SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


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

		For the Quarterly Period Ended September 30, 2003

		OR

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

Commission File No.
000-27607

CYSIVE, INC.
(Exact name of registrant as specified in its charter).


Delaware		54-1698017

(State of Incorporation)		(I.R.S. Employer Identification Number)

10790 Parkridge Blvd.
Suite 400
Reston, Virginia 20191
(Address of principal executive offices) (Zip Code).

(703) 259-2300
(Registrant’s Telephone Number, Including Area Code)

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, and (2) has been subject to such filing requirements for the past 90 days.

Yes X No

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

As of November 12, 2003, 29,286,641 shares of common stock were outstanding.

CYSIVE, INC.

FORM 10-Q

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION


Item 1.	Financial Statements

	Balance Sheets as of September 30, 2003 (Unaudited) and December 31, 2002	2
	Statements of Operations for the three months and nine months ended September 30, 2003 and 2002 (Unaudited)	3
	Statements of Cash Flows for the nine months ended September 30, 2003 and 2002 (Unaudited)	4
	Notes to Financial Statements (Unaudited)	5

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	11

Item 3.	Quantitative and Qualitative Disclosure About Market Risk	23

Item 4.	Controls and Procedures	23

	PART II — OTHER INFORMATION

Item 1.	Legal Proceedings	24

Item 2.	Changes in Securities and Use of Proceeds	24

Item 6.	Exhibits and Reports on Form 8-K	25

Signatures		26

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PART I.
FINANCIAL INFORMATION

ITEM 1. Financial Statements

CYSIVE, INC.

Balance Sheets
(In thousands, except share and per share data)


				September 30,			December 31,
				2003			2002

				(Unaudited)
Assets
	Current assets:
		Cash		$	2,241		$	8,460
		Interest-bearing investments			100,452			60,460
		Accounts receivable, less allowance of $4 and $98 at September 30, 2003 and December 31, 2002, respectively			11			133
		Prepaid expenses and other current assets			1,976			2,291

			Total current assets		104,680			71,344
	Furniture, fixtures and equipment, net				1,493			2,714
	Interest-bearing investments, less current portion				18,406			62,976
	Other assets				114			897


Total assets				$	124,693		$	137,931


Liabilities and stockholders’ equity
	Current liabilities:
		Accounts payable		$	485		$	164
		Accrued liabilities			1,268			1,708
		Deferred revenues			32			114
		Accrued restructuring			433			924

			Total current liabilities		2,218			2,910

	Accrued restructuring, less current portion				2,921			3,837

			Total liabilities		5,139			6,747

	Commitments and contingencies				–			–

	Stockholders’ equity:
	Preferred stock, $0.01 par value; 10,000,000 shares authorized; no shares issued and outstanding				–			–
	Common stock, $0.01 par value; 500,000,000 shares authorized; 31,885,842 shares issued and 29,141,991 shares outstanding at September 30, 2003 and 31,140,477 shares issued and 28,419,045 shares outstanding at December 31, 2002				319			311
	Treasury stock, 2,743,851 and 2,721,432 shares at September 30, 2003 and December 31, 2002				(27	)		(27	)
	Additional paid-in capital				202,307			201,579
	Deferred stock compensation				–			(360	)
	Unrealized gain on interest-bearing investments				437			1,205
	Accumulated deficit				(83,482	)		(71,524	)

			Total stockholders’ equity		119,554			131,184

Total liabilities and stockholders’ equity				$	124,693		$	137,931

See accompanying notes

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CYSIVE, INC.

Statements of Operations
(In thousands, except share and per share data)
(Unaudited)


			Three months ended						Nine months ended
			September 30,						September 30,

			2003			2002			2003			2002

Revenues:
		Services	$	12		$	1,044		$	114		$	3,603
		Software license		6			70			47			167

	Total revenues			18			1,114			161			3,770

Direct costs:
		Services		—			824			7			3,149
		Software license		63			38			163			106

	Total direct costs			63			862			170			3,255


Gross (loss) profit				(45	)		252			(9	)		515

Operating expenses:
		Sales and marketing		1,046			1,660			4,077			7,187
		General and administrative		2,464			2,388			6,786			7,914
		Research and development		558			1,009			2,183			2,667
		Stock compensation		7			211			309			4,201
		Restructuring		591			5,945			1,197			5,945


Total operating expenses				4,666			11,213			14,552			27,914


Operating loss				(4,711	)		(10,961	)		(14,561	)		(27,399	)

Investment income, net				735			1,464			2,603			4,114


Net loss			$	(3,976	)	$	(9,497	)	$	(11,958	)	$	(23,285	)


Basic and diluted net loss per share			$	(0.14	)	$	(0.33	)	$	(0.42	)	$	(0.80	)

Weighted average shares outstanding				28,977,067			28,765,130			28,645,281			29,209,687

See accompanying notes

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CYSIVE, INC.

Statements of Cash Flows
(In thousands)
(Unaudited)


			Nine months ended
			September 30,

			2003			2002

Cash flows from operating activities:
Net loss			$	(11,958	)	$	(23,285	)
Adjustments to reconcile net loss to net cash used in operating activities:
	Depreciation			564			1,299
	Amortization			260			294
	Stock compensation			309			4,201
	Restructuring charges, net			544			5,945
	Loss on sale of furniture, fixtures and equipment, net			16			80
	Benefit for doubtful accounts			(94	)		(20	)
	Changes in assets and liabilities:
		Accounts receivable		216			129
		Prepaid expenses and other current assets		315			746
		Income tax receivable		—			89
		Other assets		783			60
		Accounts payable		321			(243	)
		Accrued liabilities		(425	)		(553	)
		Deferred revenues		(82	)		348
		Restructuring spending		(1,630	)		(1,877	)


Net cash used in operating activities				(10,861	)		(12,787	)

Cash flows from investing activities:
		Purchases of investments		(274,660	)		(434,096	)
		Sales and maturities of investments		278,470			454,360
		Capital expenditures		(26	)		(88	)
		Proceeds from sale of fixed assets		71			—
		Rebates related to prior period capital expenditures		—			103


Net cash provided by investing activities				3,855			20,279

Cash flows from financing activities:
		Proceeds from sale of common stock		138			210
		Exercises of common stock options		721			718
		Purchases of treasury stock		(72	)		(3,910	)


Net cash provided by (used in) financing activities				787			(2,982	)

(Decrease) increase in cash				(6,219	)		4,510
Cash at beginning of period				8,460			1,484


Cash at end of period			$	2,241		$	5,994

See accompanying notes

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CYSIVE, INC.

