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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002

Commission file number 0-27231

WIRELESS FACILITIES, INC.
(Exact name of Registrant as specified in its charter)

     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.

     As of November 7, 2002 there were 48,187,337 shares of the Registrant’s $0.001 par value Common Stock outstanding.

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WIRELESS FACILITIES, INC.

FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2002
INDEX

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

WIRELESS FACILITIES, INC.
CONSOLIDATED BALANCE SHEETS
(in millions, except par value and share amounts)

See accompanying notes to unaudited consolidated financial statements.

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WIRELESS FACILITIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in millions, except per share amounts)

See accompanying notes to unaudited consolidated financial statements.

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WIRELESS FACILITIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in millions)

See accompanying notes to unaudited consolidated financial statements.

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WIRELESS FACILITIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

(1) Organization and Summary of Significant Accounting Policies

(a) Description of Business

     Wireless Facilities, Inc. (“WFI”) was formed in the state of New York on December 19, 1994, began operations in March 1995 and was reincorporated in Delaware in 1998. WFI provides a comprehensive range of global outsourcing services to both wireless carriers and equipment vendors.  Such services include the design, deployment and management of client networks. WFI’s customers are primarily mature providers (with a small percentage comprising “early stage providers”) of cellular, PCS and broadband data services and equipment. WFI’s engagements range from small to large multi-year contracts. These services are billed either on a time and materials basis or on a fixed price, time certain basis.

(b) Basis of Presentation

     The information as of September 30, 2002, and for the three and nine month periods ended September 30, 2001 and 2002 is unaudited. In the opinion of management, these consolidated financial statements include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the results of operations for the interim periods presented. Interim operating results are not necessarily indicative of operating results expected in subsequent periods or for the year as a whole. These consolidated financial statements should be read in conjunction with the consolidated financial statements and the related notes included in WFI’s annual consolidated financial statements for the fiscal year ended December 31, 2001, filed on Form 10-K with the Securities and Exchange Commission on March 19, 2002.

     The consolidated financial statements include the accounts of WFI and its wholly-owned and majority-owned subsidiaries. WFI and its subsidiaries are collectively referred to herein as the “Company.”

(c) Use of Estimates

     The preparation of financial statements in conformity with United States Generally Accepted Accounting Principles (US GAAP) 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. In the future, the Company may realize actual results that differ from the current reported estimates.

(d) Reclassifications

     Certain prior period amounts have been reclassified to conform with the current period presentation.

(2) Goodwill and Intangible Assets – Adoption of SFAS 142

     On January 1, 2002, the Company adopted SFAS 142, “Goodwill and Other Intangible Assets,” at which time the Company reclassified $2.1 million of indefinite life intangible assets (i.e., assembled workforce) to goodwill, and ceased all future amortization of goodwill and other indefinite life intangible assets. SFAS 142 requires disclosure of what reported net income or loss and related per-share amounts would have been in periods prior to the adoption of SFAS 142 exclusive of amortization expense and any related tax effects, related to goodwill and other indefinite life intangible assets. Accordingly, the Company has presented below for comparability purposes “Adjustments” and “As Adjusted” financial results for the three and nine months ended September 30, 2001. The following is a reconciliation from reported to “As Adjusted” net loss and net loss per common share:

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     In accordance with the guidelines set forth by SFAS 142, the Company completed the first step of the transitional impairment test of goodwill and other intangible assets by the end of the second quarter of 2002.  The first step of the goodwill impairment test required the Company to determine and compare the estimated fair value of its defined reporting units to their carrying values as of January 1, 2002. The estimated fair value for each reporting unit was substantially determined using a discounted cash flow valuation analysis. The carrying values of each reporting unit was determined by specifically identifying and allocating the assets and liabilities of the Company to each reporting unit based on headcount, relative revenues or costs, or other allocation methods as deemed appropriate by management.  Management believes that the assumptions made for these analyses are reasonable and consistent. The estimated fair values exceeded the carrying values for each reporting unit, resulting in no indication of impairment.  Consequently, the second step of the impairment test was not required.

     As of September 30, 2002, management has not identified any additional triggering event that would deem the current carrying value of goodwill and other indefinite life intangible assets to have additional impairment.  As set forth in SFAS 142, the Company will formally document and measure the carrying value of all related goodwill, finite and indefinite life intangible assets on an annual basis.  The Company will complete this analysis during the fourth quarter of 2002, in accordance with the provisions of SFAS 142.

(3) Significant Transactions

(a) Impairment of Goodwill and Other Intangible Assets

     During the first quarter of 2002, the Company’s operations in Europe, the Middle East and Africa (“EMEA”) experienced an accelerated decline in revenue from its consulting (Questus) and network management (Telia Contracting) operating segments, which are referenced in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001. The initial EMEA 2002 operating plan assumed that the European markets for consulting and network management services would realize a modest level of growth.  Specifically, the initial 2002 operating plan assumed that new service contracts would be procured or extended, accounting for a significant portion of the 2002 budgeted revenue and corresponding revenue growth in 2003.  Furthermore, these contracts were anticipated to have high margins that are typical of pre-deployment consulting service contracts.  For the network management segment, the initial 2002 operating plan assumed the renewal of certain contracts in mid-year 2002 which were expected to have nominal revenue growth in 2003 and 2004.

     After the finalization of the February 2002 year to date actual results for both the EMEA consulting (Questus) and network management (Telia Contracting) operating segments, the respective segments posted continued declining revenues and margins and increased selling, general and administrative costs, primarily as a result of ongoing underutilization of billable employees and corporate service overhead. Through February 2002, the overall European markets continued to realize a lack of significant capital expansion with respect to the major telecommunication carriers, as evidenced by the lack of certain anticipated contracts

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as noted above.  Revised 2002 financial projections for the EMEA consulting and network management segments indicated ongoing probable losses with minimal improvement in subsequent years.  Furthermore, based on the current cost structure in EMEA, it appeared unlikely that the Company would be able to significantly reduce related selling, general and administrative costs to a level that would allow for profitability for the respective segments. Based on these triggering events, and after evaluating the related undiscounted cash flows in relationship to the segment’s identifiable net assets in accordance with SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” and SFAS 142, “Goodwill and Other Intangible Assets,” it was determined that such cash flows on an undiscounted basis would be insufficient to cover the net book value of the related identifiable net assets. As a result, the related intangible assets were deemed fully impaired and the Company recognized a charge of $19.9 million representing all goodwill, indefinite life and finite life intangible assets related to EMEA at March 31, 2002.  The charge is a component of asset impairment charges as recorded within the Company’s operating expenses for the nine months ended September 30, 2002. 

