieu of a cash bonus for the fourth
quarter of 2000.

17



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##### 



Operating Loss.Operating loss increased
$6.5 million, or 58.3% to a loss of $17.7 million in
2000 from a loss of $11.2 million in 1999. The operating
loss margin decreased, however, to 35.3% in 2000 from 44.3% in
1999.

Investment Income, Net.Net investment income increased
$7.4 million to $7.8 million in 2000 from $432,000 in
1999 primarily due to interest income generated from the initial
public and secondary offering proceeds.

Loss before Taxes.Loss before taxes decreased $804,000
to a loss of $10.0 million in 2000 from a loss of
$10.8 million in 1999. This change was primarily due to the
increase in the interest income and decrease in stock
compensation expense offset by general and administrative costs
and restructuring expense in 2000.

Income Tax Benefit (Expense).We recorded a $4.4 million net
tax expense in 2000 as compared to a $4.4 million net tax
benefit in 1999. The 1999 benefit resulted primarily from the
stock compensation expenses recorded in 1999. In 2000, we
elected to reserve a full valuation allowance on the net
deferred tax asset, creating a net income tax expense for the
year because of the uncertainty of when the deferred tax benefit
will be realized in future periods.

Net Loss.Net loss
increased $7.9 million to a loss of $14.3 million in
2000 from a loss of $6.4 million in 1999. This change is
due primarily to the recording of a tax benefit in 1999 versus a
tax expense and restructuring expense recorded in 2000.

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, 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.

|                                  |                            |                                              |        |          |  |          |        |          |   |          |        |         |  |          |        |          |  |   |         |       |  |   |        |       |  |   |        |       |  |   |        |       | 
|--------------------------------- | -------------------------- | -------------------------------------------- | ------ | -------- |  | -------- | ------ | -------- | - | -------- | ------ | ------- |  | -------- | ------ | -------- |  | - | ------- | ----- |  | - | ------ | ----- |  | - | ------ | ----- |  | - | ------ | ----- | 
|                                  |                            |                                             
|                                  |                            | Quarter Ended                               
|                                  |                            |                                             
|                                  |                            | Dec. 31,                                     |        | Sep. 30, |  | June 30, |        | Mar. 31, |   | Dec. 31, |        | Sep 30, |  | June 30, |        | Mar. 31,
|                                  |                            | 2001                                         |        | 2001     |  | 2001     |        | 2001     |   | 2000     |        | 2000    |  | 2000     |        | 2000    
|                                  |                            |                                              |        |          |  |          |        |          |   |          |        |         |  |          |        |         
|                                  |                            |                                             
|                                  |                            | (Dollars in thousands except per share data)
|Statement of Operation Data       |                            |                                              |        |          |  |          |        |          |   |          |        |         |  |          |        |          |  |   |         |       |  |   |        |       |  |   |        |       |  |   |        |      
|Revenues                          |                            | $                                            | 1,445  |          |  | $        | 2,571  |          |   | $        | 5,145  |         |  | $        | 5,530  |          |  | $ | 9,365   |       |  | $ | 13,418 |       |  | $ | 15,209 |       |  | $ | 12,295 |      
|Gross profit (loss)               |                            |                                              | 38     |          |  |          | (544   | )        |   |          | 1,792  |         |  |          | (334   | )        |  |   | 2,492   |       |  |   | 7,039  |       |  |   | 9,688  |       |  |   | 8,216  |      
|Operating expenses:               |                            |                                              |        |          |  |          |        |          |   |          |        |         |  |          |        |          |  |   |         |       |  |   |        |       |  |   |        |       |  |   |        |      
|                                  | General and administrative |                                              |        | 2,134    |  |          |        | 2,786    |   |          |        | 3,171   |  |          |        | 4,239    |  |   |         | 6,897 |  |   |        | 7,844 |  |   |        | 4,963 |  |   |        | 4,144 | 
|                                  | Research and development   |                                              |        | 913      |  |          |        | 1,210    |   |          |        | 1,053   |  |          |        | 613      |  |   |         |      |  |   |        |      |  |   |        |      |  |   |        |      | 
|                                  | Sales and marketing        |                                              |        | 3,264    |  |          |        | 2,318    |   |          |        | 2,016   |  |          |        | 1,931    |  |   |         | 2,172 |  |   |        | 2,742 |  |   |        | 3,116 |  |   |        | 2,743 | 
|                                  | Restructuring              |                                              |        | 1,259    |  |          |        | (850     | ) |          |        |        |  |          |        | 1,689    |  |   |         | 4,710 |  |   |        |      |  |   |        |      |  |   |        |      | 
|                                  | Stock compensation         |                                              |        | 912      |  |          |        | 1,120    |   |          |        | 747     |  |          |        | 364      |  |   |         | 2,116 |  |   |        | 1,825 |  |   |        | 935   |  |   |        | 966   | 
|Operating income (loss)           |                            |                                              | (8,444 | )        |  |          | (7,128 | )        |   |          | (5,195 | )       |  |          | (9,170 | )        |  |   | (13,403 | )     |  |   | (5,372 | )     |  |   | 674    |       |  |   | 363    |      
|Income (loss) before taxes        |                            |                                              | (6,809 | )        |  |          | (5,226 | )        |   |          | (3,065 | )       |  |          | (6,773 | )        |  |   | (10,700 | )     |  |   | (3,003 | )     |  |   | 2,791  |       |  |   | 944    |      
|Net income (loss)                 |                            |                                              | (6,809 | )        |  |          | (5,281 | )        |   |          | (3,065 | )       |  |          | (6,773 | )        |  |   | (14,611 | )     |  |   | (1,925 | )     |  |   | 1,857  |       |  |   | 351    |      
|Basic earnings (loss) per share   |                            | $                                            | (0.23  | )        |  | $        | (0.18  | )        |   | $        | (0.10  | )       |  | $        | (0.23  | )        |  | $ | (0.52   | )     |  | $ | (0.07  | )     |  | $ | 0.07   |       |  | $ | 0.01   |      
|Diluted earnings (loss) per share |                            | $                                            | (0.23  | )        |  | $        | (0.18  | )        |   | $        | (0.10  | )       |  | $        | (0.23  | )        |  | $ | (0.52   | )     |  | $ | (0.07  | )     |  | $ | 0.05   |       |  | $ | 0.01   |      

18



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##### 



|                            |                            |               |        |          |  |          |        |          |   |          |        |         |  |          |        |          |  |  |        |      |  |  |       |      |  |  |       |      |  |  |       |      | 
|--------------------------- | -------------------------- | ------------- | ------ | -------- |  | -------- | ------ | -------- | - | -------- | ------ | ------- |  | -------- | ------ | -------- |  |  | ------ | ---- |  |  | ----- | ---- |  |  | ----- | ---- |  |  | ----- | ---- | 
|                            |                            |              
|                            |                            | Quarter Ended
|                            |                            |              
|                            |                            | Dec. 31,      |        | Sep. 30, |  | June 30, |        | Mar. 31, |   | Dec. 31, |        | Sep 30, |  | June 30, |        | Mar. 31,
|                            |                            | 2001          |        | 2001     |  | 2001     |        | 2001     |   | 2000     |        | 2000    |  | 2000     |        | 2000    
|                            |                            |               |        |          |  |          |        |          |   |          |        |         |  |          |        |         
|As a Percentage of Revenues |                            |               |        |          |  |          |        |          |   |          |        |         |  |          |        |          |  |  |        |      |  |  |       |      |  |  |       |      |  |  |       |     
|Revenues                    |                            |               | 100.0  | %        |  |          | 100.0  | %        |   |          | 100.0  | %       |  |          | 100.0  | %        |  |  | 100.0  | %    |  |  | 100.0 | %    |  |  | 100.0 | %    |  |  | 100.0 | %   
|Gross margin                |                            |               | 2.6    |          |  |          | (21.2  | )        |   |          | 34.8   |         |  |          | (6.0   | )        |  |  | 26.6   |      |  |  | 52.5  |      |  |  | 63.7  |      |  |  | 66.8  |     
|Operating expenses:         |                            |               |        |          |  |          |        |          |   |          |        |         |  |          |        |          |  |  |        |      |  |  |       |      |  |  |       |      |  |  |       |     
|                            | General and administrative |               |        | 147.7    |  |          |        | 108.4    |   |          |        | 61.6    |  |          |        | 76.6     |  |  |        | 73.6 |  |  |       | 58.5 |  |  |       | 32.6 |  |  |       | 33.7 | 
|                            | Research and development   |               |        | 63.2     |  |          |        | 47.0     |   |          |        | 20.5    |  |          |        | 11.1     |  |  |        |     |  |  |       |     |  |  |       |     |  |  |       |     | 
|                            | Sales and marketing        |               |        | 225.9    |  |          |        | 90.2     |   |          |        | 39.2    |  |          |        | 34.9     |  |  |        | 23.2 |  |  |       | 20.4 |  |  |       | 20.5 |  |  |       | 22.3 | 
|                            | Restructuring              |               |        | 87.1     |  |          |        | (33.1    | ) |          |        |        |  |          |        | 30.5     |  |  |        | 50.3 |  |  |       |     |  |  |       |     |  |  |       |     | 
|                            | Stock compensation         |               |        | 63.1     |  |          |        | 43.6     |   |          |        | 14.5    |  |          |        | 6.7      |  |  |        | 22.6 |  |  |       | 13.6 |  |  |       | 6.2  |  |  |       | 7.8  | 
|Operating margin (loss)     |                            |               | (584.4 | )        |  |          | (277.3 | )        |   |          | (101.0 | )       |  |          | (165.8 | )        |  |  | (143.1 | )    |  |  | (40.0 | )    |  |  | 4.4   |      |  |  | 3.0   |     
|Income (loss) before taxes  |                            |               | (471.2 | )        |  |          | (203.3 | )        |   |          | (59.6  | )       |  |          | (122.5 | )        |  |  | (114.3 | )    |  |  | (22.3 | )    |  |  | 18.3  |      |  |  | 7.7   |     
|Net margin (loss)           |                            |               | (471.2 | )        |  |          | (205.4 | )        |   |          | (59.6  | )       |  |          | (122.5 | )        |  |  | (156.0 | )    |  |  | (14.3 | )    |  |  | 12.2  |      |  |  | 2.9   |     