Notes to Financial Statements

(Unaudited)

1. Basis of presentation

The accompanying financial statements of Cysive, Inc. (“Cysive” or the “Company”) are unaudited and, in the opinion of management, reflect all normal and recurring adjustments that are necessary for a fair presentation as of the dates and for the periods presented. The financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information. Consequently, these financial statements do not include all of the disclosures normally required by generally accepted accounting principles for annual financial statements. Accordingly, these financial statements should be read in conjunction with the Company’s audited financial statements and notes thereto for the period ended December 31, 2002, included in the Annual Report on Form 10-K filed by the Company with the Securities and Exchange Commission on March 19, 2003. The results of operations for the three and nine months ended September 30, 2003 are not necessarily indicative of results for the full year.

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

Stock-Based Compensation

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

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


	Three Months Ended						Nine Months Ended
	September 30,						September 30,

	2003			2002			2003			2002

Net loss — as reported	$	(3,976	)	$	(9,497	)	$	(11,958	)	$	(23,285	)

Add: Stock compensation expense – as reported (1)		7			211			309			4,201

Add (Deduct): Stock compensation benefit (expense) – pro forma (1)		625			(4,857	)		(2,135	)		(25,637	)

Net loss — pro forma	$	(3,344	)	$	(14,143	)	$	(13,784	)	$	(44,721	)

Basic and diluted loss per share – as reported	$	(0.14	)	$	(0.33	)	$	(0.42	)	$	(0.80	)

Basic and diluted loss per share – pro forma	$	(0.12	)	$	(0.49	)	$	(0.48	)	$	(1.53	)

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

The effects of applying SFAS No. 148 on the Company’s net losses for the periods shown above are not necessarily representative of the effects on reported net loss for future periods due to, among other things, the vesting period of the stock options, the fair value of future grants of stock options and the potential issuance of restricted stock.

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Restructuring

In June 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 146 “Accounting for Costs Associated with Exit or Disposal Activities,” which requires restructurings initiated after December 31, 2002 to be accounted for using the provisions therein, with earlier application encouraged. The Company accounted for a restructuring related to the closure of its New York office in the second quarter of 2003 and a restructuring related to the termination of employees and the closure of its Atlanta office in the third quarter of 2003 in accordance with the provisions of SFAS No. 146. The Company accounted for restructurings initiated prior to December 31, 2002 using the accounting provisions of Emerging Issues Task Force (“EITF”) Issue No. 94-3 "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)” (“EITF 94-3”). Under SFAS No. 146, the accounting provisions of EITF 94-3 will continue to apply to restructurings initiated prior to December 31, 2002, and therefore, the adoption of this standard has no impact on the Company’s financial statements with respect to these restructurings.

2. Revenue recognition

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

Deferred revenues are comprised of deferrals for license fees, maintenance and services billed to customers in advance of the related revenue recognition.

3. Software development costs

SFAS No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed,” requires the capitalization of certain software development costs subsequent to the establishment of technological feasibility. Based on the Company’s product development process, technological feasibility is established upon the completion of a working model. Costs incurred by the Company between the completion of the working model and the point at which the product is ready for general release have been insignificant. Accordingly, the Company has charged all such costs to research and development expense in the period incurred.

4. Stock compensation expense

In 1999, prior to its initial public offering, the Company granted stock options to purchase shares of common stock at exercise prices deemed below fair market value of the common stock on the date of grant. In 2000, the Company granted non-qualified stock options to purchase shares of common stock at a

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15% discount from the fair market value. The Company recorded deferred stock compensation for the difference between the grant price and fair market value of the options granted. The deferred stock compensation had been amortized ratably on a quarterly basis over the period in which the remaining options vested, which extended through September 2003, less the benefit of any stock options cancelled. Stock options granted subsequent to 2000 were at exercise prices equal to the fair market value of the common stock on the date of grant, and therefore, no compensation expense has been recognized related to these grants.

During the three and nine months ended September 30, 2003, the Company recognized $7,000 and $309,000 of stock compensation expense, respectively, related to outstanding stock options issued with exercise prices below fair market value. The deferred stock compensation component of stockholders’ equity was further reduced by $50,000 during the nine months ended September 30, 2003 due to the cancellation of stock options as a result of employee terminations.

During the three and the nine months ended September 30, 2002, the Company recognized $211,000 and $4,201,000 of stock compensation expense, respectively. During the first quarter of 2002, the Company cancelled certain employee-held stock options, resulting in an acceleration of compensation expense related to the value of these options, and the Company recognized $2,208,000 of expense related to these cancellations. Additionally, in January 2002, the Company purchased certain shares of common stock from employees within six months of issuance as a result of stock option exercises, and the Company recognized stock compensation expense of $132,000 related to these purchases. Also during the quarter ended March 31, 2002, the Company recognized $40,000 of stock compensation expense related to certain restricted stock granted in 2001.

5. Restructuring expense

On August 14, 2003, the Company took specific actions to reduce its overall cost structure. The Company eliminated 26 positions, consisting of engineering, sales and general and administrative employees, and closed its Atlanta office. As a result, the Company recorded a pretax restructuring charge of $591,000 for severance, rent expense and other associated costs in the third quarter of 2003.

