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UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





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FORM 10-K


(Mark
One)


|x |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES AND EXCHANGE ACT OF 1934
|- |  | ----------------------------------------------------------------------------------------




For the year ended December 31, 2001





| ̈ |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES AND EXCHANGE ACT OF 1934
|- |  | --------------------------------------------------------------------------------------------




For the transition period from  to





Commission file
number: 0-5404





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HADRON, INC.


(Exact name of registrant as specified in its charter)








New York

11-2120726(State or other jurisdiction of incorporation or
organization)

(I.R.S.Employer Identification Number)





5904 Richmond Highway, Suite 300 Alexandria, Virginia 22303


(Address of principal executive offices)





Registrants telephone
number including area code


(703) 329-9400





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Securities registered pursuant to Section 12(b) of the Act:





None





Securities registered pursuant to Section 12(g) of the Act:





Common Stock, par value $0.02 per share


(Title of Class)





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Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.  Yes  x  No  ̈





Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ̈





The registrants revenues for the twelve
months ended December 31, 2001 were $21,936,000.





As of March 13, 2002, the aggregate market value of the common stock of the
registrant held by non-affiliates of the registrant (based upon the average bid and asked prices of the common stock as reported by the National Association of Securities Dealers Inc. through its Electronic OTC Bulletin Board) was approximately
$7,384,300.





As of March 13, 2002, 14,394,340 shares of the common stock of the registrant were outstanding.





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PART I





Item 1.Business





Introduction





Hadron, Inc. (Hadron or the Company) supports homeland security through the design, implementation and support of innovative
solutions that enhance the United States ability to detect, defend and respond to threats from hostile countries or terrorists. The Company specializes in three facets of homeland security: intelligence systems, bio-defense, and aerospace
programs. The Company was incorporated in New York in 1964, and can be found on the Internet at www.hadron.com.





Change in Fiscal Year





On February 14, 2001, the Board of Directors of the Company approved a change of the Companys fiscal year from the
period of July 1 through June 30 to the period of January 1 through December 31, and declared the period of July 1, 2000 through December 31, 2000 the transition period.





Organizational Change





Prior to the acquisition of Analex Corporation on November 5, 2001
(see Recent Developments), the Company had four operating segments: Advanced Biosystems, Inc. (ABS), Avenue Technologies, Inc. (ATI), Engineering & Information Services, Inc. (EISI), and SyCom
Services, Inc. (SyCom).





After the acquisition of Analex, EISI and ATI were merged into Analex in December 2001.
ABS, Analex and SyCom continue to operate as wholly owned subsidiaries of the Company.





With the acquisition of Analex, the
Company reorganized its internal operating structure. Hadron now has three operating segments: ABS continues to operate in the bio-defense market; the Homeland Security Group supports the United States intelligence community and is comprised of the
businesses previously reported under the ATI, EISI, and SyCom operating segments; and the Aerospace Group supports NASA, Department of Defense (DoD), and other major aerospace contractors and is comprised on the business acquired as a
result of the acquisition of Analex Corporation in November 2001.





The following table may help in understanding the
organizational units for the relevant time periods discussed in this 10-K:





Operating Units as reported for the period ended 12/31/00 and
prior fiscal years

Operating Units as reported for the fiscal year ended 12/31/01Advanced Biosystems, Inc. (ABS)

ABSAvenue Technologies, Inc. (ATI)

Homeland Security GroupEngineering & Information Services, Inc. (EISI)

Homeland Security GroupSycom Services, Inc. (SyCom)

Homeland Security GroupAnalex Corporation (Analex)

Aerospace Group







2




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Further, the consolidated financial statements for 2001 include two months of the Aerospace Group, formerly Analex Corporation. The
full-year pro-forma results for 2001 include twelve months of Aerospace Group operations, as if Analex had been acquired on January 1, 2001.





Operations





The Company has three operating units, the Homeland Security Group, Advanced Biosystems, Inc., and
the Aerospace Group, whose descriptions follow:





Homeland Security Group





Since 1964, the Company has provided hardware and software engineering, systems integration, information technology solutions and independent quality assurance to support intelligence
systems. The Companys role in the support of the intelligence community brings specialized skills to a broad set of technical requirements. In the area of Intelligence, Reconnaissance and Surveillance (ISR), it provides solutions
that enable the simulation of a realistic operational environment so that satellites and related systems can be tested prior to deployment. The Company performs verification and validation of test results to ensure the reliability of the data and
also develops radar, modeling and simulation, and system software, all in support of testing, collecting, and analyzing data from various intelligence systems.





The Company is an independent expert in the design and testing of expendable launch vehicles (ELV) for the DoD and intelligence community. Its highly specialized expertise provides test analysis and
independent validation and verification (IV&V) support in areas such as Structural Dynamics, Trajectory and Performance, Thermal System Performance, and Range Safety.





The Company provides IV&V services to the United States Air Force and the National Reconnaissance Office (NRO) in support of launches of the Atlas and Titan ELVs.
The Companys contribution to the success of the program launches has earned two prestigious awards: the DoDs David Packard Excellence in Acquisition Award, and the NROs Gold Medal Award.





The Company supports other intelligence agencies such as the National Security Agency and the Central Intelligence Agency by providing software
development, systems integration, configuration management and network administration services. In addition, the Company develops and conducts training designed to better enable military personnel in the conduct of Human Intelligence Source
Debriefings.





Advanced Biosystems, Inc.




3




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The Companys role in bio-defense began in 1999 when it established its Advanced
Biosystems (ABS) subsidiary. Since then, a elite group of biologists, immunologists and other researchers have been conducting studies to develop effective defenses and treatments for anthrax and other biological warfare
agents.





ABS scientists play a significant role in
advising Congress, members of the Bush administration, Defense officials and senior members of the medical community on strategies for bio-defense. ABS also provides training on the use of biological warfare agents, their effects, and defensive
strategies to improve preparedness. ABS has been awarded almost $7 million in contracts with the U.S. Defense Advanced Research Projects Agency (DARPA) for development of non-specific-immunity based defenses against biological threat
agents. ABS was awarded a grant from the National Institutes of Health (NIH) to study the role of certain cellular components in blocking the development of Anthrax.





Aerospace Group





The Aerospace Group, formerly Analex Corporation (Analex),
provides high quality services to NASA, the DoD and major aerospace contractors such as Lockheed Martin and Northrop Grumman. The Company provides aerospace systems engineering in the design, development, analysis, test and operation of both
hardware and software for aerospace systems. These systems include expendable launch vehicles, satellites, space-based experiments, and components and payloads associated with the International Space Station. The Company also supports a major
aerospace firm in development of sophisticated airborne electronic sensors and systems.





The Company provides a broad scope of
aerospace engineering services to support the programs of NASA Glenn Research Center (GRC), including development of next generation launch vehicles. Specific contributions include engineering design and development of aerospace systems,
engineering support to research and technology development, engineering support to operations of experimental systems, and management support.





The Company supports GRC on the Microgravity Research Development and Operations Contract (MRDOC) in providing an automated laboratory environment aboard the International Space Station to enable research
in the performance of fluids and combustion in the near-zero gravity of space. The Company participates in the design, development, manufacturing, test and delivery of the Fluids and Combustion Facility and associated payloads.





At the Kennedy Space Center, the Company supports the Payload and Ground Operations Contract (PGOC) by performing detailed
analyses of ELVs and mission assurance surveillance at launch vehicle facilities in support of NASA ELV programs.





Recent Developments




4




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The Company entered into an Agreement and Plan of Merger dated as of October 31, 2001 (the
Plan) with Analex Corporation and its equity holders pursuant to which Analex was merged with and into a wholly-owned subsidiary of the Company. Analex is a professional services and program management firm whose principal customers are
NASA and the U.S. intelligence community. The merger was closed as of November 5, 2001.





Under the terms of the Plan, the
shareholders representing all of the outstanding equity of Analex (the Sellers) exchanged their Analex equity on a pro rata basis for approximately $6,500,000 in a combination of cash and the satisfaction of certain liabilities of
Analex as well as 3,572,143 shares of the Companys Common Stock, par value $0.02 per share (Common Stock). Of these shares, 857,143 shares are subject to a provision by which the Company guarantees for a five-year period to
reimburse the Sellers the difference between the price at which they sell such shares and a guaranteed sales price ranging from $1.60 to $2.20 per share, if such shares are sold within such period and if certain other conditions are satisfied.
Approximately 1,700,000 of the 3,572,143 shares of the Common Stock issued to the Sellers and $600,000 of the Sellers proceeds are subject to various escrow and indemnification agreements to ensure Sellers compliance with various
representation and warranties.





In addition, the Company issued promissory notes to certain Sellers totaling approximately
$773,000 with a five-year term and entered into non-competition agreements with these Sellers for total payments of $540,000. The Company offered at-will part-time employment agreements to four officers of Analex, three of which contain incentive
bonus provisions relating to the achievement of certain performance goals. Finally, while Analex must have at least a prescribed minimum tangible net worth at closing, the Company permitted Analex to have indebtedness at closing of approximately
$2,400,000.





To finance the acquisition, the Company negotiated a new senior credit facility with Bank of America, N.A. in the
amount of $7,500,000 (the Credit Agreement), comprised of (i) a five-year $3,500,000 term loan (the Term Loan) and (ii) a $4,000,000 revolving credit facility through November 2, 2006 (the Credit Facility). The
principal amount of the Term Loan is amortized in sixty monthly installments of $58,333. Interest on each of the facilities is at the LIBOR rate plus an applicable margin as specified in the Credit Agreement. The Company has entered into an interest
rate swap agreement for $2,950,000 of this debt, and interest rate payments will be fixed beginning in January 2002. The Company is subject to certain financial covenants pursuant to the Credit Agreement, including debt to EBITDA ratio, fixed charge
coverage ratio, senior debt to EBITDA ratio, and net worth requirements. The Credit Facility and Term Loan are secured by the accounts receivable and other assets of the Company and its subsidiaries. In addition, Bank of America has required the
Company to obtain personal guarantees in the amount of $2,000,000, which the Company has procured from two individuals (one of whom is a director of the Company) in exchange for an annual fee and the issuance of warrants to purchase the
Companys Common Stock at an exercise price of $0.02 per share with the number of warrants to be based on the duration of the guarantees and a formula related to valuing




5




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the Company.





In addition, the Company
issued 3,961,060 shares of Common Stock for aggregate consideration of approximately $3,868,000 through a private placement pursuant to Regulation D under the Securities Act of 1933 consisting of (i) the Companys Common Stock at a price of
$1.14 per share to purchasers who purchased less than $500,000 worth thereof or (ii) units consisting of Hadron Common Stock and warrants to purchase 0.2061 shares of Hadron Common Stock at an exercise price of $0.02 per share for each share
purchased at a price of $1.14 per unit for purchasers who purchased $500,000 or more of the Companys equity. Two of such purchasers are directors or affiliates of a director. All of these proceeds were directed to financing the acquisition of
Analex.





On November 2, 2001, to assist in financing the acquisition, Dr. C.W. Gilluly, one of the Companys directors, and
J. Richard Knop, President of the Companys investment banking firm, Windsor Group, exercised warrants and/or stock options to purchase an aggregate of 247,888 shares of Common Stock, resulting in proceeds of approximately $200,000.





General Information





The
Company provides engineering, information technology, medical research and technical services to federal government agencies or major defense contractors. In general, the industry in which the Company operates includes a large number of competitors
of varying sizes. Competition within the information technology and government contracting arenas is intense. Selection is based primarily on a combination of the price of services and evaluation of technical capability, as well as past performance,
quality of service and responsiveness to client requirements.





The Company maintains a primary commitment to its direct and
indirect government clients, while intensifying its business development efforts targeted towards additional government clients. The Company is continuing efforts to diversify its client base.





Direct and indirect contracts with government defense and intelligence agencies comprise the majority of the Companys business base, and competition for government-funded
projects continues to exert pressure on profit margins. However, the Companys management continues its program of cost containment, primarily in the areas of indirect labor costs, overhead and general and administrative expenses, and therefore
believes the Company is well positioned and competitive in its marketplace.





The revenues of the Homeland Security Group
accounted for 57%, 79%, 98%, 96%, and 97% of the total revenues for 2001, the six-month periods ended December 31, 2000 and 1999 and the fiscal years 2000 and 1999, respectively. On a full-year pro-forma basis, the Homeland Security Group accounted
for approximately 26% of the total 2001 revenues (see Recent Developments).





