<PAGE>

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

                     ------------------------------------
                                   FORM 10-K

(Mark One)
___ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
    OF 1934

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

For the transition period from July 1, 2000 to December 31, 2000_

Commission file number     0-5404
                       --------------

                                 HADRON, INC.

            (Exact name of registrant as specified in its charter)

          New York                                        11-2120726
(State or other jurisdiction of                (I.R.S.Employer Identification
incorporation or organization)                              Number)

                             5904 Richmond Highway
                                   Suite 300
                          Alexandria, Virginia 22303
                   (Address of principal executive offices)
               Registrant's telephone number including area code
                                (703) 329-9400

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)

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  ___
         ---
<PAGE>

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. [X]

The registrant's revenues for the six months ended December 31, 2000 were
$8,943,400.

As of May 4, 2001, 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 $3,992,320.

As of May 4, 2001, 6,517,279 shares of the common stock of the registrant were
outstanding.

                                    PART I

Item 1. Business
        --------

Introduction

     Hadron, Inc. ("Hadron" or the "Company") supports the national security
organizations of the United States Government by providing engineering,
information technology, medical research and technical services to these
agencies. The Company specializes in developing innovative technical solutions
for the intelligence community, analyzing and supporting defense systems,
developing medical defenses for biological warfare agents and supporting
computer systems. The Company was incorporated in New York in 1964, and can be
found on the Internet at www.hadron.com.

Operations

     The Company has four ongoing business units, whose descriptions follow:

Advanced Biosystems, Inc. ("ABS")

     In December 1999, the Company incorporated its Advanced Biosystems Division
to pursue research and business opportunities in the areas of defenses against
potential biological weapons; the exploration of new products that prevent or
treat infectious disease; and the analysis of biological threats on the
battlefield or from terrorists. ABS scientists have extensive experience and
broadly recognized technical leadership in biological weapons research,
immunology, molecular biology and genetic engineering.

      Building on its initial $3,367,000 contract with the Defense Advanced
Research Projects Agency (DARPA), ABS is actively pursuing new business with a
variety of federal agencies. In support of these efforts, ABS has formed
alliances with research institutions such as Harvard's Dana-Farber Cancer
Institute, George Mason University, the University of Alabama (Birmingham) and
Southern Research Institute. ABS will continue to expand its biological

                                       2
<PAGE>

defense research while working to identify and develop new means of preventing
and treating a broad range of infectious diseases and cancers.

         In March 2001, ABS was awarded a $2,600,000 one-year contract by the
U.S. Army Medical Research and Materiel Command to study and develop new medical
defenses for anthrax. This contract is a major step in ABS' multi-phase program
to develop defenses against, and treatments for, specific biological agents that
may be used in warfare or terrorist attacks.

         ABS, incorporated in Delaware, is a wholly owned subsidiary of the
Company.

Avenue Technologies, Inc. ("ATI")

         ATI provides high technology engineering and professional services.
ATI's primary business base is the intelligence community where it specializes
in the areas of intelligence, special operations and systems integration
support. ATI's customer base includes both the federal government and aerospace
contractors.

         ATI's core personnel average over twenty years of senior professional
military and civilian leadership, managerial, and operational experience. Its
core competencies include systems integration, specialized software development,
technical evaluation services, intelligence systems architectures, specialized
training services, and information operations support. Key ATI clients include
the National Reconnaissance Office, the Defense Intelligence Agency, the
National Security Agency, the Naval Research Laboratory, the U.S. Navy, and
DARPA.

         ATI, incorporated in Virginia, was acquired on May 12, 1999 and
operates as a wholly owned subsidiary of the Company.

Engineering & Information Services, Inc. ("EISI")

         EISI provides the Department of Defense ("DoD") and related clients
with software and hardware engineering expertise that include: systems
integration; software development; local and wide-area computer networking
installation and support; relational database development on client-server
architecture; and hardware board-level design and development.

         EISI supports the DoD environment with UNIX systems installation and
administration and development of large-scale integrated database applications
on distributed workstations in a client-server architecture. EISI also provides
a variety of cost-effective engineering services.

         Historically, EISI was a long-term provider of software and hardware
expertise to The Johns Hopkins University Applied Physics Laboratory ("APL")
located near Baltimore, Maryland. EISI's business with APL constituted
approximately 17% of the 2000 transition period revenues of the Company. EISI
staff was instrumental in the design and development of multi-platform analysis,
simulation, communications, and decision support systems for APL. EISI
applications developed for APL helped ensure the accuracy and readiness of a
number of U.S. Navy defense systems that were deployed in global operations.

                                       3
<PAGE>

         In April 1997, the Company was awarded four follow-on contracts by APL
to continue its support activities through September 2001. During fiscal year
2000, APL informed the Company that hiring ceilings previously imposed on APL by
the Government and University were removed and that APL would convert contractor
positions to APL staff positions and use contract labor only for positions
expected to last for less than a year. Moreover, EISI was informed that most
contract labor positions staffed by EISI would be converted to APL staff
positions, and that most individuals in such positions would be offered
employment with APL by September 30, 2000. Revenues derived from APL decreased
significantly as a result of these conversions.

         In June 2000, the Company was awarded a one-year contract with APL to
provide staffing and recruiting assistance in addition to its existing hardware
and software contracts.

         EISI, incorporated in Virginia, is a wholly owned subsidiary of the
Company.

SyCom Services, Inc. ("SyCom")

         SyCom is an information management and systems development firm. SyCom
specializes in computer-based technologies related to complex information,
communications and electronic systems. Headquartered near Baltimore, Maryland,
SyCom performs a full range of information and network support services for
commercial and defense-related clients working on military and civilian
electronic systems.

         SyCom has particular expertise in the development of real-time and
embedded software engineering for systems such as civilian and military radars,
airspace management systems, signal analysis and specialized database systems.
SyCom also provides software support, including software documentation, document
management and imaging. SyCom's business from Northrop Grumman constituted
approximately 27% of the 2000 transition period revenues of the Company.

         SyCom, incorporated in Delaware, is a wholly owned subsidiary of the
Company.

General Information

         The Company provides engineering, information, 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, many of which, like the Company, are
principally located in the Washington, D.C. area. Competition within the
information technology and government contracting arenas is extremely intense.
Selection is based primarily on a combination of the price of services and
evaluation of technical capability, as well as reputation, quality of service
and responsiveness to client requirements.

         The Company maintains a primary commitment to its direct and indirect
government clients, but is also simultaneously intensifying its program of
business development targeted toward additional government endeavors. The
Company is continuing efforts to diversify its client base.

                                       4
<PAGE>

         Direct and indirect contracts with government defense and intelligence
agencies comprise the majority of the Company's business base, and increased
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 EISI accounted for 25%, 48%, 45%, 54% and 57% of the
Company's total consolidated revenues for the transition period ended December
31, 2000, the unaudited six-month period ended December 31, 1999, and the fiscal
years 2000, 1999 and 1998, respectively. During the same periods, SyCom's
revenues respectively accounted for 27%, 25%, 25%, 40% and 43% of consolidated
revenues. The revenues of ATI accounted for 27%, 25%, 26% and 3% of the
consolidated revenues for the six month periods ended December 31, 2000 and 1999
and the fiscal years 2000 and 1999, respectively. The revenues of ABS accounted
for 21% and 3% of the total consolidated revenues for the transition period 2000
and the fiscal year 2000.

         The Company's backlog of orders believed to be firm as of December 31,
2000 approximated $15 million, which the Company expects will be filled during
2001. As of June 30, 2000, the Company had approximately $13 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, 2000, the Company (including its subsidiaries)
employed approximately 140 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 Company is heavily dependent on the DoD, as well as other U.S.
governmental agencies, for contract work. Contracts and subcontracts with the
DoD produced approximately 43% of the Company's total revenues during the
transition period 2000. The Company's other U.S. government contracts and
subcontracts produced approximately 30% of the Company's total revenues during
the transition period ended December 31, 2000. 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

                                       5
<PAGE>

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.

Recent Developments

Modification of Loan Agreement

         The Company entered into a Loan and Security Agreement dated June 29,
1999 (the "Loan Agreement") with United Bank. The Loan Agreement provided the
Company with a $1.5 million line of credit facility (the "Credit Facility")
through October 31, 2000, and a three-year $1.5 million term loan (the "Term
Loan"). The Term Loan provides for monthly principal payments of approximately
$42,000, with interest at the prime rate plus 150 basis points. Jon M. Stout,
the Chairman of the Board, personally guaranteed the loans. The Company is
subject to certain financial covenants pursuant to the Loan Agreement, including
debt to net worth ratio, debt to EBITDA ratio, and working capital and net worth
requirements. The Credit Facility and the Term Loan are secured by the accounts
receivable and other assets of the Company. As of December 31, 2000, the
outstanding balances of the Credit Facility and Term Loan are $907,000 and
$750,000, respectively.

         On October 31, 2000, the Company entered into the Third Modification
and Extension Agreement with United Bank. This agreement extended the Credit
Facility through November 30, 2001, lowered the interest to the prime rate plus
100 basis points, and adjusted the financial covenants. On this same date, the
Company entered into a Joinder Agreement thereby adding the accounts receivable
and other assets of ABS as collateral for the Credit Facility and Term Loan.

Change of Position of Dr. C.W. Gilluly

         On January 16, 2001, Dr. Gilluly resigned as Chairman but continues to
provide consulting services and serve as a member of the Company's Board of
Directors.

Change of Position of Jon M. Stout

         On January 16, 2001, Mr. Stout resigned as President and Chief
Executive  Officer of the Company and was appointed to the position of Chairman.
Mr. Stout remains a member of the Company's Board of Directors.

                                       6
<PAGE>

Appointment of Sterling E. Phillips, Jr.

         On January 16, 2001, Mr. Phillips 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 the Company's restricted common stock, par value $0.02, for $0.75 per
share. In addition, Mr. Phillips was awarded a five-year, non-qualified stock
option to purchase 875,725 shares of the Company's common stock, par value
$0.02, 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.

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.

Item 2.  Properties
         ----------

         The Company owns no real estate. As of December 31, 2000, the Company
leased a total of 28,200 square feet of office space. These leases expire
between January and December 2002. (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.

                                       7
<PAGE>

                                    PART II

Item 5.    Market for Registrant's Common Equity and Related Shareholder Matters
           ---------------------------------------------------------------------

     The Company's common stock, par value $.02 per share ("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 the
transition period ended December 31, 2000 and the fiscal years ended June 30,
2000 and June 30, 1999 is shown below:

Period Ended December 31, 2000        High         Low
------------------------------        ----         ---

            First Quarter
            (7/1 to 9/30/00)          1.06         .63
            Second Quarter
            (10/1 to 12/31/00)        1.56         .75

Fiscal Year Ended June 30, 2000       High         Low
-------------------------------       ----         ---

            First Quarter
            (7/1 to 9/30/99)          1.28         .63
            Second Quarter
            (10/1 to 12/31/99)         .75         .50
            Third Quarter
            (1/1 to 3/31/00)          2.00         .47
            Fourth Quarter
            (4/1 to 6/30/00)          1.56         .75

Fiscal Year Ended June 30, 1999       High         Low
--------------------------------      ----         ---

            First Quarter
            (7/1 to 9/30/98)          2.06        1.63
            Second Quarter
            (10/1 to 12/31/98)        2.00        1.63
            Third Quarter
            (1/1 to 3/31/99)          1.63        1.28
            Fourth Quarter
            (4/1 to 6/30/99)          1.31        1.28


     As of May 4, 2001, there were approximately 2,186 shareholders of record of
the Company's Common Stock.

                                       8
<PAGE>

     No cash dividends were paid during the transition period and past two
fiscal years, and none are expected to be declared during 2001.


Item 6.  Selected Financial Data
         -----------------------

<TABLE>
<CAPTION>
                                                                (In Thousands, except per share amounts)

                                      -----------------------------------------------------------------------------------------
                                                        Unaudited
                                              Six          Six
                                            Months        Months      Fiscal      Fiscal      Fiscal      Fiscal      Fiscal
                                             Ended        Ended        Year        Year        Year        Year        Year
                                           12/31/00      12/31/99     6/30/00     6/30/99     6/30/98     6/30/97    6/30/96
                                      -----------------------------------------------------------------------------------------
                                             2000          1999        2000        1999        1998        1997        1996
                                             ----          ----        ----        ----        ----        ----        ----
                                      -----------------------------------------------------------------------------------------
<S>                                   <C>                <C>         <C>          <C>         <C>         <C>         <C>
Total Revenues/(1)/                         $8,943       $10,267     $19,901      $20,333     $21,134     $16,988     $18,306

                                      -----------------------------------------------------------------------------------------
Operating Income (Loss)                        190          (481)       (421)          63         888         128          59
                                      -----------------------------------------------------------------------------------------
Interest Expense, net of
 Interest income                                112           167        324           78          56          84         132
                                      -----------------------------------------------------------------------------------------
Income (Loss)
 Before income taxes                            85          (631)       (724)          48         819          57         194
                                      -----------------------------------------------------------------------------------------
Net Income (Loss)/(1)/                          85          (631)       (745)          34         761          13         162
                                      -----------------------------------------------------------------------------------------
Income (Loss) per share
 Of Common Stock:
                                      -----------------------------------------------------------------------------------------
 Basic                                         .01          (.24)       (.23)         .02         .45         .01         .11
                                      -----------------------------------------------------------------------------------------
 Diluted                                       .01          (.24)       (.23)         .01         .26         .01         .11
At Period End:
                                      -----------------------------------------------------------------------------------------
Total Assets                                 5,784         6,127       5,951        6,690       3,507       2,712       2,874
                                      -----------------------------------------------------------------------------------------
Long-term Liabilities                          412         1,040         702        2,160          53         169         320
                                      -----------------------------------------------------------------------------------------
Working Capital (Deficit)                      266        (1,454)        (13)         (67)       (186)       (906)       (654)
                                      -----------------------------------------------------------------------------------------
Shareholders' Equity
 (Deficit)                                   2,002           (80)      1,535          456          22        (811)       (869)
                                      -----------------------------------------------------------------------------------------
</TABLE>



/(1)/  See Item 7 "Management's Discussion and Analysis" for an explanation of
       events that materially affect comparability.

                                       9
<PAGE>

Item 7 and 7A.    Management's Discussion and Analysis of Financial
           -------------------------------------------------
           Condition and Results of Operations and Quantitative and
           --------------------------------------------------------
           Qualitative Disclosure about Market Risk
           ----------------------------------------


                           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.

                              Results of Operations
                              ---------------------
    Comparison Of Six Month Transition Period Ended December 31, 2000 To the
    -------------------------------------------------------------------------
              Unaudited Six Month Period Ended December 31, 1999
              --------------------------------------------------

         The Company had an operating profit 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.

         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 EISI's major client,
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.