In April 2003, the Company executed a termination agreement on its office space in New York City. As a result, the Company was relieved from a future lease obligation of approximately $1.7 million in exchange for a payment of $690,000 and the transfer of its New York office furniture and leasehold improvements, which had a combined net book value of $286,000. After giving consideration to accrued rent of $33,000 for this office space, the Company recorded restructuring expense of $943,000 relating to this lease termination.

During the first quarter of 2003, the Boston office space associated with the fourth quarter 2000 restructuring was sublet from April 2003 through the remaining term with sublease payments commencing June 1, 2003. Sublease payments were estimated to total $315,000, net of brokerage commissions, over the remaining term. Principally as a result of this sublease, the Company reduced the accrued liability for this restructuring by $337,000 through a credit to restructuring expense

6. Loss per share

The Company presents basic and diluted loss per share as one line item. Basic and diluted loss per share is based on the weighted average number of shares outstanding during the period. Common stock equivalents are excluded from the calculation of diluted loss per share, as their effect would be anti-dilutive.

Based on the closing price of $3.20 per share for the Company’s common stock on September 30, 2003, and using the treasury stock method for determining the amount of common stock equivalents, the

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number of common stock equivalent shares related to stock options outstanding as of September 30, 2003 was 4,000,638.

7. Comprehensive loss

Comprehensive loss includes net loss and unrealized gains and losses on investments. For the three and nine months ended September 30, 2003, comprehensive loss was $4.5 million and $12.7 million, respectively. For the three and nine months ended September 30, 2002, comprehensive loss was $9.2 million and $23.1 million, respectively.

8. Interest-bearing investments

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

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 also included in investment income.

9. Other assets

On July 1, 2003, a note receivable for $65,000 from a former employee was amended to delete a provision requiring the repayment of the outstanding principal and interest upon the termination of his employment with the Company. As a result, the note receivable will be due and payable on December 31, 2005 and has been classified as long-term other assets on the balance sheet as of September 30, 2003.

Subsequent to September 30, 2003, the Company agreed to amend two notes receivable totaling $350,000 from a former employee to reflect the following terms: (a) the former employee will grant the Company a security interest in certain real property as collateral for the notes receivable; (b) the interest rate will be increased from 2.74% to 4.0%; and (c) the maturity date will be extended to the earlier of December 31, 2004 or the sale of the real property securing the notes receivable. The Company and the former employee are negotiating the amendment and no definitive amendment has been executed. As a result, the notes receivables have been classified as other current assets on the balance sheet as of September 30, 2003.

10. Accrued restructuring

During the fourth quarter of 2000, the Company took specific actions to reduce its overall cost structure in anticipation of declining sales. As a result, the Company recorded a $4.7 million pre-tax restructuring expense primarily related to 1) the elimination of certain non-technical support roles, resulting in severance costs; 2) the closing of a satellite office, resulting in the write-down of assets; and 3) the accrual for professional fees related to the office closing or potential claims from severed employees. During the first quarter of 2003, the office space was sublet from April 2003 through the remaining term with sublease payments commencing June 1, 2003 and estimated to total $315,000, net of brokerage commissions, over the remaining term. Principally as a result of this sublease, the Company reduced the accrued liability for this restructuring by $337,000 through a credit to restructuring expense. During the three and nine months ended September 30, 2003, the Company paid approximately $37,000 and $240,000, respectively, for facility costs related to this restructuring. Cumulative lease obligation and related facility costs incurred as of September 30, 2003 totaled $923,000. As of September 30, 2003, estimated amounts remaining to be paid total $286,000 and are for rents payable, net of sublease income, through August 2005.

During the third quarter of 2002, the Company approved a restructuring plan which included the following: the termination of 49 employees, consisting of engineering, sales and general and administrative employees; the closing of three satellite offices; and the intent to sublet, if possible, significant portions of its office space. As a result, the Company recorded a $5.9 million pre-tax restructuring expense during the third quarter of 2002 to cover severance costs ($873,000), estimated remaining lease obligations net of estimated sublet income ($4,241,000), the write-off of leasehold improvements ($457,000), and the write-down of furniture and equipment to net realizable value ($374,000). During the three and nine months ended September 30, 2003, the Company paid approximately $532,000 and $937,000, respectively, for facilities costs related to this restructuring. Furthermore, the Company reduced accrued restructuring by $31,000, net, relating to the write-off of certain furniture and equipment and accrued rent. Cumulative lease obligation and related facilities costs incurred as of September 30, 2003 totaled

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$1,460,000. Estimated amounts remaining to be paid as of September 30, 2003, total $2.9 million and are for rents payable, net of estimated sublease income, through April 2010.

During the third quarter of 2003, the Company approved a restructuring plan which included the following: the termination of 26 employees, consisting of engineering, sales and general and administrative employees, and the closing of its Atlanta office. As a result, the Company recorded a $591,000 pre-tax restructuring expense during the third quarter of 2003 to cover severance costs ($525,000), estimated remaining lease obligations ($61,000), and the write-down of furniture and equipment ($5,000). During the three months ended September 30, 2003, the Company paid approximately $446,000 and $7,000 for severance and facilities costs, respectively, related to this restructuring. Estimated amounts remaining to be paid as of September 30, 2003, total $138,000 and are for a combination of remaining severance and rents payable through September 2004. All employees related to this restructuring have been terminated.

11. Mergers and Acquisitions

On May 13, 2003, the Company announced that it had retained Broadview International LLC to assist the Company in considering strategic alternatives, including a possible sale of the Company. The Company further announced that it was in discussions with various third parties regarding a possible acquisition of the Company and that it had formed a special committee of independent directors for the purpose of evaluating strategic alternatives and any offers the Company may receive. There can be no assurance, however, that any transaction will occur, and, if any transaction does occur, what the structure or terms would be of such transaction.