(b) Loss on Unused Office Space

     During the first quarter of 2002, the Company’s operating results reflected the continued lack of improvement in the financial markets and economic environment of the telecommunications industry. Furthermore, it was determined that the prior significant growth in several metropolitan markets had resulted in a surplus of commercial lease space.  This surplus of available office space has hindered the Company’s ability to sublease its existing unused office space. As a result, management re-assessed the market conditions surrounding its unused office space, the likelihood of achieving certain sublease rates and the overall recoverability of its related operating lease expenses. As a result, the Company calculated the estimated loss on unused office space to approximate $10.0 million and recorded the charge as a component of selling, general and administrative expenses during the quarter ended March 31, 2002, bringing the accrued loss on unused office space balance to $11.3 million at March 31, 2002. The accrual for loss on unused office space as of September 30, 2002 declined to $10.2 million, reflecting subsequent systematic and periodic offsets as computed on a straight-line basis, to lease payments totaling approximately $0.5 million and $1.0 million during the three and nine months ended September 30, 2002, respectively.

(c) Shut Down of Network Operating Center (NOC)

     Based on the continued negative results of operations from the Company’s NOC subsidiary and current economic conditions as of March 31, 2002, management approved and committed the Company to an Exit Plan for this legal subsidiary effective March 31, 2002.  In accordance with EITF 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)”, the Company recorded the following charges related to this exit plan (all charges are deemed incremental and not related to the ongoing operations of the facility during the “exit period”).  Fixed assets with net book value of $0.8 million were disposed of as of March 31, 2002.  These assets included certain electronic equipment and leasehold improvements with no readily determinable salvage value. The total amount disposed is recorded as a component of asset impairment charges for the quarter ended March 31, 2002.  A charge totaling $0.3 million, related to severance and contract termination costs that were deemed incremental costs associated with the shut down of the NOC, was recognized as a component of selling, general and administrative expenses during the quarter ended March 31, 2002.  At September 30, 2002, the balance of the accruals for severance and contract termination costs approximated $0.2 million.

     Subsequent to September 30, 2002, the Company’s management executed the final steps relating to its exit plan whereby, effective November 1, 2002, all remaining customer contracts and employees were terminated and the business ceased operations.

(d) Allowance for Doubtful Accounts

     Certain of the Company’s customers continue to face a challenging financial and operating environment due to the volatile capital markets and uncertain economic conditions both domestically and internationally within the wireless telecommunications industry.  As a result, and pursuant to the Company’s periodic assessment regarding the expected collectibility of its trade account receivable balances (billed and unbilled), certain additional amounts were identified as potentially uncollectible during 2002.  Based on this analysis, the Company provided $10.0 million, $1.9 million and $0.2 million of additions to its allowance for doubtful accounts during the quarters ended March 31, 2002, June 30, 2002 and September 30, 2002, respectively.  A significant portion of these allowances relates to estimates for trade receivable balances in Latin America due to the ongoing economic volatility in this region and associated risk to the Company.

     During the third quarter ended September 30, 2002, the Company settled its outstanding claim with Metricom, Inc. and subsequently sold its entire rights to the Metricom claim to a consortium of bankruptcy claims brokers. The Company received net proceeds of $1.7 million resulting in a net reduction to bad debt expense (a component of selling, general and administrative expenses) during the third quarter ended September 30, 2002. The Company had provided an allowance for the entire receivable balance when Metricom, Inc. filed for bankruptcy protection during the second quarter of 2001.  As a result of the settlement, the entire trade receivable balance was written off against the corresponding allowance for doubtful accounts during the third quarter ended September 30, 2002.

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(e) Valuation Allowance on Deferred Tax Assets

     In assessing the realizability of deferred tax assets, management considers, on a periodic basis, whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.  Based upon a revision to the projections for future taxable income during the quarter ended March 31, 2002, management increased the valuation allowance on deferred tax assets during the quarter ended March 31, 2002, resulting in the recognition of a provision for income tax expense during the period.  The increase in valuation allowance applies to all U.S. (federal and state) and foreign taxable loss carryforwards generated in the current period, as well as an additional portion of prior year loss carryforwards and cumulative temporary differences. As of September 30, 2002, management deems the current valuation allowance on deferred tax assets to be sufficient based upon current projected future taxable book income.

(4) Net Income (Loss) Per Common Share

     The Company calculates net income (loss) per share in accordance with SFAS No. 128, “Earnings Per Share”. Under SFAS No. 128, basic net income (loss) per common share is calculated by dividing net income (loss) by the weighted-average number of common shares outstanding during the reporting period. Diluted net income (loss) per common share reflects the effects of potentially dilutive securities. Weighted average shares used to compute basic and diluted net income (loss) per share are presented below (in millions):

     The following instruments were not included in the calculation of diluted net income (loss) per share because the effect of these instruments was anti-dilutive (in millions):

(5) Segment Information

     The Company’s operations are organized along service lines and include three reportable industry segments: Design and Deployment, Network Management and Business Consulting. Due to the nature of these services, the amount of capital assets used in providing services to customers is not significant. Revenues and operating income (loss) provided by the Company’s industry segments for the three and nine months ended September 30, 2001 and 2002 are as follows (in millions):

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     Revenues derived by geographic region are as follows (in millions):

(6) Line of Credit and Note Payable

     In May 2002, the Company repaid the $33.0 million line of credit outstanding balance and terminated its line of credit agreement.  Additionally, in June 2002, the Company repaid the $0.6 million outstanding note payable balance.