Revenues.Revenues
increased from the quarter ended March 31, 2000 through the
quarter ended June 30, 2000 primarily due to an increase in
the number of active customers from 24 to 30 over the two
quarters. Revenues decreased from the quarter ended
June 30, 2000 through the quarter ended December 31,
2001 primarily due to a decrease in demand for our services as a
result of a general economic slowdown and declining demand for
custom application development beginning in the second half of
2000. The number of active customers decreased to 13 in the
quarter ended December 31, 2001 from 30 in the quarter
ended June 30, 2000. Additionally, our average billing rate
decreased over the seven quarters.

Gross Margin.Gross
margin declined from 67% to (6)% during the periods from
March 31, 2000 through March 31, 2001, reflecting a
decrease in utilization and fees over these five quarters. Our
gross margin improved to 34.8% in the second quarter of 2001 as
a result of technical staff reductions while revenue only
declined modestly from the prior quarter. In the third quarter
of 2001 gross margin dropped to (21.2)% as a result of a
continuing decline in revenues. In the fourth quarter of 2001
the gross margin increased to 2.6% as a result of the benefit of
additional technical staff reductions more than offsetting a
further decline in revenue.

General and administrative.General and administrative costs as a
percentage of revenues were 33%-34% during the periods shown
from March 31, 2000 through June 30, 2000, reflecting
greater operating leverage as these expenditures were spread
over a larger revenue base. In the third and fourth quarters of
2000, general and administrative costs as a percentage of
revenues increased to 58.5% and 73.6%, respectively. The
increase in costs in the third and fourth quarter of 2000 was
related to our increase in bad debt expense (related to the
write-off of a bad account and other questionable receivables)
and an increase in recruiting costs and facility costs during
these two quarters. General and administrative costs decreased
over the four quarters in 2001. This was primarily due to the
restructuring plans in the fourth quarter of 2000 and in the
first quarter of 2001, and due to decreases in bad debt expense,
legal fees, and meeting costs. As a percentage of revenues,
general and administrative costs increased to 76.6%, 61.6%,
108.4% and 147.7% in the first, second, third and fourth quarter
of 2001, 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.

Sales and marketing.Sales and marketing costs as a
percentage of revenue were generally in the 20%-23% range during
the periods shown from March 31, 2000 through
December 31, 2000. The first through third quarters of 2001
showed an increase in the sales and marketing costs as a
percentage of revenues 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 of 2001.

19



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##### 



Restructuring.In
the fourth quarter of 2000, we recorded a restructuring charge
related to the severance of non-technical employees, the closing
of satellite offices and the impairment of certain assets
related to the offices. In the first quarter of 2001, we
recorded a second 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.

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 fourth quarter of 2000
includes compensation expense related to the granting of
restricted stock for fourth quarter bonuses. 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 and cancellations of
certain restricted stock shares and the adjustment of fair value
of the outstanding restricted shares.

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 September 2001, 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 $1.5 million or eighty percent of
our outstanding trade receivables less amounts greater than
90 days past due. At December 31, 2001, approximately
$639,000 was available for borrowing. 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 2002. Any
borrowings under the line of credit will be secured by our trade
receivables. At December 31, 2001, we had no outstanding
borrowings under the line of credit.

Cash and cash equivalents were $1.5 million
at December 31, 2001. Investments, which reflect the
application of our net proceeds from our public offerings, were
$149.8 million at December 31, 2001. Net cash used in
operating activities was $16.3 million for the year ended
December 31, 2001. Capital expenditures of
$1.7 million for the year ended December 31, 2001 were
used primarily for computer equipment, office equipment and
leasehold improvements related to the creation of a software
development and demonstration laboratory.

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 net proceeds from our
public offerings, existing sources of liquidity and funds
generated from operations, should be adequate to fund our
currently anticipated cash needs through at least the next
18 months. To the extent we are unable to fund our
operations from cash flows, 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.

20



---



##### 



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, 2001, we had repurchased
644,406 shares of common stock at an average price of
$2.46 per share.

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

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 as of December 31, 2001.

21



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##### 



Item 8.     Financial
Statements and Supplementary Data.

INDEX TO FINANCIAL STATEMENTS

|                                                   |  |  |    | 
|-------------------------------------------------- |  |  | -- | 
|Report of Ernst & Young LLP, Independent
	Auditors |  |  | 23 | 
|Balance Sheets                                     |  |  | 24 | 
|Statements of Operations                           |  |  | 25 | 
|Statements of Stockholders Equity                 |  |  | 26 | 
|Statements of Cash Flows                           |  |  | 27 | 
|Notes to Financial Statements                      |  |  | 28 | 

22



---



##### 



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, 2001 and 2000, and the
related statements of operations, stockholders equity, and
cash flows for each of the three years in the period ended
December 31, 2001. 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, 2001 and 2000, and
the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2001, in
conformity with accounting principles generally accepted in the
United States.



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

McLean, Virginia

February 8, 2002


23



---



##### 



CYSIVE, INC.

BALANCE SHEETS

|                                      |                                                                                                                                                                                                              |                                            |   |         |         |  |   |         |         | 
|------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------ | - | ------- | ------- |  | - | ------- | ------- | 
|                                      |                                                                                                                                                                                                              |                                           
|                                      |                                                                                                                                                                                                              | December 31,                              
|                                      |                                                                                                                                                                                                              |                                           
|                                      |                                                                                                                                                                                                              | 2001                                       |   | 2000   
|                                      |                                                                                                                                                                                                              |                                            |   |        
|                                      |                                                                                                                                                                                                              |                                           
|                                      |                                                                                                                                                                                                              | (In thousands, except                     
|                                      |                                                                                                                                                                                                              | share data)                               
|ASSETS                               
|                                     
|Current assets:                       |                                                                                                                                                                                                              |                                            |   |         |         |  |   |        
|                                      | Cash and cash equivalents                                                                                                                                                                                    |                                            | $ | 1,484   |         |  | $ | 20,674  |        
|                                      | Investments                                                                                                                                                                                                  |                                            |   | 117,459 |         |  |   | 94,568  |        
|                                      | Accounts receivable, less allowance of $125 and
	$1,600 at December 31, 2001 and 2000, respectively                                                                                                          |                                            |   | 555     |         |  |   | 6,623   |        
|                                      | Prepaid expenses and other current assets                                                                                                                                                                    |                                            |   | 2,381   |         |  |   | 2,294   |        
|                                      | Income tax receivable                                                                                                                                                                                        |                                            |   | 126     |         |  |   | 811     |        
|                                      |                                                                                                                                                                                                              |                                            |   |         |         |  |   |        
|                                      |                                                                                                                                                                                                              | Total current assets                       |   |         | 122,005 |  |   |         | 124,970 | 
|                                      | Furniture, fixtures and equipment, net                                                                                                                                                                       |                                            |   | 5,791   |         |  |   | 6,154   |        
|                                      | Investments                                                                                                                                                                                                  |                                            |   | 32,343  |         |  |   | 53,970  |        
|                                      | Other assets                                                                                                                                                                                                 |                                            |   | 995     |         |  |   | 986     |        
|                                      |                                                                                                                                                                                                              |                                            |   |         |         |  |   |        
|                                      |                                                                                                                                                                                                              | Total assets                               |   | $       | 161,134 |  |   | $       | 186,080 | 
|                                      |                                                                                                                                                                                                              |                                            |   |         |         |  |   |        
|                                     
|LIABILITIES AND STOCKHOLDERS
	EQUITY
|                                     
|Current liabilities:                  |                                                                                                                                                                                                              |                                            |   |         |         |  |   |        
|                                      | Accounts payable                                                                                                                                                                                             |                                            | $ | 303     |         |  | $ | 1,114   |        
|                                      | Accrued liabilities                                                                                                                                                                                          |                                            |   | 2,733   |         |  |   | 7,050   |        
|                                      | Accrued restructuring                                                                                                                                                                                        |                                            |   | 1,864   |         |  |   | 4,071   |        
|                                      |                                                                                                                                                                                                              |                                            |   |         |         |  |   |        
|                                      |                                                                                                                                                                                                              | Total current liabilities                  |   |         | 4,900   |  |   |         | 12,235  | 
|                                      | 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; 29,936,316 shares
	issued and 29,291,910 shares outstanding at
	December 31, 2001 and 28,804,539 issued and outstanding at
	December 31, 2000 |                                            |   | 299     |         |  |   | 288     |        
|                                      | Treasury stock, 644,406 shares repurchased
	at December 31, 2001                                                                                                                                             |                                            |   | (6      | )       |  |   |        |        
|                                      | Additional paid-in capital                                                                                                                                                                                   |                                            |   | 205,195 |         |  |   | 208,871 |        
|                                      | Deferred stock compensation                                                                                                                                                                                  |                                            |   | (5,002  | )       |  |   | (12,743 | )      
|                                      | Unrealized gain on investments                                                                                                                                                                               |                                            |   | 1,090   |         |  |   | 501     |        
|                                      | Accumulated deficit                                                                                                                                                                                          |                                            |   | (45,342 | )       |  |   | (23,072 | )      
|                                      |                                                                                                                                                                                                              |                                            |   |         |         |  |   |        
|                                      |                                                                                                                                                                                                              | Total stockholders equity                 |   |         | 156,234 |  |   |         | 173,845 | 
|                                      |                                                                                                                                                                                                              |                                            |   |         |         |  |   |        
|                                      |                                                                                                                                                                                                              | Total liabilities and stockholders equity |   | $       | 161,134 |  |   | $       | 186,080 | 
|                                      |                                                                                                                                                                                                              |                                            |   |         |         |  |   |        