On September 15, 2003, the Company entered into an amendment to the previously announced Agreement and Plan of Merger, dated as of May 30, 2003, between the Company and Snowbird. The amendment provides for, among other things, an increase in the merger consideration to be received by the Company’s stockholders (other than Snowbird and Nelson A. Carbonell, Jr.) from $3.22 per share to $3.23 per share. There can be no assurance, however, that the merger agreement will be consummated.

The Company has scheduled a special meeting of stockholders to be held on November 28, 2003 to approve the merger agreement with Snowbird.

12. Litigation

On May 30, 2003 and over the following week, four putative class action complaints were filed in the Chancery Court of the State of Delaware, County of New Castle, by certain named plaintiffs and an alleged class of unaffiliated Cysive stockholders. The complaints named the Company, its directors and (except for one complaint) Snowbird as defendants and alleged that the Company’s directors had engaged in acts of self dealing and had violated fiduciary duties of due care and loyalty owed to unaffiliated Cysive stockholders in connection with the merger. The complaints further alleged that the merger consideration was inadequate and unfair to the putative class and that the Company and its directors failed to make adequate good faith efforts to obtain a better price. Trial commenced on July 22, 2003, and concluded on July 24, 2003. During the two weeks following the conclusion of trial, the parties filed post-trial briefs with the Court and on August 15, 2003, the Court issued its opinion, ruling in favor of the defendants on all counts and dismissing the plaintiffs’ claims in their entirety. The plaintiffs had until September 25, 2003 to appeal the ruling. The plaintiffs did not appeal the ruling.

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13. Subsequent event

In October 2003, the Company entered into a letter of intent to sublease up to 24,000 square feet of office space in the Reston, VA facility. The sublease is currently under negotiation. No adjustment has been made to the restructuring accrual in connection with this proposed sublease. The Company will record an adjustment to the accrual if and when a sublease is executed.

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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis compares the three and nine months ended September 30, 2003 to the corresponding periods ended September 30, 2002 for Cysive and should be read together with our financial statements and notes thereto appearing elsewhere in this Form 10-Q and with our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 19, 2003.

Certain statements contained in this Quarterly Report on Form 10-Q, including information with respect to 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, including, but not limited to, our continued significant losses; the failure of our stockholders to approve the proposed merger or the failure of any party to the merger agreement to satisfy a condition for the closing of the merger on or prior to November 30, 2003; the implementation of our new unproven business model; uncertain demand for our product; our ability to manage growth and attract and retain highly trained and experienced employees; increased competition in the electronic business industry; and our ability to respond to new technological advances in the software products industry. Additional information concerning these and other risks and uncertainties is contained from time to time in our filings with the Securities and Exchange Commission. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. 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 securities laws.

Recent Developments

On September 15, 2003, the Company entered into an amendment to the previously announced Agreement and Plan of Merger, dated as of May 30, 2003, between the Company and Snowbird. The amendment provides for, among other things, an increase in the merger consideration to be received by the Company’s stockholders (other than Snowbird and Nelson A. Carbonell, Jr.) from $3.22 per share to $3.23 per share There can be no assurance, however, that the merger agreement will be consummated.

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The Company has scheduled a special meeting of stockholders to be held on November 28, 2003 to approve the merger agreement with Snowbird.

Overview

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

Historically, nearly all of our revenues have resulted from the delivery of custom software and services solutions to our customers. From commencement of operations in 1994 through 1997, we built large scale, distributed systems using approaches and technologies that are the foundations for current Internet applications. At that time, our advanced technology focus required a sales effort led by technology savvy project managers. In late 1996 and early 1997, we evaluated and developed software prototypes using key Internet technologies such as Java, XML and CORBA. After successfully deploying our first electronic business system in mid-1997, we began to target customers who were making significant investments in their electronic business applications. As a result, there was a fundamental shift in our business strategy away from general purpose distributed systems to customized electronic 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. Our second goal was to deploy a direct sales force capable of selling electronic business applications. These initiatives significantly impacted our results of operations for these three quarters. Specifically, the generation of a sales pipeline of electronic 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 emerge in the second half of 1998 as a leading electronic business engineering firm from the third quarter of 1998 to the second quarter of 2000.

In the second half of 2000, we again identified a technology shift emerging as customers required an integrated solution for their Web, wireless and voice activated systems. As a result, we began focusing our non-utilized software engineering personnel on solving these complex development and integration issues. We then packaged the intellectual property rights retained from prior experience in selected vertical markets with the new solutions we were developing. During the second half of 2000, the general economic slow-down in conjunction with the rapidly changing technology environment caused our results from operations to significantly decline.

Due to increasing competition, declining margins and business volatility, in 2001 we began the transition of our business model from a software engineering services model to a software product model. Accordingly, during 2001 we developed and introduced the Cysive Cymbio Interaction Server, a multi-channel, enterprise software product that uses widely supported technologies and open standards to enable users to interact with enterprises over multiple communications channels, devices and intermittent connections. The Cysive Cymbio Interaction Server enhances a user’s experience, improves return on existing information technology investments, and reduces call center, systems management and maintenance costs. At the conclusion of the year ended December 31, 2002, our business model transition was complete.

We believe that after spending several years, and expending significant resources implementing numerous non-integrated and often incompatible software products, such as application servers, portals,

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enterprise application integration tools, business process management suites and Web Services platforms, enterprises continue to face key challenges in handling multi-channel interactions involving complex, multi-stage transactions, with intermittently connected users employing a myriad of access devices. We also believe enterprises are moving to a multi-channel access approach using Web, Web Services, wireless and voice to interact with their employees, customers, suppliers, partners and distributors. Enterprises often lack a facility to manage these disparate systems, resulting in increased costs for the enterprise, and a less satisfactory experience for the user. Technology advances, such as the Cysive Cymbio Interaction Server, enable companies to integrate complex interactions between users and enterprises via multiple channels and devices, providing an improved user experience more quickly and inexpensively.