(7) Preferred Stock

     In May 2002, the Company issued an aggregate of 90,000 shares of Series B Convertible Preferred Stock, at an aggregate purchase price of $45.0 million, in a private placement to entities affiliated with a director and to the brother of the Chairman and Chief Executive Officer of the Company. The Company received $44.9 million of proceeds, net of $0.1 million of issuance costs paid by the Company. Each share of Series B Convertible Preferred Stock is initially convertible into 100 shares of Common Stock for a common stock conversion price of $5.00 per share at the option of the holder at any time subject to certain provisions in the Series B Preferred Stock Purchase Agreement. After November 2004, the Series B Convertible Preferred Stock will automatically convert into shares of the Company’s Common Stock if and when the Company’s Common Stock trades at or above $11.00 per share for 30 consecutive trading days after that date. Upon any liquidation event, as defined in the agreement, each outstanding share of Series B Convertible Preferred Stock is entitled to receive $500.00 per share (or a common stock conversion price of $5.00 per share) as a liquidation preference, in preference to any amounts paid to holders of Common Stock.  Subject to certain exceptions, the Series B Convertible Preferred Stock has anti-dilution protection, whereby any future new issuances of securities by the Company before November 30, 2003 below $5.00 per share would trigger the anti-dilution protection for the Series B Convertible Preferred Stock.  If triggered, this protection would decrease the conversion price of the Series B Convertible Preferred Stock to the lowest price per share received by the Company for such issuance of securities.  However, the conversion price may not be decreased to less than $4.17 per share.

     In October 2001, the Company issued an aggregate of 63,637 shares of Series A Convertible Preferred Stock for a common stock conversion price of $5.50 per share.  Subject to certain exceptions, the Series A Convertible Preferred Stock has anti-dilution protection, whereby any future new issuances of securities by the Company below $5.50 per share would trigger the anti-dilution protection for the Series A Convertible Preferred Stock.  If triggered, this protection would decrease the conversion price of the Series A Convertible Preferred Stock to the lowest price per share received by the Company for such issuance of securities.  However, the conversion price may not be decreased to less than $3.77 per share.  Since the anti-dilution protection clause of the Series A Convertible Preferred Stock was triggered by the Company’s issuance of Series B Convertible Preferred Stock, the holders of Series A Convertible Preferred Stock are entitled to receive, in the aggregate, an additional 636,300 shares of Common Stock upon future conversion based on a reduction in the Common Stock conversion price from $5.50 to $5.00 per share.

(8) Related Party Transactions

     During 2001 and 2002, the Company’s Latin American subsidiaries, WFI de Mexico and Wireless Facilities Latin America Ltda., entered into certain transactions with JFR Business Corporation International S. de R.L. de C.V. (“JFR”) and its related affiliates (collectively, “JFR and affiliates”).  The General Manager of WFI de Mexico is the brother of the Chairman and the Chief Executive Officer of the Company and holds a majority ownership interest in each of these entities. The primary business purpose for transacting business with JFR and affiliates relates to obtaining improved service and response compared to independent businesses providing such services, at market or less than market rates. WFI de Mexico contracted with JFR and affiliates during 2001 and 2002 for various services including automobile leasing, computer leasing, corporate and project related personnel services and construction services. Additionally, during 2001 JFR contracted with Wireless Facilities Latin America Ltda. for subcontractor engineering services for certain of its customer contracts.  The total net amount owed to JFR as of September 30, 2002 is $1.0 million for services under these related party contracts. The Company believes that the terms under these contracts are comparable to amounts that the Company could have negotiated under contracts with unaffiliated third parties for such services.  At September 30, 2002, except as noted above, there exists no other commitments or guarantees between JFR and affiliates and the Company.

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     In April 2001, WFI entered into a Strategic Teaming Agreement with GlobTel Holdings, Ltd. to market telecommunications outsourcing services in the Middle East on a non-exclusive basis. GlobTel is significantly owned by Massih Tayebi, a former Chairman of the Company and brother of Masood K. Tayebi, the current Chairman and Chief Executive Officer of the Company. In August 2001, WFI and GlobTel executed a Master Service Agreement whereby WFI or its designated affiliates would perform telecommunications outsourcing services. In August 2002, WFI Ltd., a wholly-owned subsidiary of the Company, commenced an engagement for GlobTel pursuant to the Master Services Agreement (MSA) entered into in August 2001. The Company received zero and $0.1 million from GlobTel for services provided under this agreement during the three and nine months ended September 30, 2002, respectively. As of September 30, 2002, there were no outstanding trade receivable balances from GlobTel. WFI and GlobTel continue to pursue future opportunities. If GlobTel is successful in securing new customer contracts in the foreseeable future, and WFI is selected to procure services pursuant to such contracts and the MSA, management expects WFI will recognize increased revenue, trade receivable balances and cash activity from GlobTel. The Company believes that the terms under this contract are comparable to amounts that the Company could have negotiated under contracts with unaffiliated third parties for such services. At September 30, 2002, except as noted above, there exist no other commitments or guarantees between GlobTel and the Company.

     During the second quarter of 2002, an agreement was executed between WFI and the Chief Financial Officer, whereby the repayment terms of the house relocation loan receivable of $0.3 million and related tax payment from the officer will be forgiven over the term of the officer’s future employment with the Company.

     At September 30, 2002, the Company did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.  In addition, the Company does not engage in trading activities involving non-exchange traded contracts.  As such, the Company is not materially exposed to any financing, liquidity, market or credit risk that could arise if the Company had engaged in such relationships.

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

     This report contains forward-looking statements. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential” or “continue,” the negative of such terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially.

     Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we, nor any other person, assumes responsibility for the accuracy and completeness of the forward-looking statements. We are under no obligation to update any of the forward-looking statements after the filing of this Quarterly Report on Form 10-Q to conform such statements to actual results or to changes in our expectations.

     The following discussion should be read in conjunction with our consolidated financial statements and the related notes and other financial information appearing elsewhere in this Form 10-Q. Readers are also urged to carefully review and consider the various disclosures made by us which attempt to advise interested parties of the factors which affect our business, including without limitation the disclosures made under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” under the caption “Risk Factors,” and the audited consolidated financial statements and related notes included in our Annual Report filed on Form 10-K for the year ended December 31, 2001 and other reports and filings made with the Securities and Exchange Commission.

Overview

     Wireless Facilities, Inc. offers network engineering, deployment, and network operations and maintenance services to the wireless telecommunications industry.  For the nine months ended September 30, 2001, our design and deployment network management, and business consulting segments contributed to 76%, 20%, and 4% of our revenues, respectively, compared to 76%, 21%, and 3% of our revenues, respectively, for the nine months ended September 30, 2002.  Revenues from our international operations contributed 34% and 20% of our total revenues for the nine months ended September 30, 2001 and 2002, respectively.