See accompanying notes.

24



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##### 



CYSIVE, INC.

STATEMENTS OF OPERATIONS

|                                                                  |                            |                                                 |            |        |        |      |            |        |        |   |            |        |        | 
|----------------------------------------------------------------- | -------------------------- | ----------------------------------------------- | ---------- | ------ | ------ | ---- | ---------- | ------ | ------ | - | ---------- | ------ | ------ | 
|                                                                  |                            |                                                
|                                                                  |                            | Year Ended December 31,                        
|                                                                  |                            |                                                
|                                                                  |                            | 2001                                            |            | 2000   |        | 1999
|                                                                  |                            |                                                 |            |        |        |     
|                                                                  |                            |                                                
|                                                                  |                            | (In thousands, except share and per share data)
|Revenues                                                          |                            | $                                               | 14,691     |        |        | $    | 50,287     |        |        | $ | 25,265     |       
|                                                                  | Direct costs               |                                                 |            | 13,739 |        |      |            | 22,851 |        |   |            | 8,899  |       
|                                                                  |                            |                                                 |            |        |        |      |            |        |        |   |            |       
|Gross profit                                                      |                            |                                                 | 952        |        |        |      | 27,436     |        |        |   | 16,366     |       
|Operating expenses:                                               |                            |                                                 |            |        |        |      |            |        |        |   |            |       
|                                                                  | General and administrative |                                                 |            | 12,330 |        |      |            | 23,848 |        |   |            | 7,228  |       
|                                                                  | Research and development   |                                                 |            | 3,789  |        |      |            |       |        |   |            |       |       
|                                                                  | Sales and marketing        |                                                 |            | 9,529  |        |      |            | 10,773 |        |   |            | 5,491  |       
|                                                                  | Restructuring              |                                                 |            | 2,098  |        |      |            | 4,710  |        |   |            |       |       
|                                                                  | Stock compensation         |                                                 |            | 3,143  |        |      |            | 5,843  |        |   |            | 14,851 |       
|                                                                  |                            |                                                 |            |        |        |      |            |        |        |   |            |       
|                                                                  |                            | Total operating expenses                        |            |        | 30,889 |      |            |        | 45,174 |   |            |        | 27,570 | 
|Operating loss                                                    |                            |                                                 | (29,937    | )      |        |      | (17,738    | )      |        |   | (11,204    | )     
|Investment income, net                                            |                            |                                                 | 8,064      |        |        |      | 7,770      |        |        |   | 432        |       
|                                                                  |                            |                                                 |            |        |        |      |            |        |        |   |            |       
|Loss before taxes                                                 |                            |                                                 | (21,873    | )      |        |      | (9,968     | )      |        |   | (10,772    | )     
|Income tax benefit (expense)                                      |                            |                                                 | (55        | )      |        |      | (4,360     | )      |        |   | 4,369      |       
|                                                                  |                            |                                                 |            |        |        |      |            |        |        |   |            |       
|Net loss                                                          |                            | $                                               | (21,928    | )      |        | $    | (14,328    | )      |        | $ | (6,403     | )     
|                                                                  |                            |                                                 |            |        |        |      |            |        |        |   |            |       
|Basic and diluted loss per share                                  |                            | $                                               | (0.74      | )      |        | $    | (0.54      | )      |        | $ | (0.36      | )     
|Weighted average shares outstanding and common
	stock equivalents |                            |                                                 | 29,521,894 |        |        |      | 26,438,946 |        |        |   | 17,629,932 |       

See accompanying notes.

25



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##### 



CYSIVE, INC.

STATEMENTS OF STOCKHOLDERS
EQUITY

|                                                            |  |                                   |          |              |  |            |    |          |  |          |            |              |  |               |     |               |  |        |         |        |  |   |         |   |  |   |         |   |  |   |       |  |  |   |         |   |  |   |         |  
|----------------------------------------------------------- |  | --------------------------------- | -------- | ------------ |  | ---------- | -- | -------- |  | -------- | ---------- | ------------ |  | ------------- | --- | ------------- |  | ------ | ------- | ------ |  | - | ------- | - |  | - | ------- | - |  | - | ----- |  |  | - | ------- | - |  | - | ------- | -
|                                                            |  |                                   |          |              |  |            |    |          |  |          |            |              |  |               |     |              
|                                                            |  | Treasury Stock                    |          | Common Stock |  | Additional |    | Deferred |  | Retained |            | Unrealized   |  | Total         |     | Comprehensive
|                                                            |  |                                   |          |              |  | Paid-In    |    | Stock    |  | Earnings |            | Gain on      |  | Stockholders |     | Income       
|                                                            |  | Shares                            |          | Amount       |  | Shares     |    | Amount   |  | Capital  |            | Compensation |  | (Deficit)     |     | Investments   |  | Equity |         | (Loss)
|                                                            |  |                                   |          |              |  |            |    |          |  |          |            |              |  |               |     |               |  |        |         |       
|                                                            |  |                                  
|                                                            |  | (In thousands, except share data)
|Balance at December 31, 1998                                |  |                                   |         |              |  | $          |   |          |  |          | 13,554,000 |              |  | $             | 136 |               |  | $      | 109     |        |  | $ | (106    | ) |  | $ | 2,380   |   |  | $ |      |  |  | $ | 2,519   |   |  | $ | 796     |  
|Stockholder distribution                                    |  |                                   |         |              |  |            |   |          |  |          |           |              |  |               |    |               |  |        |        |        |  |   |        |   |  |   | (4,721  | ) |  |   |      |  |  |   | (4,721  | ) |  |   |        |  
|Common stock issued upon exercise of options                |  |                                   |         |              |  |            |   |          |  |          | 2,759,596  |              |  |               | 28  |               |  |        | 1,103   |        |  |   |        |   |  |   |        |   |  |   |      |  |  |   | 1,131   |   |  |   |        |  
|Issuance of common stock in initial public
	offering        |  |                                   |         |              |  |            |   |          |  |          | 6,505,000  |              |  |               | 65  |               |  |        | 50,238  |        |  |   |        |   |  |   |        |   |  |   |      |  |  |   | 50,303  |   |  |   |        |  
|Issuance of compensatory stock options                      |  |                                   |         |              |  |            |   |          |  |          |           |              |  |               |    |               |  |        | 28,317  |        |  |   | (15,033 | ) |  |   |        |   |  |   |      |  |  |   | 13,284  |   |  |   |        |  
|Deferred stock compensation                                 |  |                                   |         |              |  |            |   |          |  |          |           |              |  |               |    |               |  |        |        |        |  |   | 1,567   |   |  |   |        |   |  |   |      |  |  |   | 1,567   |   |  |   |        |  
|Net loss                                                    |  |                                   |         |              |  |            |   |          |  |          |           |              |  |               |    |               |  |        |        |        |  |   |        |   |  |   | (6,403  | ) |  |   |      |  |  |   | (6,403  | ) |  |   | (6,403  | )
|                                                            |  |                                   |          |              |  |            |    |          |  |          |            |              |  |               |     |               |  |        |         |        |  |   |         |   |  |   |         |   |  |   |       |  |  |   |         |   |  |   |         |  
|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     |  
|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 | ) |  | $ | (23,072 | ) |  | $ | 501   |  |  | $ | 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     |  
|Deferred stock compensation                                 |  |                                   |         |              |  |            |   |          |  |          |           |              |  |               |    |               |  |        | (3,916  | )      |  |   | 7,741   |   |  |   |        |   |  |   |      |  |  |   | 3,825   |   |  |   |        |  
|Net loss                                                    |  |                                   |         |              |  |            |   |          |  |          |           |              |  |               |    |               |  |        |        |        |  |   |        |   |  |   | (21,928 | ) |  |   |      |  |  |   | (21,928 | ) |  |   | (21,928 | )
|                                                            |  |                                   |          |              |  |            |    |          |  |          |            |              |  |               |     |               |  |        |         |        |  |   |         |   |  |   |         |   |  |   |       |  |  |   |         |   |  |   |         |  
|Balance at December 31, 2001                                |  |                                   | (644,406 | )            |  | $          | (6 | )        |  |          | 29,936,316 |              |  | $             | 299 |               |  | $      | 205,195 |        |  | $ | (5,002  | ) |  | $ | (45,342 | ) |  | $ | 1,090 |  |  | $ | 156,234 |   |  | $ | (21,339 | )
|                                                            |  |                                   |          |              |  |            |    |          |  |          |            |              |  |               |     |               |  |        |         |        |  |   |         |   |  |   |         |   |  |   |       |  |  |   |         |   |  |   |         |  

See accompanying notes.