Our financial results may fluctuate from quarter-to-quarter based on factors such as the number of license sales, the amount and timing of our customers’ expenditures, and general economic conditions. Revenues from a few large customers may constitute a significant portion of our total revenues in a particular quarter or year. For example, for the three-month period ended September 30, 2003 our four largest customers represented 100.0% of our revenues and for the three-month period ended September 30, 2002, our five largest customers represented 95.3% of our revenues. For the nine-month periods ended September 30, 2003 and 2002, our five largest customers represented 100.0% and 87.4% of our revenues, respectively.

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Results of Operations

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


			Three months ended						Nine months ended
			September 30,						September 30,

			2003			2002			2003			2002

Revenues
		Services		66.7	%		93.7	%		70.8	%		95.6	%
		Software license		33.3			6.3			29.2			4.4

	Total revenues			100.0			100.0			100.0			100.0

Direct costs
		Services (1)		–			74.0			6.1			83.6
		Software license (1)		1,050.0			3.4			346.8			2.8

	Total direct costs			350.0			77.4			105.6			86.4


Gross (loss) profit				(250.0	)		22.6			(5.6	)		13.6

Operating expenses:
		Sales and marketing		5,811.1			149.0			2,532.3			190.7
		General and administrative		13,694.4			214.5			4,215.5			209.9
		Research and development		3,100.0			90.6			1,355.9			70.7
		Stock compensation		38.9			18.9			191.9			111.4
		Restructuring		3,277.8			533.9			742.9			157.7


Total operating expenses				25,922.2			1,006.9			9,038.5			740.4

Operating loss				(26,172.2	)		(984.3	)		(9,044.1	)		(726.8	)

Investment income, net				4,083.3			131.5			1,616.8			109.1


Net loss				(22,088.9	)%		(852.8	)%		(7,427.3	)%		(617.7	)%

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

Revenues (in thousands):


		Three Months Ended							Nine Months Ended
		September 30,							September 30,
						Percentage							Percentage
		2003		2002		Change			2003		2002		Change

Services		$	12	$	1,044		(98.9	)%	$	114	$	3,603		(96.8	)%
Software license			6		70		(91.4	)		47		167		(71.9	)

	Total revenues	$	18	$	1,114		(98.4	)%	$	161	$	3,770		(95.7	)%

The decrease in services revenue for the three and nine months ended September 30, 2003 as compared to the same periods in 2002 was primarily due to our transition to a software license sales business model. As of the end of 2002, we exited the custom software engineering services business and concentrated our efforts on software sales and related maintenance and support services. Services revenue represented 66.7% and 70.8% of total revenues for the three and nine months ended September 30, 2003, respectively. Services revenue represented 93.7% and 95.6% of total revenues for the three and nine months ended September 30, 2002, respectively. As of September 30, 2003, we had no billable software engineers as compared to 10 as of September 30, 2002.

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Software license revenues result from the licensing of our product, Cysive Cymbio. To date, we have sold only a limited number of Cysive Cymbio licenses. Demand for our product is uncertain and, therefore, the revenue stream from future license sales is also uncertain. Additionally, the timing of revenue recognition related to future software license sales is uncertain, as it is, in part, dependent on when vendor specific objective evidence for the value of maintenance services, included as a part of these sales, is established.

Direct costs (in thousands):


		Three Months Ended							Nine Months Ended
		September 30,							September 30,
						Percentage							Percentage
		2003		2002		Change			2003		2002		Change

Services		$	—	$	824		(100.0	)%	$	7	$	3,149		(99.8	)%
Software license			63		38		65.8			163		106		53.8

	Total direct costs	$	63	$	862		(92.7	)%	$	170	$	3,255		(94.8	)%

The decrease in direct costs from services for the three and nine months ended September 30, 2003 as compared to the same periods in 2002 was primarily due to the restructuring in the third quarter of 2002 resulting from our decision to exit the custom software engineering services business. Direct costs from software licenses represented third party technology license fees and product packaging. Third party license fees are generally amortized on a straight-line basis over the term of each license.

Operating expenses (in thousands):


		Three Months Ended							Nine Months Ended
		September 30,							September 30,
						Percentage							Percentage
		2003		2002		Change			2003		2002		Change

Sales and marketing		$	1,046	$	1,660		(37.0	)%	$	4,077	$	7,187		(43.3	)%
General and administrative			2,464		2,388		3.2			6,786		7,914		(14.3	)
Research and development			558		1,009		(44.7	)		2,183		2,667		(18.1	)
Stock compensation			7		211		(96.7	)		309		4,201		(92.6	)
Restructuring			591		5,945		(90.1	)		1,197		5,945		(79.9	)

	Total operating expenses	$	4,666	$	11,213		(58.4	)%	$	14,552	$	27,914		(47.9	)%

Sales and Marketing. The decrease in sales and marketing expenses for the three and nine months ended September 30, 2003 as compared to the same periods in 2002 was primarily due to a reduction in sales staff headcount, resulting in lower salaries and related benefits. For the three and nine months ended September 30, 2003, salary and related benefits decreased $410,000 and $1.6 million, respectively, as compared to the same periods in 2002. Spending on public relations, marketing events and meals and travel has also declined $90,000, $80,000 and $104,000, respectively, during the three months ended September 30, 2003 and $520,000, $185,000 and $342,000, respectively, during the nine months ended September 30, 2003 as compared to the same periods in 2002. As of September 30, 2003, we had seven sales and marketing staff, including two technical support personnel who conduct product demonstrations and address technical issues regarding our product. Sales and marketing expenses are expected to decline to a lower level than that experienced during the first three quarters of 2003.