     Revenues from deployment projects are generated primarily from fixed price contracts which are recognized using the percentage-of-completion method. Under the percentage-of-completion method of accounting, cost of revenues on each project are recognized as they are incurred, and revenues are recognized based on a comparison of the current costs incurred for the

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project to date compared to the then estimated total costs of the project from start to completion. Accordingly, revenue recognized in a given period depends on the total actual costs incurred on each individual project and the current estimate of the total costs to complete a project, determined at that given time. As a result, gross margins for any single project may fluctuate as total project cost estimates are revised on a periodic basis as deemed necessary. The full amount of an estimated loss is charged to operations in the period that it is determined a loss will be realized from the performance of a contract. Engineering contracts are primarily offered on a time and expense basis, and revenues are recognized as services are performed. We typically charge a fixed monthly fee for ongoing radio frequency optimization and network operations and maintenance services. With respect to these services, we also recognize revenue as services are performed.

     Cost of revenues includes direct compensation and benefits, living and travel expenses, payments to third-party sub-contractors, allocation of corporate overhead, costs of expendable computer software and equipment, and other direct project-related expenses. Direct compensation and benefits are computed based on standard costs and actual hours billed. We review these standard costs periodically and record any necessary adjustments as deemed applicable, to ensure they are comparable to actual costs.

     Selling, general and administrative expenses include compensation and benefits, costs associated with underutilization, computer software and equipment that do not meet the criteria for capitalization, net facilities expenses and other expenses not directly related to projects.

     During 2001 and continuing through the third quarter of 2002, tightened capital markets constrained the growth of the wireless telecommunications industry, resulting in delays and changes to scopes of work for the build-outs of wireless communications networks. If build-outs and deployments of wireless communications networks continue to be delayed for a sustained period of time, the demand for our services and the prices that we are able to charge for our services may decline, which would result in a decline in our revenues, gross margins and results from operations. However, despite the continuing economic challenges within the industry, our domestic operations experienced improved financial results as a result of certain significant contracts that were executed in early 2002, offset by weakened gross margins in our Latin America subsidiaries during the three months ended September 30, 2002, due to continued volatile economic and weakened industry conditions in this region.

     Additionally, although we cannot accurately anticipate the effect of inflation on our operations, we do not believe that inflation has had, or is likely in the foreseeable future to have, a material impact on our net revenues or results of operations.

     Under our new business model and internal cost structure implemented during the first quarter of 2002, we have a reduced work force and flexibility over our ongoing costs, thus allowing for improved management of underutilization costs and better alignment of such costs with fluctuations in our future revenues. The Company has begun to realize the benefits from these cost reduction programs and will continue to pursue further strategies to improve its financial performance.

Results of Operations

Comparison of Results for the Three Months Ended September 30, 2001 to the Three Months Ended September 30, 2002

     Revenues. Revenues decreased 10% from $54.8 million for the three months ended September 30, 2001 to $49.1 million for the three months ended September 30, 2002. The $5.7 million decrease resulted primarily from a decline in operations in our Latin America markets resulting from a lack of additional new projects and contractions in scope of work with certain existing customers in the region. During the three months ended September 30, 2002, the international markets continued to realize a lack of significant capital expansion with respect to the major telecommunication carriers. 

     Cost of Revenues. Cost of revenues for three months ended September 30, 2001 were $37.0 million compared to $37.2 million for the three months ended September 30, 2002.  Gross profit was 32% of revenues for the three months ended September 30, 2001 compared to 24% for the three months ended September 30, 2002. The decrease in gross profit reflects the continuation of strong industry pricing pressures, especially affecting certain domestic fixed price work, and the Latin America operations where time delays and changes to scopes of work have created additional costs with disproportionate incremental revenues.

     Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased 46% from $15.9 million for the three months ended September 30, 2001 to $8.6 million for the three months ended September 30, 2002. As a percentage of revenues, selling, general and administrative expenses decreased from 29% for the three months ended September 30, 2001 to 18% for the three months ended September 30, 2002.  The decrease reflects a reduction in staffing levels by 18%, or approximately 300 employees (from September 30, 2001), and related personnel costs. Various cost reduction and savings initiatives, including the adoption of a variable cost model in the first quarter of 2002, resulted in lower administrative expenses.  Approximately $1.7 million of the decrease relates to a net reduction to bad debt expense during the third quarter ended September 30, 2002 resulting from net proceeds received from the settlement of a claim with Metricom, Inc. whereby the entire

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rights to the claim was sold to a consortium of bankruptcy claims brokers. Furthermore, approximately $0.5 million has been offset against office lease payments for the three months ended September 30, 2002 as a result of the systematic, straight-line depletion of the accrual for unused office space that was recorded in the first quarter of 2002.

     Depreciation and Amortization Expense. Depreciation and amortization expense decreased 70% from $5.6 million for the three months ended September 30, 2001 to $1.7 million for the three months ended September 30, 2002. Approximately $2.9 million of the decline is primarily due to the adoption of SFAS 142, “Goodwill and Other Intangible Assets,” whereby amortization of goodwill and intangible assets with indefinite lives ceased effective January 1, 2002.  Additionally, the decrease reflects the elimination of amortization for certain finite life intangible assets in our EMEA operations (Questus and Telia Contracting operating segments, which are referenced in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001) which were deemed impaired and fully written off effective March 31, 2002.

     Other Income (Expense), Net. For the three months ended September 30, 2001, net other expense was $0.2 million as compared to net other income of $0.9 million for the three months ended September 30, 2002. This $1.1 million positive change is attributable to lower interest expense of $0.8 million resulting from the payoff of our line of credit and other debt balances during the second quarter 2002 and higher interest income of $0.4 million, resulting from higher cash balances during 2002, offset by $0.1 million of lower net other income.

     Provision for Income Taxes. Our effective income tax rate changed from a 26% benefit during the third quarter of 2001 to zero during the third quarter of 2002.  The change is based upon a revision of projections regarding future taxable income.  For the third quarter of 2002, no provision was recorded as a result of the Company’s expected ability to utilize existing deferred tax assets which resulted primarily from prior period net operating losses.