26



---



##### 



CYSIVE, INC.

STATEMENTS OF CASH FLOWS

|                                                                                           |                                                         |                                           |         |          |        |      |          |            |        |   |         |          |        |  
|------------------------------------------------------------------------------------------ | ------------------------------------------------------- | ----------------------------------------- | ------- | -------- | ------ | ---- | -------- | ---------- | ------ | - | ------- | -------- | ------ | -
|                                                                                           |                                                         |                                          
|                                                                                           |                                                         | Year Ended December 31,                  
|                                                                                           |                                                         |                                          
|                                                                                           |                                                         | 2001                                      |         | 2000     |        | 1999
|                                                                                           |                                                         |                                           |         |          |        |     
|                                                                                           |                                                         |                                          
|                                                                                           |                                                         | (In thousands)                           
|Cash flows from operating activities:                                                      |                                                         |                                           |         |          |        |      |          |            |        |   |         |         
|Net loss                                                                                   |                                                         | $                                         | (21,928 | )        |        | $    | (14,328  | )          |        | $ | (6,403  | )       
|Adjustments to reconcile net loss to net cash
	(used in) provided by operating activities: |                                                         |                                           |         |          |        |      |          |            |        |   |         |         
|                                                                                           | Depreciation                                            |                                           |         | 1,725    |        |      |          | 1,098      |        |   |         | 196      |       
|                                                                                           | Amortization                                            |                                           |         | 333      |        |      |          | 78         |        |   |         | 26       |       
|                                                                                           | Restructuring charges, net                              |                                           |         | 2,098    |        |      |          | 4,710      |        |   |         |         |       
|                                                                                           | Restructuring spending                                  |                                           |         | (4,305   | )      |      |          | (639       | )      |   |         |         |       
|                                                                                           | Stock compensation                                      |                                           |         | 3,143    |        |      |          | 5,843      |        |   |         | 14,851   |       
|                                                                                           | Income tax receivable                                   |                                           |         | 685      |        |      |          | (428       | )      |   |         |         |       
|                                                                                           | Deferred income taxes                                   |                                           |         |         |        |      |          | 4,766      |        |   |         | (5,149   | )     
|                                                                                           | Loss on sale of furniture, fixtures and
	equipment, net |                                           |         | 1        |        |      |          | 102        |        |   |         |         |       
|                                                                                           | Provision (benefit) for doubtful accounts               |                                           |         | (1,475   | )      |      |          | 949        |        |   |         | 558      |       
|                                                                                           | Changes in operating assets and liabilities:            |                                           |         |          |        |      |          |            |        |   |         |          |       
|                                                                                           |                                                         | Accounts receivable                       |         |          | 7,543  |      |          |            | (1,007 | ) |         |          | (5,052 | )
|                                                                                           |                                                         | Prepaid expenses and other current assets |         |          | (87    | )    |          |            | (1,051 | ) |         |          | (1,131 | )
|                                                                                           |                                                         | Other assets                              |         |          | (9     | )    |          |            | (703   | ) |         |          | (253   | )
|                                                                                           |                                                         | Accounts payable                          |         |          | (811   | )    |          |            | 769    |   |         |          | 319    |  
|                                                                                           |                                                         | Accrued liabilities                       |         |          | (3,206 | )    |          |            | 2,609  |   |         |          | 2,712  |  
|                                                                                           |                                                         |                                           |         |          |        |      |          |            |        |   |         |         
|Net cash (used in) provided by operating
	activities                                       |                                                         |                                           | (16,293 | )        |        |      | 2,768    |            |        |   | 674     |         
|Cash flows from investing activities:                                                      |                                                         |                                           |         |          |        |      |          |            |        |   |         |         
|                                                                                           | Purchase of investments                                 |                                           |         | (583,175 | )      |      |          | (1,453,558 | )      |   |         | (146,146 | )     
|                                                                                           | Sale of investments                                     |                                           |         | 582,500  |        |      |          | 1,350,560  |        |   |         | 101,107  |       
|                                                                                           | Capital expenditures                                    |                                           |         | (1,696   | )      |      |          | (6,790     | )      |   |         | (526     | )     
|                                                                                           |                                                         |                                           |         |          |        |      |          |            |        |   |         |         
|Net cash used in investing activities                                                      |                                                         |                                           | (2,371  | )        |        |      | (109,788 | )          |        |   | (45,565 | )       
|Cash flows from financing activities:                                                      |                                                         |                                           |         |          |        |      |          |            |        |   |         |         
|                                                                                           | Stockholder distributions                               |                                           |         |         |        |      |          |           |        |   |         | (3,614   | )     
|                                                                                           | Proceeds from sale of common stock                      |                                           |         | 538      |        |      |          | 123,189    |        |   |         | 50,303   |       
|                                                                                           | Exercise of common stock options                        |                                           |         | 519      |        |      |          | 2,072      |        |   |         | 23       |       
|                                                                                           | Repurchase of treasury stock                            |                                           |         | (1,583   | )      |      |          |           |        |   |         |         |       
|                                                                                           |                                                         |                                           |         |          |        |      |          |            |        |   |         |         
|Net cash (used in) provided by financing
	activities                                       |                                                         |                                           | (526    | )        |        |      | 125,261  |            |        |   | 46,712  |         
|(Decrease) increase in cash and cash equivalents                                           |                                                         |                                           | (19,190 | )        |        |      | 18,241   |            |        |   | 1,821   |         
|Cash and cash equivalents at beginning of year                                             |                                                         |                                           | 20,674  |          |        |      | 2,433    |            |        |   | 612     |         
|                                                                                           |                                                         |                                           |         |          |        |      |          |            |        |   |         |         
|Cash and cash equivalents at end of year                                                   |                                                         | $                                         | 1,484   |          |        | $    | 20,674   |            |        | $ | 2,433   |         
|                                                                                           |                                                         |                                           |         |          |        |      |          |            |        |   |         |         
|Supplemental Cash Flow Information:                                                        |                                                         |                                           |         |          |        |      |          |            |        |   |         |         
|Cash paid for income taxes                                                                 |                                                         | $                                         |        |          |        | $    |         |            |        | $ | 743     |         
|                                                                                           |                                                         |                                           |         |          |        |      |          |            |        |   |         |         

See accompanying notes.

27



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##### 



CYSIVE, INC.

NOTES TO FINANCIAL STATEMENTS

Note 1  Organization

Cysive, Inc. (Cysive or the
Company) is a provider of multi-channel enterprise
software and services that allow companies to integrate Web,
wireless, voice-activated systems, and Web services across an
enterprise. Historically, all of the Companys revenue has
resulted from the delivery of custom software and services
solutions. Due to increasing competition, declining margins, and
business volatility, in 2001 the Company we began the transition
of its business model from a software engineering services model
to a software products and engineering services model.
Accordingly, during 2001 the Company developed Cysive
CymbioTM, a software product that uses widely
supported technologies and open standards to ensure seamless
interoperability between multiple channels such as the Web,
wireless, voice, or Web services, and databases or applications.
The Company operates in one business segment.

Note 2  Summary of Significant
Accounting Policies



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

Through December 31, 2001 the Company has
derived principally 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 clients 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.

With the introduction of Cysive Cymbio, the
Company anticipates that future revenues will include components
for software license and maintenance revenue. The Company
anticipates that for the immediate future, software license
sales of Cysive Cymbio will require significant customization
services in conjunction with the license sales. Accordingly,
software license revenue and related consulting services
revenues will be recognized in accordance with AICPA Statement
of Position 81-1, Accounting for Performance of
Construction-Type and Certain Production-Type
Contracts.



| |                 
| | ----------------
| | 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.



| |                          
| | -------------------------
| | 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.

28



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##### 



CYSIVE, INC.


NOTES TO FINANCIAL
STATEMENTS  (Continued)

Investments are generally comprised of variable
rate securities that provide for optional or effective maturity
dates 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 within 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.



| |                                   
| | ----------------------------------
| | 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            |  | Estimated useful life               

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. No such impairment losses have been recognized
to date.



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

For the years ended December 31, 2001 and
2000 and for the period from October 1, 1999 through
December 31, 1999, the Company provided 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.