General and Administrative. The slight increase in general and administrative expenses for the three months ended September 30, 2003 as compared to the same period in 2002 was primarily due to an increase of $1.2 million in legal and professional fees related to the shareholders’ class action lawsuits and strategic alternatives pursued by the Company, as further discussed in Note 11 of the Unaudited Notes to the Financial Statements. This increase was offset by decreases in salary and related benefits, facilities costs, depreciation expense and office and equipment expense of $365,000, $290,000, $305,000 and $70,000, respectively, during the three months ended September 30, 2003. The decrease in general and administrative expenses for the nine months ended September 30, 2003 as compared to the same period in 2002 was primarily due to lower support staff headcount, as well as reductions in facilities costs, depreciation expense and office and equipment expense. Salary and related benefits, facilities costs, depreciation expense and office and equipment expense decreased $1.2 million, $790,000, $770,000 and $138,000, respectively, during the nine months ended September 30, 2003. These decreases were offset

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by an increase of $2.3 million during the nine months ended September 30, 2003, in legal and professional fees related to the shareholders’ class action lawsuits and strategic alternatives pursued by the Company. General and administrative expenses are expected to decline to a lower level than that experienced during the first three quarters of 2003.

Research and Development. The decrease in research and development expenses for the three and nine months ended September 30, 2003 as compared to the same periods in 2002 was primarily due to a reduction in headcount, which resulted in lower salary and related benefits. As of September 30, 2003, we had nine personnel assigned to the product engineering team, as compared with 24 as of December 31, 2002. Research and development expenses are expected to decline to a lower level than that experienced during the first three quarters of 2003.

Stock Compensation. The decrease in stock compensation expense for the three months ended September 30, 2003 as compared to the three months ended September 30, 2002 reflects a lower level of continuing stock compensation expense for stock options granted in 1999 and 2000. The decrease in stock compensation expense for the nine months ended September 30, 2003 as compared to the nine months ended September 30, 2002 was primarily due to the recognition of, on an accelerated basis, $2.0 million of expense related to the cancellation of certain officer and employee-held stock options during the first quarter of 2002. As of September 30, 2003, deferred stock compensation has been fully amortized.

Restructuring. For the nine months ended September 30, 2003, we recognized restructuring expense of $591,000 relating to severance, rent expense and other associated costs. Additionally, we also recognized restructuring expense of $943,000 relating to the termination of our New York City office lease. These restructuring charges are further discussed in Note 5 and the prior year restructurings are discussed in Note 9 of the Unaudited Notes to the Financial Statements. Additionally, we recognized a benefit of $337,000 to restructuring due to a reduction in future net rent expense for lease obligations as a result of office space that was sublet during the first quarter of 2003.

Investment income, net (in thousands):


	Three Months Ended							Nine Months Ended
	September 30,							September 30,
					Percentage							Percentage
	2003		2002		Change			2003		2002		Change

Investment income, net	$	735	$	1,464		(49.8	)%	$	2,603	$	4,114		(36.7	)%

The decrease in net investment income for the three and nine months ended September 30, 2003 as compared to the same period in 2002 was due to a combination of a lower average invested capital and lower interest rates between periods. We expect that our average invested capital will continue to trend downward during the last quarter of 2003, as we continue to use cash and investment proceeds to finance our operations.

Liquidity and Capital Resources

Cash was $2.2 million at September 30, 2003 and $8.5 million at December 31, 2002. Interest-bearing investments were $118.9 million at September 30, 2003 and $123.4 million at December 31, 2002. Net cash used in operating activities was $10.9 million and $12.8 million for the nine months ended September 30, 2003 and 2002, respectively. Capital expenditures of $26,000 and $88,000 for the nine months ended September 30, 2003 and 2002, respectively, were used primarily for computer equipment, office equipment and leasehold improvements. For the near future capital expenditure requirements are not expected to be material in relation to our operations.

We believe that our existing balances of cash and interest-bearing investments are adequate to fund our currently anticipated cash needs on both a short-term and long-term basis. The total of cash and interest-bearing investments on hand is adequate to cover all of our existing commitments, including rental payment obligations on our leased office space through the remainder of their terms. Until such time as our revenues and interest income more than cover our operating costs, if ever, we will continue to

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experience a decline in the total balances of cash and interest-bearing investments. Continuing declines in these balances may require that we restructure our operations, merge with another company, or pursue other strategic alternatives, including liquidation of the Company (See Note 10 of the Unaudited Notes to the Financial Statements).

If the planned merger of Cysive and Snowbird is consummated, up to $70 million of our existing funds may be used directly or indirectly to redeem shares of our common stock and to cover transaction costs. Use of our funds in this manner will still leave adequate funds to cover all of our existing commitments.

Certain Factors That May Affect Future Results

If any of the events described below actually occur, our business, financial condition, or results of operations could be materially adversely affected. This Form 10-Q contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially including those anticipated in such forward-looking statements as a result of a variety of factors, including those set forth in the following risk factors and elsewhere in, or incorporated by reference into, this Form 10-Q.

We expect to continue to incur significant losses at least through the end of the third quarter of 2004.

Since the third quarter of fiscal 2000, we have incurred losses. We incurred cumulative net losses of $76.7 million from the fiscal quarter ended September 30, 2000 through the fiscal quarter ended September 30, 2003. We expect losses to continue through at least the third quarter of 2004. 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.

We have agreed to be merged with a new entity owned by our CEO Nelson A. Carbonell, Jr. which, if consummated, will result in Cysive becoming a privately held subsidiary of a holding company wholly owned by Mr. Carbonell.

On May 30, 2003, the Company entered into an Agreement and Plan of Merger with Snowbird Holdings, Inc. (“Snowbird”), a newly formed entity owned by Nelson A. Carbonell, Jr., Chairman of the Board of Directors, President and Chief Executive Officer of the Company. On September 15, 2003, the Company entered into an amendment to the merger agreement. The merger agreement provides that, at the closing of the merger, each outstanding share of the Company’s common stock (other than Company common stock owned by Snowbird) will be converted into the right to receive $3.23 in cash. All outstanding stock options will be assumed by Snowbird. If the merger is consummated, the Company will become a privately held corporation. All stockholders of the Company (other than Mr. Carbonell and Snowbird) will no longer have an equity interest in the Company and therefore will not benefit from any increase in the future earnings, growth or value of the Company.