Comparison of Results for the Nine Months Ended September 30, 2001 to the Nine Months Ended September 30, 2002

     Revenues. Revenues decreased 16% from $162.2 million for the nine months ended September 30, 2001 to $136.0 million for the nine months ended September 30, 2002. The $26.2 million decrease was primarily attributable to a lack of significant capital expansion or the suspension of existing projects by certain telecommunication carriers specifically in the Latin America region. Revenues from international markets declined from 34% to 20% of our total revenues during the nine months ended September 30, 2001 and 2002, respectively.  Domestic revenues for the nine months ended September 30, 2002 reflect a net increase of $2.5 million compared to the nine months ended September 30, 2001. Despite the loss of certain significant customers during mid-year 2001, this was substantially replaced by our ability to execute certain significant contracts during early 2002, such as our subcontract agreement with Bechtel Corporation.

     Cost of Revenues. Cost of revenues decreased 7% from $108.6 million for the nine months ended September 30, 2001 to $101.4 million for the nine months ended September 30, 2002 primarily due to the generally lower revenues compared to the same period in 2001 and the cancellation of work with certain significant customers which created higher costs due to demobilization costs and downsizing of billable staff in the second half of 2001.  This decrease, however, is also offset by higher costs incurred on projects, particularly in our Latin America operations where client imposed delays and changes to scopes of work have caused a shift in utilization of billable staff efforts. Gross margin was 33% of revenues for the nine months ended September 30, 2001, compared to 25% for the nine months ended September 30, 2002. The decrease in gross profit is due primarily to the continuation of strong industry pricing pressures, especially affecting certain domestic fixed price work, and the Latin America operations where time delays and changes to scopes of work have created additional costs with disproportionate incremental revenues.

     Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased 25% from $86.5 million for the nine months ended September 30, 2001 to $64.7 million for the nine months ended September 30, 2002. There were certain significant charges recorded during the first nine months of 2001, such as bad debt expense of $21.2 million related to receivables from certain customers who filed for bankruptcy in 2001, an accrual for estimated loss on unused office space of $1.4 million and a $2.2 million charge for estimated contractor liability in our Mexico subsidiary. During the first quarter of 2002, significant charges including $10.0 million for bad debt expense, $10.0 million for estimated loss on unused office space, $2.8 million for certain employee compensation and severance costs and other general and administrative charges accumulating to $5.2 million were also recorded. Excluding these charges, selling, general and administrative expenses for the nine months ended September 30, 2001 and 2002 would have been $61.7 million and $36.7 million, respectively.  The resulting decrease of 41%, excluding these significant charges, reflects a reduction in staffing levels by 18%, or approximately 300 employees  (from September 30, 2001), and related personnel costs and significantly lower administrative expenses as a result of various cost reduction and savings initiatives, including the adoption of a variable cost model in the first quarter of 2002. Additionally, approximately $1.0 million has been offset against office lease payments for the nine months ended September 30, 2002 as a result of the systematic, straight-line depletion of the accrual for unused office space that was recorded in the first quarter of 2002.

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     Depreciation and Amortization Expense. Depreciation and amortization expense decreased 64% from $16.5 million for the nine months ended September 30, 2001 to $6.0 million for the nine months ended September 30, 2002.  Approximately $7.6 million of the decline is primarily due to the adoption of SFAS 142, “Goodwill and Other Intangible Assets,” whereby amortization of goodwill and intangible assets with indefinite lives ceased effective January 1, 2002. Additionally, the decrease reflects the elimination of amortization for certain finite life intangible assets in our EMEA operations (Questus and Telia Contracting operating segments) which were deemed impaired and written off at March 31, 2002.

     Asset Impairment Charges. For the nine months ended September 30, 2001, asset impairment charges were $12.9 million, compared to $21.1 million for the nine months ended September 30, 2002. The slowdown in the economy, existing economic conditions and visible trends in the telecommunications industry triggered an impairment evaluation by the Company of its goodwill and other intangible assets during the second quarter of 2001 and again during the first quarter of 2002. Based on the Company’s analyses of the results of operations and projected future cash flows associated with certain goodwill and other intangible assets, the Company determined that an impairment of certain long-lived assets existed.  Accordingly, the Company recorded impairment charges of $12.9 and $21.1 in the second quarter of 2001 and the first quarter of 2002, respectively.  The impairment charges were determined as the amount by which the carrying amount of the assets exceeded the present value of the estimated future cash flows.   The impairment charge in 2002 did not result from the SFAS 142 transitional impairment test, but was a result of a triggering event identified during the first quarter of 2002.

     Other Income (Expense), Net. For the nine months ended September 30, 2001, net other expense was $4.8 million compared $0.3 million net other income for the nine months ended September 30, 2002. This $5.1 million positive change was attributable to lower interest expense of $1.0 million resulting from the reduction of outstanding debt, higher interest income of $0.6 million due to the higher cash balances in 2002, net foreign currency gains of $3.0 million in 2002 due to higher international activity combined with the effects of foreign currency fluctuations during these periods, a realized loss in 2001 on available-for-sale investment securities of $1.0 million which did not repeat in 2002, offset by $0.5 million of lower net other income.

     Provision for Income Taxes. Our effective income tax rate for the nine months ended September 30, 2001 represented a 26% income tax benefit compared to an 18% income tax expense for the nine months ended September 30, 2002. The tax provision of $10.1 million for the nine months ended September 30, 2002 reflects an increase to the valuation allowance on deferred tax assets based upon expected deferred asset recoverability resulting from a downward revision to the projections of future taxable income assessed in early 2002.  The increase in the valuation allowance applies to U.S. (federal and state) and foreign taxable loss carryforwards generated in the current period, as well as an additional portion of prior year loss carryforwards and cumulative temporary differences.

Liquidity and Capital Resources

     Our sources of cash liquidity included cash and cash equivalents, cash from operations and other external sources of funds.  As of September 30, 2002, we had cash of $83.0 million.   On May 31, 2002, our $33.0 million outstanding line of credit balance was paid in full and we terminated our line of credit agreement. 

     Cash from operations is primarily derived from our customer contracts in progress and changes in working capital. Cash provided by operations was $0.4 million and $18.4 million for the nine months ended September 30, 2001 and 2002, respectively.

     Cash used in investing activities was $4.3 million and $3.0 million for the nine months ended September 30, 2001 and 2002, respectively.  Investing activities for the nine months ended September 30, 2001 and 2002 consisted of capital expenditures.