Prior to October 1, 1999, the Company and
its stockholders elected to be treated as an S corporation under
the Internal Revenue Code. Under the provisions of the tax code,
the Companys stockholders included their pro rata share of
the Companys income in their personal income tax returns.
Accordingly, the Company was not subject to federal and most
state income taxes during the historical periods prior to
October 1, 1999.

29



---



##### 



CYSIVE, INC.


NOTES TO FINANCIAL
STATEMENTS  (Continued)



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

The Company accounts for its stock-based
compensation in accordance with Accounting Principles Board
Opinion No. 25 Accounting for Stock Issued to
Employees (APB 25) using the intrinsic
value method. The Company has made pro forma disclosures
required by Statement of Financial Accounting Standards
No. 123 (SFAS 123) Accounting for
Stock Based Compensation using the fair value method.



| |               
| | --------------
| | 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 calculated using the weighted
average number of common shares and dilutive common stock
equivalents outstanding during the period, using the treasury
stock method for options. For the years ended December 31,
2001, 2000, and 1999, the common stock equivalents are excluded
as their effect would be anti-dilutive.



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

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. For the year ended
December 31, 1999, three customers individually represented
28%, 11% and 10% of the Companys revenues.

At December 31, 2001, three customers
individually represented 21%, 18% and 11% of the Companys
accounts receivable. At December 31, 2000, two customers
each individually represented 18% of the Companys accounts
receivable.



| |                  
| | -----------------
| | Advertising Costs

All advertising and promotion costs are expensed
as incurred. During the years ended December 31, 2001, 2000
and 1999, the Company expensed $2.2 million,
$3.3 million and $1.3 million, respectively, as
advertising costs.



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

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



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

In October 2001, the FASB issued Statement of
Financial Accounting Standards No. 144 Impairment
of Long-Lived Assets (SFAS 144) which
changes the criteria for defining assets held-for-sale.
SFAS 144 will also supersede the provisions of APB 30 with
regard to reporting the effects of a disposal of a segment of a
business. The provisions of SFAS 144 are effective for
financial statements issued for fiscal years beginning after
December 15, 2001. The Company will adopt SFAS 144 for
the fiscal year ended December 31, 2002. The Company does
not believe there will be a material impact to the financial
statements from the adoption of SFAS 144.

In July 2001, the FASB issued Statement of
Financial Accounting Standards No. 141 Business
Combinations (SFAS 141) and Statement
of Financial Accounting Standards No. 142 Goodwill
and Other Intangible Assets
(SFAS 142). SFAS 141 eliminates the use of
the pooling-of-interests method for all business combinations
completed after June 30, 2001, unless initiated earlier.
SFAS 141 supersedes APB 16 Business
Combinations and several interpretations of
APB 16. SFAS 142 states that goodwill and
intangible assets are no longer amortized, but are reviewed
annually for impairment. SFAS 142 supersedes

30



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##### 



CYSIVE, INC.


NOTES TO FINANCIAL
STATEMENTS  (Continued)

APB 17 Intangible Assets. The
Company does not believe there will be a material impact to the
financial statements from the adoption of SFAS 141 and
SFAS 142.

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, 2001 and 2000 (in thousands):

|                     |  |           |        |           |  |   |        | 
|-------------------- |  | --------- | ------ | --------- |  | - | ------ | 
|                     |  | Municipal |        | Corporate
|                     |  | Bonds     |        | Bonds    
|                     |  |           |        |          
|2001                 |  |           |        |           |  |   |        | 
|Gross amortized cost |  | $         | 59,921 |           |  | $ | 88,791 | 
|Net unrealized gain  |  |           | 298    |           |  |   | 792    | 
|                     |  |           |        |           |  |   |        | 
|Market value         |  | $         | 60,219 |           |  | $ | 89,583 | 
|                     |  |           |        |           |  |   |        | 
|2000                 |  |           |        |           |  |   |        | 
|Gross amortized cost |  | $         | 58,959 |           |  | $ | 89,078 | 
|Net unrealized gain  |  |           | 101    |           |  |   | 400    | 
|                     |  |           |        |           |  |   |        | 
|Market value         |  | $         | 59,060 |           |  | $ | 89,478 | 
|                     |  |           |        |           |  |   |        | 

Net unrealized holding gains for the years ended
December 31, 2001 and 2000 were $589,000 and $501,000,
respectively. Gross realized gains and losses for the year ended
December 31, 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,
|                                               |  |             
|                                               |  | 2001         |        | 2000
|                                               |  |              |        |     
|Computers and related equipment                |  | $            | 3,087  |      |  | $ | 2,647  |  
|Furniture                                      |  |              | 2,201  |      |  |   | 2,168  |  
|Software                                       |  |              | 1,219  |      |  |   | 766    |  
|Leasehold improvements                         |  |              | 2,461  |      |  |   | 1,924  |  
|Capitalized software                           |  |              | 215    |      |  |   |       |  
|                                               |  |              |        |      |  |   |        |  
|                                               |  |              | 9,183  |      |  |   | 7,505  |  
|Less accumulated depreciation and amortization |  |              | (3,392 | )    |  |   | (1,351 | )
|                                               |  |              |        |      |  |   |        |  
|                                               |  | $            | 5,791  |      |  | $ | 6,154  |  
|                                               |  |              |        |      |  |   |        |  

31



---



##### 



CYSIVE, INC.


NOTES TO FINANCIAL
STATEMENTS  (Continued)

Note 5  Accrued
Liabilities

Accrued liabilities consist of the following (in
thousands):

|                          |  |              |       |      |  |   |       | 
|------------------------- |  | ------------ | ----- | ---- |  | - | ----- | 
|                          |  |             
|                          |  | December 31,
|                          |  |             
|                          |  | 2001         |       | 2000
|                          |  |              |       |     
|Payroll and payroll taxes |  | $            | 857   |      |  | $ | 1,602 | 
|Bonuses                   |  |              | 142   |      |  |   | 1,436 | 
|Commissions               |  |              | 34    |      |  |   | 344   | 
|Vacation                  |  |              | 503   |      |  |   | 641   | 
|Accrued expenses          |  |              | 939   |      |  |   | 2,796 | 
|Other                     |  |              | 258   |      |  |   | 231   | 
|                          |  |              |       |      |  |   |       | 
|                          |  | $            | 2,733 |      |  | $ | 7,050 | 
|                          |  |              |       |      |  |   |       | 

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 satellite offices, resulting in lease
abandonments and write-down of assets; and 3) the accrual
for professional fees related to the office closings or
potential claims from severed employees. The charge was
allocated to: payroll and benefits to severed employees (42
employees consisting of recruiting, sales and general and
administrative personnel)  $1.5 million; rent
expense related to carrying vacated office space through the
lease term  $2.4 million; write-down of
assets  $400,000; and professional fees related to
the restructuring  $400,000. 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, 2001, the Company had
paid all severance-related payments, $332,000 in rent and other
related expense for vacated office space, $53,000 in
professional fees and reduced the value of impaired assets by
approximately $400,000.

On March 30, 2001, in anticipation of a
continued declining revenue base, the Company announced an
additional restructuring plan that included a reduction of 95
employees consisting of engineering, recruiting, sales and
general and administrative personnel. 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, 2001,
the Company had paid all severance-related payments from this
first quarter restructuring plan.

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, 2001, the
Company had paid all severance-related payments from this third
quarter restructuring plan.

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, 2001, the Company had paid approximately
$600,000 in severance-related payments from this fourth quarter
restructuring plan.

32



---



##### 



CYSIVE, INC.


NOTES TO FINANCIAL
STATEMENTS  (Continued)

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, 2001, the
Company has four outstanding standby letters of credit, totaling
approximately $738,000, 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, 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
$1.5 million or eighty percent of the Companys
outstanding accounts receivable 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, 2001, approximately $639,000 was available for
borrowing. The line of credit expires in September 2002.
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, 2001 and 2000, there
were no outstanding borrowings. Commitment fees of 0.5% paid per
$500,000 of credit facility during 2001, 2000 and 1999 were not
material.

Note 8  Commitments and
Contingencies



| |                  
| | -----------------
| | Lease Obligations

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, 2001 are as follows:

|           |                              |               |     |      | 
|---------- | ---------------------------- | ------------- | --- | ---- | 
|           |                              | (In millions)
|2002       |                              | $             | 2.5 |     
|2003       |                              |               | 2.6 |     
|2004       |                              |               | 2.4 |     
|2005       |                              |               | 2.1 |     
|2006       |                              |               | 1.7 |     
|Thereafter |                              |               | 5.9 |     
|           |                              |               |     |     
|           | Total minimum lease payments |               | $   | 17.2 | 
|           |                              |               |     |     

Rental expense on operating leases was
$2.4 million, $2.0 million and $326,000 for the years
ended December 31, 2001, 2000 and 1999, respectively. The
Company has subleased its former headquarters office space to
another company. Under the terms of the sublease contract, the
sub-lessee has the right to terminate the sublease with a
6-month written notice. The sub-lessee has exercised this option
and will terminate the sublease effective June 30, 2002.
The Company received payments of approximately $238,000 and
$135,000 in 2001 and 2000, respectively, under this sublease.



| |        
| | -------
| | Lawsuit

On August 23, 2000, the Company terminated a
time and materials contract with CorPay Solutions, Inc. (the
Contract) for failure to pay its outstanding
invoices. Under the terms and conditions of the Contract,

33



---



##### 



CYSIVE, INC.


