<PAGE>

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

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

                                   FORM 10-K


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

For the fiscal year ended June 30, 2000

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

For the transition period from ------------  to  -------------
                               ------------      -------------

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 twelve months ended June 30, 2000 were
$19,901,300.

As of September 15, 2000, 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 $2,280,115.

As of September 15, 2000, 5,908,538 shares of the common stock of the registrant
were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:  Parts of the definitive proxy statement to
be filed with the Securities and Exchange Commission pursuant to Regulation 14A
not later than 120 days after the end of Hadron, Inc.'s fiscal year and relating
to Hadron, Inc.'s 2000 Annual Meeting of Shareholders are incorporated by
reference into Items 9-12 of Part III of this Form 10-K.


                                    PART I

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


Introduction

     Hadron, Inc. ("Hadron" or the "Company") supports the national security
interests of the United States, by providing engineering, information, and
technical services to federal government agencies. The Company specializes in
developing innovative technical solutions for the intelligence community,
analyzing and supporting defense systems (including intelligent weapons systems
and biological warfare defense), 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("ABS") to pursue research and business opportunities in the areas of
defenses against potential biological weapons; the exploration of new products
that prevent or treat

                                       2
<PAGE>

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
Projects Agency (DARPA), ABS is actively pursuing new business with the U.S.
Army, the Department of Health and Human Services' National Institutes of
Health, and other 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 defense
research while working to identify and develop new means of preventing and
treating a broad range of infectious diseases and cancers.

Avenue Technologies, Inc.  ("ATI")

     Effective May 12, 1999, the Company acquired ATI, a privately-held high
technology engineering and professional services firm based in Alexandria,
Virginia, for approximately $2,500,000.  ATI's customer base includes both the
government and private industry where ATI is recognized as being on the cutting
edge in providing quality products and engineering 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 core personnel average over twenty years of professional senior
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 the
Defense Advanced Research Projects Agency (DARPA).

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.

                                       3
<PAGE>

     Traditionally, 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 36% of the 2000 revenues of the Company. EISI staff were
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.

     In April 1997, the Company was awarded four follow-on contracts by APL to
continue its support activities through September 2001. In June 2000, the
Company was awarded a one-year contract with APL to provide staffing and
recruiting assistance in addition to its hardware and software expertise (See
"Business-Recent Developments-APL Conversion").

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 25% of the 2000 revenues of the Company.

General Information

     The Company provides engineering, computer support services and other
professional technical services. 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 45%, 54% and 57% of the Company's total
consolidated revenues for the fiscal years 2000, 1999 and 1998, respectively.
During the same fiscal years, SyCom's revenues respectively accounted for 25%,
40% and 43% of consolidated revenues.  The revenues of ATI accounted for 26% and
3% of the consolidated revenues for fiscal years 2000 and 1999, respectively.
The revenues of ABS accounted for 3% of the total consolidated revenues for
fiscal year 2000.

     The Company's backlog of orders believed to be firm as of June 30, 2000
approximated $13 million, which the Company expects will be filled during fiscal
2001.  As of June 30, 1999, the Company had approximately $16 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 June 30, 2000, the Company (including its subsidiaries) employed
approximately 150 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 67% of the Company's total revenues during fiscal
year 2000.  The Company's other U.S. government contracts and subcontracts
produced approximately 7% of the Company's total revenues during fiscal year
2000.  Contracts with the U.S. Government are subject to audit by the Defense
Contract Audit Agency.

     The Company has been a contractor or subcontractor with the DoD
continuously since 1973 with periodic renewals.  During this time, neither the
Company nor its subsidiaries have experienced any material adjustment of profits
under these contracts; however, no assurance can be given that the DoD will not
seek and obtain an

                                       5
<PAGE>

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 service
business with the DoD and other governmental agencies is obtained through
competitive procurement and through "follow-up" 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

APL Conversion

     During fiscal year 2000, APL, EISI's major client, 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.  The Company expects revenues derived from APL to decrease
significantly as a result of these conversions.

     In June 2000, EISI was awarded a one-year contract to provide APL with
specialized services, including staffing assistance, recruiting assistance, to
fill certain "temp-to-perm" positions and to continue to fill certain short-term
positions.  There can be no assurance however that this new contractual
relationship will yield significant revenues to the Company.

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 provides the
Company with a one-year $1.5 million line of credit facility (the "Credit
Facility") and a three-year $1.5 million term loan (the "Term Loan").  Interest
on each of the facilities is at the prime rate plus 150 basic points.  The
Chairman of the Company, Dr. C.W. Gilluly, and his wife personally guaranteed
the Term Loan.  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.  On April 12, 2000, the Company
entered into a First Modification and Extension Agreement (this "Agreement")
with United Bank.  This Agreement extends the maturity date on the Credit
Facility from June 29, 2000 to October 31, 2000.

