NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2002 1. Description of Business Atlantic Data Services, Inc. ("ADS" or the "Company"), provides information technology ("IT") strategy consulting and systems integration services to customers exclusively in the financial services industry, primarily banks. The Company offers IT solutions to the business challenges faced by financial services companies through its in-depth financial services experience, technological expertise and project management skills. The Company's service offerings are organized around four practice areas: Customer Relationship Management (CRM), Conversions and Consolidations, IT Strategy and Consulting, and e-Business. 2. Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of Atlantic Data Services, Inc. and its wholly owned subsidiary, ADS Securities Corp. (collectively "the Company"). All intercompany accounts and transactions have been eliminated in consolidation. Cash and Cash Equivalents The Company considers all highly liquid investments purchased with an original maturity date of three months or less to be cash equivalents. At March 31, 2002 and 2001, cash equivalents were comprised of money market funds, commercial paper, CDs, municipal bonds and corporate debt totaling approximately $14,878,000 and $31,993,000, respectively, and repurchase agreements totaling approximately $288,000 and $4,268,000, respectively. At March 31, 2002 and 2001, cash equivalents are classified as available-for-sale and recorded at fair value. These investments are subject to minimal credit and market risk. Short-Term Investments Short-term investments consist primarily of high-grade commercial paper, municipal bonds and corporate debt with original maturities at the date of purchase greater than three months and less than twelve months. All short-term investments have been classified as held to maturity and are carried at amortized cost, which approximates fair value, due to the short period of time to maturity. Concentration of Credit Risk Financial instruments that potentially subject the Company to credit risk consist primarily of cash equivalents, short-term investments and accounts receivable. The risk with respect to cash equivalents and short-term investments is minimized by the Company's policies in which investments have relatively short maturities and are only placed with highly rated issuers. A significant portion of the Company's revenues and accounts receivable are derived from services provided to banks and other financial institutions. The risk with respect to accounts receivable is minimized by the creditworthiness of the Company's customers and the Company's credit and collection policies. The Company performs ongoing credit evaluations of its customers, generally does not require collateral, and maintains allowances for potential credit losses which, when realized, have been within the range of management's expectations.