NOTES TO FINANCIAL
STATEMENTS  (Continued)

the parties agreed to settle their disputes
through binding arbitration. Accordingly, on August 29,
2000, the Company filed a demand for arbitration seeking to
recover all amounts owed by CorPay Solutions, Inc. under all
outstanding invoices (approximately $2.2 million). CorPay
Solutions, Inc. filed a counterclaim seeking the return of all
amounts paid to the Company (approximately $4.5 million),
alleging that the Company breached the Contract by, among other
things, failing to perform the services called for in the
Contract. The Company vigorously denied all allegations raised
in the counterclaim. On February 5, 2001, an American
Arbitration Association panel of three arbitrators returned a
decision in the favor of the Company and required Corpay
Solutions, Inc. to pay all outstanding invoices plus interest to
the Company. On February 23, 2001, the Company received
approximately $2.3 million for the past due invoices and
interest related charges.

Note 9  Stockholders
Equity



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

In September 1999, the Companys
stockholders approved a stock split of 2.25 shares of
common stock for every one share of outstanding common stock. 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 these stock splits.



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

In January 1999, two employees and stockholders
of the Company exercised options for the purchase of
2,700,000 shares for $1.1 million, which was funded
through a distribution in the same amount to the stockholders.

In October 1999 and December 1999, two
stockholders and 22 employees of the Company, respectively,
exercised options to purchase a combined total of
59,596 shares for $32,669, of which $10,312 was funded
through a distribution to the stockholders and the remainder was
paid in cash.

On October 15, 1999, the Company completed
its initial public offering and issued 6,000,000 shares of
common stock at $8.50 per share. An additional
700,000 shares were sold by an existing stockholder at
$8.50 per share. In connection with the initial public
offering, the underwriters exercised an option to purchase an
additional 1,005,000 shares of common stock (505,500 sold
by the Company and 500,000 sold by an existing stockholder) at
$8.50 per share on October 22, 1999. Total proceeds to
the Company from its initial public offering, net of
underwriting discounts and costs of the offering, were
approximately $50.3 million.

On March 16, 2000, the Company completed its
secondary 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 its secondary 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

34



---



##### 



CYSIVE, INC.


NOTES TO FINANCIAL
STATEMENTS  (Continued)

purchase. During the years ended
December 31, 2001 and 2000, 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 of 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 the year ended December 31, 2001,
certain employees of the Company exercised options to purchase a
combined total of 800,688 shares of common stock for
$519,351 paid in cash. During the year ended December 31,
2000, certain employees of the Company exercised options to
purchase a combined total of 2,945,936 shares of common
stock for $1,800,726 paid in cash.

During the year ended December 31, 2001 the
Company purchased a total of 644,406 treasury shares. 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.



| |              
| | -------------
| | 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. The Board of Directors and
shareholders increased the number of shares available under the
1994 Option Plan from time to time as needed. As of
January 1, 2000, the shares of common stock reserved for
issuance was 22,700,000. In April 2000, the stockholders of the
Company voted in favor of 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, 2001, the number of shares of common stock
reserved for issuance upon the exercise of options was
35,182,746. 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.
Such amounts are included as a reduction of stockholders
equity and are being amortized on a straight-line method over a
period of three to four years, less the benefit of any stock
option cancellations. 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.

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

35



---



##### 



CYSIVE, INC.


NOTES TO FINANCIAL
STATEMENTS  (Continued)

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.

On January 24, 2002, the Company announced a
voluntary stock option exchange program for its employees. The
details of this program are provided in Note 13.

Options granted expire no more than five years
from the date of grant for 10% stockholders 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 has reserved 35,182,746 shares
of common stock issuable upon exercise of options granted under
the 1994 Option Plan, of which options to
purchase 14,499,220 shares of common stock are
available for grant under the 1994 Option Plan as of
December 31, 2001.

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 2001, 2000 and 1999.

Common stock option activity was as follows:

|                                 |                      |           |            |            |   |   |      |       | 
|-------------------------------- | -------------------- | --------- | ---------- | ---------- | - | - | ---- | ----- | 
|                                 |                      |           |            | Weighted  
|                                 |                      |           |            | Average   
|                                 |                      | Number of |            | Exercise  
|                                 |                      | Shares    |            | Price     
|                                 |                      |           |            |           
|Outstanding at December 31, 1998 |                      |           | 8,703,006  |            |   | $ | 0.54 |      
|                                 | Granted              |           |            | 7,573,252  |   |   | $    | 2.41  | 
|                                 | Exercised            |           |            | (2,759,596 | ) |   | $    | 0.41  | 
|                                 | Cancelled or expired |           |            | (254,814   | ) |   | $    | 0.69  | 
|                                 |                      |           |            |            |   |   |      |      
|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 |      
|                                 |                      |           |            |            |   |   |      |      

36



---



##### 



CYSIVE, INC.


NOTES TO FINANCIAL
STATEMENTS  (Continued)

The following table summarizes information
regarding stock options outstanding at December 31, 2001:

|                         |  |                     |            |             |  |                     |     |             |  |          |       |  |  |  |           |  |  |   |       | 
|------------------------ |  | ------------------- | ---------- | ----------- |  | ------------------- | --- | ----------- |  | -------- | ----- |  |  |  | --------- |  |  | - | ----- | 
|                         |  |                     |            |             |  |                    
|                         |  | 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 - $12.00          |  |                     | 11,315,725 |             |  |                     | 6.5 |             |  | $        | 2.31  |  |  |  | 5,971,772 |  |  | $ | 1.24  | 
|$12.01 - $24.00          |  |                     | 2,359,766  |             |  |                     | 8.1 |             |  | $        | 15.96 |  |  |  | 668,383   |  |  | $ | 16.21 | 
|$24.01 - $36.88          |  |                     | 266,484    |             |  |                     | 7.8 |             |  | $        | 25.56 |  |  |  | 93,117    |  |  | $ | 25.70 | 
|                         |  |                     |            |             |  |                     |     |             |  |          |       |  |  |  |           |  |  |   |       | 
|$ 0.00 - $36.88          |  |                     | 13,941,975 |             |  |                     | 6.8 |             |  | $        | 5.07  |  |  |  | 6,733,272 |  |  | $ | 3.07  | 
|                         |  |                     |            |             |  |                     |     |             |  |          |       |  |  |  |           |  |  |   |       | 

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. 123, the Companys pro forma
net income (loss) and earnings (loss) per share would have been
as follows (in thousands, except per share data):

|                                                                |  |                         |         |      |  |      |         |   |  |   |       | 
|--------------------------------------------------------------- |  | ----------------------- | ------- | ---- |  | ---- | ------- | - |  | - | ----- | 
|                                                                |  |                        
|                                                                |  | Year Ended December 31,
|                                                                |  |                        
|                                                                |  | 2001                    |         | 2000 |  | 1999
|                                                                |  |                         |         |      |  |     
|Net income (loss)  pro forma                                   |  | $                       | (35,448 | )    |  | $    | (33,392 | ) |  | $ | 4,907 | 
|Pro forma earnings (loss) per common share                      |  | $                       | (1.20   | )    |  | $    | (1.26   | ) |  | $ | 0.28  | 
|Pro forma earnings (loss) per common
	share  assuming dilution |  | $                       | (1.20   | )    |  | $    | (1.26   | ) |  | $ | 0.17  | 

The effect of applying SFAS No. 123 on 2001,
2000 and 1999 pro forma net income (loss) as stated above is not
necessarily representative of the effects on reported net income
(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,
|                            |  |                        
|                            |  | 2001                    |         | 2000 |  | 1999
|                            |  |                         |         |      |  |     
|Volatility                  |  |                         | 1.59    |      |  |      | 1.964   |   |  |  | 0.17    |  
|Expected life of the option |  |                         | 5 years |      |  |      | 5 years |   |  |  | 4 years |  
|Risk-free interest rate     |  |                         | 4.0     | %    |  |      | 6.0     | % |  |  | 6.5     | %
|Dividend rate               |  |                         | 0.0     | %    |  |      | 0.0     | % |  |  | 0.0     | %

The weighted average fair value of the options
granted in 2001 with a stock price equal to the exercise price
is $2.87 per share. The weighted average fair values of the
options granted in 2000 with a stock price equal to the exercise
price and with a stock price greater than the exercise price are
$10.36 and $17.49 per share, respectively. The weighted
average fair values of the options granted in 1999 with a stock
price equal to the exercise price and with a stock price greater
than the exercise price are $8.08 and $4.81 per share,
respectively.



| |           
| | ----------
| | Rescission

In September 2000, the Company and certain
employees mutually agreed to rescind options exercised to
purchase 1,043,810 shares of common stock. There was
no effect on the Companys results of operations for the
year ended December 31, 2000 as a result of this
transaction because the rescission was related to

37



---



##### 



CYSIVE, INC.


NOTES TO FINANCIAL
STATEMENTS  (Continued)

incentive stock options. Subsequent to the
rescission and before December 31, 2000, options to
purchase 980,625 shares of the Companys common
stock were re-exercised.

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 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 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 $1.1 million, $1.4 million and $546,000 for the
years ended December 31, 2001, 2000 and 1999, respectively.