         The principal customer for the Company's services is the U.S.
Government, principally the DoD, which, directly or through its prime
contractors, accounted for 43% of the Company's revenues in the transition
period ended December 31, 2000. The Company's sales to the United States
government and its prime contractors represented approximately 73% and 74% of
total net sales during the Company's six month periods ended December 31, 2000
and 1999, respectively, and are expected to continue to account for a
substantial portion of the Company's revenues for the foreseeable future. The
Company's contracts with the United States 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

                                       10
<PAGE>

purchase of fixed quantity of services or products. Reductions in United States
Government defense spending could adversely affect the Company's operating
results. While the Company is not aware of present or anticipated reductions in
United States Government spending on specific programs or contracts (except for
the reductions in the APL contract previously discussed), there can be no
assurance that such reductions will not occur or that decreases in United States
Government defense spending in general will not have an adverse effect on the
Company's revenues in the future.

         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 EISI 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.

                              Results of Operations
                              ---------------------
               Comparison Of Fiscal Year 2000 To Fiscal Year 1999
               --------------------------------------------------

         The Company had an operating loss of $421,000 in the fiscal year ended
June 30, 2000, compared to an operating profit 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
EISI's major client, APL, and the difficulties retaining and recruiting new
technical employees for SyCom's major 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.

         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.

         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

                                       11
<PAGE>

Company's technical employees by EISI's major client, APL, and the difficulties
retaining and recruiting new technical employees at SyCom's major client,
Northrop Grumman, partially offset by additional revenue produced by ABS and
ATI.

         The principal customer for the Company's services is the U.S.
Government, principally the DoD, which, directly or through its prime
contractors, accounted for 67% of the Company's revenues in fiscal year 2000.
The Company's sales to the United States government and its prime contractors
represented approximately 74% and 60% of total net sales during the Company's
fiscal years ended June 30, 2000 and June 30, 1999, respectively, and are
expected to continue to account for a substantial portion of the Company's
revenues for the foreseeable future. The Company's contracts with the United
States 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 United States Government defense spending could
adversely affect the Company's operating results. While the Company is not aware
of present or anticipated reductions in United States Government spending on
specific programs or contracts (except for the reductions in the APL contract
previously discussed), there can be no assurance that such reductions will not
occur or that decreases in United States Government defense spending in general
will not have an adverse effect on the Company's revenues in the future.

         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 both EISI
and SyCom. 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 incorporating the cost mixes of ABS and ATI,
coupled with the reduction in retention of technical personnel on overhead while
awaiting new customer tasking and funding.

         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 ATI, totaling
$362,000 and $364,000, respectively, along with the amortization of goodwill of
approximately $344,000 associated with the purchase of 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 goodwill
amortization of $344,000 per year related to the acquisition of ATI will
continue on a straight-line basis through fiscal year 2006.

                              Results of Operations
                              ---------------------
               Comparison Of Fiscal Year 1999 To Fiscal Year 1998
               --------------------------------------------------

         The Company had an operating profit of $63,000 in the fiscal year ended
June 30, 1999, compared to an operating profit of $888,000 in the prior fiscal
year. This decrease is primarily attributable to the loss of billable employees
due to customer cutbacks, coupled with the costs of retaining technical
personnel while awaiting new customer tasking and funding. In

                                       12
<PAGE>

addition, the Company had increased costs associated with the addition of
corporate personnel hired to develop the Company's initiatives in the areas of
biological weapons defense and counter terrorism.

         For the twelve months ended June 30, 1999, other income (expense)
decreased by $55,000, primarily reflecting the write-off of assets held for
resale and certain miscellaneous liabilities.

         Net income was approximately $34,000 in the fiscal year ended June 30,
1999, compared to net income of approximately $761,000 in the prior year. The
decrease resulted from the loss of billable positions and hiring freezes by the
Company's major customers, coupled with the costs of retaining key technical
professional personnel and diversifying business development efforts.

         Revenues for the fiscal year ended June 30, 1999 were approximately
$20,333,000, a 4% decrease from the prior fiscal year. This decrease reflects
fewer contract requirements of both EISI and SyCom at major government and
commercial customers, primarily due to certain government budgetary constraints,
partially offset by revenues from newly acquired companies Vail and ATI.

         The principal customer for the Company's services is the U.S.
Government, principally the DoD, which, directly or through its prime
contractors, accounted for 48% of the Company's revenues in fiscal year 1999.
The Company's sales to the United States government and its prime contractors
represented approximately 60% and 55% of total net sales during the Company's
fiscal years ended June 30, 1999 and June 30, 1998, respectively, and are
expected to continue to account for a substantial portion of the Company's
revenues for the foreseeable future. The Company's contracts with the United
States 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 United States Government defense spending could
adversely affect the Company's operating results. While the Company is not aware
of present or anticipated reductions in United States Government spending on
specific programs or contracts (except for the reductions in the APL contract
previously discussed), there can be no assurance that such reductions will not
occur or that decreases in United States Government defense spending in general
will not have an adverse effect on the Company's revenues in the future.

         Costs of revenue for the fiscal year ended June 30, 1999 were
approximately $17,735,000, a decrease of approximately 2% from the prior fiscal
year. The decrease is due primarily to a decrease in billable positions with
major government and commercial customers of both EISI and SyCom. Costs of
revenue as a percentage of revenues were approximately 87% and 86% for the
fiscal years ended June 30, 1999 and 1998, respectively. This 1% increase is due
primarily to retaining technical professionals awaiting new tasking by
customers.

         Selling, general and administrative expenses totaled approximately
$2,535,000 for the fiscal year ended June 30, 1999, compared with approximately
$2,128,000 for the prior fiscal year. The increase is primarily

                                       13
<PAGE>

due to the Company's addition of key administrative personnel heading up the
Company's business development efforts.

                         Capital Resources and Liquidity
                         -------------------------------

         The working capital at December 31, 2000 increased by approximately
$278,000 from June 30, 2000, primarily due to the Company's positive cash flow
resulting from its current period profitability, coupled with increases in
equity capital, as discussed below, partially offset by debt pay down and ABS'
laboratory equipment purchases.

         In the three months ended December 31, 2000, the Company recorded a
profit of $22,000 and EBITDA, as defined below, of $180,000, after add-backs for
interest of $44,000, depreciation of $38,000 and goodwill amortization of
$76,000.

         In the six months ended December 31, 2000, the Company recorded a
profit of $85,000 and EBITDA of $426,000, after add-backs for interest of
$112,000, depreciation of $67,000 and goodwill amortization of $162,000.

         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 generally accepted accounting principles. 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. 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 $78,000 and $385,000 during
the six months ended December 31, 2000 and 1999, respectively. Net cash used for
operating activities in the six months ended December 31, 2000 was primarily the
result of changes in working capital, partially offset by operating income. Net
cash used for operating activities in the same period of the prior year was
primarily the result of operating losses coupled with changes in working
capital.

         Net cash used for investing activities during the six months ended
December 31, 2000 and 1999 was $133,000 and $2,000, respectively. Net cash used
for investing activities in each of these periods was for fixed asset purchases.

         In the six months ended December 31, 2000, the Company paid $237,000 to
Dr. C.W. Gilluly to satisfy its note obligation, $250,000 to United Bank to pay
down its Term Loan, and $133,000 to purchase fixed assets in support of ABS'
growth. To provide funding for these obligations, the Company primarily

                                       14
<PAGE>

utilized its $467,000 increase in shareholders' equity, resulting from equity
transactions of $382,000 and profits of $85,000.

         In August 2000, the Company received approximately $56,000 in equity
capital from a group of investors consisting of two directors, Dr. Gerald R.
McNichols and Mr. Gerald R. Young, and two principals of an investment banking
and brokerage firm. The investment group purchased 75,000 units, each consisting
of one share of common stock and a warrant to purchase one share of common stock
at $0.75 per share.

         In September 2000, Jon M. Stout, the Company's Chairman, and J. Richard
Knop, President of the Company's investment banking firm, Boles Knop & Co.
(later renamed The Windsor Group), exercised warrants to purchase an aggregate
of 462,894 shares of common stock resulting in proceeds of approximately
$333,000.

         The Company entered into a Loan and Security Agreement dated June 29,
1999 (the "Loan Agreement") with United Bank. The Loan Agreement provided the
Company with a $1.5 million line of credit facility (the "Credit Facility")
through October 31, 2000, and a three-year $1.5 million term loan (the "Term
Loan"). The Term Loan provides for monthly principal payments of approximately
$42,000, with interest at the prime rate plus 150 basis points. Jon M. Stout,
the Chairman of the Board, personally guaranteed the loans. The Company is
subject to certain financial covenants pursuant to the Loan Agreement, including
debt to net worth ratio, debt to EBITDA ratio, and working capital and net worth
requirements. The Credit Facility and the Term Loan are secured by the accounts
receivable and other assets of the Company. As of December 31, 2000, the
outstanding balances of the Credit Facility and Term Loan are $907,000 and
$750,000, respectively.

         On October 31, 2000, the Company entered into the Third Modification
and Extension Agreement with United Bank. This agreement extended the Credit
Facility through November 30, 2001, lowered the interest to the prime rate plus
100 basis points, and adjusted the financial covenants. On this same date, the
Company entered into a Joinder Agreement thereby adding the accounts receivable
and other assets of ABS as collateral for the Credit Facility and Term Loan.

         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 the Company's restricted common stock, par value
$0.02, for $0.75 per share. In addition, Mr. Phillips was awarded a five-year,
non-qualified stock option to purchase 875,725 shares of the Company's common
stock, par value $0.02, 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.

         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. Mr. Stout also remains a member of the Company's Board of Directors.
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.

                                       15
<PAGE>

         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 $15,000.

          For 2001, the Company plans to maintain its control over costs,
aggressively pursue new business opportunities within core competencies and
clients, and perform its contracts efficiently. Plans are underway to bolster
business development capabilities and penetrate key accounts. To this end, the
Company has reorganized its recruiting function and enhanced its benefits
offerings to improve the Company's competitive position in the marketplace. In
January 2001, the Company finalized its annual renegotiations with Northrop
Grumman on its principal contract with SyCom. The Company renegotiated the
contract such that SyCom could achieve and maintain profitable operations.

         Except for the historical information contained herein, the matters
discussed in this Form 10-K include forward-looking statements that involve a
number of risks and uncertainties. There are certain important factors and risks
that could cause results to differ materially from those anticipated by the
statements contained herein. Such factors and risks include business conditions
and growth in the information services, engineering services, software
development and government contracting arenas and in the economy in general.
Competitive factors include the pressures toward consolidation of small
government contracts into larger contracts awarded to major, multi-national
corporations; the Company's ability to continue to recruit and retain highly
skilled technical, managerial and sales/marketing personnel; and the Company's
ability to successfully identify, complete and integrate acquisitions. Other
risks may be detailed from time to time in the Company's SEC reports.

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 Auditors on Accounting and
             -------------------------------------------------------------
             Financial Disclosure
             --------------------

         None.

                                       16
<PAGE>

                                   PART III

Item 10.  Directors and Executive Officers of the Registrant
          --------------------------------------------------

     The names of the six directors and certain other information about them are
set forth below as of May 4, 2001:

<TABLE>
<CAPTION>
                  Directors                  Age           Director Since          Office Held with Company
                  ---------                  ---           --------------          ------------------------
        <S>                                  <C>           <C>                     <C>
        Jon M. Stout *                       54                 2000               Chairman of the Board and Director

        C.W. Gilluly, Ed.D.                  55                 1992               Director

        Gerald R. McNichols, Sc.D. *         57                 2000               Director

        Sterling E. Phillips, Jr.            54                 2001               Director, President and Chief Executive Officer

        John D. Sanders, Ph.D.               62                 1997               Director

        Gerald R. Young *                    71                 2000               Director
</TABLE>

     *  This individual is elected pursuant to the Voting Agreement described
     in "Change of Control" and is elected pursuant to the Voting Agreement.

     JON M. STOUT was appointed the Company's President and Chief Executive
Officer and to the Board on March 31, 2000. On January 16, 2001, Mr. Stout
resigned as President and Chief Executive Officer of the Company and was
appointed to the position of Chairman. Mr. Stout, along with his wife, founded
DPC Technologies, Inc., a military intelligence information technology company,
which was sold to Northrop Grumman in 1999. Prior to that endeavor, Mr. Stout
served in senior management and marketing positions with various firms,
including the Harris Corporation and Perkin Elmer Corporation.

     C.W. GILLULY, Ed.D. was Chairman of the Company from October 1994 until
January 16, 2001. He also served as Chief Executive Officer of the Company from
May 1993 to March 2000. Since June 1992, Dr. Gilluly has served as Chairman of
COMTEX News Network, Inc., a provider of electronic news and business
information, for which he also served as Chief Executive Officer from June 1992
through September 1997. Dr. Gilluly has served as Chairman of the Board and
President of AMASYS Corporation and its predecessor, Infotechnology, Inc. since
June 1992.

     GERALD R. MCNICHOLS, Sc.D., who was appointed to the Board on June 12,
2000, has more than 35 years of experience in management and consulting. He has
founded several companies and serves on the boards of various private

                                       17
<PAGE>

companies. In 1977, Dr. McNichols founded Management Consulting & Research,
Inc., which he sold to GRC International, Inc. in 1999. Dr. McNichols was
commissioned by the Air Force in 1965 and spent four years in the Air Force
before joining the Office of the Secretary of Defense.

     STERLING E. PHILLIPS, JR. was appointed the Company's President and Chief
Executive Officer and to fill the vacancy on the Board on January 16, 2001.
Prior to joining the Company, Mr. Phillips held senior management positions with
Federal Data Corporation, in the Science and Engineering and Corporate Marketing
Groups from 1996 to 2001. From 1993 to 1996, he was the Chief Operating Officer
of TRI-COR Industries, Inc., and from 1992 to 1993 served as President of
Business Development for Computer Sciences Corporation. Prior to these, he held
senior national and international marketing positions with International
Business Machines Corporation for twenty-four years.

     JOHN D. SANDERS, Ph.D., who was been a member of the Board since September
1997, serves as a business consultant to emerging technology companies. He was
Chairman and Chief Executive Officer of TechNews, Inc., publisher of Washington
Technology newspaper, from 1988 to 1996, prior to its sale to The Washington
Post Company. In addition, Dr. Sanders has been a registered representative of
Wachtel & Co., Inc., a Washington D.C.-based stock brokerage firm, since 1968.
Dr. Sanders serves on the boards of ITC Learning Corporation, SenSyTech, Inc.
and COMTEX News Network, Inc.

     GERALD R. YOUNG, who was appointed to the Board on June 12, 2000, serves as
a management consultant to emerging companies. Mr. Young served on the Board of
Directors and as a management consultant with DPC Technologies, Inc. until 1999
when DPC was sold to Northrop Grumman Logicon. Mr. Young continues to provide
services to Logicon/DPC Technologies as a member of its Board of Advisors.