     Cash used in financing activities for the nine months ended September 30, 2001 was $2.1 million, which consisted primarily of net repayment of borrowings under the line of credit, repayments of notes payable and capital lease obligations partially offset by proceeds from the issuance of common stock. Cash provided by financing activities was $8.6 million for the nine months ended September 30, 2002. Financing activities for this period consisted primarily of net proceeds from the issuance of Series B Convertible Preferred Stock totaling $44.9 million and proceeds from the issuance of common stock of $2.1 million from exercises of employee stock options and purchases under the Company’s employee stock purchase plan, offset by the $33.0 million repayment of the remaining outstanding balance of the line of credit, a $0.6 million repayment of an outstanding note payable and the $4.8 million payments of capital lease obligations.

     As discussed in the “Risk Factors” section of this Quarterly Report on Form 10-Q, our quarterly and annual operating results have fluctuated in the past and may vary in the future due to a variety of factors, many of which are outside of our control.  Following the receipt of $44.9 million in net proceeds from the sale of Series B Convertible Preferred Stock, we repaid and terminated our line of credit agreement in order to reduce interest expense and related commitment fees. If the downturn in the telecommunications industry continues or if we are unable to sufficiently increase our revenues and/or further reduce our expenses,

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we may experience a negative impact to our financial results and cash flows from operations, thus limiting our available liquidity and capital resources.

     Currently we have no material cash commitments other than our normal recurring trade payables, expense accruals and operating and capital leases which are currently expected to be paid through existing and future cash flows from operations. Aside from these normal business operating expenses, future capital expenditures will depend upon many factors, including the timing of payments under existing contracts and technology requirements within the wireless telecommunications industry. We continuously evaluate and leverage the latest technology relative to electronic equipment and software used in our business operations.  Additional capital expenditures may be required as deemed necessary, in order to stay competitive with our resources and effectively service our customers.

     We believe that our cash and cash equivalent balances will be sufficient to satisfy cash requirements for the next twelve months. We are focused on preserving and improving cash by continuously monitoring expenses, identifying effective cost savings programs and effectively managing our accounts receivable collection efforts.

Critical Accounting Principles and Estimates

     In response to the SEC’s Release Numbers 33-8040 “Cautionary Advice Regarding Disclosure About Critical Accounting Policies” and 33-8056, “Commission Statement about Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the Company has identified the following critical accounting policies that affect its more significant judgments and estimates used in the preparation of its consolidated financial statements. The preparation of the Company’s financial statements in conformity with accounting principles generally accepted in the United States of America requires management of the Company to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On a periodic basis, the Company evaluates its estimates, including those related to revenue recognition, allowance for doubtful accounts, valuation of long-lived assets including goodwill and identifiable intangibles, accounting for income taxes including the related valuation allowance, accruals for self-insurance and compensation and related benefits, and contingencies and litigation. We explain these accounting policies in the notes to the consolidated financial statements and at relevant sections in this discussion and analysis. These estimates are based on the information that is currently available and on various other assumptions that are believed to be reasonable under the circumstances. Actual results could vary from those estimates under different assumptions or conditions.

     We believe the following critical accounting policies affect the Company’s more significant judgments and estimates used in the preparation of its consolidated financial statements.

     Revenue recognition. We derive our revenue primarily from long-term contracts and account for these contracts under the provisions of Statement of Position 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts.” Revenue on time and materials contracts is recognized as services are rendered at contract labor rates plus material and other direct costs incurred. Revenue on fixed price contracts is recognized on the percentage-of-completion method based on the ratio of total costs incurred to date compared to estimated total costs to complete the contract. Estimates of costs to complete include material, direct labor, overhead, and allowable general and administrative expenses. These estimates are reviewed on a contract-by-contract basis, and are revised periodically throughout the life of the contract such that adjustments to profit resulting from revisions are made cumulative to the date of the revision. The full amount of an estimated loss is charged to operations in the period it is determined that a loss will be realized from the performance of a contract. Significant management judgments and estimates, including the estimated costs to complete projects, which drives the project’s percent complete, must be made and used in connection with the revenue recognized in any accounting period. Material differences may result in the amount and timing of our revenue for any period if management made different judgments or utilized different estimates. In addition, many of our contracts include milestone billings. If a contract is terminated or reduced in scope prior to a milestone billing, we may not be able to recover the full amount of revenue recognized, which would result in a reduction of revenue and gross margin in the respective period.

     Allowance for doubtful accounts. We maintain an allowance for doubtful accounts for estimated losses resulting from the potential inability of certain customers to make required future payments on amounts due to the Company. Management determines the adequacy of this allowance by periodically evaluating individual customer accounts receivable balances considering the customer’s current financial situation as well as the existing industry and economic conditions. If the future financial condition of our customers were to further deteriorate, resulting in their inability to make specific required payments, additions to the allowance for doubtful accounts may be required.

     Valuation of long-lived and intangible assets and goodwill. We have recorded significant amounts of goodwill and finite life and indefinite life intangible assets resulting from the acquisitions we have completed over the prior periods. Management assesses the impairment of identifiable intangibles, long-lived assets and related goodwill whenever events or changes in circumstances indicate that the

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carrying value may not be recoverable, but at a minimum on an annual basis. Factors we consider relevant which could trigger an impairment review include, but are not limited to, the following:

     When we determine that the carrying value of intangibles, long-lived assets and related goodwill may not be recoverable based upon the existence of one or more of the above indicators of impairment, we measure any impairment based substantially on a projected discounted future cash flow method using a discount rate determined by our management to be commensurate with the risk inherent in our current business model combined with other readily available and other relevant information. Net intangible assets, long-lived assets, and goodwill was $64.2 million as of September 30, 2002.

     On January 1, 2002, SFAS No. 142 became effective and as a result, we ceased amortization of goodwill and indefinite lived intangible assets.  Through December 31, 2001, goodwill was amortized on a straight-line basis over lives ranging from 5 to 20 years, and intangibles were amortized on a straight-line basis over lives ranging from 2 to 5 years. In lieu of amortization, we are required to perform an initial impairment review of our goodwill and intangible assets with indefinite lives in 2002 and an annual impairment review thereafter. The first step of the goodwill impairment test required the Company to determine and compare the fair value of its defined reporting units to their carrying values as of January 1, 2002. The fair value for each reporting unit was determined using a discounted cash flow valuation analysis. The carrying values of each reporting unit was determined by specifically identifying and allocating the assets and liabilities of the Company to each reporting unit based on headcount, relative revenues or costs, or other methods as deemed appropriate by management.  Management believes that the assumptions made for these analyses are reasonable and consistent. The estimated fair values exceeded the carrying values for each reporting unit, resulting in no indication of impairment.  Consequently, the second step of the impairment test was not required.  If we are required to record an impairment charge in the future, it could have an adverse impact on our results of operations.