Note 11  Income
Taxes



| |              
| | -------------
| | S Corporation

From inception through September 30, 1999,
the Company operated as an S corporation under the Internal
Revenue Code. Under the provisions of the tax code, the
Companys stockholders included their pro rata share of the
Companys income in their personal income tax returns.
Accordingly, the Company was not subject to federal and most
state income taxes for earnings in 1997, 1998 and the first nine
months of 1999.

Stockholders elected to rescind the S corporation
election effective on October 1, 1999. The Company
calculated $3.0 million as the previously earned and
undistributed S corporation taxable earnings through
September 30, 1999 and paid out approximately
$2.8 million to the existing stockholders of the Company as
of September 30, 1999 during 1999. These payments were paid
out of the cumulative earnings of the Company.



| |              
| | -------------
| | C Corporation

The Company recorded a net deferred tax benefit
of $4.8 million for the cumulative differences between the
financial reporting and income tax basis of certain assets and
liabilities at October 1, 1999. In 2000, the Company
increased the deferred tax benefit net of deferred liabilities
to $7.9 million. At the end of 2000, as a result of the
Companys current and expected future operating losses, the
Company elected to record a full valuation allowance on all of
the operating deferred tax assets, resulting in an income tax
expense for the year.

Additionally, during 2000 and 2001, certain
grantees of non-qualified and incentive stock options exercised
their options and periodically sold the common stock issued upon
such exercise. In 2000, these sales created an additional
non-operational tax benefit of $13.2 million to the
Company. In addition, the Company generated an additional
$906,997 tax benefit in 2000 related to losses from continued
operations. The Company recorded a valuation allowance of
$13.2 million because of the uncertainty of future benefit
arising from this tax benefit. The use of these losses expires
beginning in 2020.

Deferred income taxes 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.

38



---



##### 



CYSIVE, INC.


NOTES TO FINANCIAL
STATEMENTS  (Continued)

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

|                          |                                                      |                                |         |        |        |   |         |        |        |  
|------------------------- | ---------------------------------------------------- | ------------------------------ | ------- | ------ | ------ | - | ------- | ------ | ------ | -
|                          |                                                      |                               
|                          |                                                      | December 31,                  
|                          |                                                      |                               
|                          |                                                      | 2001                           |         | 2000  
|                          |                                                      |                                |         |       
|                          |                                                      |                               
|                          |                                                      | (In thousands)                
|Deferred tax assets:      |                                                      |                                |         |        |        |   |         |       
|                          | Net operating loss                                   |                                | $       | 22,939 |        |   | $       | 14,131 |       
|                          | Accrued expenses                                     |                                |         | 922    |        |   |         | 1,890  |       
|                          | Stock compensation                                   |                                |         | 5,694  |        |   |         | 5,612  |       
|                          | Asset reserves                                       |                                |         | 48     |        |   |         | 620    |       
|                          |                                                      |                                |         |        |        |   |         |       
|                          |                                                      | Total deferred tax assets      |         |        | 29,603 |   |         |        | 22,253 |  
|                          |                                                      |                                |         |        |        |   |         |       
|Deferred tax liabilities: |                                                      |                                |         |        |        |   |         |       
|                          | Change from cash to accrual method for tax
	purposes |                                |         |       |        |   |         | (168   | )     
|                          | Depreciation                                         |                                |         | (54    | )      |   |         | (47    | )     
|                          |                                                      |                                |         |        |        |   |         |       
|                          |                                                      | Total deferred tax liabilities |         |        | (54    | ) |         |        | (215   | )
|                          |                                                      |                                |         |        |        |   |         |       
|Net deferred tax asset    |                                                      |                                | 29,549  |        |        |   | 22,038  |       
|Valuation allowance       |                                                      |                                | (29,423 | )      |        |   | (21,227 | )     
|                          |                                                      |                                |         |        |        |   |         |       
|Income tax receivable     |                                                      | $                              | 126     |        |        | $ | 811     |       
|                          |                                                      |                                |         |        |        |   |         |       

The above table does not include a deferred tax
liability of $230,000 and $195,000 at December 31, 2001 and
2000, respectively, related to the change in net unrealized gain
on investments included in other comprehensive income. On a
comprehensive basis, inclusion of these balances would be offset
by decreases in the valuation allowance of $230,000 and $195,000
at December 31, 2001 and 2000, respectively.

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

|                                 |         |                |        |        |   |      |         |         |   |   |        |        |  
|-------------------------------- | ------- | -------------- | ------ | ------ | - | ---- | ------- | ------- | - | - | ------ | ------ | -
|                                 |         |               
|                                 |         | December 31,  
|                                 |         |               
|                                 |         | 2001           |        | 2000   |   | 1999
|                                 |         |                |        |        |   |     
|                                 |         |               
|                                 |         | (In thousands)
|Current tax expense (benefit):   |         |                |        |        |   |      |         |         |   |   |        |       
|                                 | Federal |                | $      |       |   |      | $       | (660    | ) |   | $      | 635    |  
|                                 | State   |                |        |       |   |      |         | (129    | ) |   |        | 145    |  
|Deferred tax expense (benefit):  |         |                |        |        |   |      |         |         |   |   |        |       
|                                 | Federal |                |        | (6,629 | ) |      |         | (13,091 | ) |   |        | (4,192 | )
|                                 | State   |                |        | (1,512 | ) |      |         | (2,987  | ) |   |        | (957   | )
|                                 |         |                |        |        |   |      |         |         |   |   |        |       
|Net benefit for income taxes     |         |                | (8,141 | )      |   |      | (16,867 | )       |   |   | (4,369 | )     
|Change in valuation allowance    |         |                | 8,196  |        |   |      | 21,227  |         |   |   |       |       
|                                 |         |                |        |        |   |      |         |         |   |   |        |       
|Net income tax expense (benefit) |         | $              | 55     |        |   | $    | 4,360   |         |   | $ | (4,369 | )     
|                                 |         |                |        |        |   |      |         |         |   |   |        |       

39



---



##### 



CYSIVE, INC.


NOTES TO FINANCIAL
STATEMENTS  (Continued)

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

|                                                             |  |                |        |      |  |      |         |   |  |   |        |  
|------------------------------------------------------------ |  | -------------- | ------ | ---- |  | ---- | ------- | - |  | - | ------ | -
|                                                             |  |               
|                                                             |  | December 31,  
|                                                             |  |               
|                                                             |  | 2001           |        | 2000 |  | 1999
|                                                             |  |                |        |      |  |     
|                                                             |  |               
|                                                             |  | (In thousands)
|Federal statutory income tax benefit                         |  | $              | (7,437 | )    |  | $    | (3,311  | ) |  | $ | (3,663 | )
|Adjustment for S corporation income taxable to
	stockholders |  |                |       |      |  |      |        |   |  |   | 3,595  |  
|State taxes (net of federal benefit)                         |  |                | (998   | )    |  |      | (409    | ) |  |   | 52     |  
|Permanent items                                              |  |                | 294    |      |  |      | (13,147 | ) |  |   | 440    |  
|Effect of change in tax status                               |  |                |       |      |  |      |        |   |  |   | (4,793 | )
|Effect of asset valuation allowance                          |  |                | 8,196  |      |  |      | 21,227  |   |  |   |       |  
|                                                             |  |                |        |      |  |      |         |   |  |   |        |  
|                                                             |  | $              | 55     |      |  | $    | 4,360   |   |  | $ | (4,369 | )
|                                                             |  |                |        |      |  |      |         |   |  |   |        |  

Note 12  Loss Per
Share

The following table summarizes the computation of
basic and diluted loss per share for the years ended
December 31, 2001, 2000 and 1999:

|                |                                                                  |                                                 |            |            |   |      |            |            |   |   |            |            |  
|--------------- | ---------------------------------------------------------------- | ----------------------------------------------- | ---------- | ---------- | - | ---- | ---------- | ---------- | - | - | ---------- | ---------- | -
|                |                                                                  |                                                
|                |                                                                  | Year Ended December 31,                        
|                |                                                                  |                                                
|                |                                                                  | 2001                                            |            | 2000       |   | 1999
|                |                                                                  |                                                 |            |            |   |     
|                |                                                                  |                                                
|                |                                                                  | (In thousands, except share and per share data)
|Numerator:      |                                                                  |                                                 |            |            |   |      |            |            |   |   |            |           
|Net loss        |                                                                  | $                                               | (21,928    | )          |   | $    | (14,328    | )          |   | $ | (6,403     | )         
|Denominator:    |                                                                  |                                                 |            |            |   |      |            |            |   |   |            |           
|                | Weighted average shares outstanding                              |                                                 |            | 29,521,894 |   |      |            | 26,438,946 |   |   |            | 17,629,932 |  
|                | Weighted average effect of common stock
	equivalents outstanding |                                                 |            |           |   |      |            |           |   |   |            |           |  
|                |                                                                  |                                                 |            |            |   |      |            |            |   |   |            |           
|                |                                                                  |                                                 | 29,521,894 |            |   |      | 26,438,946 |            |   |   | 17,629,932 |           
|                |                                                                  |                                                 |            |            |   |      |            |            |   |   |            |           
|Loss per share: |                                                                  |                                                 |            |            |   |      |            |            |   |   |            |           
|                | Basic                                                            |                                                 | $          | (0.74      | ) |      | $          | (0.54      | ) |   | $          | (0.36      | )
|                | Diluted                                                          |                                                 | $          | (0.74      | ) |      | $          | (0.54      | ) |   | $          | (0.36      | )

Note 13  Subsequent
Event

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. Eligible options priced between
$5.67 and $14.01 per share will be exchanged for 0.5 times
the number of options cancelled, and eligible options priced
greater than $14.01 per share will be exchanged for 0.25
times the number of options cancelled. The new options will be
issued no earlier than six months and one day after the
cancellation date, which is currently expected to be
August 23, 2002. The exercise price of the new options will
be based on the trading price of the Companys common stock
at the time of the new option grants. The new options will vest
25% on the date of the grant, and then 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.