Executive Officers

     The following table contains information as of May 4, 2001 as to the
executive officers of the Company, who are not also directors of the Company:


                               Officer                   Office Held
       Name                     Since                   With Company
       ----                     -----                   ------------

     Kenneth Alibek             2000           Vice President

     Karen L. Dickey            2000           Vice President and Secretary

     Deborah J. Hickox          2000           Vice President and Treasurer

     Ellen J. Hyslope           2000           Vice President

     Donald E. Jewell           1996           Vice President

     Donald J. Kellmel          1999           Chief Technical Officer

     Shawn K. McCoy             1999           Vice President

     George W. Tonn             2001           Vice President

     DR. KENNETH ALIBEK (50) was appointed Vice President in September 2000, and
also serves as President of the Company's Advanced Biosystems, Inc. (ABS)

                                       18
<PAGE>

subsidiary, a position he has held since December 1999. Dr. Alibek joined the
Company in April 1999 as Chief Scientist and leads the Company's medical
research and biowarfare defense initiatives. Prior to joining the Company, Dr.
Alibek served as Program Manager for Battelle Memorial Institute from 1998 to
1999. From 1996 to 1998, he was Program Manager at SRS Technologies. From 1992
to 1996, Dr. Alibek held various research and consulting positions at the
National Institutes of Health and BDM Federal, Inc. Prior to coming to the
United States in 1992, Dr. Alibek served as the First Deputy Chief of
Biopreparat,the principal government agency for biological weapons research and
development in the former Soviet Union.

     KAREN L. DICKEY (41) was appointed Vice President and Corporate Secretary
in September 2000. Ms. Dickey is a C.P.A. who has held numerous financial and
management positions with the Company for sixteen years. From 1996 to 2000, she
held the position of Corporate Controller. Ms. Dickey's previous experience
includes accounting and management positions with Presidential Airways, Inc.

     DEBORAH J. HICKOX (37) was appointed Vice President of Finance and
Corporate Treasurer in September 2000. Ms. Hickox is a C.P.A. who joined the
Company in June 1999 as Controller of the Company's Avenue Technologies, Inc.
(ATI) subsidiary. From 1996 to 1999, Ms. Hickox served as Controller of EDO
Corporation's Technology Services and Analysis subsidiary. Ms. Hickox's previous
experience includes finance positions with The Consortium of Universities of the
Washington Metropolitan Area and The Concert Society at Maryland.

     ELLEN J. HYSLOPE (38) was appointed Vice President of Administration in
September 2000. Ms. Hyslope joined the Company in May 2000 as Director of Human
Resources. From 1996 to 2000, Ms. Hyslope served as the Human Resources Director
of Logicon DPC Technologies, a unit of Northrop Grumman. Ms. Hyslope's previous
experience includes administrative positions with the Republican National
Committee, the Community Associations Institute, Abacus Technology Corporation,
and MCI Telecommunications Corporation.

     DONALD E. JEWELL (49) was appointed Vice President of the Company in May
1996, and also serves as President of the Company's Engineering & Information
Services, Inc. (EISI) and Sycom Services, Inc. (SyCom) subsidiaries, positions
he has held since 1993 and 2000, respectively. Mr. Jewell has held senior
management positions in the government contracting business for over twenty
years. He was Technical Director for Kendrick & Company in 1988 and 1989, and
served as Director of Information Systems at British Aerospace from 1985 until
1988. From 1977 until 1985, he served in various computer services management
roles for Planning Research Corporation.

     DONALD J. KELLMEL, Ph.D. (52) was appointed Chief Technical Officer of the
Company in June 1999. Dr. Kellmel joined the Company in May 1999 when the
Company acquired ATI. Dr. Kellmel has more than twenty-four years of
professional experience in the management of corporate and systems engineering,
computer applications and signal processing. Dr. Kellmel, who has held senior
management positions with ATI since 1995, previously held senior management
positions with Kaman Sciences Corporation and Locus, Inc.

     SHAWN K. McCOY (45) was appointed Vice President of the Company in June
1999, and also serves as Vice President of ABS. Mr. McCoy joined the Company

                                       19
<PAGE>

in June 1999 as President of SyCom. Most recently, Mr. McCoy served as General
Manager of EDO Corporation's Technology Services and Analysis subsidiary, which
had been acquired in 1998 from Global Associates Ltd., where he served as Chief
Operating Officer. Mr. McCoy's previous experience includes positions with Betac
Corporation, Lockheed Martin and Martin Marietta Corporation, and service as an
intelligence officer in the U.S. Navy.

     GEORGE W. TONN (58) was appointed Vice President of the Company in April
2001, and also serves as President of ATI. Prior to joining the Company in April
2001, Mr. Tonn was with Raytheon where he served as the Director of the Advanced
Battle Management Systems organization in the Strategic Systems Division from
1998 to 2001. Mr. Tonn's previous experience includes positions with Hughes
Aircraft, Hughes Information Technology Company, SAIC, IBM Federal Systems, and
service as a lieutenant colonel in the U.S. Army.

     There are no family relationships among the directors or executive officers
of the Company.

                     Meetings of the Board and Committees
                     ------------------------------------

     The Board held a total of two meetings during the Company's transition
period ended December 31, 2000. Each director attended in person or
telephonically all of the meetings held by the Board and all committees thereof
on which he served during the transition period ended December 31, 2000.

     The Audit Committee, comprised of Messrs. McNichols, Sanders, and Young,
recommends engagement of the Company's independent auditors, is primarily
responsible for approving the services performed by the Company's independent
auditors and for reviewing and evaluating the Company's accounting principles
and its system of internal accounting controls and has general responsibility in
connection with related matters (See "Audit Committee Report" below). The Audit
Committee met one time during the transition period ended December 31, 2000.

Audit Committee Report
----------------------

     The audit committee oversees the Company's financial reporting process on
behalf of the Board. The Company's management has the primary responsibility for
the financial statements and the reporting process including the systems of
internal controls. In fulfilling its oversight responsibilities, the committee
reviewed the audited financial statements in the Annual Report with management
including a discussion of the quality, not just the acceptability, of the
accounting principles, the reasonableness of significant judgments, and the
clarity of disclosures in the financial statements.

     The committee reviewed with the independent auditors, who are responsible
for expressing an opinion on the conformity of those audited financial
statements with generally accepted accounting principles, their judgments as to
the quality, not just the acceptability, of the Company's accounting principles
and such other matters as are required to be discussed with the committee under
generally accepted auditing standards. In addition,

                                       20
<PAGE>

the committee has discussed with the independent auditors the auditors'
independence from the management and the Company including the matters in the
written disclosures required by the Independence Standards Board.

     The committee discussed with the Company's independent auditors the overall
scope and plan for their audits. The committee meets with the independent
auditors, with and without management present, to discuss the results of their
examinations, their evaluations of the Company's internal controls, and the
overall quality of the Company's financial reporting. The committee held one
meeting during the transition period ended December 31, 2000.

     In reliance on the reviews and discussions referred to above, the committee
recommended to the Board (and the Board has approved) that the audited financial
statements be included in the Annual Report on Form 10-K for the transition
period ended December 31, 2000 for filing with the Securities and Exchange
Commission.

Submitted by the Audit Committee

     John D. Sanders, Ph.D., Audit Committee Chair
     Gerald R. McNichols, Sc.D., Audit Committee Member
     Gerald R. Young, Audit Committee Member

May 4, 2001

     The Compensation Committee of the Board (the "Compensation Committee"),
which held one meeting in the transition period ended December 31, 2000, is
comprised of Messrs. McNichols, Sanders, and Young. The Compensation Committee
evaluates management's recommendations and makes its own recommendations to the
Board concerning the compensation of the Company's executive officers. It is
also responsible for the formulation of the Company's executive compensation
policy and the research, analysis and subsequent recommendation regarding the
establishment and administration of the Company's Stock Option and Stock
Purchase Plans.

     The Board does not have a Nominating Committee or an Executive Committee.

                                       21
<PAGE>

Item 11.  Executive Compensation
          ----------------------

                            EXECUTIVE COMPENSATION
                            ----------------------

                          Summary Compensation Table
                          --------------------------

     The following table sets forth information concerning all compensation paid
by the Company during the transition period ended December 31, 2000 to its Chief
Executive Officer, Chairman, and each of the three other most highly paid
executive officers:

                           Summary Compensation Table
                           --------------------------

<TABLE>
<CAPTION>
                                                                                                      Long-Term
                                                                                                      ----------
                                                                                                     Compensation
                                                                                                     ------------
                                            Compensation                                                Awards
                                            ------------                                                ------
                                                                                                        Stock
              Name and                                                               Bonus($)          Options         All Other
       Principal Position (7)                Period              Salary ($)           (1)(2)         Granted (3)    Compensation (4)
       ----------------------                ------              ----------           ------         -----------    ----------------
<S>                                      <C>                     <C>                 <C>             <C>            <C>
Jon M. Stout, Chairman, Director,        6 Mos 12/31/00            $  47,308          $ 25,000            50,000        $ 1,077
and former  President                    6 Mos 12/31/99                    -                 -                 -              -
And Chief Executive Officer (5)              FY 2000                       -                 -            15,000              -
                                             FY 1999                       -                 -                 -              -
                                             FY 1998                       -                 -                 -              -

C. W. Gilluly, Ed.D., Director and       6 Mos 12/31/00            $  69,350          $      -                 -        $     -
former Chairman (6)                      6 Mos 12/31/99               72,381                 -                 -            100
                                             FY 2000                 140,010                 -                 -          1,000
                                             FY 1999                 140,796            34,408            15,000          1,000
                                             FY 1998                 131,690             8,000            12,000          1,000

Dr. Kenneth Alibek,                      6 Mos 12/31/00            $  62,115          $      -            20,000        $     -
Vice President                           6 Mos 12/31/99               48,124                 -            15,000              -
                                             FY 2000                  97,234                 -            15,000              -
                                             FY 1999                  17,998                 -                 -              -
                                             FY 1998                       -                 -                 -              -


Donald J. Kellmel, Ph.D., Chief          6 Mos 12/31/00            $  77,000          $      -            20,000          1,866
Technical Officer                        6 Mos 12/31/99               69,131                 -            10,000          2,188
                                             FY 2000                 143,932                 -            10,000          5,038
                                             FY 1999                  18,500                 -                 -            648
                                             FY 1998                       -                 -                 -              -

Shawn K. McCoy,                          6 Mos 12/31/00            $  65,388          $      -            15,000        $ 1,185
Vice President                           6 Mos 12/31/99               62,815                 -                 -              -
                                             FY 2000                 122,708                 -            10,000            196
                                             FY 1999                       -                 -                 -              -
                                             FY 1998                       -                 -                 -              -
</TABLE>

_______________________________

(1)  No bonuses were awarded in transition period 2000.

(2)  The bonuses paid in fiscal year or transition period represent the bonuses
     awarded for the prior fiscal year.

                                       22
<PAGE>

(3) Options granted pursuant to the Company's 2000 Stock Option Plan. See
    "Executive Compensation - Stock Option Grants."

(4) Contributions made by the Company under its 401(k) plan.

(5) Mr. Stout was appointed President and Chief Executive Officer of the Company
    on March 30, 2000. In January 2001, he resigned these positions and assumed
    the position of Chairman of the Company.

(6) Dr. Gilluly entered into an Amendment to Employment Agreement and assumed
    the positions of Chairman and Director of the Company on March 30, 2000. In
    January 2001, he resigned as Chairman of the Company, but continues to
    provide consulting services and to serve as a Director.

(7) On January 16, 2001, Sterling E. Phillips, Jr. was appointed to the
    positions of President and Chief Executive Officer of the Company.

Stock Option Grants

    The following table provides details regarding all stock options granted to
the named executive officers during the transition period ended December 31,
2000:

                     Option Grants in Transition Period 2000

<TABLE>
<CAPTION>
                                                                                                              Potential
                                                                                                         Realizable Value at
                                                                                                               Assumed
                                 Number of            % of Total                                         Annual Rates of Stock
                                  Shares            Options Granted                                     Price Appreciation for
                                Underlying            to Employees                                          Option Term (1)
                                 Options             In Transition     Exercise       Expiration            ---------------
            Name                Granted (2)              Period          Price           Date              5%              10%
            ----                -----------              ------          -----           ----              --              ---
<S>                             <C>                  <C>               <C>            <C>               <C>              <C>
Jon M. Stout                       50,000                  26%               $1.12     9/30/2005        $15,472          $34,189
C. W. Gilluly                           -                   -                    -             -              -                -
Kenneth Alibek                     20,000                  11%                1.02     9/30/2010         12,830           32,518
Donald J. Kellmel                  20,000                  11%                1.02     9/30/2010         12,830           32,518
Shawn K. McCoy                     15,000                   8%                1.02     9/30/2010          9,624           24,388
</TABLE>

--------------------------------

    (1)     Amounts represent hypothetical gains that could be achieved if
        exercised at end of the option term. The dollar amounts under these
        columns assume 5% and 10% compounded annual appreciation in the Common
        Stock from the date the respective options were granted. These
        calculations and assumed realizable values are required to be disclosed
        under Securities and Exchange Commission rules and, therefore, are not
        intended to forecast possible future appreciation of Common Stock or
        amounts that may be ultimately realized upon exercise. The Company does
        not believe this method accurately illustrates the potential value of a
        stock option.

    (2)     Options vest one-third upon the date of grant, and one-third

                                       23
<PAGE>

        each on the first and second anniversaries of the date of grant, and
        expire 10 years (5 years for 10% shareholders) after the grant date. The
        option exercise price is 100% of the fair market value on the date of
        grant (110% for 10% shareholders). Options are exercisable for a period
        of 90 days after termination of employment to the extent vested at that
        time.

Options Exercised and Transition Period End Option Values

        The following table sets forth certain information regarding options
exercised during the transition period ended December 31, 2000 and the value of
unexercised options held as of December 31, 2000 by the named executive
officers:

                  Options Exercised and Period End Option Value
                  ---------------------------------------------

<TABLE>
<CAPTION>
                               Shares                               Number of Shares                      Value of Unexercised
                              Acquired                           Underlying Unexercised                   In-the-Money Options
                                upon           Value            Options at Dec. 31, 2000                   At Dec. 31, 2000 (1)
                                                             ------------------------------          -------------------------------
           Name               Exercise      Realized (2)     Exercisable      Unexercisable          Exercisable       Unexercisable
           ----               --------      ------------     -----------      -------------          -----------       -------------
<S>                           <C>           <C>              <C>              <C>                    <C>               <C>
Jon M. Stout                        -        $         -         17,000             33,000           $      617        $    1,198
C. W. Gilluly                       -                  -         72,000                  -               46,624                 -
Kenneth Alibek                      -                  -         16,800             18,200                4,389             3,531
Donald J. Kellmel                   -                  -         13,500             16,500                3,247             2,942
Shawn K. McCoy                      -                  -          5,100              9,900                  695             1,349
</TABLE>

--------------------------------

    (1)     Represents the difference between the exercise price of the options
        and the closing bid price of the Common Stock on December 31, 2000,
        which was $1.1563 per share. Options that have an exercise price greater
        than the fiscal year-end market value have not been included in the
        value calculation.

    (2)     Represents the difference between the exercise price and the market
        value on the date of exercise.