     As of September 30, 2002, management has not identified any additional triggering event(s) that would deem the current carrying value of goodwill and other indefinite life intangible assets to have additional impairment.  As set forth in SFAS 142, the Company will formally document and measure the carrying value of all related goodwill, finite and indefinite life intangible assets on an annual basis.  The Company will complete this analysis during the fourth quarter of 2002, in accordance with the provisions of SFAS 142.

     Accounting for income taxes. As part of the process of preparing our consolidated financial statements we are required to estimate our income taxes in each of the jurisdictions in which we conduct business. This process involves estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of certain items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are netted and included within our consolidated balance sheet. We must then assess the probability that our net deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not probable, a valuation allowance is established to mitigate such risk resulting in a related provision for income taxes during the period in which this is determined. If we are required to further increase the valuation allowance in the future, it could have an adverse impact on our results of operations.

     Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. We have recorded a valuation allowance of $27.0 million as of September 30, 2002, due to uncertainties related to our ability to utilize certain deferred tax assets, primarily consisting of certain net operating losses carried forward and foreign tax credits, before they expire. The valuation allowance is based on our estimates of future taxable income by jurisdiction in which we operate and the period over which our deferred tax assets will be recoverable. In the event that actual results differ from these estimates or we adjust these estimates in future periods, our financial position and results of operations could be materially impacted. Net deferred tax liabilities as of September 30, 2002 were $1.6 million comprising deferred tax assets of $38.9 million, valuation allowance of $27.0 million and deferred tax liability of $13.5 million.

     Accrual for partial self insurance. The Company maintains an accrual for its health and workers compensation self-insurance, which is a component of accrued expenses in the consolidated balance sheets. Management determines the adequacy of these accruals by periodically evaluating our historical experience and trends related to both health and workers compensation claims and payments, information provided to us by our insurance broker, industry experience and trends and average lag period in which claims are paid. If such information indicates that our accruals are overstated or understated, we will adjust the

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assumptions utilized in our methodologies and reduce or provide for additional accruals as appropriate.  The Company also carries stop-loss insurance that provides coverage limiting its total exposure related to each medical and workers compensation claim incurred, as defined in the applicable insurance policies.

     Contingencies and litigation. The Company is subject to various claims and legal actions in the ordinary course of our business. Although we are currently not aware of any such pending or threatened litigation that we believe is reasonably likely to have a material adverse effect on us, if we become aware of such assessments against the Company, we will evaluate the probability of an adverse outcome and provide accruals for such contingencies as necessary. See Part II Item 1. Legal Proceedings of this Quarterly Report on Form 10-Q regarding our assessment of the probability of current and future adverse effects on the Company.

Related Party Transactions

     In May 2002, the Company issued an aggregate of 90,000 shares of Series B Convertible Preferred Stock, at an aggregate purchase price of $45.0 million, in a private placement to entities affiliated with a director and to the brother of the Chairman and Chief Executive Officer of the Company. The Company received $44.9 million of proceeds, net of $0.1 million of issuance costs paid by the Company. Each share of Series B Convertible Preferred Stock is initially convertible into 100 shares of Common Stock for a common stock conversion price of $5.00 per share at the option of the holder at any time subject to certain provisions in the Series B Preferred Stock Purchase Agreement. After November 2004, the Series B Convertible Preferred Stock will automatically convert into shares of the Company’s Common Stock if and when the Company’s Common Stock trades at or above $11.00 per share for 30 consecutive trading days after that date. Upon any liquidation event, as defined in the agreement, each outstanding share of Series B Convertible Preferred Stock is entitled to receive $500.00 per share (or a common stock conversion price of $5.00 per share) as a liquidation preference, in preference to any amounts paid to holders of Common Stock.  Subject to certain exceptions, the Series B Convertible Preferred Stock has anti-dilution protection, whereby any future new issuances of securities by the Company before November 30, 2003 below $5.00 per share would trigger the anti-dilution protection for the Series B Convertible Preferred Stock.  If triggered, this protection would decrease the conversion price of the Series B Convertible Preferred Stock to the lowest price per share received by the Company for such issuance of securities.  However, the conversion price may not be decreased to less than $4.17 per share.

     In October 2001, the Company issued an aggregate of 63,637 shares of Series A Convertible Preferred Stock for a common stock conversion price of $5.50 per share.  Subject to certain exceptions, the Series A Convertible Preferred Stock has anti-dilution protection, whereby any future new issuances of securities by the Company below $5.50 per share would trigger the anti-dilution protection for the Series A Convertible Preferred Stock.  If triggered, this protection would decrease the conversion price of the Series A Convertible Preferred Stock to the lowest price per share received by the Company for such issuance of securities.  However, the conversion price may not be decreased to less than $3.77 per share.  Since the anti-dilution protection clause of the Series A Convertible Preferred Stock was triggered by the Company’s issuance of Series B Convertible Preferred Stock, the holders of Series A Convertible Preferred Stock are entitled to receive, in the aggregate, an additional 636,300 shares of Common Stock upon future conversion based on a reduction in the Common Stock conversion price from $5.50 to $5.00 per share.

     During 2001 and 2002, the Company’s Latin American subsidiaries, WFI de Mexico and Wireless Facilities Latin America Ltda., entered into certain transactions with JFR Business Corporation International S. de R.L. de C.V. (“JFR”) and its related affiliates (collectively, “JFR and affiliates”).  The General Manager of WFI de Mexico is the brother of the Chairman and the Chief Executive Officer of the Company and holds a majority ownership interest in each of these entities. The primary business purpose for transacting business with JFR and affiliates relates to obtaining improved service and response compared to independent businesses providing such services, at market or less than market rates. WFI de Mexico contracted with JFR and affiliates during 2001 and 2002 for various services including automobile leasing, computer leasing, corporate and project related personnel services and construction services. Additionally, during 2001 JFR contracted with Wireless Facilities Latin America Ltda. for subcontractor engineering services for certain of its customer contracts.  The total net amount owed to JFR as of September 30, 2002 is $1.0 million for services under these related party contracts. The Company believes that the terms under these contracts are comparable to amounts that the Company could have negotiated under contracts with unaffiliated third parties for such services.  At September 30, 2002, except as noted above, there exists no other commitments or guarantees between JFR and affiliates and the Company.