     On April 12, 2000, the Company also entered into an Amended and Restated
Guaranty of Payment with Dr. Gilluly and his wife to modify

                                       6
<PAGE>

their personal guarantee on the Notes to cover 50% of the aggregate principal
outstanding in an amount not to exceed $750,000, through October 31, 2000. In
addition, Jon M. Stout, the Company's newly elected President and Chief
Executive Officer, pursuant to the April 12, 2000 Guaranty of Payment, agreed to
guarantee the remaining 50% of the principal outstanding in an amount not to
exceed $750,000, through October 31, 2000.

     On August 23, 2000, the Company entered into a Second Modification and
Extension Agreement (this "Second Modification") with United Bank.  This Second
Modification releases Dr. Gilluly and his wife from all liability as guarantors
of the payment of the Notes and the other obligations of the Borrower under the
Loan Agreement, and cancels their Amended and Restated Guaranty of Payment.  In
addition, the obligation of Jon M. Stout, the Remaining Guarantor under this
Guaranty of Payment dated April 12, 2000, is increased from 50% to 100% of the
aggregate unpaid principal balance of the Notes.

Conversion of Convertible Notes
-------------------------------

     In May 1999, the Company issued three-year $998,000 convertible notes,
interest payable at 6% per annum, to the former shareholders of ATI in
connection with the Company's acquisition of ATI.  The notes were convertible
into 444,000 shares of the Company's restricted Common Stock for $2.25 per
share, and were 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 the Company for the conversion before the
close of business on June 30, 2000.  At June 30, 2000, approximately $846,000 of
the convertible notes were converted into 677,000 shares of the Company's
restricted Common Stock at the $1.25 per share price.

Transfer of Vail Contract to Nighthawk

     On December 18, 1998, the Company acquired Vail Research and Technology,
Inc. ("Vail"), a privately-held information technology firm based in Annandale,
Virginia, for approximately $1,580,000. The revenues of Vail accounted for 1%
and 3% of the Company's total consolidated revenues for fiscal years 2000 and
1999, respectively.

     In June 2000, the Company agreed to transfer Vail's last remaining
contract, a contract with DynCorp Information & Engineering Technology, Inc.,
under which support services are provided for DARPA, to Nighthawk Technologies,
Inc. ("Nighthawk") for consideration of approximately $55,000.  As consideration
for the transfer, the Company was released from $50,000 of the convertible note
principal of Howard Whetzel, President of Nighthawk and a former member of the
Company's Board of Directors.  In addition, the Company transferred its
obligations of accrued vacation totaling approximately $5,000 to Nighthawk.

                                       7
<PAGE>

     With the transfer of the DynCorp contract to Nighthawk, Vail had no active
contracts remaining and became an inactive subsidiary of the Company.

Change of Position of C.W. Gilluly

     On March 30, 2000, Dr. Gilluly entered into an Amendment to Employment
Agreement and assumed the sole position of Chairman of the Company.  He will
continue to provide management and strategic consulting services to the Company
on a part-time basis pursuant to a consulting agreement dated July 1, 2000.

Resignation of S. Amber Gordon

     As of September 1, 2000, S. Amber Gordon resigned from her positions as
Executive Vice President, Corporate Secretary and Treasurer of the Company.  Ms.
Gordon will continue to provide services to the Company pursuant to a Consulting
Agreement between the Company and an entity owned by Ms. Gordon, dated August
14, 2000 and effective September 1, 2000, concentrating on investor relations
and marketing support services.

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

     The Company owns no real estate.  As of June 30, 2000, the Company leased a
total of 26,800 square feet of office space.  These leases expire between
February 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.

                                       8
<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 fiscal
years ended June 30, 2000 and June 30, 1999 is shown below:

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       .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      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 September 15, 2000, there were approximately 2,172 shareholders of
record of the Company's Common Stock.

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

                                       9
<PAGE>

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

<TABLE>
<CAPTION>
                                                           Fiscal Year Ended
                                                                June 30,

                                      2000          1999         1998         1997          1996
                                    --------      --------     --------     --------      --------

                                 (In Thousands, except per share amounts)
<S>                                 <C>           <C>          <C>          <C>           <C>
Total Revenues/(1)/                  $19,901       $20,333      $21,134      $16,988       $18,306

Operating Income (Loss)                 (421)           63          888          128            59
Interest Expense, net of
 Interest income                         324            78           56           84           132
Income (Loss)
 Before income taxes                    (724)           48          819           57           194

Net Income (Loss)/(1)/                  (745)           34          761           13           162
Income (Loss) per share
 Of Common Stock:
 Basic                                  (.23)          .02          .45          .01           .11
 Diluted                                (.23)          .01          .26          .01           .11
At Period End:
Total Assets                           5,951         6,690        3,507        2,712         2,874
Long-term Liabilities                    702         2,160           53          169           320
Working Capital (Deficit)                (13)          (67)        (186)        (906)         (654)
Shareholders' Equity
 (Deficit)                             1,535           456           22         (811)         (869)
</TABLE>

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

                                       10
<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 Fiscal Year 2000 To Fiscal Year 1999
              --------------------------------------------------

     Revenues for the fiscal year ended June 30, 2000 were approximately
$19,901,000, a 2% decrease from the prior fiscal year.  This decrease is due to
the loss of billable personnel resulting from the hiring of certain of the
Company's technical employees by 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 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 as
discussed above, (See "Business: Recent Developments").