We may not be able to consummate the merger.

The merger is subject to many conditions. We cannot assure you that these conditions will be satisfied or waived by the parties. If the conditions to the merger are not satisfied or waived by the parties and we are unable to find another buyer for the Company, the Board of Directors may recommend that the Company pursue other strategic alternatives, including liquidation of the Company. It is uncertain what amount our shareholders would receive, if any, if the Company pursued other strategic alternatives.

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Expenses related to the merger could increase the Company’s future losses.

We believe that legal, accounting and other fees relating to the merger could substantially increase our losses for the fourth quarter of 2003 and possibly future quarters.

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

We decided at the beginning of 2001 to change our business strategy from a software engineering services model to a software products model. Accordingly, our business model is new and unproven and we will need to continue to develop it as we implement our new business strategy. Our ability to generate significant revenues with our new business model will depend, in large part, on our ability to successfully develop our software products and to effectively market them to existing and potential clients. We have offered our software product since October 2001, and to date have executed five license agreements. However, we have not executed any license agreements since April 2002. We intend to continue to develop our business model as the demand for our software products evolves. We expect that our financial model and results of operations will change as a result of our transition from a software engineering services model to a software products model. We do not have sufficient experience with the sale and support of our products to determine all of the effects this transition will have on our financial model and results of operations. Our new business strategy may not be successful and we may need to restructure or revise our business model or our restructurings done to date may leave us with insufficient personnel resources to execute this new business strategy

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

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

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

•

lack of a perceived need to embrace interaction server technology or our solution;

•

actual or perceived lack of security of information;

•

lack of access and ease of use;

•

congestion of Internet traffic or other usage delays;

•

inconsistent quality of support and services;

•

increases in access costs to the Internet;

•

evolving government regulation;

•

uncertainty regarding intellectual property ownership;

•

costs associated with licensing and implementing multi-channel interaction server technology;

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•

costs associated with the obsolescence of the multi-channel interaction server and existing infrastructure;

•

our economic viability and the economic viability of our competitors; and

•

the uncertainty resulting from a delay in the consummation of the Company’s proposed merger.

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

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

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

Our future success depends in large part on our ability to attract and retain highly trained and experienced software engineers as well as other technical personnel and sales and marketing professionals of various levels with experience in software products and related solutions. If we fail to attract and retain these personnel, we may be unable to timely develop new products and enhancements to our existing products, and to complete existing projects or bid for new projects of similar size, which could reduce our revenues. While attracting and retaining experienced software engineers is critical to our business and growth strategy, maintaining our current level of software engineer experience, averaging more than 14 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.

During the nine months ended September 30, 2003, we derived 100.0% of our revenues from our five largest customers, and we expect to continue to rely on a limited number of customers for a significant portion of our revenues; as a result, the loss of a customer could result in reduced revenues and earnings.

We currently derive and expect to continue to derive a significant portion of our revenues from a limited number of customers. As a result, the net loss of customers could reduce our revenues. During the nine months ended September 30, 2003, our five largest customers represented 100.0% of our revenues: CAPS Logistics, Inc., 36.1%; McDATA Corporation, 27.5%; Philips Medical Systems, N.A., 21.5%; Charles Machine Works, Inc., 10.2%; and Manheim Auctions, 4.7%. Many of these customers have completed the related software engineering services projects or Cysive Cymbio installations, and therefore, there is not a significant expected future revenue stream from these customers.

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

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

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

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

•

the lengthy sales cycle for our products and our level of product sales;

•

the loss of a significant customer;

•

financial difficulty encountered by a significant customer;

•

the introduction of new products or changes in pricing policies by us or our competitors;

•

any increased price sensitivity by our customers, particularly in the face of current adverse economic conditions and increased competition;

•

our ability to manage costs, including employee costs and support services costs;

•

costs related to restructurings and the under-utilization or closing of our offices; and

•

the uncertainty resulting from a delay in the consummation of the Company’s proposed merger.

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

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

We believe that our success will depend, in part, on our ability to enhance existing products and develop new products that meet the needs of a rapidly evolving marketplace and increasingly sophisticated and demanding customers. However, enhancement and development of products is a complex process involving several risks. Hiring and retaining highly qualified technical employees is critical to the success of our development efforts, and we face intense competition for these employees. Launches of products can be delayed for a variety of reasons, including the typically long development and testing periods. Further, new or improved products may also have “bugs” that hinder performance, or third party products we incorporate in, or use to build and support, our products, may contain defects that

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impair performance. These problems can be expensive to fix and can also result in higher technical support costs and lost customers. In addition, new products or features are sometimes built on top of older architectures or infrastructures, which can take longer to get to market, make quality assurance and support more difficult, and lead to complexity in supporting future functionality. Significant delays in new product enhancements or significant problems in creating new products may give competitors opportunities to improve their competitive position at our expense and result in declines in our revenues and earnings.

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

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

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

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

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

We expect to derive a substantial portion of our revenues from creating software products that are based upon the latest, most advanced technologies and are capable of adapting to future technologies. Our success depends on our ability to offer products that stay at the forefront of continuing changes in technology, evolving industry standards and changing customer preferences. Our failure to create products that use these technologies could cause us to lose current and potential business opportunities, resulting in reduced revenues. Additionally, to the extent technology becomes standardized or simplified, there may be less demand for our products.

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

The software product we offer is internally complex and, despite extensive testing and quality control, may contain errors or defects. We may need to issue corrective releases of our software product to fix any defects or errors. Any defects or errors could also cause damage to our reputation or suits for

-21-

damages and result in loss of revenues, product returns or order cancellations, or lack of market acceptance of our product. Accordingly, any defects or errors could have an adverse affect on our business, results of operations and financial condition.

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

Furthermore, our general liability insurance coverage may not continue to be available on reasonable terms or in sufficient amounts to cover one or more large claims, or the insurer may disclaim coverage as to any future claim.