Employment Agreements, Termination of Employment and Change of Control
Arrangements

        On March 30, 2000, pursuant to the Purchase Agreement, the Company
entered into a rolling two-year employment agreement with Jon M. Stout. Under
the agreement, Mr. Stout would serve as the Company's President and Chief
Executive Officer. Mr. Stout was entitled to receive an initial annual base
salary of $50,000 for the first six months of his employment and thereafter to
receive an annual base salary of $140,000. For the fiscal year ended June 30,
2000, Mr. Stout opted to forego his salary and defer any bonus. Mr. Stout's
employment agreement further provides for Mr. Stout to participate in the
Company's Stock Option and Bonus Plans. Under the Bonus

                                       24
<PAGE>

Plan, Mr. Stout may receive additional compensation based upon the Company's
financial performance. On September 12, 2000, the Board approved a $25,000 bonus
based upon the Company's financial performance in the fourth quarter of the
fiscal year ended June 30, 2000. If Mr. Stout is terminated by the Company other
than for cause, the Company must pay Mr. Stout a lump sum payment that is the
sum of (1) Mr. Stout's base salary and bonus through the date of termination;
(2) any compensation previously deferred by Mr. Stout; (3) any accrued vacation
pay; and (4) the base salary that would have been payable to Mr. Stout through
the remainder of the term of the agreement.

         The Committee has, at various times, granted Mr. Stout options under
the 1994 and 2000 Stock Option Plans to purchase a total of 65,000 shares of the
Company's Common Stock at 110% of the market price on the date of grant. Under
the Plan, one-third of options granted are immediately exercisable upon the date
of grant, with one-third becoming exercisable on each of the first and second
anniversaries of the date of grant.

         On January 16, 2001,  Mr. Stout resigned as President and Chief
Executive  Officer of the Company and was appointed to the position of Chairman.
Mr. Stout remains a member of the Company's Board of Directors.

         On January 16, 2001, Mr. Phillips was appointed to the positions of
President and Chief Executive Officer of the Company. Mr. Phillips was also
elected to fill the 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 the Company's restricted common stock, par value $0.02, for $0.75 per
share. In addition, Mr. Phillips was awarded a five-year, non-qualified stock
option to purchase 875,725 shares of the Company's common stock, par value
$0.02, 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.

        The Company entered into a rolling two-year employment agreement with
Dr. Gilluly, to serve as Chief Executive Officer, commencing in fiscal year 1998
at an initial base annual salary of $140,000. On March 30, 2000, Dr. Gilluly
entered into an Amendment to Employment Agreement and assumed the sole position
of Chairman of the Company. Dr. Gilluly continues to provide management and
strategic services to the Company on a part-time basis pursuant to his agreement
dated July 1, 2000. Pursuant to this agreement, Dr. Gilluly works up to 90 hours
per quarter and receives $11,868 per month for a period of two years.

         On January 16, 2001, Dr. Gilluly resigned as Chairman and continues to
provide consulting services and serve as a member of the Company's Board of
Directors.

         On May 23, 2000, the Company entered into a severance agreement with
Dr. Kellmel. Pursuant to the agreement, if Dr. Kellmel is terminated other than
for cause as defined in his agreement, he will receive three months severance at
his current base pay of $154,000.

         On October 3, 2000, the Company entered into a severance agreement with
Mr. McCoy. Pursuant to the agreement, if Mr. McCoy is terminated other than for
cause as defined in his agreement, he will receive six months severance at his
current base pay of $140,000 per annum.

                                       25
<PAGE>

Compensation of Directors
-------------------------

         Directors receive a quarterly cash fee of $1,250 for their services. In
addition, directors receive $500 per Board meeting attended, and $250 per
committee meeting attended (unless such meeting is combined with a full Board
meeting). Directors who are employees do not receive any additional compensation
for their service as directors. Directors are reimbursed for out-of-pocket
expenses associated with their attendance at Board meetings.

Compensation Committee Report on Executive Compensation

         The responsibility of the Compensation Committee is to administer the
Company's executive compensation programs, to monitor corporate performance and
its relationship to compensation of executive officers and to make appropriate
recommendations concerning matters of executive compensation. The Compensation
Committee is comprised of three independent non-employee directors. This report
sets forth the major components of executive compensation and the basis by which
transition year 2000 compensation determinations were made with respect to the
executive officers of the Company.

Compensation Policy and Guidelines
----------------------------------

         The main objective of the Company is to maintain and increase the
profitability of its operations and to maximize value for shareholders,
employees and clients. The goals of the Company's compensation policy are to
align executive compensation with the Company's long-term business objectives
and performance, to enable the Company to attract and retain high-quality
executive officers and employees who will contribute to the long-term success of
the Company and to reward such executive officers and employees for their
successful efforts in attaining objectives beneficial to the growth and
profitability of the Company.

         In order to achieve the Company's goals, the Compensation Committee has
developed the following principles that serve as guidance for compensation
decisions for all employees: (i) to attract and retain the most highly qualified
management and employee team, (ii) to pay competitively with prevailing industry
standards, (iii) to emphasize sustained performance by aligning monetary rewards
with shareholder interests, (iv) to emphasize performance-related contributions
as the basis of pay decisions, and (v) to provide incentive bonus awards for
management based upon attaining revenue and profitability goals. To implement
these policies, the Compensation Committee has designed a compensation program
consisting of base salary, an annual incentive bonus plan, stock options and
other employment benefits.

Compensation Program Elements

         The Company's compensation levels and benefits are reviewed on an
annual basis to determine whether they are competitive and reasonable in light
of the overall performance of the Company and the Company's ability to attract
and retain talented executives. The Company's focus is on growth and
profitability.

     Base Salary. Salary levels are primarily determined by the Compensation
     -----------

                                       26
<PAGE>

     Committee in consideration of the performance of the individual executive,
     the financial performance of the Company and the prevailing industry
     standards for similar executives of similar companies. The Company's
     philosophy regarding base salaries is conservative, using published
     industry reports and surveys on executive compensation. The Company
     compares itself for this purpose with other technology service providers
     and/or government contracting firms who face similar challenges in their
     markets. Periodic increases in base salary relate to individual
     contribution evaluated against established objectives.

     Stock Options. The Company believes the compensation program should provide
     -------------
     employees with an opportunity to increase their ownership and potentially
     gain financially from Company stock price increases. By this approach, the
     interests of shareholders, executives and employees are closely aligned.
     Through the Company's Stock Option Plan, executives and employees are
     eligible to receive stock options, giving them the right to purchase shares
     of Common Stock of the Company at a specified price in the future. The
     Compensation Committee believes the use of stock options as the basis for
     long-term incentive compensation meets the Compensation Committee's defined
     compensation strategy and the team-based operations approach that the
     Company has adopted.

     Incentive Program. The Company's executive officers and operating managers
     -----------------
     participate in an incentive compensation program which awards cash bonuses
     based on attaining or exceeding specific revenue and profitability goals.
     For transition 2000, no incentive awards were paid to executive officers
     and operating managers.

     Severance Compensation. To retain highly qualified executive officers, the
     ----------------------
     Company from time to time enters into severance agreements with certain of
     its officers. The determination of whether the Company would benefit from a
     severance agreement with a particular officer is subjective, based upon
     such officer's experience and value to the Company.

     Other Benefits. The Company's philosophy is to provide adequate health and
     --------------
     welfare oriented benefits to executives and employees, but to maintain a
     highly conservative posture relative to executive benefits.

Transition Period 2000 Compensation for the Chairman
----------------------------------------------------

         The Committee entered into an employment agreement with Dr. Gilluly,
commencing in fiscal year 1998 at an initial base annual salary of $140,000, to
serve as Chief Executive Officer. On March 30, 2000, Dr. Gilluly entered into an
Amendment to Employment Agreement and assumed the sole position of Chairman of
the Company, which he resigned as of January 16, 2001. He continues to provide
management and strategic services to the Company on a part-time basis pursuant
to his agreement dated July 1, 2000. Pursuant to this agreement, Dr. Gilluly
works up to 90 hours per quarter and receives $11,868 per month for a period of
two years. Dr. Gilluly remains a member of the Board of Directors.

         The Committee has, at various times, granted Dr. Gilluly options under
the 1994 Stock Option Plan to purchase a total of 87,000 shares of the Company's
Common Stock at the market price on the date of grant. Under the Plan, one-third
of options granted are immediately exercisable upon the date

                                       27
<PAGE>

of grant, with one-third becoming exercisable on each of the first and second
anniversaries of the date of grant.

Transition Period 2000 Compensation for the President and Chief Executive
-------------------------------------------------------------------------
Officer
-------

         On March 30, 2000, pursuant to the Purchase Agreement, the Company
entered into a rolling two-year employment agreement with Mr. Stout. Under the
agreement, Mr. Stout would serve as the Company's President and Chief Executive
Officer. Mr. Stout was entitled to receive an initial annual base salary of
$50,000 for the first six months of his employment and thereafter to receive an
annual base salary of $140,000. For the fiscal year ended June 30, 2000, Mr.
Stout opted to forego his salary and defer any bonus. On September 12, 2000, the
Board approved a $25,000 bonus based upon the Company's financial performance in
the fourth quarter of the fiscal year ended June 30, 2000. Mr. Stout's
employment agreement further provides for Mr. Stout to participate in the
Company's Stock Option and Bonus Plans. Under the Bonus Plan, Mr. Stout may
receive additional compensation based upon the Company's financial performance.
If Mr. Stout is terminated by the Company other than for cause, the Company must
pay Mr. Stout a lump sum payment that is the sum of (1) Mr. Stout's base salary
and bonus through the date of termination; (2) any compensation previously
deferred by Mr. Stout; (3) any accrued vacation pay; and (4) the base salary
that would have been payable to Mr. Stout through the remainder of the term of
the agreement.

         The Committee has, at various times, granted Mr. Stout options under
the 1994 and 2000 Stock Option Plans to purchase a total of 65,000 shares of the
Company's Common Stock at 110% of the market price on the date of grant. Under
the Plan, one-third of options granted are immediately exercisable upon the date
of grant, with one-third becoming exercisable on each of the first and second
anniversaries of the date of grant.

         On January 16, 2001, Mr. Stout resigned as President and Chief
Executive Officer of the Company and was appointed to the position of Chairman.
Mr. Stout remains a member of the Company's Board of Directors.

Summary
-------

         The Compensation Committee believes the total compensation program for
executives of the Company is appropriate and competitive with the total
compensation programs provided by similar companies in the industry with which
the Company competes. The Compensation Committee believes its compensation
practices are directly tied to shareholder returns and linked to the achievement
of annual and longer-term financial and operating results of the Company on
behalf of the Company's shareholders.

                  Submitted by the Compensation Committee

                  Gerald R. McNichols, Sc.D, Compensation Committee Chair
                  John D. Sanders, Ph.D., Compensation Committee Member
                  Gerald R. Young, Compensation Committee Member

                                       28
<PAGE>

Performance Graph

         The following graph compares the cumulative, five-year shareholder
returns on the Company's Common Stock with the cumulative returns of the NASDAQ
Market Index and Media General's Other Business Services Index, comprised of the
Common Stock of approximately 200 companies in diversified business service
industries, excluding the Company. The graph assumes the value of the investment
in the Company's Common Stock and each index was $100 on June 30, 1996.

                                 PERIOD ENDING

<TABLE>
<CAPTION>
                                                                                                 SIX MONTHS
                         FISCAL YEAR    FISCAL YEAR   FISCAL YEAR   FISCAL YEAR   FISCAL YEAR      ENDED
    COMPANY                 1996           1997           1998         1999          2000         12/31/00
<S>                      <C>            <C>           <C>           <C>           <C>            <C>
Hadron, Inc.                  100.00       107.40          246.91        158.01         92.18        121.80
MG - Bus Serv Index           100.00       112.15          126.34        126.42        134.79        113.78
NASDAQ Market Index           100.00       120.46          159.68        223.77        336.71        208.80
</TABLE>


COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934

         Section 16(a) of the Exchange Act requires the Company's officers,
directors and persons who own more than 10% of a registered class of the
Company's equity securities to file reports of ownership and changes in
ownership with the Securities and Exchange Commission. Officers, directors and
greater than 10% shareholders are required by the regulation to furnish the
Company with copies of the Section 16(a) forms which they file.

         To the Company's knowledge, based solely on a review of the copies of
such reports furnished to the Company, and written representations that no other
reports were required during the transition year beginning July 1, 2000 and
ended December 31, 2000, all Section 16(a) filing requirements applicable to the
Company's officers, directors and greater than ten percent beneficial owners
were complied with in a timely manner.



                                       29
<PAGE>

Item 12.  Security Ownership of Certain Beneficial Owners and
          ---------------------------------------------------
          Management
          ----------

CHANGE OF CONTROL

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

         Pursuant to the Purchase Agreement, on the Closing Date, C.W. Gilluly
resigned from his position as the Company's Chief Executive Officer, and Jon M.
Stout was appointed as the Company's President and Chief Executive Officer. Dr.
Gilluly continued to serve as Chairman of the Company's Board of Directors.
Further pursuant to the Purchase Agreement, two members of the Board resigned,
Jon M. Stout was appointed a director and subsequently, Gerald R. McNichols,
Sc.D and Gerald R. Young were appointed to the Board.

         On January 16, 2001,  Mr. Stout resigned as President and Chief
Executive  Officer of the Company and was appointed to the position of Chairman.
Mr. Stout  remains a member of the Company's  Board of  Directors.  On this same
date,  Dr.  Gilluly  resigned as Chairman but  continues  to provide  consulting
services and serve as a member of the Company's Board of Directors.

         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

                                       30
<PAGE>

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 the terms of
the Voting Agreement.

                                       31
<PAGE>

BENEFICIAL OWNERSHIP OF COMMON STOCK

     The following table sets forth information as of May 4, 2001 regarding
the beneficial ownership of the Company's Common Stock of (i) each person known
to the Company to be the beneficial owner, within the meaning of Section 13(d)
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), of more
than 5% of the outstanding shares of Common Stock, (ii) each director of the
Company, (iii) each executive officer or former executive officer of the Company
named in the Summary Compensation Table (see "Executive Compensation") and (iv)
all executive officers and directors of the Company as a group. Unless otherwise
indicated, the address of each named beneficial owner is c/o Hadron, Inc., 5904
Richmond Highway, Suite 300, Alexandria, Virginia 22303. Except to the extent
indicated in the footnotes, each of the beneficial owners named below has sole
voting and investment power with respect to the shares listed.

    ----------------------------------------------------------------------------
                                     Number of Shares                Percent
          Name and Address               Shares                     of Class
          ----------------               ------                     --------
    ----------------------------------------------------------------------------
     Jon M. Stout                    5,883,877 /(1)(2)/                 65.1%
    -------------------------------------- ------------- -----------------------
     Stout Dynastic Trust            5,883,877 /(1)(3)/                 65.1%
     13380 W. Polo Road
     Wellington, FL 33414
    ------------------------------------------- ------------- ------------------
     Patricia W. Stout               5,883,877  /(1)(4)/                65.1%
     13380 W. Polo Road
     Wellington, FL 33414
    ------------------------------------------- ------------- ------------------
     J. Richard Knop                 5,883,877  /(1)(5)/                65.1%
     Boles Knop & Company, LLC
     2 West Washington St
     Middleburg, VA 20118
    ------------------------------------------- ------------- ------------------
     C.W. Gilluly, Ed.D.             1,418,875  /(1)(6)/                19.1%
    ------------------------------------------- ------------- ------------------
     Six Nations, Inc.                 382,947  /(7)/                    5.9%
     5521 Newhall Court
     Centreville, VA 22020
    ------------------------------------------- ------------- ------------------
     Howard C. Whetzel, Ph.D.          382,947  /(8)/                    5.9%
     5521 Newhall Court
     Centreville, VA 22020
    ------------------------------------------- ------------- ------------------
     John D. Sanders, Ph.D.            219,336  /(1)(9)/                 3.3%
    ------------------------------------------- ------------- ------------------
     Gerald R. McNichols, Sc.D.         87,506  /(10)/                   1.3%
    ------------------------------------------- ------------- ------------------
     Gerald R. Young                    22,506  /(11)/                     *
    ------------------------------------------- ------------- ------------------
     Donald J. Kellmel, Ph.D.          108,442  /(12)/                   1.7%
    ------------------------------------------- ------------- ------------------
     Shawn K. McCoy                     12,876  /(13)/                     *
    ------------------------------------------- ------------- ------------------
     Sterling E. Phillips              358,575  /(14)/                   5.3%
    ------------------------------------------- ------------- ------------------
     Dr. Kenneth Alibek                 24,531  /(15)/                     *
    ------------------------------------------- ------------- ------------------
     All directors and
     executive
     Officers as a group             6,722,605  /(1)(16)/               70.3%
     (14 persons)
    ------------------------------------------- ------------- ------------------

*  Less than 1%

                                       32
<PAGE>

(1)      Includes certain shares as to which voting power is shared in certain
         respects as a result of the Voting Agreement more fully described in
         the preceding section entitled "Change of Control."