     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

                                       11
<PAGE>

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
discussed above), 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.

     The Company had an operating loss of $421,000 in the current fiscal year,
compared to an operating profit of $63,000 in the prior fiscal year.  This
$484,000 decrease is primarily attributable to the loss of billable employees
from EISI and SyCom, as discussed above, coupled with the addition of key
administrative personnel hired to develop the Company's initiatives in the areas
of biological weapons defense and counterterrorism, along with the amortization
of goodwill associated with the purchase of ATI.

     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 increases in debt associated with the
acquisition of ATI.

     The net loss 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.

                                       12
<PAGE>

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

     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 at major government and commercial customers of both
EISI and SyCom, primarily due to certain government budgetary constraints,
partially offset by revenues from newly acquired companies Vail and ATI.

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

     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 retaining of technical personnel on
overhead while awaiting new customer tasking and funding, along with the
increase in 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.

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

     The working capital deficit at June 30, 2000 decreased by approximately
$54,000 from June 30, 1999, primarily due to the

                                       13
<PAGE>

Company's positive cash flow resulting from additional equity capital, as
discussed below, partially offset by operating losses and debt pay down.

     In the fourth quarter of fiscal year 2000, the Company recorded a profit of
$204,000 and positive EBITDA of $404,000. The Company embarked on an aggressive
cost-cutting program in the second half of fiscal year 2000, which enabled it to
lower its general and administrative expenses by 18% in the final quarter
compared to the third quarter.  Although the Company had a net loss of $745,000
for fiscal year 2000, the EBITDA, as defined below, was positive $58,000 after
add-backs for interest of $325,000, taxes of $21,000, depreciation of $113,000
and goodwill amortization of $344,000.

     EBITDA consists of earnings (loss) before interest expense, interest and
other income, income tax benefit, 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 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.  See the audited financial statements and notes thereto contained
elsewhere in this report for more detailed information.

     On April 26, 2000, the Company was awarded a $3,367,000 one-year contract
with DARPA for ABS to provide research in the area of biological warfare
defense, providing the Company with the revenue necessary for it to continue its
research and development efforts in this area.

     In fiscal year 2000, the Company lowered its long-term debt by $1,458,000,
primarily due to the $846,000 convertible note conversion (See "Business-Recent
Developments-Conversion of Convertible Notes") and the $500,000 pay down of the
United Bank debt.  In addition, the Company increased its shareholders' equity
by $1,079,000, primarily resulting from the equity transactions discussed below.

     On March 30, 2000, the Company received $877,500 in equity capital from a
group of investors led by Jon M. Stout.  The investment group purchased
2,250,000 units, each consisting of one

                                       14
<PAGE>

share of common stock and a warrant to purchase 0.9 shares of common stock, at
$0.39 per unit. The five-year warrants are exercisable at $0.72 per share. The
Company incurred legal and financial fees of $42,500 in connection with this
investment.

     For the fiscal year ended June 30, 2000, the Company received new capital
of $1,825,000 in the aggregate, resulting from the exercise of stock warrants
and options, purchase of stock in connection with the Company's Stock Purchase
Program, shares issued upon conversion of $846,000 of convertible notes (See
"Business-Recent Developments-Conversion of Convertible Notes"), and the equity
capital from a group of investors led by Jon M. Stout described above.

     The Company's additional equity capital generated $969,000 in positive cash
flow, which enabled the Company to timely meet its United Bank principal and
interest requirements of $500,000 and $252,000, respectively, in addition to its
operating obligations, even though the Company recorded an operating loss of
$421,000 for fiscal year 2000.

     Effective June 29, 1999, the Company entered into a Line of Credit
Agreement with United Bank, which provides the Company with a $1,500,000 line of
credit facility through October 31, 2000.  The line of credit provides
additional working capital availability to fund the Company's growth.
Borrowings outstanding under the line of credit totaled $481,000 at June 30,
2000.

     The Company had been unable to comply with certain of the original
financial covenants of its bank credit facility during fiscal year 2000 due to
operating losses incurred.  On April 12, 2000, the Company received a waiver and
modification of the original financial covenants through June 30, 2000.  The
Company is now in compliance with these amended and modified covenants. However,
the inability of the Company to maintain compliance with the covenants going
forward could have a material adverse effect on the Company's liquidity,
financial condition and results of operations.  The Company may require
additional infusion of equity capital to pursue its new business development
strategy and/or to facilitate ongoing compliance with bank loan covenants.

     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.

     Except for the historical information contained herein, the matters
discussed in this 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

                                       15
<PAGE>

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

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

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

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

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

                                       17
<PAGE>

                                    PART IV

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

(a) (1)  Financial Statements                                         Page

Report of Independent Auditors                                         F-1

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

Consolidated Statements of Operations for the fiscal
 years ended June 30, 2000, 1999, and 1998                             F-4

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

Consolidated Statements of Cash Flows for 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

                                       18
<PAGE>

               reference to the Company's Annual Report on Form 10-K for the
               fiscal year ended June 30, 1993).

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

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

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

 10.3          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).