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

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

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

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

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

A substantial portion of our custom software engineering services business involved the development of software applications for specific projects. Ownership of customer-specific software was generally retained by the customer, although we retained rights to some of the applications, processes and other intellectual property developed in connection with projects. We sometimes agreed, however, not to reuse this customer-specific software when building systems for a customer’s competitors. In addition, we occasionally agreed not to build any type of system for a customer’s competitors for limited periods of time, which have been as long as three years. These non-compete agreements reduce the number of our potential customers and our sources of revenues. We may enter into such non-compete agreements in the future.

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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.

Item 3. Quantitative and Qualitative Disclosure About Market Risk

We are exposed to interest rate risk related to our cash and interest-bearing investments. Our interest-bearing investments are generally comprised of variable rate securities that provide for optional or early redemption within twelve months, and the contractual maturities are generally greater than twelve months. As of September 30, 2003, we had total cash and interest-bearing investments of $121.1 million, and this balance is expected to continue to decline. We believe that a change in interest rates of 100 basis points or more could have a material impact on our investment income and cash flows.

We are potentially exposed to interest rate risk related to borrowings under our credit facility with Merrill Lynch & Co., Inc. We had no borrowings outstanding under our credit facility at September 30, 2003.

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures. We carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934, as amended) as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures are effective in timely reporting material information required to be included in our periodic reports filed with the Securities and Exchange Commission.

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

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PART II.

OTHER INFORMATION

Item 1. Legal Proceedings

On May 30, 2003 and over the following week, four putative class action complaints were filed in the Chancery Court of the State of Delaware, County of Newcastle, by certain named plaintiffs and an alleged class of unaffiliated stockholders of the Company. The complaints name the Company, its directors and (except for one complaint) Snowbird Holdings, Inc., a Delaware corporation (“Snowbird”), as defendants and allege that the Company and its directors engaged in acts of self-dealing and have violated fiduciary duties of due care and loyalty owed to the unaffiliated stockholders of the Company in connection with the transactions contemplated by that certain Agreement and Plan of Merger, dated as of May 30, 2003, among the Company, Snowbird and Snowbird Merger Sub, Inc., a Delaware corporation and wholly-owned subsidiary of Snowbird (“Merger Sub”), pursuant to which Merger Sub will be merged with and into the Company, with the Company being the surviving corporation and a wholly-owned subsidiary of Snowbird (the “Merger”). The complaints further allege that the Merger consideration is inadequate and unfair to the putative class and that the Company and its directors failed to make adequate good faith efforts to obtain a better price. The complaint seeks, among other things:

•

injunctive relief blocking the consummation of the Merger or, if it is consummated, rescinding the Merger;

•

an accounting by the defendants of any benefits received by them as a result of their allegedly wrongful conduct; and

•

costs and disbursements of the action, including attorneys’ and experts’ fees in unspecified amounts.

On June 10, 2003, defendants Mr. Carbonell and Snowbird moved the Chancery Court to consolidate the complaints into one action, to shorten the time for defendants to respond to the complaints, to expedite discovery and to set down a prompt trial date. On June 12, 2003, plaintiffs responded to the motion, indicating their agreement with all of the motion’s requests. On June 16, 2003, the Chancery Court granted the motion and set a trial date of July 22, 2003. The parties filed pretrial motions with the court on July 14, 2003. On July 18, plaintiffs filed an amended consolidated class action complaint. Trial commenced on Tuesday, July 22, 2003, and concluded on Thursday, July 24, 2003. During the two weeks following the conclusion of trial, the parties filed their post-trial briefs with the Court and on Friday, August 15, 2003, the Court issued its opinion, ruling in favor of the defendants on all counts and dismissing the plaintiffs’ claims in their entirety. In so ruling, the Court determined that the merger must be measured against the “entire fairness” standard under Delaware law. The Court then concluded that the proposed merger satisfied this heightened standard of scrutiny based on the procedural fairness of the merger and the financial fairness of the consideration being offered to Cysive stockholders. The plaintiffs had until September 25, 2003 to appeal the ruling. The plaintiffs did not appeal the ruling.

Item 2. Changes in Securities and Use of Proceeds

During the three months ended September 30, 2003, we issued a total of 491,717 shares of our common stock upon stock option exercises, and we also issued 29,422 shares of our common stock pursuant to stock purchases under our Employee Stock Purchase Plan. Proceeds from the exercise of stock options were nominal and were added to the Company’s general funds. On August 20, 2003, a former officer of the Company exchanged 22,419 outstanding shares of Cysive common stock owned by him to pay the exercise price of options to purchase 97,696 shares of Cysive common stock. The Company recorded the treasury shares under the par-value method.

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Item 6. Exhibits and Reports on Form 8-K

Exhibits:

31.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 – CEO,

31.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 – CFO,

32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 — CEO.

32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 — CFO.

Reports on Form 8-K:


		August 14, 2003		Announcement of the Company’s third quarter 2003 restructuring plan.
		August 15, 2003		Announcement of the Company’s third quarter 2003 restructuring plan, resulting in cost savings of approximately $805,757 per quarter.
		August 19, 2003		Announcement that the Delaware Court of Chancery dismissed, in its entirety, the consolidated securities class action complaint filed against the Company and its Board of Directors.
		September 15, 2003		Announcement that the Company and Snowbird Holdings, Inc. signed an amendment to the Agreement and Plan of Merger entered into between the two companies on May 30, 2003.

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Items 3, 4 and 5 are not applicable to the Company and have been omitted.

* * *

We would be pleased to furnish a copy of this Form 10Q to any stockholder who requests it by writing to:

Cysive, Inc.
Investor Relations
10790 Parkridge Boulevard
Suite 400
Reston, VA 20191

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized.

CYSIVE, INC.


Date: November 14, 2003 By:		/s/ John R. Lund John R. Lund Chief Financial Officer, Treasurer and Secretary (Chief Financial and Accounting Officer)

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CYSIVE INC 10-Q