    In April 2001, WFI entered into a Strategic Teaming Agreement with GlobTel Holdings, Ltd. to market telecommunications outsourcing services in the Middle East on a non-exclusive basis. GlobTel is significantly owned by Massih Tayebi, a former Chairman of the Company and brother of Masood K. Tayebi, the current Chairman and Chief Executive Officer of the Company. In August 2001, WFI and GlobTel executed a Master Service Agreement whereby WFI or its designated affiliates would perform telecommunications outsourcing services. In August 2002, WFI Ltd., a wholly-owned subsidiary of the Company, commenced an engagement for GlobTel pursuant to the Master Services Agreement (MSA) entered into in August 2001. The Company received zero and $0.1 million from GlobTel for services provided under this agreement during the three and nine months ended September 30, 2002, respectively. As of September 30, 2002, there were no outstanding trade receivable balances from GlobTel. WFI and GlobTel continue to pursue future opportunities. If GlobTel is successful in securing new customer contracts in the foreseeable future, and WFI is selected to procure services pursuant to such contracts and the MSA, management expects WFI will recognize increased revenue, trade receivable balances and cash activity from GlobTel. The Company believes that the terms under this contract are comparable to amounts that the Company could have negotiated under contracts with unaffiliated third parties for such services. At September 30, 2002, except as noted above, there exist no other commitments or guarantees between GlobTel and the Company.

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2002, respectively.  As of September 30, 2002, there were no outstanding trade receivable balances from GlobTel. WFI and GlobTel continue to seek future opportunities in the region. If GlobTel is successful in securing new customer contracts in the foreseeable future, and WFI is selected to procure services under its Master Services Agreement, management expects WFI will recognize increased revenue, trade receivable and cash activity from GlobTel. The Company believes that the terms under this contract are comparable to amounts that the Company could have negotiated under contracts with unaffiliated third parties for such services. At September 30, 2002, except as noted above, there exist no other commitments or guarantees between GlobTel and the Company.

     During the second quarter of 2002, an agreement was executed between WFI and the Chief Financial Officer, whereby the repayment terms of the house relocation loan receivable of $0.3 million and related tax payment from the officer will be forgiven over the term of the officer’s future employment with the Company.

     At September 30, 2002, the Company did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.  In addition, the Company does not engage in trading activities involving non-exchange traded contracts.  As such, the Company is not materially exposed to any financing, liquidity, market or credit risk that could arise if the Company had engaged in such relationships.

Recent Accounting Pronouncements

     In June 2001, the FASB issued SFAS 143, “Accounting for Asset Retirement Obligations,” which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and for the associated asset retirement costs. The standard applies to tangible long-lived assets that have a legal obligation associated with their retirement that results from the acquisition, construction or development or normal use of the asset. SFAS 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The fair value of the liability is added to the carrying amount of the associated asset and this additional carrying amount is depreciated over the remaining life of the asset. The liability is accreted at the end of each period through charges to operating expense. The provisions of SFAS 143 are required to be applied during the quarter ending March 31, 2003. To accomplish this, the Company must identify all legal obligations for asset retirement obligations, if any, and determine the fair value of these obligations on the date of adoption. The determination of fair value is complex and will require the Company to gather market information and develop cash flow models. Additionally, the Company will be required to develop processes to track and monitor these obligations. This statement is effective for fiscal years beginning after June 15, 2002.  At this time, the Company does not anticipate that the adoption of SFAS 143 will have a material effect on the Company’s consolidated financial statements.

     In April 2002, SFAS No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections” was issued. SFAS 145 provides guidance on the classification of gains and losses from the extinguishment of debt and on the accounting for certain specified lease transactions. This statement is effective for fiscal years beginning after May 31, 2002.  It is not anticipated that the financial impact of this statement will have a material effect on the Company’s consolidated financial statements. 

     In July 2002, SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” was issued. SFAS 146 provides guidance on the recognition and measurement of liabilities associated with exit and disposal activities.  Under SFAS 146, liabilities for costs associated with exit or disposal activities should be recognized when the liabilities are incurred and measured at fair value. This statement is effective prospectively for exit or disposal activities initiated after December 31, 2002.  It is not anticipated that the financial impact of this statement will have a material effect on the Company’s consolidated financial statements. 

Risk Factors

     You should carefully consider the following risk factors and all other information contained herein as well as the information included  in our Annual Report on Form 10-K for the year ended December 31, 2001, and other reports and filings made with the Securities and Exchange Commission before investing in our common stock. Investing in our common stock involves a high degree of risk. Risks and uncertainties, in addition to those we describe below, that are not presently known to us or that we currently believe are immaterial may also impair our business operations. If any of the following risks occur, our business could be harmed, the price of our common stock could decline and you may lose all or part of your investment. See the note regarding forward-looking statements included at the beginning of Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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Our financial results may suffer if we are unable to effectively implement our new business model.

     During the first quarter of 2002, we implemented a new business model in order to enhance flexibility related to our overall ongoing cost structure.  Under our new business model, we reduced our workforce in order to further minimize underutilization costs and better align such costs with the fluctuations in our future revenues.  We plan to hire additional staff as “project-based associate employees” when the need arises under large contracts. The lack of history with managing this new model combined with continued uncertainty in the business environment may result in inefficiencies.

     Because we no longer retain a surplus capacity of project-based employees, it may be difficult for us to hire a significant number of highly experienced and skilled personnel when necessary in order to service a major contract in the future, particularly if the market for related personnel becomes competitive.  Further, our ability to recruit highly qualified personnel in the future may be harmed due to the significant layoffs that we have recently implemented.  If we are unable to win major contracts or perform such contracts effectively and on time due to staffing deficiencies, our revenues may decline and our business may be harmed. 

We expect our quarterly results to fluctuate. If we fail to meet earnings estimates, our stock price could decline.

     Our quarterly and annual operating results have fluctuated in the past and will vary in the future due to a variety of factors, many of which are outside of our control.

     The factors outside of our control include:

     The factors substantially within our control include: