Robert W. Howe Cairman and Chief Executive Officer William H. Gallagher President and Chief Operating Officer
	Fiscal year 2001 was a year of transition for ADS. In an effort to better align the Company with our clients' business objectives and to take greater advantage of our core competencies, we executed our strategy to refocus the business through four practices: e-Business, CRM, IT Strategy and Consulting, and Conversions and Consolidations. Our repositioning of ADS has come at an opportune, but challenging time; many "dot-coms" and New Economy start-ups have seen their values plummet. Although the economic environment has been difficult, we have made solid progress—making investments that we believe will help us generate revenue from new sources, improve our earnings, and consequently build shareholder value. We invested in strengthening our sales support function to provide better intelligence on customer and industry trends. We have also improved our training programs in leadership, technology and project management. And in the past fiscal year, we met our goal to expand our sales force from seven to ten Business Development Managers. We continued to see encouraging results from the Alliance investments that we began to make in January 1999. Our work as the integration arm for firms such as Brokat Financial Systems (a wholly owned subsidiary of Brokat Infosytems, AG), S2 Systems, and Siemens Ltd., Ireland paid off. Our Alliance revenue grew by 130.4% over fiscal 2000. We are also pleased that we have been able to expand our relationships beyond integration work; we are now working collaboratively with our partners in a number of sales and marketing endeavors. During the past year, we further developed our practice offerings to help our clients stay competitive as they respond to an increased demand for on-line services and diverse delivery channels. We believe our offerings are currently well aligned with our clients' needs, and the growth of both our e-Business and CRM Practices seems to bear out that belief. The annual revenues from our e-Business and CRM Practices grew 154.3% in fiscal 2001 versus fiscal 2000. This trend is consistent with industry research estimates that financial services institutions will continue to increase their e-Business and CRM spending. One industry analyst, for example, has projected that industry CRM spending will increase from $475 million in calendar year 2000 to $545 million in calendar 2001, a growth rate of approximately 15%. As we move into fiscal 2002, we are seeing a shift of emphasis within our client base away from top-line revenue and toward bottom-line profits. Accordingly, our clients are shying away from "business transformation projects" that seek to implement entirely new business models. Instead, clients are increasingly moving toward improving their capabilities to manage and integrate their existing assets via upgrades of infrastructure to support new and more robust applications. These changes in priorities fit well with ADS' historical strengths: financial services experience, technological expertise and project management skills. Our financial results for fiscal year 2001 reflected both our transitional focus and the effects of the "roller coaster ride" in both the financial services and IT consulting sectors. However, despite the difficult economy, our year-end cash position of $36.7 million remained strong, allowing us to focus on the fundamentals, achieving operational and financial stability and generating sustainable operating cash flow. In January 2001, and again in April, we took the necessary steps to bring expenses more in line with anticipated revenues, reducing our headcount by a total of 62 people, or approximately 31% of the total number of staff at December 31, 2000. For fiscal year 2001, ADS recorded revenues of $34.1 million, or 3% less than the prior year's $35.2 million. Net income was $26,000 or $0.00 per share, compared to $19,000 or $0.00 per share in fiscal 2000. Largely by increasing our average billing and utilization rates, we were able to improve our gross profit margin by 4.5 basis points from 25.5% of revenue to 30.0%, despite the decline in revenues. We also decreased general and administrative expenses by 7%, or $521,000. Our $1,624,000 increase in sales and marketing expense reflects the investments we made to strengthen our sales support function, to expand our Business Development team, and to execute our strategy to refocus the business. In spite of newspaper headlines trumpeting disappointing earnings, layoffs and depressed stock prices within the IT services sector, we believe that the demand for IT services within the financial services industry will continue to grow, albeit at a slower rate. Most analysts are projecting growth between 5 and 7% for the industry in the current year. We believe ADS has served its clients well over the past year. In this report, you will read about four of our recent successes—clients that ADS has helped to meet their business objectives and to achieve their goal of "Potential realized." Our assistance to Zions Bank in Salt Lake City, Utah, is just one of several examples where our CRM Practice was called in to facilitate an executive educational workshop for the bank's management. After successfully setting the stage strategically, we were able to win a follow-on engagement to implement a data repository that will allow the bank to improve its analysis capability and increase its shareholder value. At Citizens Banking Corporation, headquartered in Flint, Michigan, we helped our client meet its regulatory requirements under the Gramm- Leach-Bliley Act. As part of the engagement, a comprehensive assessment of over thirty departments by our IT Strategy and Consulting Practice became the basis for the processes by which the bank developed (and implemented) its mandated privacy policy. Another example of how ADS adds value for our customers is the work performed by our e-Business Practice with SunTrust Bank of Atlanta, Georgia. Our team's assistance to the bank at a strategic level, defining the business case for an Internet-based account aggregation service, was the basis for the project's funding. ADS consultants did the research and provided the analysis to document and justify the decision to move forward. As a result of this work, ADS was chosen by SunTrust Bank to be its Phase II partner. As such, we will provide the financial services experience, technology expertise, and project management capabilities, required to see the Phase II project to completion. Finally, you will read how our Conversions and Consolidations Practice, a cornerstone of our business for over twenty years, has assisted NBT Bancorp in Norwich, New York, in managing its conversion and consolidation efforts. As part of this engagement, we were asked by the bank to take a leadership role in designing an infrastructure to better support future growth through its merger activities. ADS enters fiscal year 2002 as a stronger and more focused company, committed to increasing shareholder value. First among our priorities is to improve earnings growth. To help us achieve this fundamental goal, we intend to carefully manage our costs through continued improvements to our expense control program. As a company, we will continue to make strategic investments in our sales organization, enhancing our ability to identify and close opportunities. We will also continue to look at strategic opportunities to invest our cash while ensuring that the value proposition can be quantified in ways that are meaningful to our clients and shareholders. As a service provider, we must always remember that our people remain our greatest asset. We need to continue to actively recruit and train employees on the key technologies that are essential to delivering value to our clients. We also recognize that to attract and retain quality people we must provide our employees a place to grow. We have made considerable progress in this area recently through leadership development and mentoring programs. We will continue to make similar investments, particularly in Project Management training, which is essential to delivering value to our clients. Finally, we want to thank the employees of ADS for the hard work, dedication, and team spirit they have shown throughout the year. We have made real progress toward our goals. We also want to thank our investors for their continued confidence in ADS. Although we still have challenges to overcome, we remain confident that we can successfully build on the foundation we have carefully established over the past year. Robert W. Howe Chairman and Chief Executive Officer William H. Gallagher President and Chief Operating Officer