(2)      Includes 205,190 shares held by spouse, 102,440 shares held by
         children, and 1,475,422 shares held by the Stout Dynastic Trust (the
         "Trust"); includes 26,666 shares which may be acquired upon the
         exercise of vested options granted under the Company's 1994 and 2000
         Stock Option Plans; and includes 235,161, 230,769, and 668,158 shares
         which may be acquired respectively by self, spouse, and Stout Dynastic
         Trust pursuant to warrants which are immediately exercisable. Includes
         shares, warrants and options immediately exercisable by others
         representing 2,690,001 shares of the Company's Common Stock as to which
         Mr. Stout has shared voting power.

(3)      Includes 250,070 shares held by Mr. Stout, who is the Trustee of the
         Trust, 205,190 shares held by Mrs. Stout, 102,440 shares held by the
         children of Mr. Stout; includes 26,666 shares which may be acquired by
         Mr. Stout upon the exercise of vested options granted under the
         Company's 1994 and 2000 Stock Option Plans; and includes 668,158,
         235,161, and 230,769 shares which may be acquired respectively by the
         Trust, Mr. Stout, and Mrs. Stout pursuant to warrants which are
         immediately exercisable. Includes shares, warrants and options
         immediately exercisable by others representing 2,690,001 shares of the
         Company's Common Stock as to which Mr. Stout has shared voting power.

(4)      Includes 250,070 shares held by spouse, 102,440 shares held by
         children, and 1,475,422 shares held by the Trust; includes 26,666
         shares which may be acquired by Mr. Stout upon the exercise of vested
         options granted under the Company's 1994 and 2000 Stock Option Plans;
         and includes 230,769, 235,161 and 668,158 shares which may be acquired
         respectively by self, spouse and the Trust, pursuant to warrants which
         are immediately exercisable. Includes shares, warrants and options
         immediately exercisable by others representing 2,690,001 shares of the
         Company's Common Stock as to which Mrs. Stout has shared voting power.

(5)      Includes warrants immediately exercisable to purchase 347,018 shares of
         the Company's Common Stock. Includes shares, warrants and options
         immediately exercisable by others representing 4,883,612 shares of the
         Company's Common Stock as to which Mr. Knop has shared voting power.

(6)      Includes warrants immediately exercisable to purchase 830,000 shares of
         the Company's Common Stock. Also includes 87,000 shares, which may be
         acquired upon the exercise of vested options granted under the
         Company's 1994 Stock Option Plan.

(7)      Includes 11,244 shares, which are held by Howard C. Whetzel, Ph.D, who
         controls Six Nations.

(8)      Includes 371,703 shares owned by Six Nations, Inc., a company
         controlled by Dr. Whetzel.

(9)      Includes 8,336 shares, which may be acquired upon the exercise of
         vested options granted under the Company's 1994 and 2000 Stock Option
         Plans and 81,000 shares which may be acquired pursuant to warrants.

(10)     Includes 2,506 shares, which may be acquired upon the exercise of
         vested options granted under the Company's 1994 and 2000 Stock Option
         Plans and 32,500 shares, which may be acquired pursuant to warrants.

(11)     Includes 2,506 shares, which may be acquired upon the exercise of
         vested options granted under the Company's 1994 and 2000 Stock Option
         Plans and 10,000 shares which may be acquired pursuant to warrants.

(12)     Includes 13,366 shares, which may be acquired upon the exercise of
         vested options granted under the Company's 1994 and 2000 Stock Option
         Plans.

(13)     Includes 11,700 shares, which may be acquired upon the exercise of
         vested options granted under the Company's 1994 and 2000 Stock Option
         Plans.

(14)     Includes 291,908 shares, which may be acquired upon the exercise of
         vested options granted under the Company's 2000 Stock Option Plan.

(15)     Includes 16,666 shares, which may be acquired upon the exercise of
         vested options granted under the Company's 1994 and 2000 Stock Option
         Plans.

                                       33
<PAGE>

(16)     Includes 605,159 shares, which may be acquired upon the exercise of
         vested options granted under the Company's 1994 and 2000 Stock Option
         Plans and 2,434,606 shares which may be acquired pursuant to warrants.

Item 13.  Certain Relationships and Related Transactions
          ----------------------------------------------

                 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The Company entered into a Loan and Security Agreement dated June 29, 1999
(the "Loan Agreement") with United Bank. The Loan Agreement provided the Company
with a $1.5 million line of credit facility (the "Credit Facility") through
October 31, 2000, and a three-year $1.5 million term loan (the "Term Loan"). The
Term Loan provides for monthly principal payments of approximately $42,000, with
interest at the prime rate plus 150 basis points. Jon M. Stout, Chairman of the
Board, personally guaranteed the loans. The Company is subject to certain
financial covenants pursuant to the Loan Agreement, including debt to net worth
ratio, debt to EBITDA ratio, and working capital and net worth requirements. The
Credit Facility and the Term Loan are secured by the accounts receivable and
other assets of the Company.

     On October 31, 2000, the Company entered into the Third Modification and
Extension Agreement with United Bank. This agreement extended the Credit
Facility through November 30, 2001, lowered the interest to the prime rate plus
100 basis points, and adjusted the financial covenants. On this same date, the
Company entered into a Joinder Agreement thereby adding the accounts receivable
and other assets of ABS as collateral for the Credit Facility and Term Loan.

     In January 2000, the Company borrowed $430,000 from Dr. Gilluly to meet its
operating needs. On February 15, 2000, these borrowings were converted into a
$430,000 note payable, due on demand, to Dr. Gilluly with interest of 12% per
annum. In connection with the issuance of the Note, the Company issued to Dr.
Gilluly a warrant, which entitles him to purchase 430,000 shares of Common
Stock, par value $0.02 per share, at the exercise price of seventy-two cents
($0.72) ("Warrant"). The term of the Warrant is for a period of five years,
commencing on February 15, 2000 and ending February 15, 2005. The Warrant was
deemed to have a nominal value at the time of issuance. As of September 30,
2000, the Company made principal and interest payments of $430,000 and $24,200,
respectively, satisfying the note payment in full.

     On August 15, 2000, Directors McNichols and Young purchased 32,500 and
10,000, respectively, of the Company's restricted Common Stock at $0.75 per
share. In addition, Mr. McNichols and Mr. Young received warrants of 32,500 and
10,000, respectively, to purchase the Company's Common Stock at $0.75 per share.

     On September 20, 2000, the Stout Dynastic Trust exercised warrants,
pursuant to the March 30, 2000 equity capital investment by a group of investors
led by Jon M. Stout, to purchase 347,222 shares of the Company's Common Stock at
$0.72 per share.

     On September 29, 2000, J. Richard Knop exercised warrants, pursuant to

                                       34
<PAGE>

the March 30, 2000 equity capital investment by a group of investors led by Jon
M. Stout, to purchase 115,672 shares of the Company's Common Stock at $0.72 per
share.

     On February 23, 2001, Mr. Stout purchased 40,000 shares of the Company's
restricted Common Stock in a private transaction.

     On June 20, 2000, the Company entered into a consulting agreement with
Shawna Stout, the daughter of Mr. Stout, to provide professional services to the
Company on an as needed basis. Pursuant to the agreement, Ms. Stout will be paid
$75 per hour and will receive travel reimbursement and health benefits. In
transition period 2000, $9,300 was paid to Ms. Stout for consulting services.

     As of September 1, 2000, the Company entered into a letter agreement with
Dr. Sanders to provide strategic financial consulting services. Pursuant to the
agreement, Dr. Sanders will be paid a monthly retainer of $2,500, plus
reimbursement of direct expenses authorized by the Company. This agreement may
be terminated by either party by giving the other party thirty days notice in
writing. In addition, should Dr. Sanders initiate and be involved with a merger
or acquisition that results in a formal agreement and transaction, the Company
will pay Dr. Sanders a financial advisory or finders fee of one and one-half
percent of the total value of the transaction. Should a broker or other
intermediary be involved, Dr. Sanders' fee would be reduced to one percent. This
portion of the agreement survives termination if a merger situation or
acquisition company has been introduced and discussions or negotiations are
continuing. In the transition period 2000, $2,500 was paid to Dr. Sanders
pursuant to this agreement.

     On June 29, 2000, the Company entered into a letter agreement with Mr.
Young to provide business development services to the Company, on an as needed
basis, at the rate of $1,500 per day. In the transition period 2000, $1,500 was
paid to Mr. Young pursuant to this agreement.

                                       35
<PAGE>

                                    PART IV

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

(a) (1)  Financial Statements
Report of Independent Auditors                                          F-1

Consolidated Balance Sheets as of December 31, 2000,
June 30, 2000 and June 30, 1999                                         F-2

Consolidated Statements of Operations for the transition
period ended December 31, 2000, the unaudited six month
period ended December 31, 1999, and the fiscal years
ended June 30, 2000, 1999 and 1998                                      F-4

Consolidated Statements of Shareholders' Equity for
the transition period ended December 31, 2000 and the
fiscal years ended June 30, 2000, 1999 and 1998                         F-5

Consolidated Statements of Cash Flows for the transition
period ended December 31, 2000, the unaudited six month
period ended December 31, 1999, and the fiscal years
ended June 30, 2000, 1999 and 1998                                      F-6

Notes 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).

  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

                                       36
<PAGE>

         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    Employment Agreement entered into the 18th day of December 1998, by and
         between Hadron, Inc. and Jeannine Mantz (incorporated by reference to
         the Company's Current Report on Form 8-K filed January 4, 1999).

 10.4    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).

 10.5    Employment Agreement entered into the 12th day of May 1999, by and
         between Hadron, Inc. and Howard C. Whetzel (incorporated by reference
         to the Company's Current Report on Form 8-K filed May 27, 1999).

 10.6    Loan and Security Agreement between United Bank and Hadron, Inc.,
         Avenue Technologies, Inc., Vail Research and Technology Corporation,
         SyCom Services, Inc., and Engineering & Information Services, Inc.
         dated June 29, 1999 (incorporated by reference to the Company's Current
         Report on Form 8-K filed July 14, 1999).

 10.7    Guaranty of Payment between United Bank and Hadron, Inc., Avenue
         Technologies, Inc., Vail Research and Technology Corporation, SyCom
         Services, Inc., and Engineering & Information Services, Inc. dated June
         29, 1999 (incorporated by reference to the Company's Current Report on
         Form 8-K filed July 14, 1999).

 10.8    $1,500,000 Commercial Note in favor of United Bank dated June 29, 1999
         (incorporated by reference to the Company's Current Report on Form 8-K
         filed July 14, 1999).

 10.9    $1,500,000 Revolving Commercial Note in favor of United Bank dated June
         29, 1999 (incorporated by reference to the Company's Current Report on
         Form 8-K filed July 14, 1999).

 10.10   Employment Agreement with C.W. Gilluly dated July 1, 1998 (incorporated
         by reference to the Company's Annual Report on Form 10-K for the fiscal
         year ending June 30, 1998 and filed with the Commission on September
         25, 1998).

 10.11   Amended Stock Purchase Warrant issued to C.W. Gilluly and dated June 2,
         1997 (incorporated by reference to the Company's Annual

                                       37
<PAGE>

         Report on Form 10-K for the fiscal year ended June 30, 1999 and filed
         with the Commission on September 28, 1999).

 10.12   Employment Agreement between the Company and S. Amber Gordon dated June
         24, 1999 (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).

 10.13   Employment Agreement between the Company and Donald Jewell dated July
         1, 1999 (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).

 10.14   Employment Agreement between the Company and Shawn K. McCoy dated July
         1, 1999 (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).

 10.15   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).

 10.16   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).

 10.17   Securities Purchase Agreement with Jon M. Stout, Patricia W. Stout, the
         Stout Dynastic Trust, J. Richard Knop and John D. Sanders and C.W.
         Gilluly dated March 30, 2000 (incorporated by reference to the
         Company's Current Report on Form 8-K filed April 14, 2000).

 10.18   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).

 10.19   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).

 10.20   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).

 10.21   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).

 10.22   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).

                                       38
<PAGE>

 10.23   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).

 10.24   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).

 10.25   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).

 10.26   Amendment to Employment Agreement between C.W. Gilluly and the Company
         dated March 30, 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)

 10.27   Employment Agreement between the Company and Jon M. Stout dated March
         30, 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)

 10.28   Severance Agreement between the Company and Donald Kellmel dated May
         23, 2000.

 10.29   Second Modification and Extension Agreement among United Bank, C.W.
         Gilluly, Martha Gilluly, Jon M. Stout and Hadron, Inc. dated August 23,
         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)

 10.30   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)

 10.31   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)

 10.32   Employment Agreement Amendment and Mutual Release between S. Amber
         Gordon 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)

 10.33   Severance Agreement between the Company and Shawn McCoy dated October
         3, 2000.

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

 10.35   Third Modification and Extension Agreement among United Bank, Jon M.
         Stout, and Hadron, Inc. dated October 31, 2000. (incorporated by
         reference to the Company's Form 10-Q for the fiscal quarter ended
         September 30, 2000 and filed with the Commission on November 14, 2000)


 10.36   Revolving Commercial Note Agreement among United Bank, Jon M. Stout,
         and Hadron, Inc. dated October 31, 2000. (incorporated by reference to
         the Company's Form 10-Q for the fiscal quarter ended September 30, 2000
         and filed with the Commission on November 14, 2000)

 10.37   Joinder Agreement among United Bank, Jon M. Stout, and Hadron, Inc.
         dated October 31, 2000. (incorporated by reference to the Company's
         Form 10-Q for the fiscal quarter ended September 30, 2000 and filed
         with the Commission on November 14, 2000)

 10.38   Form of Stock Pledge Agreement between United Bank and Hadron, Inc.
         dated October 31, 2000. (incorporated by reference to the Company's
         Form 10-Q for the fiscal quarter ended September 30, 2000 and filed
         with the Commission on November 14, 2000)

                                       39
<PAGE>

 10.39   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).