The revenues of ABS accounted for 22%,
21% and 3% of the total revenues for 2001, the six-month period ended December 31, 2000 and the fiscal year




6




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2000. On a full-year pro-forma basis, ABS accounted for approximately 10% of the total 2001 revenues (see Recent Developments).





The revenues of the Aerospace Group, which became part of Hadron as a result of the Analex acquisition, accounted for 21% of the total
revenues for 2001, respectively. On a full-year pro-forma basis, the Aerospace Group accounted for approximately 64% of the total 2001 revenues (see Recent Developments).





The Companys funded backlog of orders believed to be firm as of December 31, 2001 and realizable during 2002 approximated $32 million. As of December 31, 2000, before the
acquisition of Analex, the Company had approximately $15 million in firm backlog orders. Included in the firm backlog approximation are estimates of amounts the Company anticipates receiving under government contracts, some of which are indefinite
delivery, indefinite quantity contracts, under which services are provided as ordered by the government. Not included in the backlog approximation are amounts from future years of government contracts under which the government has the right to
exercise an option for the Company to perform services.





As of December 31, 2001, the Company (including its subsidiaries)
employed approximately 450 people. The Companys employees are not members of any union, and employee relations are believed by management to be generally good.





Raw materials, patents, licenses, trademarks, franchises and concessions are not materially important to the conduct of the Companys business and the Companys business is not
seasonal.





Government Procurement





The principal customer for the Companys services is the United States government. The Companys sales to the U.S. government and its prime contractors represented approximately 99% of total net sales during the Companys
twelve months ended December 31, 2001, the six month periods ended December 31, 2000 and 1999, and the fiscal years 2000 and 1999, and are expected to continue to account for a substantial portion of the Companys revenues for the foreseeable
future. On a full-year pro-forma basis, government revenues also accounted for 99% of the total 2001 revenues (see Recent Developments).





The principal U.S. government customer is the DoD, which, directly or through its prime contractors, accounted for approximately 64%, 70%, 76%, 92% and 88% of the Companys revenues in the twelve months ended
December 31, 2001, the six month periods ended December 31, 2000 and 1999, and the fiscal years 2000 and 1999, respectively. On a full-year pro-forma basis, DoD revenues accounted for 43% of the total 2001 revenues (see Recent
Developments).





The Companys DoD government business from Northrop Grumman constituted approximately 26% of the
total 2001 revenues of the Company, but only 12% on the 2001 full-year pro-forma basis (see Recent Developments).




7




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The Companys contracts with the U.S. government are subject to the availability of funds
through annual appropriations, may be terminated by the government for its convenience at any time and generally do not require the purchase of fixed quantity of services or products. Reductions in U.S. government defense spending could adversely
affect the Companys operating results. While the Company is not aware of present or anticipated reductions in U.S. government spending on specific programs or contracts, there can be no assurance that such reductions will not occur or that
decreases in U.S. government defense spending in general will not have an adverse effect on the Companys revenues in the future. Contracts with the U.S. government are subject to audit by the Defense Contract Audit Agency (DCAA).





The Company has been a contractor or subcontractor with the DoD continuously since 1973 with periodic renewals. During this
time, neither the Company nor its subsidiaries have experienced any material adjustment of profits under these contracts; however, no assurance can be given that the DoD will not seek and obtain an adjustment of profits in the future. All U.S.
government contracts contain clauses that allow for the termination of contracts at the convenience of the U.S. government.





The
preponderance of the Companys technical and professional services business with the DoD and other governmental agencies is obtained through competitive procurement and through follow-on services related to existing business. In certain
instances, however, the Company acquires such service contracts because of special professional competency or proprietary knowledge in specific subject areas.





The Company derives no revenues from foreign operations.





Item
2.Properties





The Company owns no real estate. As of December 31, 2001, the
Company leased a total of 68,373 square feet of office space. These leases expire between February 2002 and September 2006. (See Note 11 of the Notes to Consolidated Financial Statements.)





Item 3.Legal Proceedings





No
material legal proceedings are currently pending.





Item 4.Submission of Matters to a Vote of Security
Holders





None.




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PART II





Item
5.Market for Registrants Common Equity and Related Stockholder Matters





Common Stock is traded on the National Association of Securities Dealers (NASD) Electronic OTC Bulletin Board, under the symbol HDRN. The Company has no other class of common stock.





The range of high and low bid quotations for the Common Stock, as reported by the National Quotation Bureau, for each quarterly period during 2001, the
six-month period ended December 31, 2000 and fiscal year 2000 is shown below:





Year Ended December 31, 2001

High

LowFirst Quarter(1/1 to 3/31/01)

1.44

81Second Quarter(4/1 to 06/30/01)

1.40

1.00Third Quarter(7/1 to 09/30/01)

2.50

1.06Fourth Quarter(10/1 to 12/31/01)

4.55

1.40





Period Ended December 31, 2000

High

LowFirst Quarter(7/1 to 9/30/00)

1.06

.63Second Quarter(10/1 to 12/31/00)

1.56

.75





Fiscal Year Ended June 30, 2000

High

LowFirst Quarter(7/1 to 9/30/99)

1.28

.63Second Quarter(10/1 to 12/31/99)

.75

.50Third Quarter(1/1 to 3/31/00)

2.00

.47Fourth Quarter(4/1 to 6/30/00)

1.56

.75





As of March 13, 2002, there were approximately 2,101 shareholders of record of
the Companys Common Stock. No cash dividends were paid during 2001 and past two fiscal years, and none are expected to be declared during 2002.




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Item 6.Selected Financial Data








Year Ended 12/31/01

Six Months Ended 12/31/00

Unaudited Six Months Ended 12/31/99


Fiscal Year 6/30/00


Fiscal Year 6/30/99


Fiscal Year 6/30/98


Fiscal Year 6/30/97(In thousands of dollars, except per share amounts)Total Revenues (1)

$
21,936

$
8,943

$
10,267


$
19,901


$
20,333


$
21,134


$
16,988Operating Income (Loss)


454


190


(481
)


(421
)


63



888



128Interest Expense, net of Interest income


217


112


167



324



78



56



84Income (Loss) Before income taxes


216


85


(631
)


(724
)


48



819



57Net Income (Loss) (1)


196


85


(631
)


(745
)


34



761



13Income (Loss) per shareBasic


.03


.01


(.24
)


(.23
)


.02



.45



.01Diluted


.02


.01


(.24
)


(.23
)


.01



.26



.01At Period End:Total Assets


26,400


5,784


6,127



5,951



6,690



3,507



2,712Long-term Liabilities


5,839


412


1,040



702



2,160



53



169Working Capital (Deficit)


73


266


(1,454
)


(13
)


(67
)


(186
)


(906
)Shareholders Equity (Deficit)


11,175


2,002


(80
)


1,535



456



22



(811
)


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|(1) |  | See Item 7 Managements Discussion and Analysis for an explanation of events that materially affect
comparability.
|--- |  | --------------------------------------------------------------------------------------------------------------------



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Item 7.Managements Discussion and Analysis of Financial Condition and Results
of Operations





Forward-Looking Statements





The statements contained in this report that are not purely historical are 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, including without limitation, statements about the Companys expectations, beliefs, intentions or strategies regarding the future. All forward-looking statements included in this report are based on
information available to the Company on the date hereof, and the Company assumes no obligation to update any such forward-looking statements. The forward-looking statements contained herein involve risks and uncertainties. The Companys actual
results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in this report.








Critical Accounting Policies





The consolidated
financial statements are prepared in accordance with accounting principles generally accepted in the United States, which require the Company to make estimates and assumptions. The Company believes the following critical accounting policies affect
significant judgments, estimates and assumptions used in the preparation of the consolidated financial statements.








Revenue





The Company uses the percentage of completion
method to recognize revenues and costs on all contracts. Under this method of accounting, the Company expenses all contract costs as they are incurred and simultaneously recognizes an estimate of the revenues related to those costs. Contract costs
include direct labor, direct materials, subcontract costs, as well as an allocated share of overhead and general and administrative costs. The Company uses different techniques for estimating and recording revenues depending on the type of contract.
Revenues may differ from recorded estimates due to various factors, including favorable or unfavorable performance in comparison to estimated contract costs, unanticipated conditions, the resolution of contract claims or disputes and audits by
government audit agencies. Revisions to costs and revenues recorded are recognized in the period in which the revisions occur. Revenues on cost-plus contracts are recorded as the sum of allowable costs incurred to date plus estimated earned fees,
which are recognized based on the percentage that costs incurred bears to total estimated costs. Some of the fees on cost-plus contracts may be awarded or adjusted in accordance with performance incentive provisions. These incentive-fee awards or
adjustments are included in revenues at the time they can be reasonably estimated. Revenues on fixed-price contracts are recorded based on the percentage of costs incurred to date compared to total estimated costs. Revenues on time and materials
contracts are recorded based upon the agreed prices per direct labor hour




11




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expended plus the cost of direct materials and subcontract costs incurred. In the normal course of business, the Company may be party to claims and disputes
resulting from modifications and change orders and other contract matters. Claims for additional contract compensation are recognized when realization is probable and estimable.








Long-Lived Assets





In
assessing the recoverability of long-lived assets, including goodwill and other intangibles, the Company must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. If these
estimates or the Companys related assumptions change in the future, the Company may be required to record impairment charges for these assets not previously recorded.








Contingencies





From time
to time, the Company is subject to proceedings, lawsuits and other claims related to labor and other matters. The Company is required to assess the likelihood of any adverse judgments or outcomes to these contingencies as well as potential ranges of
probable losses and establish reserves accordingly. The amount of reserves required, if any, may change in future periods due to new developments in each matter or changes in approach to a matter such as a change in settlement strategy.








Results of Operations





Comparison of Year Ended December 31, 2001 to the Unaudited Twelve Months Ended December 31, 2000





Revenues for the twelve months ended December 31, 2001 were approximately $21,936,000, an 18% increase from the twelve-month period ended December 31, 2000. This increase is
primarily due to the addition of two months of revenues, totaling $4,658,000, generated by the Aerospace Group, formerly Analex Corporation, acquired in November 2001 (see Recent Developments), coupled with the increased revenues of ABS,
partially offset by decreased revenues of the Homeland Security Group.





Costs of revenue for the twelve months ended December
31, 2001 were approximately $18,158,000, an increase of approximately 18% from the same period of the prior year. The increase is primarily due to the costs of revenue of the Aerospace Group, coupled with increased ABS costs, partially offset by
decreased costs of the Homeland Security Group. Costs of revenue as a percentage of revenues were approximately 83% for the twelve months ended December 31, 2001 and 2000.





Selling, general and administrative expenses totaled approximately $3,324,000 for the twelve months ended December 31, 2001, compared with approximately $2,908,000 for the twelve
months ended December 31, 2000. The $416,000, or 14% increase is primarily due to the addition of the Aerospace Groups costs and the costs associated with the acquisition.




12




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The Company had operating income of approximately $454,000 for the twelve months ended December 31, 2001, compared to operating income
of approximately $250,000 for the twelve month period ended December 31, 2000. This $204,000 increase is primarily attributable to the profitability of the Aerospace Group partially offset by the Companys acquisition costs.





Net income was approximately $196,000 for the twelve months ended December 31, 2001, compared to a net loss of approximately
$29,000 for the twelve months ended December 31, 2000. The $225,000 increase resulted primarily from the $350,000 net income produced by the Aerospace Group, coupled with the $186,000 net income of ABS, partially offset by the $10,000 net loss of
the Homeland Security Group and increased costs associated with the Analex acquisition.








Results of Operations





Comparison of Six Month Period Ended December 31, 2000 to the Unaudited Six Month Period Ended December 31, 1999





Revenues for the six months ended December 31, 2000 were approximately $8,943,000, a 13% decrease from the period ended
December 31, 1999. This decrease is primarily due to the loss of billable personnel resulting from the hiring of certain of the Companys technical employees by the Homeland Security Groups major client, Johns Hopkins Universitys
Applied Physics Laboratory (APL), partially offset by additional revenue produced by ABS. The Companys billable staff dedicated to the APL contracts decreased 83% between December 31, 1999 and December 31, 2000.





Costs of revenue for the six months ended December 31, 2000 were approximately $7,601,000, a decrease of approximately 13% from the same
period of the prior year. The decrease is primarily due to the lowered personnel costs of the Homeland Security Group partially offset by costs associated with the increased ABS revenues. Costs of revenue as a percentage of revenues were
approximately 85% for the six-month periods ended December 31, 2000 and 1999, respectively.





Selling, general and administrative
expenses totaled approximately $1,153,000 for the six months ended December 31, 2000, compared with approximately $1,995,000 for the same period of the prior year. The $842,000, or 42%, decrease is primarily due to the Companys aggressive cost
reduction and containment program.





The Company had operating income of $190,000 for the six months ended December 31, 2000,
compared to an operating loss of $481,000 for the period ended December 31, 1999. This $671,000 increase is primarily attributable to the Companys aggressive cost reductions coupled with increases in the productivity of the Companys
billable staff.





Net income was $85,000 for the six months ended December 31, 2000, compared to a net loss of approximately
$631,000 for the same period of the prior year. The $716,000 increase resulted from the same factors mentioned above.




13




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Results of Operations





Comparison of Fiscal Year 2000 to Fiscal Year 1999





Revenues for the fiscal year ended
June 30, 2000 were approximately $19,901,000, a 2% decrease from the prior fiscal year. This decrease is due to the loss of billable personnel resulting from the hiring of certain of the Companys technical employees by the Homeland Security
Groups major client, APL, and the difficulties retaining and recruiting new technical employees at another Homeland Security Groups major client, Northrop Grumman, partially offset by additional revenue produced by ABS.





Costs of revenue for the fiscal year ended June 30, 2000 were approximately $16,572,000, a decrease of approximately 7% from the prior fiscal
year. The decrease is due primarily to the lowered personnel costs of the Homeland Security Group. Costs of revenue as a percentage of revenues were approximately 83% and 87% for the fiscal years ended June 30, 2000 and 1999, respectively. This 4%
decrease is primarily due to increases in direct personnel of ABS, coupled with decreased company-wide indirect personnel.





Selling, general and administrative expenses totaled approximately $3,750,000 for the fiscal year ended June 30, 2000, compared with approximately $2,535,000 for the prior fiscal year. The increase is primarily due to the Companys
addition of key administrative personnel of ABS and the Homeland Security Group, totaling $362,000 and $364,000, respectively, along with the amortization of goodwill of approximately $344,000 associated with the purchase of Avenue Technologies,
Inc. (ATI). The Company embarked on an aggressive cost reduction and containment program in the second half of fiscal year 2000 evidenced by a 26% decrease in general and administrative expenses between the first and fourth quarters of
fiscal year 2000.





The Company had an operating loss of $421,000 in the fiscal year ended June 30, 2000, compared to operating
income of $63,000 in the prior fiscal year. This $484,000 decrease is primarily due to the loss of billable personnel resulting from the hiring of certain of the Companys technical employees by the Homeland Security Groups major client,
APL, and the difficulties retaining and recruiting new technical employees at Homeland Security Groups client, Northrop Grumman, coupled with the addition of key administrative personnel hired to develop the Companys initiatives in the
areas of biological weapons defense and counterterrorism. In addition, the Company amortized the goodwill associated with the purchase of ATI. The Companys net billable headcount at APL and Northrop Grumman decreased by 30 and 36, or 59% and
42%, respectively, during the fiscal year ended June 30, 2000 as compared with the prior year. The loss of billable personnel at APL is expected to continue as a result of the removal of hiring ceilings at APL.





Net interest expense increased approximately $246,000 between the fiscal year ended June 30, 1999 and the fiscal year ended June 30, 2000 due to higher
outstanding borrowings during the year and increased debt associated with the acquisition of ATI.




14




---




The net loss for the fiscal year ended June 30, 2000 was approximately $745,000, compared to
net income of approximately $34,000 in the prior year. The net loss resulted primarily from the loss of billable positions, as discussed above, coupled with the costs of retaining key technical professional personnel and diversifying business
development efforts.








Capital Resources and Liquidity





The working capital at December 31, 2001 decreased by approximately $192,000 from December 31, 2000, primarily due to the Companys purchase of
Analex (see Recent Developments). While the Company paid off its previous bank obligations with United Bank, it added increased line of credit and term note facilities at Bank of America, issued promissory notes and non-competition
agreements and inherited an extended payout settlement, as further discussed below.





These increases in debt were partially
offset by Analex two month net income of approximately $350,000. On an adjusted full-year pro-forma basis, the net income of Analex was approximately $1,458,000 for 2001, which would have resulted in a company-wide increase to working capital
of over $1,266,000.





In the three months ended December
31, 2001, the Company recorded net income of $48,000 and EBITDA, as defined below, of $359,000, after add-backs for interest of $120,000, taxes of $20,000, depreciation of $45,000 and goodwill amortization of $126,000.





In the twelve months ended December 31, 2001, the Company recorded net income of $196,000 and EBITDA of $957,000, after add-backs for interest of
$217,000, taxes of $20,000, depreciation of $146,000 and goodwill amortization of $378,000.





On an adjusted full-year pro-forma
basis for 2001, the Company recorded net income of $910,000 and EBITDA of $2,346,000, after add-backs for interest of $823,000, depreciation of $235,000 and goodwill amortization of $378,000.





The Company believes that with anticipated increased earnings in the upcoming years, it will be able to sufficiently pay down its debt obligations.





EBITDA consists of earnings before interest expense, interest and other income, income taxes, deferred compensation, and depreciation and amortization.
EBITDA does not represent funds available for the Companys discretionary use and is not intended to represent cash flow from operations. EBITDA should also not be construed as a substitute for operating income or a better measure of liquidity
than cash flow from operating activities, which are determined in accordance with accounting principles generally accepted in the U.S. EBITDA excludes components that are significant in understanding and assessing the Companys results of
operations and cash flows. In addition, EBITDA is considered to be relevant and useful information, which is often reported and widely used by analysts, investors and other interested parties.




15




---

Accordingly, the Company is disclosing this information to permit a more comprehensive analysis of the Companys operating performance, as an additional
meaningful measure of performance and liquidity, and to provide additional information with respect to the Companys ability to meet future debt service, capital expenditure and working capital requirements.





Net cash used in operating activities was $435,000 during the twelve months ended December 31, 2001. Net cash used in operating activities in the
twelve months ended December 31, 2001 was primarily the result of changes in working capital, partially offset by operating income.





Net cash used for investing activities during the twelve months ended December 31, 2001 was $6,254,000. Net cash used for investing activities in this period was for fixed asset purchases of $86,000 and the cash portion of the Analex
acquisition of $6,168,000.





On November 2, 2001, to finance the acquisition of Analex, the Company entered into the Credit
Agreement which provides the Company with a $4,000,000 Credit Facility through November 2, 2006 and a five-year $3,500,000 Term Loan. The principal amount of the Term Loan is amortized in sixty equal monthly payments of $58,333. Interest on each of
the facilities is at the LIBOR Rate plus an applicable margin as specified in a pricing grid. The Company is subject to certain financial covenants pursuant to the Agreement, including debt to EBITDA ratio, fixed charge coverage ratio, senior debt
to EBITDA ratio, and net worth requirements. The Credit Facility and Term Loan are secured by the accounts receivable and other assets of the Company. The Company was required by Bank of America to obtain personal guarantees in the amount of
$2,000,000, which the Company procured from two individuals, the Companys Board member Gerald R. McNichols and the Companys Investment Banker J. Richard Knop. The compensation during the period of guaranty is in the form of cash and
warrants.





In addition, the Company issued 3,961,060 shares of Common Stock for aggregate consideration of approximately
$3,868,000 through a private placement pursuant to Regulation D under the Securities Act of 1933 consisting of (i) the Companys Common Stock at a price of $1.14 per share to purchasers who purchased less than $500,000 worth thereof or (ii)
units consisting of Hadron Common Stock and warrants to purchase 0.2061 shares of Hadron Common Stock at an exercise price of $0.02 per share for each share purchased at a price of $1.14 per unit for purchasers who purchased $500,000 or more of the
Companys equity. Two of such purchasers are directors or affiliates of a director. All of these proceeds were directed to financing the acquisition of Analex.





On November 2, 2001, the Company issued promissory notes to certain Analex sellers totaling $773,000 with a five-year term, bearing interest at 6%. The Company also entered into
non-competition agreements with these Sellers for total payments of $540,000 over a three-year period. In addition, the Company entered into non-competition agreements with former employees totaling $352,000, on a discounted basis, payable over
various periods.




16




---




With its purchase of Analex, the Company assumed a note payable to the Department of Justice
(DOJ). The agreement provides for quarterly payments of $80,000 consisting of principal and interest at 7% through February 2006, with a final payment due in May 2006.





On November 2, 2001, to assist in financing the acquisition, Dr. C.W. Gilluly, one of the Companys directors, and J. Richard Knop, President of the Companys investment
banking firm, Windsor Group, exercised warrants and/or stock options to purchase an aggregate of 247,888 shares of common stock, resulting in proceeds of approximately $200,000.








Contractual Obligations





The
Company has contractual obligations to pay long-term debt, leases and other non-cancelable obligations. The following table aggregates the amounts of these obligations as of December 31, 2001:





Year

Long-term debt(1)

Operating Leases

Non-compete Agreements

Total2002

$
1,276,600

$
1,022,600

$
261,900

$
2,561,1002003


1,107,500


614,500


261,900


1,983,9002004


1,122,800


590,700


261,900


1,975,4002005


1,141,800


408,300


81,900


1,632,0002006


1,015,500


48,300


10,900


1,074,700Total contractual obligations

$
5,664,200

$
2,684,400

$
878,500

$
9,227,100


---

|(1) |  | Does not include line of credit.
|--- |  | --------------------------------




Payments for long-term debt do not include interest payments. Lease commitments could require higher payments than shown in the table due to escalation provisions that are tied to various measures of inflation. The lease commitments reflect
only existing commitments and do not include future requirements necessary to replace existing leases. In addition to the contractual obligations included above, the Company also has routine purchase order commitments for materials and supplies that
are entered into in the normal course of business and are not in excess of current requirements. Also, pursuant to the purchase of Analex, the Company has guaranteed a minimum sales price ranging from $1.60 to $2.20 per share for 857,143 shares
issued to the sellers, for various periods through 2006.








Recently Issued Accounting Standards





In June 2001, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards, or
SFAS, No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets. Under the new rules, goodwill will no longer be amortized starting in 2002 but will




17




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be subject to annual impairment tests. Other intangible assets will continue to be amortized over their useful lives. The Company applied these new rules to the
Analex acquisition and will fully implement the new standards in 2002. If SFAS No. 142 had been adopted at the beginning of 2001, the absence of goodwill amortization would have increased 2001 income before taxes by approximately $337,000.








Income Taxes





The provision for income taxes has been limited to state taxes and the liability for alternative minimum tax as the majority of income for federal and state tax purposes has been offset by carrying forward net
operating losses.








Management Changes





On January 16, 2001, Sterling E. Phillips, Jr. was appointed to the positions of President and Chief Executive Officer of the Company. Mr. Phillips was also elected to fill an existing
vacancy and serve as a member of the Companys Board of Directors. In connection with his appointments, Mr. Phillips purchased 66,667 shares of Common Stock for $0.75 per share. In addition, Mr. Phillips was awarded a five-year, non-qualified
stock option to purchase 875,725 shares of Common Stock at the exercise price equal to 100% of the fair market value of the Common Stock on the grant date, exercisable in one-third increments over a two-year period. Pursuant to his employment
agreement, Mr. Phillips has an initial base salary of $175,000 and is eligible for an annual bonus of up to $125,000 upon the successful completion of annual milestones as agreed upon by Mr. Phillips and the Board of Directors.





Jon M. Stout resigned as President and Chief Executive Officer of the Company effective January 16, 2001 and was appointed to the position of
Chairman. Dr. C.W. Gilluly resigned as Chairman effective January 16, 2001 but continues to provide consulting services and serve as a member of the Companys Board of Directors.





In 2001, the Company filled other executive positions. In April 2001, the Company appointed two individuals to its business development and marketing functions. In November 2001, it
filled its Chief Financial Officer position and, with its acquisition of Analex, inherited management expertise in the aerospace segment of homeland security. In addition, the Company added two new board members, who have extensive business and
finance expertise.




18




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Item 7A.Quantitative and Qualitative Disclosure about Market Risk





Market Risks and Hedging Activities





The Companys outstanding bank debt bears interest at variable interest rates tied to LIBOR. The use of variable-rate debt to finance operations and capital improvements exposes the Company to variability in
interest payments due to changes in interest rates. The Company uses an interest rate swap to reduce the interest rate exposure on these variable rate obligations. The Company does not hold any derivatives for trading or speculative purposes.





The Companys $3.5 million term loan facility from Bank of America carries interest comprised of two components:
floating-rate LIBOR plus a credit performance margin. The Company has entered into an interest-rate swap agreement with Bank of America whereby its obligation to pay floating-rate LIBOR is swapped into a fixed rate obligation at 4.25% beginning in
January 2002. The Company continues to have the obligation to pay the credit performance margin in addition to its swapped 4.25% payment obligation.





Interest rate hedges that are designated as cash flow hedges hedge the future cash outflows on debt. Interest rate swaps that convert variable payments to fixed payments, interest rate caps, floors, collars and
forwards are cash flow hedges. The unrealized gains/losses in the fair value of these hedges are reported on the balance sheet and included in accounts payable and other liabilities with a corresponding adjustment to either accumulated other
comprehensive income/(loss) or in earnings depending on the hedging relationship. If the hedging transaction is a cash flow hedge, then the offsetting gains/losses are reported in accumulated other comprehensive income/(loss). Over time, the
unrealized gains/losses held in accumulated other comprehensive income/(loss) will be recognized in earnings consistent with when the hedged items are recognized in earnings.





Under the interest rate swap, the Company pays the bank at a fixed rate and receives variable interest at a rate approximating the variable rate of the Companys debt, thereby
creating the equivalent of a fixed rate obligation. The following table summarizes the financial terms of the Companys interest rate swap that begins January 1, 2002:





Notional Value

Variable Rate Received

Fixed Rate Paid

Effective Date

Expiration Date$2,950,000

LIBOR

4.25%

1/1/02

12/1/04





The Company is exposed to market risks related to fluctuations in interest rates
on its debt. Increases in prevailing interest rates could increase the Companys interest payment obligations relating to variable rate debt. For example, a 100 basis points increase in interest rates would increase annual interest expense by
$51,000.




19




---




Item 8.Financial Statements and Supplementary Data





The information required by this item is set forth under Item 14(a), which information is incorporated herein by reference.








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





None.




20




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PART III





Item
10.Directors and Executive Officers of the Registrant








Item
11.Executive Compensation








Item
12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters








Item 13.Certain Relationships and Related Transactions





The information required by Items 10, 11, 12 and 13 of Part III of Form 10-K have been omitted in reliance on General Instruction G(3) to Form 10-K and are incorporated herein by reference to the
Companys definitive proxy statement to be filed with the SEC pursuant to Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended.




21




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PART IV





Item 14.Exhibits, Financial Statement Schedules, and Reports on Form 8-K





(a)  (1)  Financial Statements





Report of Independent Auditors

F-1Consolidated Balance Sheets as of December 31, 2001 and 2000

F-2Consolidated Statements of Operations for the year ended December 31, 2001, the six-month period ended December 31, 2000, the unaudited six-month period ended December 31, 1999, and the fiscal years ended June 30, 2000 and
1999

F-4Consolidated Statements of Shareholders Equity for the year ended December 31, 2001, the six-month period ended December 31, 2000, and the fiscal years ended June 30, 2000 and 1999

F-5Consolidated Statements of Cash Flows for the year ended December 31, 2001, the six-month period ended December 31, 2000, the unaudited six-month period ended December 31, 1999, and the fiscal years ended June 30, 2000 and
1999

F-6Notes to Consolidated Financial Statements

F-7





(a)  (2)  Financial Statement Schedules





All schedules are omitted since the required information is not present or is not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the consolidated financial statements and notes thereto.





(a)
(3) Exhibits








Exhibit No.2.1

Stock Purchase Agreement dated as of December 18, 1998 among Jeannine Mantz, Hadron, Inc., and Vail Research and Technology
Corporation (incorporated by reference to the Companys Current Report on Form 8-K filed January 4, 1999).2.2

Stock Purchase Agreement dated as of May 12, 1999 among Hadron, Inc., Avenue Technologies, Inc. and Six Nations, Inc.
(incorporated by reference to the Companys Current Report on Form 8-K filed May 27, 1999).




22




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|
|

|
|

Exhibit No.2.3

Agreement and Plan of Merger by and among Analex Corporation, certain Sellers, Analex Corporation Employee Stock Ownership Plan
and Trust, Hadron, Inc. and Hadron Acquisition Corp., as of October 31, 2001 (portions omitted pursuant for an application for confidential treatment).3.1

Articles of Incorporation (incorporated by reference to the Companys Registration Statement on Form S-1, Registration No.
T-77699, filed May 21, 1982).3.2

Certificate of Amendment of Certificate of Incorporation of Hadron, Inc. dated August 12, 1993 (incorporated by reference to the
Companys Annual Report on Form 10-K for the fiscal year ended June 30, 1993).3.3

Amended and Restated Bylaws (incorporated by reference to the Companys Annual Report on Form 10-K for the fiscal year ended
June 30, 1991).10.1

Hadron, Inc. 1994 Employee Stock Option Plan, As Amended (incorporated by reference to the Companys Proxy Statement dated
October 28, 1994).10.2

Hadron, Inc. 1997 Employee Stock Purchase Plan (incorporated by reference to the Companys Proxy Statement dated October
28,1997).10.3

Investment Banking Agreement dated January 7, 1999 between Hadron, Inc. and Boles Knop & Company, L.L.C. (incorporated by
reference to the Companys Current Report on Form 8-K filed January 28, 1999).10.4

Amended Stock Purchase Warrant issued to C.W. Gilluly and dated June 2, 1997 (incorporated by reference to the Companys
Annual Report on Form 10-K for the fiscal year ended June 30, 1999 and filed with the Commission on September 28, 1999).10.5

Note Agreement between C.W. Gilluly and Hadron, Inc. dated February 15, 2000 (incorporated by reference to the Companys
Form 10-Q for the fiscal quarter ended March 31, 2000 and filed with the Commission on May 15, 2000).10.6

Stock Purchase Warrant for the purchase of 430,000 shares of common stock issued to C.W. Gilluly by the Company dated February
15, 2000 (incorporated by reference to the Companys Form 10-Q for the fiscal quarter ended March 31, 2000 and filed with the Commission on May 15, 2000).10.7

Securities Purchase Agreement with Jon M. Stout, Patricia W. Stout, the Stout Dynastic Trust, J. Richard Knop and John D. Sanders
and




23




---




|
|

Exhibit No.C.W. Gilluly dated March 30, 2000 (incorporated by reference to the Companys Current Report on Form 8-K filed April 14, 2000).10.8

First Amendment to the Hadron, Inc. 1997 Employee Stock Purchase Plan dated as of February 7, 2000 (incorporated by reference to
the Companys Form S-8 filed with the Commission on February 7, 2000).10.9

First Amendment to the Hadron, Inc. 1994 Stock Option Plan, dated as of September 17, 1997 (incorporated by reference to the
Companys Form S-8 filed with the Commission on February 7, 2000).10.10

Warrant issued to Jon M. Stout to purchase up to 235,161 shares of Hadron, Inc.s Common Stock (incorporated by reference to
the Form 8-K filed with the Commission on April 14, 2000).10.11

Warrant issued to Patricia W. Stout to purchase up to 230,769 shares of Hadron, Inc.s Common Stock (incorporated by
reference to the Form 8-K filed with the Commission on April 14, 2000).10.12

Warrant issued to Stout Dynastic Trust up to 1,015,380 shares of Hadron, Inc.s Common Stock (incorporated by reference to
the Form 8-K filed with the Commission on April 14, 2000).10.13

Warrant issued to J. Richard Knop to purchase up to 462,690 shares of Hadron, Inc.s Common Stock (incorporated by reference
to the Form 8-K filed with the Commission on April 14, 2000).10.14

Warrant issued to John D. Sanders to purchase up to 81,000 shares of Hadron, Inc.s Common Stock (incorporated by reference
to the Form 8-K filed with the Commission on April 14, 2000).10.15

Voting Agreement among certain holders of the common stock of Hadron, Inc., C.W. Gilluly and Jon M. Stout, Patricia W. Stout, the
Stout Dynastic Trust and J. Richard Knop dated March 30, 2000 (incorporated by reference to the Form 8-K filed with the Commission on April 14, 2000).10.16

Severance Agreement between the Company and Donald Kellmel dated May 23, 2000 (incorporated by reference to the Form 10-K for the
transition period ended December 31, 2000 and filed with the Comission on May 11, 2001).10.17

Agreement between Dr. C.W. Gilluly and the Company dated July 1, 2000, relating to consulting services (incorporated by reference
to the Companys Annual Report on Form 10-K for the fiscal year ended June 30, 2000 and filed with the Commission on September 28, 2000).10.18

Consulting Agreement between S.A. Gordon Enterprises, Inc. and the Company dated August 14, 2000 (incorporated by reference to
the Companys Annual Report on Form 10-K for the fiscal year ended June 30, 2000 and filed with the Commission on September 28, 2000.




24




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Exhibit No.10.19

Hadron, Inc. 2000 Employee Stock Option Plan (incorporated by reference to the Companys Proxy Statement dated October 30,
2000).10.20

Second Amendment to the Hadron, Inc. 1997 Employee Stock Purchase Plan dated as of February 7, 2000 (incorporated by reference to
the Companys Form S-8 filed with the Commission on May 8, 2001).10.21

Form of Amendment to Consulting Agreement between C.W. Gilluly and the Company dated January 16, 2001 (incorporated by reference
to the exhibits filed with the Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 2001 filed with the Commission onAugust 14, 2001).10.22

Form of Amendment to Employment Agreement between Jon M. Stout and the Company dated January 16, 2001(incorporated by reference
to the exhibits filed with the Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 2001 filed with the Commission on August 14, 2001).10.23

Form of Employment Agreement between the Company and Sterling E.Phillips, Jr. dated January 16, 2001 (incorporated by reference
to the exhibits filed with the Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 2001 filed with the Commission on August 14, 2001).10.24

Promissory Note between Peter C. Belford, Sr. and Hadron, Inc. dated November 5, 2001, pursuant to the Agreement and Plan of
Merger between Hadron, Inc. and Analex Corporation.10.25

Promissory Note between Lese Ann Kodger and Hadron, Inc. dated November 5, 2001, pursuant to the Agreement and Plan of Merger
between Hadron, Inc. and Analex Corporation.10.26

Promissory Note between Alex Patterson and Hadron, Inc. dated November 5, 2001, pursuant to the Agreement and Plan of Merger
between Hadron, Inc. and Analex Corporation.10.27

Employment Agreement of Peter C. Belford, Sr. dated November 5, 2001 (portions omitted pursuant to an application for
confidential treatment).10.28

Credit Agreement between Hadron, Inc. and Bank of America, N.A. dated November 2, 2001 (portions omitted pursuant to an
application for confidential treatment).10.29

Security Agreement between Hadron, Inc. and Bank of America, N.A. dated November 2, 2001.10.30

Pledge Agreement between Hadron, Inc. and Bank of America, N.A. dated November 2, 2001.




25




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Exhibit No.10.31

Hadron, Inc. Term Loan Note between Hadron, Inc. and Bank of America, N.A. dated November 2, 2001.10.32

Hadron, Inc. Revolving Credit Facility Note between Hadron, Inc. and Bank of America, N.A. dated November 2, 2001.10.33

Form of Securities Purchase Agreement between Hadron, Inc., Gerald McNichols, Michael Besche, VBB Trust, S Co., LLC, RSSJ
Associates, LLC, Norman Dreyfuss, Deepak Chopra, George Tonn and Frank Derwin dated November 2, 2001.10.34

Form of Warrant to Purchase Shares of Common Stock of Hadron, Inc. issued in connection with Securities Purchase Agreement dated
November 2, 2001.10.35

Warrant to Purchase Shares of Common Stock issued to J. Richard Knop in Guarantee of Bank of America Loan dated November 2,
2001.10.36

Warrant to Purchase Shares of Common Stock issued to Gerald McNichols in Guarantee of Bank of American Loan dated November 2,
2001.10.37

Continuing and Unconditional Guaranty between Bank of America, N.A. and Subsidiaries (Advanced Biosystems, Inc.; Avenue
Technologies, Inc.; Engineering and Information Services, Inc.; Sycom Services, Inc.; Vail Research and Technology Corporation; and Hadron Acquisition Corp.) dated November 2, 2001.21

Subsidiaries of the Company.23

Consent of Independent Auditors.





(b)  Reports on Form 8-K





On November 5, 2001, the Company filed a report on Form 8-K disclosing that it had entered into an Agreement and Plan of Merger dated as of October 31,
2001 with Analex Corporation and its equity holders pursuant to which Analex Corporation would be merged with and into a wholly-owned subsidiary of Hadron.





On January 4, 2002, the Company filed a report on Form 8-K/A amending its Current Report on Form 8-K dated November 5, 2001 by the addition of required financial statements.




26




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SIGNATURES





Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.





Date:  March 26, 2002



HADRON, INC.By:

/s/    STERLING E. PHILLIPS, JR.



By:

/s/    RONALD B. ALEXANDERSterling E. Phillips, Jr. Chief Executive Officer and
President (Principal Executive Officer)





Ronald B. Alexander Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)





Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated.





Signature

Title

Date/s/    PETER C. BELFORD, SR. Peter C. Belford, Sr.

Director

March 26, 2002/S/    C.W. GILLULY C.W. Gilluly

Director

March 26, 2002/S/    GERALD R. MCNICHOLS Gerald R. McNichols

Director

March 26, 2002/S/    STERLING E. PHILLIPS,
JR. Sterling E. Phillips, Jr.

Director

March 26, 2002/S/    JOHN D. SANDERS John D. Sanders

Director

March 26, 2002/S/    JON M. STOUT
Jon M. Stout

Chairman

March 26, 2002/S/    SHAWNA L.
STOUT Shawna L. Stout

Director

March 26, 2002/S/    GERALD R.
YOUNG Gerald R. Young

Director

March 26, 2002




27




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REPORT OF INDEPENDENT AUDITORS





Board of Directors and Shareholders


Hadron, Inc.





We have audited the
accompanying consolidated balance sheets of Hadron, Inc. and subsidiaries as of December 31, 2001 and 2000 and the related consolidated statements of operations, shareholders equity, and cash flows for the year ended December 31, 2001, the
six-month transition period ended December 31, 2000 and for each of the two years in the period ended June 30, 2000. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on
these financial statements based on our audits.





We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.





In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects, the consolidated financial position of Hadron, Inc. and subsidiaries at December 31, 2001 and 2000, and the consolidated results of their operations and their cash flows for the year ended
December 31, 2001, the six-month transition period ended December 31, 2000 and for each of the two years in the period ended June 30, 2000, in conformity with accounting principles generally accepted in the United States.





As discussed in Note 2 to the consolidated financial statements, the Company adopted Statements of Financial Accounting Standards No. 141 and 142 for
acquisitions subsequent to July 1, 2001.








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




McLean, Virginia


March 1, 2002




F-1




---




HADRON, INC.





CONSOLIDATED BALANCE SHEETS


DECEMBER 31, 2001 AND 2000


December 31,2001

2000ASSETSCurrent assets:Cash and cash equivalents

$
83,100

$
234,900Accounts receivable, net


9,152,800


3,237,300Prepaid expenses and other


223,300


163,800Total current assets


9,459,200


3,636,000Fixed assets, net


260,600


284,800Goodwill and other intangibles, net


16,488,600


1,809,600Deferred finance costs


72,500


Other


119,400


53,500Total other assets


16,941,100


2,147,900Total assets

$
26,400,300

$
5,783,900








See Notes to Consolidated Financial Statements




F-2




---

HADRON, INC.





CONSOLIDATED BALANCE SHEETS


DECEMBER 31, 2001 AND 2000








December 31,2001


2000LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable

$
1,371,400


$
529,500Note payableline of credit


1,696,500



907,100Notes payable


1,538,500



600,000Other current liabilities


4,779,400



1,333,700Total current liabilities


9,385,800



3,370,300Notes payable


5,004,200



351,700Other


835,200



60,000Total long-term liabilities


5,839,400



411,700Commitments and contingenciesTotal liabilities


15,225,200



3,782,000Shareholders equity:Common stock $.02 par; authorized 20,000,000 shares; issued and outstandingDecember 31, 2001, 14,375,975 shares and
December 31, 2000, 6,450,913 shares


287,500



129,000Additional capital


20,726,300



11,885,300Deferred compensation


(22,300
)


Accumulated deficit


(9,816,400
)


(10,012,400
)Total shareholders equity


11,175,100



2,001,900Total liabilities and shareholders equity

$
26,400,300


$
5,783,900





See Notes to Consolidated Financial Statements




F-3




---




HADRON, INC.





CONSOLIDATED STATEMENTS OF OPERATIONS


FOR THE YEAR ENDED DECEMBER 31, 2001, THE SIX MONTH PERIOD ENDED


DECEMBER 31, 2000, THE SIX MONTH UNAUDITED PERIOD ENDED DECEMBER 31, 1999,


AND THE FISCAL YEARS ENDED JUNE 30, 2000 AND 1999





Year Ended December 31, 2001


Six Month Period Ended December 31, 2000


Six Months Ended December 31, 1999 (Unaudited)


Fiscal Year Ended June 30, 2000


Fiscal Year EndedJune 30, 1999Revenues

$
21,936,000


$
8,943,400


$
10,267,300


$
19,901,300


$
20,333,200Operating costs and expenses:Costs of revenue


18,157,800



7,600,700



8,753,200



16,572,200



17,734,800Selling, general and administrative


3,324,200



1,153,000



1,995,200



3,749,900



2,535,400Total operating costs and expenses


21,482,000



8,753,700



10,748,400



20,322,100



20,270,200Operating income (loss)


454,000



189,700



(481,100
)


(420,800
)


63,000Other income (expense):Interest income


8,600







600



8,100



2,600Interest expense


(225,200
)


(112,000
)


(167,100
)


(332,600
)


(80,800
)Other income (expense)


(21,800
)


7,100



16,600



21,800



63,500Total other expense


(238,400
)


(104,900
)


(149,900
)


(302,700
)


(14,700
)Income (loss) before income taxes


215,600



84,800



(631,000
)


(723,500
)


48,300Provision for income taxes


19,600











21,300



13,900Net income (loss)

$
196,000


$
84,800


$
(631,000
)

$
(744,800
)

$
34,400Net income (loss) per share:Basic

$
0.03


$
0.01


$
(0.24
)

$
(.23
)

$
0.02Diluted

$
0.02


$
0.01


$
(0.24
)

$
(.23
)

$
0.01Weighted average number of shares:Basic


7,721,779



6,153,914



2,599,915



3,276,269



1,794,775Diluted


9,588,029



7,118,895



2,599,915



3,276,269



2,579,439











See Notes
to Consolidated Financial Statements




F-4




---




HADRON, INC.





CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY


FOR THE YEAR ENDED DECEMBER 31, 2001,


THE SIX MONTH PERIOD ENDED DECEMBER 31, 2000


AND THE FISCAL YEARS ENDED JUNE 30, 2000 AND 1999





Common Stock

Additional Capital

Deferred Compensation


Accumulated Deficit


TotalShares

AmountBalanceJune 30, 1998

1,731,956

$
34,700

$
9,374,100

$



$
(9,386,800
)

$
22,000Shares issued for services

75,000


1,500


73,500










75,000Shares purchased pursuant to the Employee Stock Purchase Plan

75,896


1,400


99,200










100,600Exercise of warrants

400,000


8,000


92,000










100,000Shares issued upon conversion of debt

200,000


4,000


116,000










120,000Exercise of options

4,666


100


3,500










3,600Net income














34,400



34,400BalanceJune 30, 1999

2,487,518


49,700


9,758,300






(9,352,400
)


455,600Shares purchased pursuant to the Employee Stock Purchase Plan

118,722


2,400


48,000










50,400Exercise of warrants

220,000


4,400


50,600










55,000Exercise of options

78,166


1,600


27,000










28,600Shares issued upon conversion of debt

676,933


13,500


842,100










855,600Shares issued pursuant to sale of common stock

2,250,000


45,000


790,000










835,000Net loss














(744,800
)


(744,800
)BalanceJune 30, 2000

5,831,339


116,600


11,516,000






(10,097,200
)


1,535,400Shares purchased pursuant to the Employee Stock Purchase Plan

19,180


400


13,900










14,300Exercise of warrants

462,894


9,300


324,000










333,300Exercise of options

62,500


1,200


25,300










26,500Shares issued pursuant to sale of common stock

75,000


1,500


6,100










7,600Net income














84,800



84,800BalanceDecember 31, 2000

6,450,913


129,000


11,885,300






(10,012,400
)


2,001,900Shares issued pursuant to sale of common stock

4,027,727


80,600


3,837,000










3,917,600Shares and warrants issued pursuant to acquisition of Analex

3,572,143


71,400


4,687,200










4,758,600Deferred stock compensation







38,800


(38,800
)






Amortizaton of deferred stock compensation










16,500







16,500Shares purchased pursuant to the Employee Stock Purchase Plan

39,964


800


40,400










41,200Exercise of options and warrants

285,228


5,700


237,600










243,300Net income














196,000



196,00014,375,975

$
287,500

$
20,726,300

$
(22,300
)

$
(9,816,400
)

$
11,175,100





See Notes to Consolidated Financial Statements







F-5




---




HADRON, INC.





CONSOLIDATED STATEMENTS OF CASH FLOWS


FOR THE YEAR ENDED DECEMBER 31, 2001, THE SIX MONTH PERIOD


ENDED DECEMBER 31, 2000, THE SIX MONTH UNAUDITED PERIOD ENDED


DECEMBER 31, 1999 AND THE FISCAL YEARS ENDED JUNE 30, 2000 AND 1999





Year Ended December 31, 2001


Six Month Period Ended December 31, 2000


Six Month Period Ended December 31, 1999 (unaudited)


Fiscal YearEndedJune 30, 2000


Fiscal Year Ended June 30, 1999Cash flows from operating activities:Net income (loss)

$
196,000


$
84,800


$
(631,000
)

$
(744,800
)

$
34,400Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities:Depreciation and amortization


146,200



67,500



36,700



113,300



56,200Goodwill amortization


378,000



162,000



172,000



344,000



41,000Deferred finance costs


37,500















Stock compensation expense


16,500















Changes in operating assets and liabilities:Accounts receivable


(940,700
)


217,200



141,400



41,200



1,768,600Prepaid expenses and other


(39,100
)


(35,000
)


89,800



81,300



(127,400
)Other assets


(11,300
)


5,200



86,200



86,500



(67,100
)Accounts payable


108,600



(250,200
)


(123,200
)


(137,400
)


(254,400
)Other current liabilities


(327,100
)


(289,300
)


(135,700
)


(268,800
)


(968,400
)Other long-term liabilities






(40,000
)


(20,800
)


37,400



(13,300
)Total adjustments


(631,400
)


(162,600
)


246,400



297,500



435,200Net cash provided (used) by operating activities


(435,400
)


(77,800
)


(384,600
)


(447,300
)


469,600Cash flows from investing activities:Property additions


(86,000
)


(132,800
)


(2,400
)


(41,600
)


(121,800
)Purchase of Analex, net of cash acquired


(6,167,900
)














Purchase of Vail and ATI, net of cash acquired


















(378,700
)Net cash provided (used) by investing activities


(6,253,900
)


(132,800
)


(2,400
)


(41,600
)


(500,500
)Cash flows from financing activities:Proceeds from borrowings on bank and other loans


5,500,000



1,326,400



1,496,600



1,926,600



850,000Proceeds from stock options and warrants exercised


243,300



359,800



58,800



83,600



103,600Proceeds from employee stock purchases


41,200



14,300



36,700



50,400



100,600Proceeds from sale of common stock


3,917,600



7,600







835,000



Payments on bank and other loans


(3,164,600
)


(1,380,600
)


(1,267,900
)


(2,544,700
)


(827,800
)Net cash provided (used) by financing activities


6,537,500



327,500



324,200



350,900



226,400Net increase (decrease) in cash and cash equivalents


(151,800
)


116,900



(62,800
)


(138,000
)


195,500Cash and cash equivalents at beginning of period


234,900



118,000



256,000



256,000



60,500Cash and cash equivalents at end of period

$
83,100


$
234,900


$
193,200


$
118,000


$
256,000








See Notes to Consolidated Financial Statements




F-6




---



HADRON, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




1.    The Company:





Hadron, Inc. (Hadron or the Company) supports homeland security through the design, implementation and support of innovative solutions that enhance the United States ability to detect,
defend and respond to threats from hostile countries or terrorists. The Company specializes in three facets of homeland security: intelligence systems, bio-defense and aerospace programs.





Revenues from services performed under direct and indirect long-term contracts and subcontracts with government defense and intelligence agencies comprise the majority of the
Companys business. The majority of the Companys technical and professional services business with governmental departments and agencies is obtained through competitive procurement and through follow-on services related to existing
contracts. In certain instances, however, the Company acquires such service contracts because of special professional competency or proprietary knowledge in specific subject areas.








2.    Summary of significant accounting policies:





A.  Principles of consolidation:





The consolidated financial statements include
the accounts of Hadron, Inc. and its three active wholly owned subsidiaries, Advanced Biosystems, Inc. (ABS), Analex Corporation (Analex), and SyCom Services, Inc. (SyCom)(the Company). All significant
intercompany transactions have been eliminated.








B.  Risks and
uncertainties:





Financial instruments that potentially subject the Company to concentrations of credit risk consist
principally of cash and cash equivalents, and accounts receivable. The Company maintains its cash and cash equivalents principally in five United States (U.S.) commercial banks. Cash in excess of daily requirements is invested by the
banks in one-day repurchase agreements of securities of U.S. government agencies. To date, the Company has not incurred losses related to cash and cash equivalents.





The Companys accounts receivable consists principally of accounts receivable from prime contractors to agencies and departments of, as well as directly from, the U.S. government.
The Company extends credit in the normal course of operations and does not require collateral from its customers.




F-7




---



HADRON, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







The Company has historically been, and continues to be, heavily dependent upon
direct and indirect contracts from various U.S. government agencies. Contracts and subcontracts with the U.S. government are subject to audit by audit agencies of the government. Such audits determine, among other things, whether an adjustment of
invoices rendered to the government is appropriate under the underlying terms of the contracts. All U.S. government contracts contain clauses that allow for the termination of contracts at the convenience of the government.





The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities and contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ
from those estimates.








C.  Cash equivalents:





Cash equivalents represent amounts invested in highly liquid short-term investments with original maturities of three months or less.








D.  Fixed assets:





Furniture and equipment and leasehold improvements are stated at cost. The Company uses the straight-line method of depreciation and amortization over the estimated useful lives of the
furniture and equipment (principally three to ten years) and over the lease term for leasehold improvements, if shorter.





Maintenance and repairs are charged to expense as incurred, and the cost of additions and betterments are capitalized. When assets are retired or sold, the cost and related accumulated depreciation are removed from the accounts and the gain
or loss is included in operations.





Purchased software is capitalized at cost. Such costs are amortized using the straight-line
method for a period of up to five years.








E.  Goodwill and Other Intangible
Assets:





Goodwill related to the acquisition of Avenue Technologies, Inc. (ATI) in May 1999, was amortized using
the straight-line method for a period of seven years. In 2001, the six-month periods ended December 31, 2000 and 1999 and the fiscal years 2000 and 1999, respectively, the Company recorded goodwill




F-8




---



HADRON, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







amortization of $337,000, $162,000, $172,000, $344,000 and $41,000. As of December 31, 2001, the accumulated
amortization of goodwill is $884,000.





In June 2001, the Financial Accounting Standards Board issued Statements of Financial
Accounting Standards No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill will no longer be amortized
but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives. If SFAS No. 142 had been adopted at the beginning of 2001, the absence of goodwill
amortization would have increased 2001 income before taxes by approximately $337,000.





Goodwill related to the acquisition of
Analex in November 2001 is subject to SFAS 142, and accordingly has not been amortized. Other intangible assets identified in connection with the acquisition, including non-compete arrangements and contractual relationships, are amortized on a
straight-line basis over their estimated lives ranging from three to ten years.








F.  Accounting for contracts:





Revenues on time and material contracts are recorded at the contracted
rates as the labor hours and out-of-pocket expenses are incurred. Revenues from fixed-price and cost-plus-fixed-fee contracts are generally recorded on the percentage-of-completion method, determined by the percentage that incurred costs bear to
estimated total costs or on engineering estimates. As soon as it is determined that it is probable a contract will result in a loss and the loss can be reasonably estimated, the entire estimated loss is charged to operations.





In accordance with industry practice, accounts receivable relating to long-term contracts are classified as current assets although an
indeterminable portion of these amounts is not expected to be realized within one year.








G.  Income taxes:





The provision for income taxes has been limited to state taxes and the liability
for alternative minimum tax as the majority of income for federal and state tax purposes has been offset by carrying forward net operating losses.








H.  Stock-based compensation:




F-9




---



HADRON, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







The Company accounts for stock option grants in accordance with APB Opinion No. 25,
Accounting for Stock Issued to Employees, and accordingly recognizes compensation expense for the difference between the fair market value and the exercise price on the grant date for the stock option grants.








I.  Reclassifications:





Certain prior period amounts have been reclassified to conform to the 2001 presentation.








3.    Accounts receivable:





The components of accounts
receivable are as follows:





December 31,2001


2000Trade accounts receivable:U.S. Government:Amounts billed

$
5,252,000


$
875,000Recoverable costs and profitsnot billed


2,337,600



2,020,600Total


7,589,600



2,895,600Commercial, state and local governments:Amounts billed


725,800



24,600Recoverable costs and profitsnot billed


988,600



468,300Total


1,714,400



492,900Total accounts receivable


9,304,000



3,388,500Less: Allowance for doubtful accounts


(151,200
)


(151,200
)Total accounts receivable, net

$
9,152,800


$
3,237,300





The following table summarizes activity in the allowance for
doubtful accounts:




F-10




---



HADRON, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Calendar year 2001

6 months 12/31/00

Unaudited 6 months 12/31/99


Fiscal year 2000


Fiscal year 1999Beginning balance

$
151,200

$
151,200

$
253,700


$
253,700


$
209,800Additions
















93,900Write-offs








(104,300
)


(102,500
)


(50,000
)Ending Balance

$
151,200

$
151,200

$
149,400


$
151,200


$
253,700





The amount of customer retentions included in U.S. Government unbilled accounts
receivable is $28,000 at December 31, 2001 and 2000.





Unbilled accounts receivable can be invoiced upon completion of
contractual billing cycles, attaining certain milestones under fixed-price contracts, attaining a stipulated level of effort on cost-type contracts for government agencies, upon completion of federal government overhead audits and upon final
approval of design plans for engineering services.








4.    Fixed assets:





The components of fixed assets are as follows:





December 31,2001


2000Computer hardware and software

$
747,400


$
688,500Leasehold improvements


27,700



3,900Laboratory equipment


141,400



113,300Office equipment


150,800



136,900Total fixed assets


1,067,300



942,600Less: Accumulateddepreciation and amortization


(806,700
)


(657,800
)Total fixed assets, net

$
260,600


$
284,800








5.    Debt:





The components of debt are as follows:




F-11




---



HADRON, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







December 31,2001

2000Current:Line of Credit

$
1,696,500

$
907,100Bank Term Note


700,000


500,000Convertible Notes


101,700


Notes Payable Shareholder


154,500


Note Payable Other


100,000


100,000Non-compete Agreements


261,900


Note to DOJ


207,300


Other


13,100


Subtotal current debt


3,235,000


1,507,100Long-term:Bank Term Note


2,741,600


250,000Convertible Notes





101,700Notes Payable Shareholder


618,100


Non-compete Agreements


616,600


Note to DOJ


1,025,500


Other


2,400


Subtotal long-term debt


5,004,200


351,700Total debt

$
8,239,200

$
1,858,800





On November 2, 2001, to finance the acquisition of Analex, the Company entered
into a Credit Agreement (Agreement) with Bank of America, N.A. The Agreement provides the Company with a $4,000,000 revolving credit facility (the Credit Facility) through November 2, 2006 and a five-year $3,500,000 term loan
(Term Loan). The principal amount of the Term Loan is amortized in sixty equal monthly payments of $58,333. Interest on each of the facilities is at the LIBOR Rate plus an applicable margin as specified in a pricing grid. The interest
rate at December 31, 2001 was 4.68% for the Credit Facility and 5.39% for the Term Loan. The Company is subject to certain financial covenants pursuant to the Agreement, including debt to EBITDA ratio, fixed charge coverage ratio, senior debt to
EBITDA ratio, and net worth requirements. The Credit Facility and Term Loan are secured by the accounts receivable and other assets of the Company. The Company has entered into an interest rate swap agreement, and interest rate payments will be
fixed beginning in January 2002.





The Companys $3.5 million term loan facility from Bank of America carries interest
comprised of two components: floating-rate LIBOR plus a credit performance margin. The Company has entered into an interest-rate swap agreement with Bank of America whereby its obligation to pay floating-rate LIBOR on debt totaling $2,950,000 is
swapped into a fixed rate obligation at 4.25% beginning in January 2002. The Company continues to have the obligation to pay the credit performance margin in addition to its swapped 4.25% payment obligation.




F-12




---



HADRON, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)




In addition, the Company was required by Bank of America to obtain personal guarantees in the amount of $2,000,000, which
the Company procured from two individuals, the Companys Board member Gerald R. McNichols and the Companys Investment Banker J. Richard Knop. The compensation during the period of guaranty is in the form of cash and warrants.





On November 2, 2001, the Company issued promissory notes to certain Analex sellers totaling $772,600 with a five-year term,
bearing interest at 6%. The Company also entered into non-competition agreements with these sellers for total payments of $540,000 over a three-year period. In addition, the Company entered into non-competition agreements with former employees
totaling $352,000, on a discounted basis, payable over various periods.





With its purchase of Analex, the Company assumed a note
payable to the Department of Justice (DOJ). The agreement provides for quarterly payments of $80,000 consisting of principal and interest at 7% through February 2006, with a final payment due in May 2006.





In May 1999, the Company issued three-year $998,000 convertible notes, interest payable at 6%, to the former shareholders of ATI in connection with the
Companys acquisition of ATI. The notes are convertible into 444,000 restricted shares of the Companys Common Stock at $2.25 per share. These notes are subordinated to the Companys obligations under the Term Note and the Credit
Facility. In May 2000, the Board of Directors adopted resolutions providing for the conversion of the convertible notes on the basis of one share of Common Stock for $1.25 per share if tendered to Hadron for conversion before the close of business
on June 30, 2000. At June 30, 2000, $846,000 of the convertible notes were converted into 677,000 restricted shares of the Companys Common Stock at the $1.25 per share. As of December 31, 2001, two convertible notes totaling $102,000 remain.





In connection with the December 1998 purchase of Vail Research and Technology Corporation (Vail), the Company
issued two non-interest bearing promissory notes of $300,000 and $100,000, respectively. The $300,000 non-interest bearing note was payable each month in the amount of $25,000 for twelve months. The $100,000 non-interest bearing promissory note was
due and payable on the two-year anniversary of the closing date, less permitted deductions taken for contingent liabilities and uncollected accounts receivable. The Company is currently reviewing the permitted deductions and the status of the note
payable.




F-13




---



HADRON, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







The Companys future debt maturities at December 31, 2001 are summarized
below:





Year

Debt Maturities2002

$
3,235,0002003


1,369,4002004


1,384,7002005


1,223,7002006


1,026,400Total minimum debt payments


8,239,200Less: current maturities


(3,235,000
)Total long-term debt

$
5,004,200








6.    Equity capital:





Pursuant to the November 2, 2001 acquisition of Analex, the Company issued 3,572,143 shares of the Companys Common Stock to the
shareholders representing all of the outstanding equity of Analex (the Sellers). Of the 3,572,143 shares, 857,143 shares are subject to a provision by which the Company guarantees for a five-year period to reimburse the Sellers the
difference between the price at which they sell such shares and a guaranteed sales price ranging from $1.60 to $2.20 per share (Guaranteed Shares), if such shares are sold within such period and if certain other conditions are satisfied.





To finance the acquisition of Analex, the Company issued 3,961,060 shares of common stock for aggregate consideration of
approximately $3,868,000 through a private placement consisting of (i) Hadron Common Stock at a price of $1.14 per share to purchasers who purchased less than $500,000 worth thereof or (ii) units consisting of Hadron Common Stock and warrants to
purchase 0.2061 shares of Hadron Common Stock at an exercise price of $0.02 per share for each share purchased at a price of $1.14 per unit for purchasers who purchased $500,000 or more of Hadrons equity. Two of such purchasers are directors
or affiliates of a director. The warrants were exercised concurrent with the stock purchase.





On November 2, 2001, to assist in
financing the Analex acquisition, Dr. C.W. Gilluly, one of the Companys directors, and J. Richard Knop, President of the Companys investment banking firm, Windsor Group, exercised warrants and/or stock options to purchase an aggregate of
247,888 shares of common stock, resulting in proceeds of approximately $200,000.




F-14




---



HADRON, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







On January 16, 2001, Sterling E. Phillips, Jr. was appointed to the positions of
President and Chief Executive Officer of the Company. Mr. Phillips was also elected to serve as a member of the Companys Board of Directors. In connection with his appointment, Mr. Phillips purchased 66,667 shares of Common Stock for $0.75 per
share. As a result of this transaction, the Company recorded deferred compensation of $10,800, $5,400 of which was amortized during 2001. In addition, Mr. Phillips was awarded a five-year, non-qualified stock option to purchase 875,725 shares of the
Companys common stock at the exercise price equal to 100% of the fair market value of the common stock on the grant date, exercisable in one-third increments over a two-year period.








7.    Other current liabilities:





Other current liabilities include the following major classifications:





December 31,2001

2000Payroll and related taxes

$
2,599,900

$
696,000Accrued vacation


1,162,700


277,000Self-insured medical expense


88,300


88,300Due to subcontractors


175,000


213,200Deferred income


434,500


Other


319,000


59,200Total other current liabilities

$
4,779,400

$
1,333,700








8.    Acquisitions:





Effective November 2001, the Company acquired Analex, a professional services and program management firm whose principal customers are NASA
and the U.S. intelligence community, for approximately $12,898,000. The purchase price was satisfied with cash payments of $6,510,000, 3,572,143 shares of Common Stock valued at $4,723,000, the issuance of promissory notes of $773,000, non-compete
arrangements of $892,000, and the satisfaction of other certain liabilities of Analex. The purchase price is subject to additional contingent consideration related to certain contract rights of up to $1,500,000. The acquisition of Analex should
increase the Companys presence in the intelligence community and provide an additional earnings base from which the Company can grow.





The fair value of the assets acquired and liabilities assumed approximated their book value of $5,058,000 and $6,647,000, respectively. The Company incurred financial, legal and accounting costs associated with the
Analex purchase of approximately $570,000.




F-15




---



HADRON, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Following is a condensed balance sheet reflecting the tentative purchase price
allocation:





Cash

343,100Accounts receivable and other assets

4,624,600Goodwill and other intangibles

15,057,000Other long term assets

90,300Current liabilities

5,274,500Long term debt and other liabilities

1,372,500





Resulting from the acquisition of Analex, the Company recorded goodwill and other
intangibles of approximately $15,057,000. The purchase price has not yet been finalized due to certain contingencies associated with contract rights and other potential adjustments. Accordingly, the final purchase price allocation has not been
completed.





Goodwill related to the acquisition of Analex in November 2001 is subject to SFAS 142, and accordingly has not been
amortized. Other intangible assets identified in connection with the acquisition, including non-compete arrangements and contractual relationships, are amortized on a straight-line basis over their estimated lives ranging from three to ten years.





The following table sets forth adjusted pro forma results of operations of the Company for 2001, the six month period ended
December 31, 2000 and the fiscal year 2000, as if Analex had been acquired on July 1, 1999. The proforma amounts do not reflect potential additional amortization resulting from finalization of the purchase price allocation.





2001

Six months 12/31/00

Fiscal Year 2000Net revenues

$
49,126,600

$
24,772,400

$
49,733,300Net income (loss)

$
910,200

$
1,242,100

$
(650,500
)Net income (loss) per share:Basic

$
.06

$
.09

$
(.06
)Diluted

$
.05

$
.08

$
(.06
)





Effective December 18, 1998, the Company acquired Vail, a privately held
information and technology firm based in Annandale, Virginia, for approximately $1,580,000. On May 12, 1999, the Company acquired all the outstanding capital stock of ATI, a privately held information technology firm based in Alexandria, Virginia,
for $2,503,000. Resulting from the acquisition of ATI, the Company recorded goodwill of approximately $2,287,000, which was being amortized, on a straight-line basis, over a 7-year period.





9.    Net income (loss) per share:





The following table
sets forth the computation of basic and diluted earnings per share:




F-16




---



HADRON, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







2001

6 mos 12/31/00

Unaudited 6 mos 12/31/99


Fiscal 2000


Fiscal 1999Numerator:Net income (loss)

$
196,000

$
84,800

$
(631,000
)

$
(744,800
)

$
34,400Weighted average shares outstanding


7,721,779


6,153,914


2,599,915



3,276,269



1,794,775Effect of dilutive securities:Warrants


1,413,289


892,288










527,738Employee stock options


452,961


72,693










256,926Denominator for diluted earnings per share


9,588,029


7,118,895


2,599,915



3,276,269



2,579,439Basic earnings per share

$
.03

$
.01

$
(.24
)

$
(.23
)

$
.02Diluted earnings per share

$
.02

$
.01

$
(.24
)

$
(.23
)

$
.01





Shares issuable upon the exercise of stock options or warrants or upon conversion
of debt have been excluded from the computation to the extent that their inclusion would be anti-dilutive.








10.    Income taxes:





The provision for income taxes for 2001, the six month periods ended
December 31, 2000 and 1999, and the fiscal years 2000 and 1999 has been limited to state taxes and the liability for alternative minimum tax as the majority of income for federal and state tax purposes has been offset by carrying forward net
operating losses.





The tax provision differs from the amounts computed using the statutory federal income tax rate as follows:





2001


6 mos 12/00


6 mos 12/99


FY 2000


FY 1999Tax expense at statutory rate-federal

35
%

35
%

(35
)%

(35
)%

35
%State tax expense net of federal taxes

13


3


1


1


29Permanent differences

63


158


17


17


38Utilization of net operating loss carry forwards

(102
)

(196
)

17


20


(73
)Tax expense at actual rate

9
%

0
%

0
%

3
%

29
%





Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting and income tax purposes. Deferred tax assets at December 31, 2001 and 2000 consist primarily of




F-17




---



HADRON, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)




temporary differences, including net operating loss carryforwards, which aggregate to approximately $2,314,000 and $2,187,000, respectively, and are
fully reserved.





The Company has net operating loss (NOL) carryforwards for federal and state purposes available to offset
future taxable income of approximately $5,013,000 as of December 31, 2001, which may be subject to limitations under Section 382 of the Internal Revenue Code. These NOL carryforwards expire at various dates beginning June 30, 2008.








11.    Commitments and contingencies:





Operating leases:





The Company leases real property and
personal property under various long-term operating leases and sublease agreements expiring at various dates through 2006. Certain of the leases contain renewal options and require payment of property taxes, insurance and maintenance costs. The
Companys future minimum operating lease commitments inclusive of property taxes, insurance and maintenance costs at December 31, 2001 are summarized below:





Year

Lease Commitments2002

$
1,022,6002003


614,5002004


590,7002005


408,3002006


48,300Total minimum payments required

$
2,684,400





Rent expense, net of sublease income, included in the consolidated statements of
operations is as follows:





Period

Rent Expense2001

$
572,9006 Months 2000


247,5006 Months 1999(unaudited)


272,100Fiscal Year 2000


530,300Fiscal Year 1999


235,700








U.S. government contract audits:




F-18




---



HADRON, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







The Companys revenues and costs related to contracts with agencies and
departments of the U.S. government are subject to audit by the Defense Contract Audit Agency, which has completed the majority of its audits for the Companys fiscal years through fiscal year 1997. It is the opinion of management that the
results of such audits will not have a material effect on the financial condition or results of operations of the Company.








12.    Benefit plans:





Employee savings plan:





The Company sponsors a defined contribution savings plan under section 401(k) of the Internal Revenue Code. The Companys contributions
to the 401(k) plan are based upon a percentage of employee contributions. The Companys discretionary contributions to the Plan were $432,000, $79,000, $69,000, $150,000 and $147,000 for 2001, the six month periods ended December 31,
2000 and 1999, and the fiscal years 2000 and 1999, respectively.








Employee stock
purchase plan:





In December 1997, shareholders approved the Hadron, Inc. 1997 Employee Stock Purchase Plan (the
Plan). In fiscal year 2000 and the six-month period ended December 31, 2000, amendments to the Plan were adopted to increase the number of shares reserved for issuance thereunder from 250,000 to 500,000. The purpose of the Plan is to
secure for the Company and its shareholders the benefits of the incentive inherent in the ownership of Common Stock by present and future employees of the Company. The Plan is intended to comply with the terms of Section 423 of the Internal Revenue
Code of 1986, as amended, and Rule 16b-3 of the Securities Exchange Act of 1934. The Plan is non-compensatory as defined by APB 25. Under the terms of the Plan, individual employees may pay up to $10,000 for the purchase of the Companys common
shares, at 85% of the determined market price. During 2001, the six month periods ended December 31, 2000 and 1999, and the fiscal years 2000 and 1999, employees paid approximately $41,000, $14,000, $37,000, $50,000 and $101,000, respectively, for
the purchase of common stock under the Plan.








Employee deferred compensation plan:





In December 1998, shareholders approved the Hadron, Inc. Deferred Compensation Plan (the Plan). The Plan is
intended to provide employees an option to defer a portion of their salary in order to provide for supplemental retirement benefits. As a requirement of this non-qualified plan, participant deferrals remain as unsecured liabilities of Hadron. Under
the terms of the




F-19




---



HADRON, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Plan, eligible employees can elect to irrevocably defer salary of up to $50,000 for the calendar year. If an
employee elects to defer at least one and one-half percent of his/her gross salary, the Company contributes one-half percent of the participants gross salary to the participants supplemental account. Salary deferrals and Company
contributions earn interest at the higher of six percent or the rate quoted for ninety-day Treasury Bills. During 2001, the six month periods ended December 31, 2000 and 1999, and the fiscal years 2000 and 1999, employees deferred approximately
$10,700, $2,000, $54,000, $81,000 and $75,000, respectively, of which the Company matched approximately $3,000, $500, $3,000, $4,000 and $4,000 during these periods.








Other:





Pursuant to the
acquisition of Analex, the Company assumed the Analex Corporation Employee Stock Ownership Plan and Trust (the Analex ESOP). The Analex ESOP was terminated as of the November 5, 2001, the effective date of the acquisition. The Company is
in the process of obtaining a determination letter from the Internal Revenue Service. Following receipt thereof, the Analex ESOP will be liquidated.








13.    Stock option plan:





In December 2000, shareholders
approved the Hadron, Inc. 2000 Stock Option Plan (2000 Stock Option Plan). The 2000 Stock Option Plan provides for the issuance of incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986 and
non-qualified stock options to purchase an aggregate of up to 600,000 shares of Common Stock. The 2000 Stock Option Plan permits the grant of options to key employees, consultants and directors of the Company. The exercise price of the incentive
stock options is required to be at least equal to 100% of the fair market value of the Companys common stock on the date of grant (110% of the fair market value in the case of options granted to employees who are 10% shareholders). The
exercise price of the non-qualified stock options is required to be not less than the par value of a share of the Companys common stock on the date of grant. The term of an incentive or non-qualified stock option may not exceed ten years (five
years in the case of an incentive stock option granted to a 10% shareholder). The vesting for each option holder are set forth in the individual option agreements. The 2000 Stock Option Plan honors all of the stock options outstanding under the
Companys 1994 Stock Option Plan, as amended (the Plan).





Information with respect to incentive and
non-qualified stock options issued under both plans are as follows:




F-20




---



HADRON, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)










2001

6 mos. 12/31/00

6 mos. 12/31/99

Fiscal 2000

Fiscal 1999Shares


Weighted Average Exercise Price

Shares


Weighted Average Exercise Price

Shares


Weighted Average Exercise Price

Shares


Weighted Average Exercise Price

Shares


Weighted Average Exercise PriceUnauditedOutstanding at beginning of period


479,300


$
.98


395,400


$
.94


514,400


$
.90


514,400


$
.90


398,100


$
.59Granted


1,272,800



1.29


204,500



1.04


109,500



.81


129,500



.91


135,400



1.98Exercised


(64,300
)


1.31


(62,500
)


.42


(15,000
)


.25


(78,200
)


.37


(4,700
)


.76Expired


(35,300
)


1.01


(58,100
)


1.47


(32,900
)


.94


(170,300
)


1.10


(14,400
)


1.69Outstanding at end of period


1,652,500


$
1.20


479,300


$
.98


576,000


$
.90


395,400


$
.94


514,400


$
.90Options exercisable at end of period


743,300


$
1.12


301,800


$
.96


494,700


$
.83


304,100


$
.75


404,700


$
.69Weighted average fair value of options granted during the period

$
1.24





$
.95





$
.48





$
.42





$
1.25





The weighted average remaining contractual life of options outstanding at
December 31, 2001 was 6.1 years. The range of exercise prices of options outstanding at December 31, 2001 was $.25 to $2.25.





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





Outstanding

ExercisableExercise Price

Number of Shares

Weighted- Average Exercise Price

Weighted- Average Remaining Contractual Life (years)

Number of Shares

Weighted- Average Exercise Price0.250.75

97,500

$0.44

3.57

97,500

$0.440.761.30

617,100

1.07

9.06

313,400

1.031.312.25

937,900

1.39

4.33

332,400

1.421,652,500





743,300





The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, Accounting for Stock Compensation (SFAS No. 123). Had compensation cost for the Companys stock option plan been determined based upon the fair value at the grant date for awards under the plan
consistent with




F-21




---



HADRON, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)




the methodology prescribed under SFAS No. 123, the Companys net income/(loss) in the periods above would have been approximately $(320,600),
$50,900, $(671,900), $(812,000) and $(69,000), or $(.03), $.01, $(.26), $(.25) and $(.04) per share on a diluted basis, respectively. The effect of applying SFAS No. 123 on the pro forma net income/(loss) as stated above is not necessarily
representative of the effects on reported net income or loss for future years due to, among other things, (1) the vesting period of the stock options and (2) the fair value of additional stock options in future years.





The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing fair value model. The following
weighted-average assumptions were used for grants: dividend yield of 0%; expected volatility of 1.115; expected life of the option term of 10 years and risk-free interest rate of 5.17%.








14.    Warrants:





The Company has issued warrants to certain parties to purchase its Common Stock in connection with certain debt and equity transactions. The range of exercise prices for warrants outstanding at December 31, 2001 was $.02 to $.75.





Information with respect to warrants issued is as follows:





2001 Warrants


Price

6 months 12/31/00 Warrants


Price

6 months 12/31/99 Warrants


Price

Fiscal 2000 Warrants


Price

Fiscal 1999 Warrants


PriceUnauditedOutstanding at beginning of period

2,467,100





2,855,000





620,000





620,000





1,020,000Granted

31,100


$
0.02

75,000


$
0.75







2,455,000


$
0.72

Exercised

(220,900
)


0.72

(462,900
)


0.72

(220,000
)

$
0.25

(220,000
)


0.25

(400,000
)

$
0.25Expired

























Outstanding at end of period

2,277,300





2,467,100





400,000





2,855,000





620,000








15.    Voting Agreement:





On March 30, 2000, a group of investors led by Jon M. Stout,




F-22




---



HADRON, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)




Patricia W. Stout, the Stout Dynastic Trust (collectively the Stouts), J. Richard Knop (Knop) (the Stouts and Knop, being
collectively the Investors) and John D. Sanders purchased certain of the Companys securities pursuant to a Securities Purchase Agreement among the Company and the Investors (the Purchase Agreement). Pursuant to the
Purchase Agreement, the Investors acquired 2,250,000 units, each consisting of one share of Common Stock and a warrant to purchase 0.9 share of Common Stock for a total of $877,500 in cash.





As further required by the Purchase Agreement, the Investors and others designated therein also entered into a Voting Agreement dated March 30, 2000 (the Voting Agreement).
The Voting Agreement was entered into by and among certain affiliates of Boles Knop & Company, L.L.C. (the Affiliates), Dr. Sanders, C.W. Gilluly and the Investors (collectively, the Voting Group). The Voting Group
agreed, for a period of five (5) years from March 30, 2000, to vote all of the voting shares over which they have voting control and to take all other actions within such Voting Groups control (whether in his or its capacity as a stockholder,
director, member of a board committee or officer of the Company or otherwise), including, without limitation, attendance at meetings in person or by proxy for purposes of obtaining a quorum and execution of written consents in lieu of meetings so
that: (1) The authorized number of members of the Board will continue to be five unless and until such greater number is directed or approved by the Investors; (2) During the term of the Voting Agreement, the Investors shall be entitled to nominate
a majority of the members of the Board (the Nominees) and the Stockholders shall vote their shares to elect such Nominees; (3) Any Nominee elected or appointed as a director will be removed from the Board (and thereupon from all
committees of the Board), with or without cause, only upon the written request or consent of the Investors; (4) In the event that any Nominee designated hereunder for any reason ceases to serve as a member of the Board or any committee thereof
during such representatives term of office, the resulting vacancy on the Board or committee will be filled by a newly designated Nominee; and (5) Upon the written direction or consent of the Investors, the Company will take such actions as may
be necessary and convenient to change the corporate domicile of the Company to the state of Delaware.





In addition, the Voting
Agreement provides that with the exception of transfers made: (i) pursuant to open market sales in brokers transactions; or (ii) sales made after the Investors declined a right of first refusal to purchase such shares at the same price and
terms, any attempt to transfer the Voting Groups voting shares will be of no effect unless the person(s) to whom such shares are being transferred agrees in writing to be bound by




F-23




---



HADRON, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)




the terms of the Voting Agreement.








16.    Fair value of financial instruments:





Accounts receivable,
accounts payable, accrued expenses and other current assets and liabilities are carried at amounts which reasonably approximate their fair value. The estimated fair value of the Companys variable rate debt approximates its carrying value of
$5,138,000. It is not practicable to estimate the fair value of the Companys notes payable to related parties and convertible notes payable due to their unique nature.








17.    Statement of cash flowssupplemental disclosures:





During 2001, the six month periods ended December 31, 2000 and 1999, and the fiscal years 2000 and 1999, the Company paid income taxes of $23,000, $12,000, $3,000, $4,000 and $57,000,
respectively. The Company paid interest of $165,000, $110,000, $167,000, $325,000 and $51,000 during those same periods.








18.    Business segments and major customers:





Business segments:





Prior to the acquisition of Analex Corporation in November 2001, the Company had four operating segments: ABS, ATI, Engineering &
Information Services, Inc. (EISI), and SyCom.





In December 2001, EISI and ATI were merged into Analex. ABS, Analex
and SyCom continue to operate as wholly owned subsidiaries of the Company.





With the acquisition of Analex, the Company
reorganized its internal operating structure. Hadron now has three operating segments: ABS continues to operate in the bio-defense market; the Homeland Security Group supports the United States intelligence community and is comprised of the
businesses previously reported under the ATI, EISI, and SyCom operating segments; and the Aerospace Group supports NASA, Department of Defense (DoD), and other major aerospace contractors and is comprised on the business acquired as a
result of the acquisition of Analex Corporation in November 2001.





The Company has four active reportable segments, comprising
its individual operating unitsABS, the Homeland Security Group, the Aerospace Group and the Corporate Pool. Each of the operating segments provides engineering, information technology, medical research or technical services to federal
government agencies or major defense contractors. The reportable segments are




F-24




---



HADRON, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)




distinguished by their individual clients, prior experience and technical skills.





Operating results are measured at the net income/(loss) level for each segment. The accounting policies of the reportable segments are the same as those described in the summary of
significant accounting policies. Interest on debt incurred in connection with an acquisition and applicable associated goodwill amortization is charged to the reportable segment. The Companys corporate amounts consist primarily of certain
activities and assets not attributable to the reportable segments.








Hadron, Inc.


Reportable SegmentsFASB Statement 131


For the Year ended December 31 2001, the Six
Months


ended December 31, 2000 and 1999 and the Fiscal Years


ended June 30, 2000 and 1999




F-25




---



HADRON, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







2001


6 mos 2000


Unaudited 6 mos 1999


Fiscal 2000


Fiscal 1999DESCRIPTION:Trade revenues:ABS

$
4,761,300


$
1,880,600


$



$
522,800


$
Homeland Security Group


12,516,500



7,062,800



10,065,500



19,164,000



19,745,700Aerospace Group


4,658,200















Corporate










201,800



214,500



587,500Total trade revenues

$
21,936,000


$
8,943,400


$
10,267,300


$
19,901,300


$
20,333,200Interest income:Homeland Security Group

$



$



$
600


$
8,100


$
200Corporate


8,600















2,400Total interest income

$
8,600


$



$
600


$
8,100


$
2,600Interest expense:Homeland Security Group

$
45,300


$
48,100


$
74,000


$
189,300


$
29,700Corporate


179,900



63,900



93,100



143,300



51,100Total interest expense

$
225,200


$
112,000


$
167,100


$
332,600


$
80,800Depreciation and amortization expense:ABS

$
47,300


$
10,600


$



$



$
Homeland Security Group


366,900



173,400



174,400



390,200



48,400Aerospace Group


4,200















Corporate


143,300



45,500



34,300



67,100



48,800Total depreciation and amortization expense

$
561,700


$
229,500


$
208,700


$
457,300


$
97,200Income tax expense:Homeland Security Group

$



$



$



$
20,000


$
13,000Corporate


19,600











1,300



900Total income tax expense

$
19,600


$



$



$
21,300


$
13,900Net income/(loss):ABS

$
186,200


$
4,300


$



$
(158,200
)

$
Homeland Security Group


(9,600
)


152,800



(490,500
)


(422,800
)


140,000Aerospace Group


350,000















Corporate


(330,600
)


(72,300
)


(140,500
)


(163,800
)


(105,600
)Total net income/(loss)

$
196,000


$
84,800


$
(631,000
)

$
(744,800
)

$
34,400Assets:ABS

$
1,017,200


$
335,900


$



$
387,200


$
Homeland Security Group


3,761,600



4,507,400



5,193,200



4,806,800



5,342,200Aerospace Group


20,210,900















Corporate


1,410,600



940,600



934,000



757,100



1,347,500Total assets

$
26,400,300


$
5,783,900


$
6,127,200


$
5,951,100


$
6,689,700Fixed assets, net:ABS

$
116,400


$
126,200


$



$
15,700


$
Homeland Security Group


100,000



146,700



114,100



95,600



110,800Aerospace Group


36,800















Corporate


7,400



11,900



142,500



107,800



180,100Total fixed assets, net

$
260,600


$
284,800


$
256,600


$
219,100


$
290,900








Major Customers:





Gross revenue from contracts and subcontracts with U.S. government agencies amounted to $21,885,000, $8,868,000, $10,160,000 $19,684,000 and
$20,303,000, respectively, in 2001, the six months ended December 31, 2000 and 1999, and the fiscal years 2000 and 1999.





Revenues earned on sales to the Companys major customers are as follows:




F-26




---



HADRON, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Period

Department of Defense2001

$
14,019,0006 Months 2000


6,240,0006 Months 1999 (unaudited)


7,791,000Fiscal Year 2000


18,323,000Fiscal Year 1999


17,826,000








19.    Selected quarterly information
(Unaudited):





The following is a summary of the quarterly results of operations for the years 2001 and 2000:





Quarter Ended:December 31, 2001

September 30, 2001

June 30, 2001

March 31, 2001Revenues

$
9,211,200

$
4,137,300

$
4,357,600

$
4,229,900Operating Income


139,600


124,200


106,500


83,700Net Income


48,200


54,100


72,400


21,300Net Income per share, basic

$
0.004

$
0.01

$
0.01

$
.003Shares used in per share calculation, basic


11,284,468


6,536,276


6,517,780


6,505,728Net Income per share, diluted

$
0.003

$
0.01

$
0.01

$
.003Shares used in per share calculation, diluted


13,922,965


8,186,996


7,985,845


7,731,937




F-27




---



HADRON, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Quarter Ended:December 31, 2000

September 30, 2000

June 30, 2000

March 31, 2000Revenues

$
4,239,700

$
4,703,700

$
4,879,200

$
4,754,800Operating Income/(Loss)


53,600


136,100


261,900


(201,600
)Net Income/(Loss)


22,200


62,600


203,900


(317,700
)Net Income per share, basic

$
0.004

$
0.01

$
0.04

$
(.11
)Shares used in per share calculation, basic


6,393,463


5,916,209


5,100,172


2,833,692Net Income per share, diluted $ 0.003

$
0.003

$
0.01

$
0.03

$
(.11
)Shares used in per share calculation, diluted


7,603,607


6,605,045


6,648,677


2,833,692




F-28