                                       19
<PAGE>

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
               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 George E. Fowler
               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 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).

10.15          Employment Agreement between the Company and Donald E. Ziegler
               dated July 1, 1998 (incorporated by reference to the Company's
               Annual Report on Form 10-K for the fiscal year ended June 30,
               1998 and filed with the Commission on September 25, 1998).

10.16          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).

10.17          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).

10.18          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).

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

                                       20
<PAGE>

               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).

10.20          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).

10.21          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).

10.22          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).

10.23          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).

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

10.25          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).

10.26          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).

10.27          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).

10.28          Amendment to Employment Agreement between C.W. Gilluly and the
               Company dated March 30, 2000.

10.29          Employment Agreement between the Company and Jon M. Stout dated
               April 1, 2000.

                                       21
<PAGE>

10.30          Second Modification and Extension Agreement among United Bank,
               C.W. Gilluly, Martha Gilluly, Jon M. Stout and Hadron, Inc. dated
               August 23, 2000.

10.31          Agreement between Dr. C.W. Gilluly and the Company dated July 1,
               2000, relating to consulting services.

10.32          Consulting Agreement between S.A. Gordon Enterprises, Inc. and
               the Company dated August 14, 2000.

10.33          Employment Agreement Amendment and Mutual Release between S.
               Amber Gordon and the Company dated August 14, 2000.

22             Subsidiaries of the Company.

23             Consent of Independent Auditors.

27             Financial Data Schedule.

(b)  Reports on Form 8-K

     On April 14, 2000, the Company filed a Form 8-K reporting on the sale by
the Company of 2,250,000 shares of common stock, and warrants to purchase an
additional 2,025,000 shares of common stock to a group of investors in a private
transaction, and related transactions, that raised $877,500 for the Company.

     On June 19, 2000, the Company filed a Form 8-K reporting on the election of
Gerald R. McNichols, Sc.D., and Gerald Young to the Board of Directors of the
Corporation as of June 12, 2000.

                                       22
<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: September 28, 2000                HADRON, INC.


By: /S/ Jon M. Stout                    By: /S/ Jon M. Stout
    ------------------------------          ------------------------------
    Jon M. Stout                            Jon M. Stout
    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/ Jon M. Stout              Director       September 28, 2000
----------------------
Jon M. Stout


/S/ John D. Sanders           Director       September 28, 2000
-----------------------
John D. Sanders


/S/ Gerald R. McNichols       Director       September 28, 2000
-----------------------
Gerald R. McNichols


/S/ Gerald R. Young           Director       September 28, 2000
-----------------------
Gerald R. Young


/S/ C.W. Gilluly             Chairman        September 28, 2000
------------------------
C.W.Gilluly

                                       23
<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 June 30, 2000 and 1999 and the related consolidated
statements of operations, shareholders' equity, and cash flows 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 June 30, 2000 and 1999, and the consolidated results of
their operations and their cash flows 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
August 25, 2000

                                      F-1
<PAGE>

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

                                           JUNE 30,            JUNE 30,
ASSETS                                      2000                 1999
------                                  ------------        -----------
Current assets:
  Cash and cash equivalents             $    118,000        $   256,000
  Accounts receivable, net                 3,454,500          3,495,700
  Prepaid expenses and other                 128,800            255,400
                                        ------------        -----------
    Total current assets                   3,701,300          4,007,100
                                        ------------        -----------
Fixed assets, net                            219,100            290,900
Goodwill, net                              1,972,000          2,246,600
Other                                         58,700            145,100
                                        ------------        -----------
    Total other assets                     2,249,800          2,682,600
                                        ------------        -----------
Total assets                            $  5,951,100        $ 6,689,700
                                        ============        ===========



                See Notes to Consolidated Financial Statements

                                      F-2
<PAGE>

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

                                               JUNE 30,         JUNE 30,
LIABILITIES AND SHAREHOLDERS' EQUITY            2000              1999
-------------------------------------       ------------      -----------
Current liabilities
  Accounts payable                          $    779,700      $   917,100
  Note payable - line of credit                  481,300          638,800
  Note payable - current maturity
   of long-term debt                             500,000          500,000
  Notes payable - related party                  330,000          150,000
  Other current liabilities                    1,623,000        1,867,800
                                            ------------      -----------
    Total current liabilities                  3,714,000        4,073,700
                                            ------------      -----------
Notes payable                                    601,700        1,292,700
Notes payable - related parties                        -          805,100
Other                                            100,000           62,600
                                            ------------      -----------
    Total long-term liabilities                  701,700        2,160,400
                                            ------------      -----------
Commitments and contingencies

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

Common stock $.02 par; authorized
 20,000,000 shares; issued and
  outstanding - June 30, 2000,
   5,831,339 shares, and June 30,
    1999, 2,487,518 shares                       116,600           49,700
Additional capital                            11,516,000        9,758,300
Accumulated deficit                          (10,097,200)      (9,352,400)
                                            ------------      -----------
    Total shareholders' equity                 1,535,400          455,600
                                            ------------      -----------

Total liabilities and shareholders' equity  $  5,951,100      $ 6,689,700
                                            ============      ===========


                See Notes to Consolidated Financial Statements

                                      F-3
<PAGE>

                                 HADRON, INC.
                     CONSOLIDATED STATEMENTS OF OPERATIONS
            FOR THE FISCAL YEARS ENDED JUNE 30, 2000, 1999 AND 1998
            -------------------------------------------------------

                                           2000          1999         1998
                                       ------------  ------------  -----------
Revenues                               $19,901,300   $20,333,200   $21,133,900
Operating costs and expenses:
  Costs of revenue                      16,572,200    17,734,800    18,118,100
  Selling, general and administrative    3,749,900     2,535,400     2,127,500
                                       ------------  ------------  -----------
Total operating costs and expenses      20,322,100    20,270,200    20,245,600
                                       ------------  ------------  -----------
Operating income (loss)                   (420,800)       63,000       888,300
                                       ------------  ------------  -----------
Other income (expense):
  Interest income                            8,100         2,600         5,500
  Interest expense                        (332,600)      (80,800)      (61,700)
  Other income (expense)                    21,800        63,500       (13,000)
                                       ------------  ------------  -----------
Total other income (expense)              (302,700)      (14,700)      (69,200)
                                       ------------  ------------  -----------
Income (loss) before income taxes         (723,500)       48,300       819,100
Provision for income taxes                  21,300        13,900        58,500
                                       ------------  ------------  -----------
Net income (loss)                      $  (744,800)  $    34,400   $   760,600
                                       ===========   ===========   ===========
Per share data:
Net income (loss) per share
  Basic                                $      (.23)  $       .02   $       .45
                                       ===========   ===========   ===========
  Diluted                              $      (.23)  $       .01   $       .26
                                       ===========   ===========   ===========

Weighted average number of shares
  Basic                                  3,276,269     1,794,775     1,686,808
                                       ===========   ===========   ===========
  Diluted                                3,276,269     2,579,439     2,990,897
                                       ===========   ===========   ===========



                See Notes to Consolidated Financial Statements

                                      F-4
<PAGE>

                                 HADRON, INC.
                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
            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
                                                   ========================================================================
</TABLE>

                See Notes to Consolidated Financial Statements

                                      F-5
<PAGE>

                     HADRON, INC.
         CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED JUNE 30, 2000, 1999 AND 1998
---------------------------------------------------------

<TABLE>
<CAPTION>
                                                                          2000               1999               1998
                                                                   ----------------   -----------------   ----------------
<S>                                                                <C>                <C>                 <C>
Cash flows from operating activities:
  Net income (loss)                                                $       (744,800)  $          34,400   $        760,600
                                                                   ----------------   -----------------   -----------------
Adjustments to reconcile net income (loss) to net
    cash provided (used) by operating activities:
    Depreciation and amortization                                           457,300              97,200             34,500
    Changes in operating assets and liabilities:
      Accounts and notes receivable                                          41,200           1,768,600           (741,600)
      Prepaid expenses and other                                             81,300            (127,400)           (11,900)
      Other assets                                                           86,500             (67,100)             5,200
      Accounts payable                                                     (137,400)           (254,400)          (453,400)
      Other current liabilities                                            (268,800)           (968,400)           348,900
      Other long-term liabilities                                            37,400             (13,300)             4,100
                                                                   ----------------   -----------------   -----------------
      Total adjustments                                                     297,500             435,200           (814,200)
                                                                   ----------------   -----------------   ----------------
Net cash provided (used) by operating activities                           (447,300)            469,600            (53,600)
                                                                   ----------------   -----------------   ----------------
Cash flows from investing activities:

    Property additions                                                      (41,600)           (121,800)           (29,600)
    Investment in PEI                                                             -                   -            (15,900)
    Purchase of Vail and ATI, net of cash acquired                                -            (378,700)                 -
                                                                   ----------------   -----------------   ----------------
Net cash used by investing activities                                       (41,600)           (500,500)           (45,500)
                                                                   ----------------   -----------------   ----------------
Cash flows from financing activities:
    Proceeds from borrowings on bank and other loans                      1,926,600             850,000            796,700
    Proceeds from stock options and warrants exercised                       83,600             103,600                  -
    Proceeds from employee stock purchases                                   50,400             100,600             72,200
    Proceeds from sale of common stock                                      835,000                   -                  -
    Payments on bank and other loans                                     (2,544,700)           (827,800)          (734,000)
                                                                   ----------------   -----------------   ----------------
Net cash provided by financing activities                                   350,900             226,400            134,900
                                                                   ----------------   -----------------   ----------------
Net increase (decrease) in cash and cash equivalents                       (138,000)            195,500             35,800

Cash and cash equivalents at beginning of year                              256,000              60,500             24,700
                                                                   ----------------   -----------------   ----------------

Cash and cash equivalents at end of year                           $        118,000   $         256,000   $         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
   interests of the United States, by providing engineering, information, and
   technical services to federal government agencies. The Company specializes in
   developing innovative technical solutions for the intelligence community,
   analyzing and supporting defense systems (including intelligent weapons
   systems and biological warfare defense), 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 service business with governmental
   departments and agencies is obtained through competitive procurement and
   through "follow-up" 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 five wholly-owned subsidiaries, Advanced Biosystems, Inc.
       ("ABS"), Avenue Technologies, Inc. ("ATI"), Engineering & Information
       Services, Inc. ("EISI"), SyCom Services, Inc. ("SyCom"), and Vail
       Research and Technology, Inc. ("Vail")(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.

                                      F-7
<PAGE>

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

          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.

          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.

                                      F-8
<PAGE>

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

          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 fiscal years 2000 and 1999, respectively, the Company
       recorded goodwill amortization, related to the May 1999 purchase of ATI,
       of $344,000 and $41,000. As of June 30, 2000, the accumulated
       amortization of goodwill is $385,000.

         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:

          Deferred tax liabilities and assets are determined based on the
       difference between the financial statement and tax bases of assets and
       liabilities using enacted tax rates in effect for

                                      F-9
<PAGE>

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

       the year in which the differences are expected to reverse.

   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 1999 and 1998 amounts have been reclassified to
       conform to the fiscal year 2000 presentation.


3. Accounts receivable:

       The components of accounts receivable are as follows:

                                          June 30,
                                   -----------------------
                                      2000         1999
                                   ----------   ----------
Trade accounts receivable:
U.S. Government:
Amounts billed                     $1,084,100   $1,640,800
Recoverable costs and
  profits - not billed              2,023,900    1,247,400
                                   ----------   ----------
  Total                             3,108,000    2,888,200
                                   ----------   ----------
Commercial, state and local
  governments:
Amounts billed                        223,600      555,200
Recoverable costs and
  profits - not billed                274,100      306,000
                                   ----------   ----------
  Total                               497,700      861,200
                                   ----------   ----------
Total accounts receivable           3,605,700    3,749,400
Less allowance for doubtful
 accounts                            (151,200)    (253,700)
                                   ----------   ----------
Total accounts receivable, net     $3,454,500   $3,495,700
                                   ==========   ==========

                                      F-10
<PAGE>

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

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

                                 Fiscal Year ended June 30,
                                2000        1999       1998
                              ---------   --------   --------

      Beginning Balance       $ 253,700   $209,800   $158,800
       Additions                      -     93,900     51,000
       Deletions               (102,500)   (50,000)         -
                              ---------   --------   --------
      Balance at end of year  $ 151,200   $253,700   $209,800
                              =========   ========   ========

      The amount of customer retentions included in U.S. Government unbilled
   accounts receivable is $18,400 at June 30, 2000 and 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. Discussions are ongoing for the
   resolution of 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:

                                              June 30,
                                      ------------------------
                                         2000        1999
                                      ----------    ----------
      Computer hardware and
       software                       $  672,900    $  631,300
      Office equipment                   136,900       136,900
                                      ----------    ----------

      Total fixed assets                 809,800       768,200

                                      F-11
<PAGE>

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

Less accumulated depreciation
  and amortization                 (590,700)     (477,300)
                                 ----------    ----------
 Total fixed assets, net         $  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 provides the
   Company with a one-year $1.5 million line of credit facility (the "Credit
   Facility") and a three-year $1.5 million term loan (the "Term Loan").
   Interest on each of the facilities is at the prime rate plus 150 basic
   points. Dr. C.W. Gilluly, Chairman of the Board of Directors, and his wife
   personally guaranteed the Term Loan. 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 April 12, 2000, the Company entered into a First Modification and
   Extension Agreement (this "Agreement") with United Bank. This Agreement
   extends the maturity date on the Credit Facility from June 29, 2000 to
   October 31, 2000.

      On April 12, 2000, the Company entered into an Amended and Restated
   Guaranty of Payment with Dr. Gilluly and his wife to modify their personal
   guarantee on the Notes to cover 50% of the aggregate principal outstanding in
   an amount not to exceed $750,000, through October 31, 2000. In addition, Jon
   M. Stout, the Company's President and Chief Executive Officer, pursuant to
   the April 12, 2000 Guaranty of Payment, will guarantee the remaining 50% of
   the principal outstanding in an amount not to exceed $750,000, through
   October 31, 2000.

      The Company had been unable to comply with certain of the original
   financial covenants of its bank credit facility during fiscal year 2000 due
   to operating losses incurred. On April 12, 2000, United Bank granted a waiver
   and modification of the original financial covenants set forth in the Loan
   Agreement through June 30, 2000. The Company is now in compliance with these
   modified financial covenants.

      On August 23, 2000, the Company entered into a Second Modification and
   Extension Agreement (this "Agreement") with United Bank. This Agreement
   releases Dr. C.W. Gilluly and his wife from all liability as guarantors of
   the payment of the Notes

                                      F-12
<PAGE>

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

   and the other obligations of the Borrower under the Loan Agreement, and
   cancels their Amended and Restated Guaranty of Payment. In addition, the
   obligation of Jon M. Stout, the Remaining Guarantor under his Guaranty of
   Payment dated April 12, 2000, is hereby increased from 50% to 100% of the
   aggregate unpaid principal balance of the Notes.