  22     Subsidiaries of the Company.

  23     Consent of Independent Auditors.


  (b)  Reports on Form 8-K

                                       40
<PAGE>

                                   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: May 11, 2001                 HADRON, INC.

By: /S/ Sterling E. Phillips, Jr.         By:/S/ Sterling E. Phillips, Jr.
    -----------------------------         ---------------------------------
   Sterling E. Phillips, Jr.              Sterling E. Phillips, Jr.
   Chief Executive Officer                  Acting Chief Financial Officer
    and President                           (Principal Financial
    (Principal Executive Officer)           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/ C.W. Gilluly               Director        May 11, 2001
-----------------------------
C.W. Gilluly

/S/ Gerald R. McNichols        Director        May 11, 2001
-----------------------------
Gerald R. McNichols

/S/ Sterling E. Phillips, Jr.  Director        May 11, 2001
-----------------------------
Sterling E. Phillips, Jr.

/S/ John D. Sanders            Director        May 11, 2001
-----------------------------
John D. Sanders

/S/ Jon M. Stout               Chairman        May 11, 2001
-----------------------------
Jon M. Stout

/S/ Gerald R. Young            Director        May 11, 2001
-----------------------------
Gerald R. Young

                                       41
<PAGE>

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, 2000, June 30, 2000 and June 30, 1999 and the
related consolidated statements of operations, shareholders' equity, and cash
flows for the six-month transition period ended December 31, 2000 and for each
of the three 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, 2000, June 30, 2000 and June 30, 1999, and
the consolidated results of their operations and their cash flows for the
six-month transition period ended December 31, 2000 and for each of the three
years in the period ended June 30, 2000, in conformity with accounting
principles generally accepted in the United States.

                                                          /S/ ERNST & YOUNG, LLP

McLean, Virginia
April 17, 2001

                                      F-1
<PAGE>

                                 HADRON, INC.
                          CONSOLIDATED BALANCE SHEETS
              DECEMBER 31, 2000, JUNE 30, 2000, AND JUNE 30, 1999
              ---------------------------------------------------



<TABLE>
<CAPTION>
                                                                           DECEMBER 31,          JUNE 30,             JUNE 30,
        ASSETS                                                                 2000                2000                 1999
        ------                                                          ----------------     ----------------     ----------------
<S>                                                                     <C>                  <C>                  <C>
        Current assets:
          Cash and cash equivalents                                     $        234,900     $        118,000     $        256,000
          Accounts receivable, net                                             3,237,300            3,454,500            3,495,700
          Prepaid expenses and other                                             163,800              128,800              255,400
                                                                        ----------------     ----------------     ----------------

            Total current assets                                               3,636,000            3,701,300            4,007,100
                                                                        ----------------     ----------------     ----------------

        Fixed assets, net                                                        284,800              219,100              290,900
        Goodwill, net                                                          1,809,600            1,972,000            2,246,600
        Other                                                                     53,500               58,700              145,100
                                                                        ----------------     ----------------     ----------------
            Total other assets                                                 2,147,900            2,249,800            2,682,600
                                                                        ----------------     ----------------     ----------------

        Total assets                                                    $      5,783,900     $      5,951,100     $      6,689,700
                                                                        ================     ================     ================
</TABLE>


                See Notes to Consolidated Financial Statements

                                      F-2
<PAGE>

                                 HADRON, INC.
                          CONSOLIDATED BALANCE SHEETS
              DECEMBER 31, 2000, JUNE 30, 2000 AND JUNE 30, 1999
              --------------------------------------------------

<TABLE>
<CAPTION>
                                                                            DECEMBER 31,          JUNE 30,            JUNE 30,
        LIABILITIES AND SHAREHOLDERS' EQUITY                                   2000                 2000                1999
        ------------------------------------                              ---------------      ---------------     ---------------
<S>                                                                       <C>                  <C>                 <C>
        Current liabilities:
          Accounts payable                                                $       529,500      $       779,700     $       917,100
          Note payable - line of credit                                           907,100              481,300             638,800
          Note payable - current maturity of long-term debt                       500,000              500,000             500,000
          Note payable - related party                                            100,000              330,000             150,000
          Other current liabilities                                             1,333,700            1,623,000           1,867,800
                                                                          ---------------      ---------------     ---------------
            Total current liabilities                                           3,370,300            3,714,000           4,073,700
                                                                          ---------------      ---------------     ---------------

        Notes payable                                                             351,700              601,700           1,292,700
        Notes payable - related parties                                                 -                    -             805,100
        Other                                                                      60,000              100,000              62,600
                                                                          ---------------      ---------------     ---------------
            Total long-term liabilities                                           411,700              701,700           2,160,400
                                                                          ---------------      ---------------     ---------------
        Commitments and contingencies

        Total liabilities                                                       3,782,000            4,415,700           6,234,100
                                                                          ---------------      ---------------     ---------------
        Shareholders' equity:

        Common stock $.02 par; authorized 20,000,000  shares;
        issued and outstanding  -  December 31, 2000, 6,450,913 shares,
        June 30, 2000, 5,831,339 shares and June 30, 1999, 2,487,518 shares       129,000              116,600              49,700

        Additional capital                                                     11,885,300           11,516,000           9,758,300

        Accumulated deficit                                                   (10,012,400)         (10,097,200)         (9,352,400)
                                                                          ---------------      ---------------     ---------------
            Total shareholders' equity                                          2,001,900            1,535,400             455,600
                                                                          ---------------      ---------------     ---------------

        Total liabilities and shareholders' equity                        $     5,783,900      $     5,951,100     $     6,689,700
                                                                          ===============      ===============     ===============
</TABLE>


                See Notes to Consolidated Financial Statements

                                      F-3
<PAGE>

<TABLE>
<CAPTION>
                                                           HADRON, INC.
                                               CONSOLIDATED STATEMENTS OF OPERATIONS
                         FOR THE TRANSITION PERIOD ENDED DECEMBER 31, 2000, THE UNAUDITED SIX MONTHS ENDED
                   DECEMBER 31, 1999, AND THE FISCAL YEARS ENDED JUNE 30, 2000, JUNE 30, 1999 AND JUNE 30, 1998



                                     SIX MONTHS
                                     TRANSITION          SIX MONTHS
                                       PERIOD              ENDED
                                       ENDED             DECEMBER 31,         FISCAL              FISCAL              FISCAL
                                    DECEMBER 31,            1999               YEAR                YEAR                YEAR
                                        2000             (UNAUDITED)           2000                1999                1998
                                   ---------------     ---------------     --------------     ---------------     ---------------
<S>                               <C>                 <C>                 <C>               <C>                  <C>
Revenues                           $     8,943,400     $    10,267,300     $   19,901,300     $    20,333,200     $    21,133,900

Operating costs and expenses:
  Costs of revenue                       7,600,700           8,753,200         16,572,200          17,734,800          18,118,100
  Selling, general and
    administrative                       1,153,000           1,995,200          3,749,900           2,535,400           2,127,500
                                   ---------------     ---------------     --------------     ---------------     ----------------
Total operating costs and expenses       8,753,700          10,748,400         20,322,100          20,270,200          20,245,600
                                   ---------------     ---------------     --------------     ---------------     ----------------
Operating income (loss)                    189,700            (481,100)          (420,800)             63,000             888,300
                                   ---------------     ---------------     --------------     ---------------     ----------------
Other income (expense):
  Interest income                                -                 600              8,100               2,600               5,500
  Interest expense                        (112,000)           (167,100)          (332,600)            (80,800)            (61,700)
  Other income (expense)                     7,100              16,600             21,800              63,500             (13,000)
                                   ---------------     ---------------     --------------     ---------------     ----------------
Total other expense                       (104,900)           (149,900)          (302,700)            (14,700)            (69,200)
                                   ---------------     ---------------     --------------     ---------------     ----------------

Income (loss) before income taxes           84,800            (631,000)          (723,500)             48,300             819,100

Provision for income taxes                       -                   -             21,300              13,900              58,500
                                   ---------------     ---------------     --------------     ---------------     ----------------

Net income (loss)                  $        84,800     $      (631,000)    $     (744,800)    $        34,400     $       760,600
                                   ===============     ===============     ==============     ===============     ===============

Per share data:

Net income (loss) per share:
  Basic                            $          0.01     $         (0.24)    $         (.23)    $          0.02    $           0.45
                                   ===============     ===============     ==============     ===============     ===============
  Diluted                          $          0.01     $         (0.24)    $         (.23)    $          0.01    $           0.26
                                   ===============     ===============     ==============     ===============     ================

Weighted average number of shares:
  Basic                                  6,153,914           2,599,915          3,276,269           1,794,775           1,686,808
                                   ===============     ===============     ==============    ================    ================
  Diluted                                7,118,895           2,599,915          3,276,269           2,579,439           2,990,897
                                   ===============     ===============     ==============    ================    ================
</TABLE>


                See Notes to Consolidated Financial Statements

                                      F-4
<PAGE>

                                 HADRON, INC.
                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
             FOR THE TRANSITION PERIOD ENDED DECEMBER 31, 2000 AND
            FOR THE FISCAL YEARS ENDED JUNE 30, 2000, 1999 AND 1998
      -------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                Common Stock               Additional    Accumulated
                                                                   Shares        Amount     Capital        Deficit       Total
                                                                ----------------------------------------------------------------
      <S>                                                         <C>          <C>       <C>         <C>             <C>
       Balance - June 30, 1997                                     1,686,685    $ 33,800  $ 9,302,800 $ (10,147,400)  $ (810,800)

         Shares purchased pursuant
          to the Employee Stock Purchase Plan                         45,271         900       71,300                     72,200

         Net income                                                                                         760,600      760,600
                                                                ----------------------------------------------------------------

       Balance - June 30, 1998                                     1,731,956      34,700    9,374,100    (9,386,800)      22,000

         Shares issued to investment banking firm                     75,000       1,500       73,500                     75,000

         Shares purchased pursuant
          to the Employee Stock Purchase Plan                         75,896       1,400       99,200                    100,600

         Exercise of warrants                                        400,000       8,000       92,000                    100,000

         Shares issued upon conversion of debt                       200,000       4,000      116,000                    120,000

         Exercise of options                                           4,666         100        3,500                      3,600

         Net income                                                                                          34,400       34,400
                                                                ----------------------------------------------------------------

       Balance - June 30, 1999                                     2,487,518      49,700    9,758,300    (9,352,400)     455,600

         Shares purchased pursuant
          to the Employee Stock Purchase Plan                        118,722       2,400       48,000                     50,400

         Exercise of warrants                                        220,000       4,400       50,600                     55,000

         Exercise of options                                          78,166       1,600       27,000                     28,600

         Shares issued upon conversion of debt                       676,933      13,500      842,100                    855,600

         Shares issued pursuant to sale of common stock            2,250,000      45,000      790,000                    835,000

         Net loss                                                                                          (744,800)    (744,800)
                                                                ----------------------------------------------------------------

       Balance - June 30, 2000                                     5,831,339     116,600   11,516,000   (10,097,200)   1,535,400

         Shares purchased pursuant
          to the Employee Stock Purchase Plan                         19,180         400       13,900                     14,300

         Exercise of warrants                                        462,894       9,300      324,000                    333,300

         Exercise of options                                          62,500       1,200       25,300                     26,500

         Shares issued pursuant to sale of common stock               75,000       1,500        6,100                      7,600

         Net income                                                                                          84,800       84,800
                                                                ----------------------------------------------------------------

       Balance - December 31, 2000                                 6,450,913    $129,000  $11,885,300  ($10,012,400)  $2,001,900
                                                                ================================================================
</TABLE>


                See Notes to Consolidated Financial Statements

                                      F-5
<PAGE>

                                 HADRON, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
              FOR THE TRANSITION PERIOD ENDED DECEMBER 31, 2000,
            THE SIX MONTH UNAUDITED PERIOD ENDED DECEMBER 31, 1999,
            AND THE FISCAL YEARS ENDED JUNE 30, 2000, 1999 AND 1998
          -----------------------------------------------------------

<TABLE>
<CAPTION>
                                                             SIX MONTHS
                                                             TRANSITION        UNAUDITED
                                                               PERIOD          SIX MONTH
                                                               ENDED          PERIOD ENDED
                                                            DECEMBER 31,      DECEMBER 31,      FISCAL YEAR       FISCAL YEAR
                                                                2000              1999              2000             1999
                                                           -------------    --------------    --------------    --------------
<S>                                                      <C>               <C>               <C>               <C>
Cash flows from operating activities:
 Net income (loss)                                        $       84,800    $     (631,000)   $     (744,800)   $       34,400
                                                           -------------    --------------    --------------    --------------
Adjustments to reconcile net income (loss) to net
  cash provided (used) by operating activities:
  Depreciation and amortization                                  229,500           208,700           457,300            97,200
  Changes in operating assets and liabilities:
   Accounts receivable                                           217,200           141,400            41,200         1,768,600
   Prepaid expenses and other                                    (35,000)           89,800            81,300          (127,400)
   Other assets                                                    5,200            86,200            86,500           (67,100)
   Accounts payable                                             (250,200)         (123,200)         (137,400)         (254,400)
   Other current liabilities                                    (289,300)         (135,700)         (268,800)         (968,400)
   Other long-term liabilities                                   (40,000)          (20,800)           37,400           (13,300)
                                                           -------------    --------------    --------------    --------------
   Total adjustments                                            (162,600)          246,400           297,500           435,200
                                                           -------------    --------------    --------------    --------------
Net cash provided (used) by operating activities                 (77,800)         (384,600)         (447,300)          469,600
                                                           -------------    --------------    --------------    --------------
Cash flows from investing activities:
  Property additions                                            (132,800)           (2,400)          (41,600)         (121,800)
  Investment in PEI                                                    -                 -                 -                 -
  Purchase of Vail and ATI, net of cash acquired                       -                 -                 -          (378,700)
                                                           -------------    --------------    --------------    --------------
Net cash used by investing activities                           (132,800)           (2,400)          (41,600)         (500,500)
                                                           -------------    --------------    --------------    --------------
Cash flows from financing activities:
  Proceeds from borrowings on bank and other loans             1,326,400         1,496,600         1,926,600           850,000
  Proceeds from stock options and warrants exercised             359,800            58,800            83,600           103,600
  Proceeds from employee stock purchases                          14,300            36,700            50,400           100,600
  Proceeds from sale of common stock                               7,600                 -           835,000                 -
  Payments on bank and other loans                            (1,380,600)       (1,267,900)       (2,544,700)         (827,800)
                                                           -------------    --------------    --------------    --------------
Net cash provided by financing activities                        327,500           324,200           350,900           226,400
                                                           -------------    --------------    --------------    --------------
Net increase (decrease) in cash and cash equivalents             116,900           (62,800)         (138,000)          195,500

Cash and cash equivalents at beginning of period                 118,000           256,000           256,000            60,500
                                                           -------------    --------------    --------------    --------------

Cash and cash equivalents at end of period                 $     234,900    $      193,200    $      118,000    $      256,000
                                                           =============    ==============    ==============    ==============
</TABLE>


<TABLE>
<CAPTION>
                                                                FISCAL YEAR
                                                                   1998
                                                              ---------------
<S>                                                          <C>
Cash flows from operating activities:
 Net income (loss)                                            $       760,600
                                                              ---------------
Adjustments to reconcile net income (loss) to net
  cash provided (used) by operating activities:
  Depreciation and amortization                                        34,500
  Changes in operating assets and liabilities:
    Accounts receivable                                              (741,600)
    Prepaid expenses and other                                        (11,900)
    Other assets                                                        5,200
    Accounts payable                                                 (453,400)
    Other current liabilities                                         348,900
    Other long-term liabilities                                         4,100
                                                              ---------------
    Total adjustments                                                (814,200)
                                                              ---------------
Net cash provided (used) by operating activities                      (53,600)
                                                              ---------------
Cash flows from investing activities:
  Property additions                                                  (29,600)
  Investment in PEI                                                   (15,900)
  Purchase of Vail and ATI, net of cash acquired                            -
                                                              ---------------
Net cash used by investing activities                                 (45,500)
                                                              ---------------
Cash flows from financing activities:
  Proceeds from borrowings on bank and other loans                    796,700
  Proceeds from stock options and warrants exercised                        -
  Proceeds from employee stock purchases                               72,200
  Proceeds from sale of common stock                                        -
  Payments on bank and other loans                                   (734,000)
                                                              ---------------
Net cash provided by financing activities                             134,900
                                                              ---------------
Net increase (decrease) in cash and cash equivalents                   35,800

Cash and cash equivalents at beginning of period                       24,700
                                                              ---------------

Cash and cash equivalents at end of period                    $        60,500
                                                              ===============
</TABLE>


                See Notes to Consolidated Financial Statements

                                      F-6
<PAGE>

                                  HADRON, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


1.     The Company:

              Hadron, Inc. ("Hadron" or the "Company") supports the national
       security organizations of the United States Government by providing
       engineering, information technology, medical research and technical
       services to these agencies. The Company specializes in developing
       innovative technical solutions for the intelligence community, analyzing
       and supporting defense systems, developing medical defenses for
       biological warfare agents and supporting computer systems.