40



---



##### 



CYSIVE, INC.


NOTES TO FINANCIAL
STATEMENTS  (Continued)

Options for the purchase of an aggregate of
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. The Company expects to
issue replacement options for the purchase of up to
547,640 shares on or after August 23, 2002.

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

None.

41



---



##### 



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. |  |     | 38 |             |  | Chairman of the Board, President and Chief
	Executive Officer              
|John R. Lund             |  |     | 39 |             |  | Vice President, Chief Financial Officer,
	Treasurer, Secretary and Director
|Ken R. Hargrave          |  |     | 40 |             |  | Vice President                                                             
|John N. Carbonell        |  |     | 31 |             |  | Vice President                                                             
|Robert H. Skinner        |  |     | 50 |             |  | Vice President                                                             
|R. Eugene Willingham     |  |     | 35 |             |  | Vice President                                                             
|Jon S. Korin             |  |     | 47 |             |  | Director                                                                   
|Daniel F. Gillis         |  |     | 55 |             |  | Director                                                                   
|Kenneth H. Holec         |  |     | 47 |             |  | 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.
Mr. Carbonell received a B.S. in Electrical Engineering
from George Washington University in 1985. Mr. Carbonell is
the brother of John N. Carbonell.

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. From December 1995 until April
1997, Mr. Lund served as our Vice President of Finance.
Mr. Lund received a B.S. in Accounting from Brigham Young
University in 1986.

Ken R. Hargravehas
served as Vice President, Services since June 2001 and manages
our professional services operations. From January 2001 to May
2001 Mr. Hargrave served as 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 the
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 a Project
Manager. Mr. Hargrave received his B.S. in Computer Science
from Rochester Institute of Technology in 1985.

John N. Carbonellhas served as a Vice President since June 2001, and has managed
our transition efforts to a product company, our recruiting and
our training operations. From January 2001 to May 2001
Mr. Carbonell served as 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 the Director of
Operations  East and managed our operations in New
York, Reston, Atlanta and Dallas. From January 2000 
May 2000 Mr. Carbonell served as our Director of Operations
for Reston. From August 1998 to December 1999,
Mr. Carbonell served as a Project Manager. From July 1995
to August 1998, Mr. Carbonell served as a Senior Developer.
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.

Robert H. Skinnerhas served as Vice President of Sales and Marketing since July
2001. Prior to joining Cysive, Mr. Skinner held executive
positions at High Branch Software (as President and Chief
Executive Officer from August 2000 to June 2001) and at Best
Software (as Vice President, Sales from June 1992 to April 1995
and Executive Vice President, Sales and Professional Services
from April 1995 to April 2000). Mr. Skinner received his
B.A. in History from Quinnipiac College in 1974 and an MBA in
Finance from the University of Connecticut in 1977.

42



---



##### 



R. Eugene
Willinghamhas served as Vice
President of 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 the Director of Operations
for the East. From September 1996 to June 1997,
Mr. Willingham served as a Project Manager.
Mr. Willingham received his B.S. in Aerospace Engineering
from the University of Maryland in 1989.

Jon S. Korinhas
served as a Director since April 1997. Since April 2001,
Mr. Korin has served as vice president of strategic
development for Northrop Grumman information technology, a
$4 billion sector of Northrop Grumman Corporation. Since
1993, he has served in the same 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 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 2001. 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 when ShowCase, Inc. was
acquired by SPSS, Inc. Mr. Holec has served 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
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 May 2002. 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.

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.

43



---



##### 



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 consists of
Messrs. Carbonell and Korin. 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 2002 Proxy Statement.

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

The information is incorporated herein by
reference to our definitive 2002 Proxy Statement.

Item 13.     Certain
Relationships and Related Transactions.

The information is incorporated herein by
reference to our definitive 2002 Proxy Statement.

44



---



##### 



PART IV

Item 14.     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, 2001 and
	2000.                                        
|
| |  | Statements of Operations for the years ended
	December 31, 2001, 2000 and 1999.          
|
| |  | Statements of Stockholders Equity for the
	years ended December 31, 2001, 2000 and 1999.
|
| |  | Statements of Cash Flows for the years ended
	December 31, 2001, 2000 and 1999.          
|
| |  | 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(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)                               

45



---



##### 



|        |       |             |  |                                                                       
|------- | ----- | ----------- |  | ----------------------------------------------------------------------
|Exhibit |       |            
|No.     |       | Description
|        |       |            
|        | 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
	Robert H. Skinner(4)   
|        | 23.1  |             |  | Consent of Ernst & Young LLP(3)                                       



---



|    |                                                                                                        
|--- | -------------------------------------------------------------------------------------------------------
|(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 10-K (File No. 000-27607).                
|   
|(4) | Filed herewith.                                                                                        

(b) Reports on Form 8-K.



| |   |                                                                               
| | - | ------------------------------------------------------------------------------
| |  | Current Report on Form 8-K, filed with the
	Commission on November 2, 2001.   
|
| |  | Current Report on Form 8-K, filed with the
	Commission on February 15, 2002.  
|
| |  | Current Report on Form 8-K/A, filed with the
	Commission on February 22, 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 18, 2002.



| |             
| | ------------
| | 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 18,
2002.

|                                                     |  |                                                                                                          |  | 
|---------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------- |  | 
|                                                     |  |                                                                                                         
|Name                                                 |  | Title                                                                                                   
|                                                     |  |                                                                                                         
|                                                    
|/s/ NELSON A. CARBONELL, JR.Nelson 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



---



##### 



REPORT OF INDEPENDENT AUDITORS ON FINANCIAL
STATEMENT SCHEDULE

We have audited the financial statements of
Cysive, Inc. as of December 31, 2001 and 2000, and for each
of the three years in the period ended December 31, 2001,
and have issued our report thereon dated February 8, 2002
(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 8, 2002


S-1



---



##### 



VALUATION AND QUALIFYING ACCOUNTS AND
RESERVES

ALLOWANCE FOR DOUBTFUL ACCOUNTS


Years Ended December 31, 2001, 2000,
1999


|                                 |                              |                |   |            |  |            |   |            |   |  |   |        |   |  |   |       | 
|-------------------------------- | ---------------------------- | -------------- | - | ---------- |  | ---------- | - | ---------- | - |  | - | ------ | - |  | - | ----- | 
|                                 |                              | 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, 2001 |                | $ | 1,600      |  |            | $ | (1,257     | ) |  | $ | (218   | ) |  | $ | 125   | 
|                                 | Year ended December 31, 2000 |                |   | 651        |  |            |   | 2,359      |   |  |   | (1,410 | ) |  |   | 1,600 | 
|                                 | Year ended December 31, 1999 |                |   | 160        |  |            |   | 558        |   |  |   | (67    | ) |  |   | 651   | 

RESTRUCTURING RESERVE

Years Ended December 31, 2001, 2000,
1999


|                       |                              |                |   |            |  |            |   |            |   |  |   |      |   |  |   |       | 
|---------------------- | ---------------------------- | -------------- | - | ---------- |  | ---------- | - | ---------- | - |  | - | ---- | - |  | - | ----- | 
|                       |                              | 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, 2001 |                | $ | 4,071      |  |            | $ | (2,098     | ) |  | $ | (109 | ) |  | $ | 1,864 | 
|                       | Year ended December 31, 2000 |                |   |           |  |            |   | 4,710      |   |  |   | (639 | ) |  |   | 4,071 | 
|                       | Year ended December 31, 1999 |                |   |           |  |            |   |           |   |  |   |     |   |  |   |      | 

ALLOWANCE FOR DEFERRED TAX ASSET

Years Ended December 31, 2001, 2000,
1999


|                                  |                              |                |   |            |  |            |   |            |  |  |   |        |  |  |   |        | 
|--------------------------------- | ---------------------------- | -------------- | - | ---------- |  | ---------- | - | ---------- |  |  | - | ------ |  |  | - | ------ | 
|                                  |                              | 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, 2001 |                | $ | 21,227     |  |            | $ | 55         |  |  | $ | 8,141  |  |  | $ | 29,423 | 
|                                  | Year ended December 31, 2000 |                |   |           |  |            |   | 4,360      |  |  |   | 16,867 |  |  |   | 21,227 | 
|                                  | Year ended December 31, 1999 |                |   |           |  |            |   |           |  |  |   |       |  |  |   |       | 

S-2