      In May 1999, the Company issued three-year $998,000 convertible notes,
   interest payable at 6%, to the former shareholders of ATI in connection with
   the Company's acquisition of ATI. The notes are convertible into 444,000
   restricted shares of the Company's Common Stock at $2.25 per share. These
   notes are subordinated to the Company's obligations under the Term Note and
   the Credit Facility.

      In May 2000, the Board of Directors adopted resolutions providing for the
   conversion of the convertible notes on the basis of one share of Common Stock
   for $1.25 per share if tendered to Hadron for conversion before the close of
   business on June 30, 2000. At June 30, 2000, $846,000 of the convertible
   notes were converted into 677,000 restricted shares of the Company's Common
   Stock at the $1.25 per share. As a result of the Company's debt conversion
   inducement, an expense of approximately $10,000 was recorded.

      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 June 30, 2000, the Company has made principal and interest
   payments of $200,000 and $17,300, respectively, leaving an outstanding note
   balance of $230,000.

      In connection with the December 1998 purchase of 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 is due and payable on the two-year anniversary of the closing
   date, less permitted deductions taken for contingent liabilities and
   uncollected accounts receivable.

                                      F-13
<PAGE>

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

          The Company's future debt maturities at June 30, 2000 are summarized
     below:

                                            Debt
     Fiscal Year                         Maturities
     -----------                        ------------

     2001                                $ 1,311,300
     2002                                    601,700
     2003                                          -
                                         -----------

     Total minimum debt payments           1,913,000

     Less: current maturities             (1,311,300)
                                         -----------

     Total long-term debt                $   601,700
                                         ===========

6.   Equity capital:

          On March 30, 2000, the Company received $877,500 in equity capital
     from a group of investors led by Jon M. Stout, who has been named to the
     position of President and Chief Executive Officer. The investment group,
     which also included investment banker J. Richard Knop and John D. Sanders,
     financial advisor and a member of the Company's Board of Directors,
     respectively, purchased 2,250,000 units, each consisting of one share of
     common stock and a warrant to purchase 0.9 shares of common stock, at $0.72
     per share. The Company incurred legal and financial fees of $42,500 in
     connection with this investment.

7.   Other current liabilities:

     Other current liabilities include the following major classifications:

                                                June 30,
                                        ------------------------
                                            2000         1999
                                        -----------   ----------

     Payroll and related taxes           $  763,800   $  855,900
     Accrued vacation                       365,700      543,800
     Self-insured medical expense           131,200      165,300
     Due to subcontractors                  266,500      143,900
     Other                                   95,800      158,900
                                         ----------   ----------

     Total other current liabilities     $1,623,000   $1,867,800
                                         ==========   ==========

                                      F-14
<PAGE>

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

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 proforma 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

     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>
                                                     2000                    1999                   1998
                                             --------------------    --------------------   --------------------
<S>                                          <C>                     <C>                    <C>
Numerator:
 Net income (loss)                                     $ (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                                    $ (744,800)             $   34,400             $  772,600
                                             ====================    ====================   ====================
</TABLE>

                                      F-15
<PAGE>

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

<TABLE>
<S>                                                  <C>                     <C>                    <C>
Denominator:
 Denominator for basic
  earnings per share:
  weighted average shares
  outstanding                                           3,276,269               1,794,775              1,686,808

Effect of dilutive securities:
 Warrants                                                       -                 527,738                855,064
 Employee stock options                                         -                 256,926                249,025
 Convertible debt                                               -                       -                200,000
                                             --------------------    --------------------   --------------------
Denominator for diluted
 earnings per share                                     3,276,269               2,579,439              2,990,897
                                             ====================    ====================   ====================
Basic earnings per share                               $     (.23)             $      .02             $      .45
                                             ====================    ====================   ====================
Diluted earnings per share                             $     (.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 years ended June 30, 2000, 1999
    and 1998 is for state income taxes currently due.

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


                                           2000           1999      1998
                                         -------          ----      ----
   Tax expense at
    statutory rate - federal                (35)%          35%       35%
   State tax expense
    Net of federal taxes                      1            29         7

   Permanent differences                     17            38         -
   Utilization of net
     Operating loss
     Carryforwards                           20           (73)      (35)
                                           ----          ----       ---
   Tax expense at
     actual rate                              3%           29%        7%
                                           ====          ====       ===

                                      F-16
<PAGE>

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

        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 June 30,
    2000 and 1999 consist primarily of temporary differences from net operating
    loss carryforwards of approximately $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
    $6,000,000 as of June 30, 2000, of which $830,000 is 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 fiscal year 2003. 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 June 30, 2000 are summarized
    below:


          Fiscal Year Ending                        Lease
               June 30,                          Commitments
          ------------------                     -----------

          2001                                   $  497,400
          2002                                      447,500
          2003                                      182,300
                                                 ----------

    Total minimum payments required              $1,127,200
                                                 ==========

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


                                      Rent
               Period               Expense
          ----------------        ----------
          Fiscal Year 2000        $  530,300
          Fiscal Year 1999           235,700
          Fiscal Year 1998           141,800


                                      F-17
<PAGE>

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

     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 $150,000, $147,000
    and $101,500 for fiscal years 2000, 1999 and 1998, respectively.