              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 four active wholly owned subsidiaries,
              Advanced Biosystems, Inc. ("ABS"), Avenue Technologies, Inc.
              ("ATI"), Engineering & Information Services, Inc. ("EISI"), 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
              commercial banks. Cash in excess of daily requirements is invested
              by the banks in one-day repurchase agreements of securities of
              United States Government agencies. To date, the Company has not
              incurred losses related to cash and cash equivalents.

                  The Company's accounts receivables consist principally of
              accounts receivable from prime contractors to agencies and
              departments of the United States Government. The Company extends
              credit in the normal course of operations and does not require
              collateral from its customers.

                                      F-7
<PAGE>

                                  HADRON, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

                  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
              generally accepted accounting principles 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:

                  Goodwill is amortized using the straight-line method for a
              period of seven years. In the six-month periods ended December 31,
              2000 and 1999 and the fiscal years 2000 and 1999, respectively,
              the Company recorded goodwill amortization, related to the May
              1999 purchase of ATI, of $162,000, $172,000, $344,000 and $41,000.
              As of December 31, 2000, the accumulated amortization of goodwill
              is $547,000.

                                      F-8
<PAGE>

                                  HADRON, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

                  The Company evaluates its long-lived assets and certain
              identifiable intangibles for impairment whenever events or changes
              in circumstances indicate that the carrying amount of such assets
              may not be recoverable. Recoverability of assets to be held and
              used is measured by a comparison of the carrying amount of any
              asset to future net undiscounted cash flows expected to be
              generated by the asset. If such assets are considered to be
              impaired, the impairment to be recognized is measured by the
              future discounted cash flows compared to the carrying amount of
              the asset. In addition, the Company continually evaluates the
              recoverability of enterprise goodwill by assessing whether the
              book value can be recovered through the expected undiscounted cash
              flows.

          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 is limited to 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:

                  The Company grants stock options for a fixed number of shares
              to employees with an exercise price equal to the fair value of the
              shares at the date of the grant. The Company accounts for stock
              option grants in accordance with APB Opinion No. 25, "Accounting
              for Stock Issued to Employees", and accordingly recognizes no
              compensation expense for the stock option grants.

          I.  Reclassifications:

                  Certain fiscal year 2000, 1999 and 1998 amounts have been
              reclassified to conform to the transition period 2000

                                      F-9
<PAGE>

                                  HADRON, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

              presentation.

          J.  Recent accounting pronouncements:

                  In June 2000, the FASB issued SFAS No. 138,  "Accounting  for
              Certain Derivative Instruments and Certain Hedging Activities", an
              amendment of SFAS No. 133, which is effective for fiscal years
              beginning after June 15, 2000. The adoption of SFAS No. 133, as
              amended, does not have a material impact on the Company's
              financial statements.


3.        Accounts receivable:

                  The components of accounts receivable are as follows:

                                      December 31,             June 30,
                                     -------------   --------------------------
                                          2000            2000          1999
                                     -------------   --------------------------
      Trade accounts receivable:
      U.S. Government:
      Amounts billed                  $  875,000     $ 1,084,100    $ 1,640,800
      Recoverable costs
       and profits -
       not billed                      2,020,600       2,023,900      1,247,400
                                      ----------     -----------    -----------

        Total                          2,895,600       3,108,000      2,888,200
                                      ----------     -----------    -----------

      Commercial, state
       and local
       Governments:
      Amounts billed                      24,600         223,600        555,200
      Recoverable costs
       and profits - not
       billed                            468,300         274,100        306,000
                                      ----------     -----------     ----------

        Total                            492,900         497,700        861,200
                                      ----------     -----------     ----------

      Total accounts
      receivable                       3,388,500       3,605,700      3,749,400

      Less: Allowance for
       doubtful accounts                (151,200)       (151,200)      (253,700)
                                      ----------      ----------     ----------

      Total accounts
      receivable, net                 $3,237,300      $3,454,500     $3,495,700
                                      ==========      ==========     ==========


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

                                      F-10
<PAGE>

                                 HADRON, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------


                      Six months ended
                         December 31,            Fiscal Year Ended June 30,
                  ------------------------   -----------------------------------
                                Unaudited
                      2000        1999          2000        1999         1998
                  ------------------------   ----------  ----------   ----------

Beginning
balance           $151,200    $253,700       $253,700    $209,800    $158,800

Additions                -           -              -      93,900      51,000

Write-offs               -    (104,300)      (102,500)    (50,000)          -
                  ---------   ---------      ---------   ---------   ---------

Ending Balance    $151,200    $149,400       $151,200    $253,700    $209,800
                  =========   =========      =========   =========   =========


           The amount of customer retentions included in U.S. Government
       unbilled accounts receivable is $18,000 at December 31, 2000, June 30,
       2000 and June 30, 1999.

           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.

           In December 1997, ATI received a Stop Work Order from a Department of
       Defense agency. The contract was terminated for convenience. The Company
       has submitted a termination claim for approximately $403,000,
       representing the costs incurred by the Company and its subcontractors.
       The U.S. Government has questioned certain of the costs submitted. An
       arbitration date has been set to determine the final claim amounts. It is
       reasonably possible that a lesser amount could be received. However, this
       claim has been recorded at its expected realizable amount.

4.     Fixed assets:

           The components of fixed assets are as follows:

                                   December 31,             June 30,
                                 --------------- -------------------------------
                                      2000            2000            1999
                                 --------------- --------------  ---------------

Computer hardware and
  Software                       $   688,500     $   672,900     $   631,300
Leasehold improvements                 3,900               -               -
Laboratory equipment                 113,300               -               -
Office equipment                     136,900         136,900         136,900
                                 --------------- --------------  ---------------

Total fixed assets                   942,600         809,800         768,200

                                      F-11
<PAGE>

                                 HADRON, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------


Less accumulated depreciation
  And amortization                  (657,800)        (590,700)       (477,300)
                                 -----------      -----------     -----------

Total fixed assets, net          $   284,800      $   219,100     $   290,900
                                 ===========      ===========     ===========

5.  Debt:

              The Company entered into a Loan and Security Agreement dated June
         29, 1999 (the "Loan Agreement") with United Bank. The Loan Agreement
         provided the Company with a $1.5 million line of credit facility (the
         "Credit Facility") through October 31, 2000, and a three-year $1.5
         million term loan (the "Term Loan"). The Term Loan provides for monthly
         principal payments of approximately $42,000, with interest at the prime
         rate plus 150 basis points. Jon M. Stout, the Company's Chairman and
         former President and Chief Executive Officer, personally guaranteed the
         loans. The Company is subject to certain financial covenants pursuant
         to the Loan Agreement, including debt to net worth ratio, debt to
         EBITDA ratio, and working capital and net worth requirements. The
         Credit Facility and the Term Loan are secured by the accounts
         receivable and other assets of the Company. As of December 31, 2000,
         the outstanding balances of the Credit Facility and Term Loan are
         $907,000 and $750,000, respectively.

              On October 31, 2000, the Company entered into the Third
         Modification and Extension Agreement with United Bank. This agreement
         extended the Credit Facility through November 30, 2001, lowered the
         interest to the prime rate plus 100 basis points, and adjusted the
         financial covenants. On this same date, the Company entered into a
         Joinder Agreement thereby adding the accounts receivable and other
         assets of Advanced Biosystems, Inc. ("ABS") as collateral for the
         Credit Facility and Term Loan.

              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.

              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

                                      F-12
<PAGE>

                                  HADRON, INC
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

         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, 2000, two convertible notes totaling
         $102,000 remain.

              In January 2000, the Company borrowed $430,000 from Dr. C.W.
         Gilluly to meet its operating needs. On February 15, 2000, these
         borrowings were converted into a $430,000 note payable, due on demand,
         to Dr. Gilluly with interest of 12% per annum. In connection with the
         issuance of the Note, the Company issued to Dr. Gilluly a warrant,
         which entitles him to purchase 430,000 shares of Common Stock, par
         value $0.02 per share, at the exercise price of seventy-two cents
         ($0.72) ("Warrant"). The term of the Warrant is for a period of five
         years, commencing on February 15, 2000 and ending February 15, 2005.
         The Warrant was deemed to have a nominal value at the time of issuance.
         As of September 30, 2000, the Company made principal and interest
         payments of $430,000 and $24,000, respectively, satisfying all
         principal and interest obligations.

              The Company's future debt maturities at December 31, 2000 are
         summarized below:

                                               Debt
         Year                                  Maturities
         ----                                  ----------
         2001                                  $1,507,100
         2002                                     351,700
         2003                                           -
                                               ----------

         Total minimum debt payments            1,858,800

         Less:  current maturities             (1,507,100)
                                               -----------

         Total long-term debt                  $  351,700
                                               ===========

6.       Equity capital:

                In August 2000, the Company received approximately $56,000 in
         equity capital from a group of investors consisting of two directors,
         Dr. Gerald R. McNichols and Mr. Gerald R. Young, and two principals of
         an investment banking and brokerage firm. The investment group
         purchased 75,000 units, each consisting of one share of common stock
         and a warrant to purchase one share of common stock at $0.75 per share.

                                      F-13
<PAGE>

                                 HADRON, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------

              In September 2000, Jon M. Stout, the Company's President and Chief
       Executive Officer, and J. Richard Knop, President of the Company's
       investment banking firm, Boles Knop & Co., exercised warrants to purchase
       an aggregate of 462,894 shares of common stock, resulting in an equity
       investment of approximately $333,000.


7.     Other current liabilities:

            Other current liabilities include the following major
       classifications:

                                  December 31,            June 30,
                                ---------------  -------------------------
                                       2000         2000           1999
                                ---------------  ------------  -----------

Payroll and related taxes           $   696,000  $   763,800   $   855,900
Accrued vacation                        277,000      365,700       543,800
Self-insured medical
expense                                  88,300      131,200       165,300
Due to subcontractors                   213,200      266,500       143,900
Other                                    59,200       95,800       158,900
                                    -----------  -----------   -----------
Total other current
liabilities                         $ 1,333,700  $ 1,623,000   $ 1,867,800
                                    ===========  ===========   ===========


8.     Acquisitions:

            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 is being amortized over a 7-year period.

            The following table sets forth pro forma results of operations of
       the Company for the fiscal years ended June 30, 1999 and 1998, as if Vail
       and ATI had been acquired on July 1, 1997.

                              Fiscal year ended          Fiscal year ended
                                June 30, 1999              June 30, 1998
                        -------------------------------------------------------

       Net revenues               $27,780,200               $36,211,600

       Net income/(loss)          $  (716,300)              $   391,300

                                      F-14
<PAGE>

                                 HADRON, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

         Net income/ (loss)
          Per share:

        Basic                                    $ (.40)                   $ .23

        Diluted                                  $ (.40)                   $ .13

9.     Net income (loss) per share:

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

<TABLE>
<CAPTION>
                                                      Six Months                                   Fiscal Years
                                         ----------------------------------    ----------------------------------------------------
                                                                Unaudited
                                               2000               1999               2000              1999               1998
                                         -----------------  ---------------    ----------------  ----------------   ---------------
<S>                                      <C>                <C>                <C>               <C>                <C>
Numerator:
 Net income (loss)                       $         84,800   $     (631,000)    $      (744,800)           34,400    $     760,600
Effect of dilutive securities:
Convertible debt                                     -               -                   -                  -              12,000
                                         -----------------  ---------------    ----------------  ----------------   ---------------
Numerator for diluted
 earnings per share -
 income available to common shareholders
 after assumed conversion                $         84,800   $     (631,000)    $      (744,800)  $        34,400    $      772,600
                                         =================  ===============    ================  ================   ===============

Denominator:
 Denominator for basic earnings per
   share:

Weighted average shares outstanding
                                                6,153,914        2,599,915           3,276,269         1,794,775         1,686,808

Effect of dilutive securities:
                                                                    -                   -
 Warrants                                         892,288           -                   -                527,738           855,064
 Employee stock options                            72,693           -                   -                256,926           249,025
 Convertible debt                                  -                                                      -                200,000
                                         -----------------  ---------------    ----------------  ----------------   ---------------

Denominator for diluted
 earnings per share                             7,118,895        2,599,915           3,276,269         2,579,439         2,990,897
                                         =================  ===============    ================  ================   ===============

Basic earnings per share                 $            .01   $         (.24)    $          (.23)  $           .02    $          .45
                                         =================  ===============    ================  ================   ===============

Diluted earnings per share               $            .01   $          (.24)   $          (.23)  $           .01    $          .26
                                         =================  ================   ================  ================   ===============
</TABLE>

               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 the transition period ended
       December 31, 2000, the unaudited six month period ended December 31,
       1999, and the fiscal years 2000, 1999 and 1998 is limited to

                                     F-15
<PAGE>

                                 HADRON, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

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:

<TABLE>
<CAPTION>
                                             Six Months                          Fiscal Years
                                         2000          1999            2000          1999          1998
                                       ---------     ---------       ----------    ----------    ----------
<S>                                    <C>           <C>             <C>           <C>           <C>
Tax expense at
 statutory rate-federal                   35%         (35)%            (35)%          35%           35%
State tax expense
 net of federal taxes                      3            1                1            29             7

Permanent differences                    158           17               17            38             -
Utilization of net operating loss
  carry forwards                        (196)          17               20           (73)          (35)
                                       ---------     ---------       ----------    ----------    ----------
Tax expense at
  actual rate                              0%           0%               3%           29%            7%
                                       =========     =========       ==========    ==========    ==========
</TABLE>

              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, 2000, June 30, 2000 and June 30, 1999 consist primarily of
       temporary differences from net operating loss carryforwards of
       approximately $2,187,000, $2,535,000 and $2,100,000, 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 $5,654,000 as of December 31, 2000, of which $828,000 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 2002. 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, 2000 are
       summarized below:

                                     F-16
<PAGE>

                                 HADRON, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

                                                 Lease
               Year                           Commitments
             --------                         -----------
               2001                           $  547,400
               2002                              362,600
               2003                                    -
                                              ----------

  Total minimum payments required             $  910,000
                                              ==========


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

                                                      Rent
                        Period                      Expense
                  -----------------               -----------

                  6 Months 2000                   $   247,500
                  6 Months 1999(unaudited)            272,100
                  Fiscal Year 2000                    530,300
                  Fiscal Year 1999                    235,700
                  Fiscal Year 1998                    141,800


     U.S. Government contract audits:

          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 1994. 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. 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 $79,000, $69,000,
    $150,000, $147,000 and $102,000 for the transition period ended December 31,
    2000, the six month period ended December 31, 1999, and the fiscal years
    2000, 1999 and 1998, respectively.

13. Stock option plan:

          In December 2000, shareholders approved the Hadron, Inc. 2000 Stock
     Option Plan ("2000 Stock Option Plan"). The 2000 Stock

                                      F-17
<PAGE>

                                 HADRON, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

     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:


<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                                    Unaudited
                                                    ---------
                          6 mos. 12/31/00        6 mos. 12/31/99        Fiscal 2000          Fiscal 1999            Fiscal 1998
------------------------------------------------------------------------------------------------------------------------------------
                                   Weighted              Weighted              Weighted             Weighted              Weighted
                                   Average                Average               Average             Average               Average
                                   Exercise              Exercise              Exercise             Exercise              Exercise
                        Shares      Price      Shares      Price    Shares       Price    Shares     Price      Shares      Price
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
<S>                    <C>         <C>        <C>       <C>         <C>        <C>       <C>         <C>        <C>        <C>
Outstanding at
beginning of
period                   395,400   $   .94     514,400   $   .90    514,400     $ .90     398,100   $   .59     315,500      $ .49
------------------------------------------------------------------------------------------------------------------------------------

Granted                  204,500      1.04     109,500       .81    129,500       .91     135,400      1.98      87,100        .98
------------------------------------------------------------------------------------------------------------------------------------

Exercised                (62,500)      .42     (15,000)      .25    (78,200)      .37      (4,700)      .76           -         -
------------------------------------------------------------------------------------------------------------------------------------

Expired                  (58,100)     1.47     (32,900)      .94   (170,300)     1.10     (14,400)     1.69      (4,500)      .88
------------------------------------------------------------------------------------------------------------------------------------
Outstanding at
end of period            479,300   $   .98     576,000   $   .90    395,400     $ .94     514,400   $   .90     398,100      $ .59
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
Options
exercisable at
end of period            301,800   $   .96     494,700   $   .83    304,100     $ .75     404,700   $   .69     305,374      $ .50
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
Weighted average
fair value of
options granted
during the period      $     .95              $    .48             $    .42             $    1.25              $    .94
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>



           The weighted average remaining contractual life of options
      outstanding at December 31, 2000 was 8.1 years. The range of exercise
      prices of options outstanding at December 31, 2000 was $.25 to $1.99.

           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

                                      F-18
<PAGE>

                                 HADRON, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

      the Company's stock option plan been determined based upon the fair value
      at the grant date for awards under the plan consistent with the
      methodology prescribed under SFAS No. 123, the Company's net income (loss)
      in the transition period ended December 31, 2000, the six month period
      ended December 31, 1999, and the fiscal years 2000, 1999 and 1998 would
      have been approximately $50,900, $(671,900), $(812,000), $(69,000) and
      $700,000, or $.01, $(.26), $(.25), $(.04) and $.25 per share on a diluted
      basis, respectively. The effect of applying SFAS No. 123 on the transition
      period ended December 31, 2000, the six month period ended December 31,
      1999, and the fiscal years 2000, 1999 and 1998 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 1.6; expected life of the option term of 10 years
      and risk-free interest rate of 5.1%.

14.   Warrants:

          The Company has issued warrants to certain parties to purchase its
      common stock, par value $.02, in connection with certain debt and equity
      transactions. The range of exercise prices for warrants outstanding at
      December 31, 2000 was $.25 to $.75.

      Information with respect to warrants issued is as follows:

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                                    Unaudited

                                6 months            6 months              Fiscal              Fiscal              Fiscal
                                12/31/00    Price   12/31/99    Price      2000      Price     1999      Price     1998       Price
                                Warrants            Warrants             Warrants            Warrants            Warrants
------------------------------------------------------------------------------------------------------------------------------------
<S>                            <C>          <C>     <C>        <C>      <C>         <C>      <C>        <C>      <C>         <C>
Outstanding at beginning        2,455,000             620,000             220,000              620,000            620,000
of period
------------------------------------------------------------------------------------------------------------------------------------
Granted                            75,000   $0.75           -           2,455,000    $0.72           -                  -
------------------------------------------------------------------------------------------------------------------------------------
Exercised                        (462,900)   0.72    (220,000)  $0.25    (220,000)    0.25    (400,000)  $0.25          -
------------------------------------------------------------------------------------------------------------------------------------
Expired                                 -                   -                   -                    -                  -
------------------------------------------------------------------------------------------------------------------------------------
Outstanding at end of           2,067,100             400,000           2,455,000              220,000            620,000
period                          =========             =======           =========              =======            =======
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>



15.   Voting Agreement:

          On March 30, 2000, a group of investors led by Jon M. Stout, Patricia
      W. Stout, the Stout Dynastic Trust (collectively the

                                      F-19
<PAGE>

                               HADRON, INC.
                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

      "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.

           Pursuant to the Purchase Agreement, on the Closing Date, C.W. Gilluly
      resigned from his position as the Company's Chief Executive Officer, and
      Jon M. Stout was appointed as the Company's President and Chief Executive
      Officer. Dr. Gilluly continued to serve as Chairman of the Company's Board
      of Directors. Further pursuant to the Purchase Agreement, two members of
      the Board resigned, Jon M. Stout was appointed a director and
      subsequently, Gerald R. McNichols, Sc.D and Gerald R. Young were appointed
      to the Board.

           On January 16, 2001, Mr. Stout resigned as President and Chief
      Executive Officer of the Company and was appointed to the position of
      Chairman. Mr. Stout remains a member of the Company's Board of Directors.
      On this same date, Dr. Gilluly resigned as Chairman but continues to
      provide consulting services and serve as a member of the Company's Board
      of Directors.

           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

                                      F-20
<PAGE>

                               HADRON, INC.
                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

      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 the terms of the Voting Agreement.

16.   Employee stock purchase plan:

            In December 1997, shareholders approved the Hadron, Inc. 1997
      Employee Stock Purchase Plan (the "Plan"). In fiscal year 2000 and
      transition period 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 the transition period ended December 31, 2000, the six month period
      ended December 31, 1999 and the fiscal years 2000, 1999 and 1998,
      employees paid approximately $14,000, $37,000, $50,000, $101,000 and
      $72,000, respectively, for the purchase of common stock under the Plan.

17.   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 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

                                      F-21
<PAGE>

                               HADRON, INC.
                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

      of six percent or the rate quoted for ninety-day Treasury Bills. During
      the transition period ended December 31, 2000, the six month period ended
      December 31, 1999, and the fiscal years 2000 and 1999, employees deferred
      approximately $2,000, $54,000, $81,000 and $75,000, respectively, of which
      the Company matched approximately $500, $3,000, $4,000 and $4,000 during
      these periods.

18.   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 $1,517,300. 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.

19.   Statement of cash flows - supplemental disclosures:

           During the transition period ended December 31, 2000, the six month
      period ended December 31, 1999, and the fiscal years 2000, 1999 and 1998,
      the Company paid income taxes of $12,000, $3,000, $4,000, $57,000 and
      $76,000, respectively. The Company paid interest of $110,000, $167,000,
      $325,000, $51,000 and $55,000 during those same periods.

20.   Business segments and major customers:

      Business segments:

           The Company has four active reportable segments, comprising its
      individual operating subsidiaries - ABS, ATI, EISI, and SyCom; and one
      inactive reportable segment - Vail Research and Technology, Inc. ("Vail").
      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
      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.

                                      F-22
<PAGE>

                                 HADRON, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


                                 Hadron, Inc.
                   Reportable Segments - FASB Statement 131
            For the Six Months Ended December 31, 2000 and 1999 and
              the Fiscal Years ended June 30, 2000, 1999 and 1998
            -------------------------------------------------------

<TABLE>
<CAPTION>
                                                        Unaudited
                    DESCRIPTION:         6 mos 2000     6 mos 1999   Fiscal 2000  Fiscal 1999   Fiscal 1998
                                         ----------    -----------   -----------  -----------   -----------
        <S>                              <C>           <C>           <C>          <C>           <C>
        Trade revenues:
          ABS                            $1,880,600    $         -   $   522,800  $         -   $         -
          ATI                             2,508,000      2,589,000     5,166,000      643,300             -
          EISI                            2,196,900      4,946,500     8,998,900   10,989,600    12,023,100
          SYCOM                           2,357,900      2,530,000     4,999,100    8,112,800     9,066,800
          VAIL                                    -        104,000       206,100      551,800             -
          Corporate                               -         97,800         8,400       35,700        44,000
                                         ----------    -----------   -----------  -----------   -----------
        Total trade revenues             $8,943,400    $10,267,300   $19,901,300  $20,333,200   $21,133,900
                                         ==========    ===========   ===========  ===========   ===========

        Interest income:
          ATI                            $        -    $       300   $     5,400  $       200   $         -
          EISI                                    -            300         2,700            -             -
          SYCOM                                   -              -             -            -         5,500
          VAIL                                    -              -             -        2,400             -
          Corporate                               -              -             -            -             -
                                         ----------    -----------   -----------  -----------   -----------
        Total interest income            $        -    $       600   $     8,100  $     2,600   $     5,500
                                         ==========    ===========   ===========  ===========   ===========

        Interest expense:
          ATI                            $   48,100    $    72,000   $   186,800  $    25,600   $         -
          EISI                                    -              -             -            -       (10,100)
          SYCOM                                   -          2,000         2,500        4,100         4,100
          Corporate                          63,900         93,100       143,300       51,100        67,700
                                         ----------    -----------   -----------  -----------   -----------
        Total interest expense           $  112,000    $   167,100   $   332,600  $    80,800   $    61,700
                                         ==========    ===========   ===========  ===========   ===========

        Depreciation and
        amortization expense
          ABS                            $   10,600    $         -   $         -  $         -   $         -
          ATI                               172,200        172,700       386,800       40,800             -
          EISI                                1,200          1,500         3,100        3,100         8,400
          SYCOM                                   -            200           300        4,500         9,600
          VAIL                                    -            800         1,000            -             -
          Corporate                          45,500         33,500        66,100       48,800        16,500
                                         ----------    -----------   -----------  -----------   -----------
        Total depreciation and
        amortization expense             $  229,500    $   208,700   $   457,300  $    97,200   $    34,500
                                         ==========    ===========   ===========  ===========   ===========
</TABLE>


                                      F-23
<PAGE>

                                 HADRON, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

<TABLE>
        <S>                                   <C>              <C>              <C>               <C>             <C>
        Income tax expense:
          ATI                                 $         -      $         -      $         -       $   (10,700)    $         -
          EISI                                          -                -           20,000            23,700          56,700
          Corporate                                     -                -            1,300               900           1,800
                                              -----------      -----------      -----------       -----------     -----------
        Total income tax expense              $         -      $         -      $    21,300       $    13,900     $    58,500
                                              ===========      ===========      ===========       ===========     ===========

        Net income/(loss):
          ABS                                 $     4,300      $         -      $  (158,200)      $         -     $         -
          ATI                                     161,700         (389,700)        (407,700)          (55,600)              -
          EISI                                     59,800          151,200          226,100           332,200         734,900
          SYCOM                                   (68,700)        (252,000)        (241,200)         (136,600)        112,000
          VAIL                                          -         (123,900)         (63,400)          (37,000)              -
          Corporate                               (72,300)         (16,600)        (100,400)          (68,600)        (86,300)
                                              -----------      ------------     -----------       -----------     -----------
        Total net income/(loss)               $    84,800      $  (631,000)     $  (744,800)      $    34,400     $   760,600
                                              ===========      ===========      ===========       ===========     ===========

        Assets:
          ABS                                 $   335,900      $         -      $   387,200       $         -     $         -
          ATI                                   3,458,500        3,644,400        3,559,600         3,594,400               -
          EISI                                    650,300        1,134,400          794,000         1,135,700       1,751,400
          SYCOM                                   398,600          414,400          453,200           612,100       1,163,700
          VAIL                                    582,100          735,800          647,000           868,500               -
          Corporate                               358,500          198,200          110,100           479,000         591,900
                                              -----------      -----------      -----------       -----------     -----------
        Total assets                          $ 5,783,900      $ 6,127,200      $ 5,951,100       $ 6,689,700     $ 3,507,000
                                              ===========      ===========      ===========       ===========     ===========
        Fixed assets, net:
          ABS                                 $   126,200      $         -      $    15,700       $         -     $         -
          ATI                                     146,700          107,000           90,200           102,000               -
          EISI                                          -            6,900            5,400             8,500          11,600
          SYCOM                                         -              200                -               300           4,900
          VAIL                                          -            1,300            1,100             4,000               -
          Corporate                                11,900          141,200          106,700           176,100          99,800
                                              -----------      -----------      -----------       -----------     -----------
        Total fixed assets, net               $   284,800      $   256,600      $   219,100       $   290,900     $   116,300
                                              ===========      ===========      ===========       ===========     ===========
</TABLE>

    Major Customers:

               Gross revenue from contracts and subcontracts with U.S.
        government agencies amounted to $6,510,000, $7,630,000 $14,685,000,
        $12,300,000 and $11,628,000, respectively, in the transition period
        ended December 31, 2000, the six months ended December 31, 1999, and the
        fiscal years 2000, 1999 and 1998.

               Revenues from one commercial customer totaled $2,358,000,
        $2,530,000, $4,999,000, $8,103,000 and $9,067,000 in the

                                      F-24
<PAGE>

                                 HADRON, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

        transition period ended December 31, 2000, the six month period ended
        December 31, 1999, and the fiscal years 2000, 1999 and 1998,
        respectively.

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

                                         Department            Commercial
                                         of Defense             Customer
                                         ----------            ----------

         6 Months 2000                  $ 3,882,000           $ 2,358,000
         6 Months 1999 (unaudited)        5,261,000             2,530,000
         Fiscal Year 2000                13,324,000             4,999,000
         Fiscal Year 1999                 9,723,000             8,103,000
         Fiscal Year 1998                10,242,000             9,067,000

                                      F-25