13. Stock option plan:

       Under the Company's 1994 Stock Option Plan, as amended, (the "Plan"),
    shares of its common stock may be issued to key employees, consultants and
    directors. In fiscal year 1998, an amendment to the 1994 Stock Option Plan
    was adopted to increase the number of shares reserved for issuance
    thereunder from 345,000 to 645,000. The Plan provides for both incentive
    stock options within the meaning of Section 422 of the Internal Revenue Code
    and non-qualified stock options. 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 options vest in three equal annual installments beginning with the date
    of grant. 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.

       Information with respect to incentive and non-qualified stock options
    issued under the Plan is as follows:

<TABLE>
<CAPTION>
                                                 2000                      1999                       1998
                                  ----------------------     -------------------------   -------------------

                                              Weighted                   Weighted                   Weighted
                                               Average                    Average                    Average
                                               Exercise                  Exercise                   Exercise
                                  Shares        Price        Shares         Price        Shares       Price
                                  --------------------------------------------------------------------------
<S>                               <C>         <C>            <C>         <C>             <C>        <C>
    Outstanding at
     Beginning of year            514,400       $ .90        398,068       $ .59          315,500      $ .49
</TABLE>

                                      F-18
<PAGE>

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

<TABLE>
<S>                                  <C>              <C>      <C>              <C>       <C>              <C>
    Granted                           129,500          .91     135,400          1.98      87,100           .98
    Exercised                         (78,166)         .37      (4,666)          .76
    Expired                          (170,289)        1.10     (14,402)         1.69      (4,532)          .88
                                     -------------------------------------------------------------------------
     Outstanding at
     End of year                      395,445        $ .94     514,400         $ .90     398,068         $ .59
                                    ==========================================================================
     Options exercisable
     At year-end                      304,100        $ .75     404,740         $ .69     305,374         $ .50

  Weighted average
  Fair value of
  Options granted
  During the year                   $     .42                 $   1.25                  $    .94
</TABLE>

        The weighted average remaining contractual life of options outstanding
   at June 30, 2000 was 7.1 years. The range of exercise prices of options
   outstanding at June 30, 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 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 fiscal years 2000, 1999 and 1998 would have
   been approximately $(811,700), $(69,200) and $700,200, or $(.25), $(.04) and
   $.25 per share on a diluted basis, respectively. The effect of applying SFAS
   No. 123 on 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 .43 to 1.22; expected life of the option term of 7 to
   10 years and risk-free interest rate of 5.5% to 6.9%.

14. Employee stock purchase plan:

        In December 1997, shareholders approved the Hadron, Inc. 1997 Employee
    Stock Purchase Plan (the "Plan").  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

                                      F-19
<PAGE>

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

    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 fiscal years 2000, 1999 and 1998, employees
    paid approximately $50,400, $100,600 and $72,200, respectively, for the
    purchase of common stock under the Plan.

15. 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 of six percent or the rate quoted
    for ninety-day Treasury Bills. During fiscal years 2000 and 1999, employees
    deferred approximately $81,000 and $75,000, respectively, of which the
    Company matched approximately $4,000 in both years.

16. Fair value of financial instruments:

        Accounts receivable, accounts payable, accrued expenses and other
    current assets and liabilities are carried at amounts which reasonably
    approximate their fair value. The estimated fair value of the Company's
    variable rate debt approximates its carrying value of $1,481,300. 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.

17. Statement of cash flows - supplemental disclosures:

        During fiscal years 2000, 1999 and 1998, the Company paid income taxes
    of $3,500, $57,000 and $76,000, respectively.  The Company paid interest of
    $325,000, $51,000 and $55,000 during those same periods.

                                      F-20
<PAGE>

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

18. Business segments and major customers:

    Business segments:

        The Company has five reportable segments, comprising its individual
    operating subsidiaries - ABS, ATI, EISI, SyCom, and Vail. Each of the
    operating segments provides engineering, computer support services and other
    professional technical services.  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.


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

<TABLE>
<CAPTION>
         DESCRIPTION:                      2000                 1999                 1998
                                       ------------         ------------         ------------
    <S>                                <C>                  <C>                  <C>
    Trade revenues:
      ABS                               $   522,800          $         -          $         -
      ATI                                 5,166,000              643,300                    -
      EISI                                8,998,900           10,989,600           12,023,100
      SYCOM                               4,999,100            8,112,800            9,066,800
      VAIL                                  206,100              551,800                    -
      Corporate                               8,400               35,700               44,000
                                        -----------          -----------          -----------
    Total trade revenues                $19,901,300          $20,333,200          $21,133,900
                                        ===========          ===========          ===========

    Interest income:
      ATI                               $     5,400          $       200          $         -
      EISI                                    2,700                    -                    -
      SYCOM                                       -                    -                5,500
      VAIL                                        -                2,400                    -
                                        -----------          -----------          -----------
    Total interest income               $     8,100          $     2,600          $     5,500
                                        ===========          ===========          ===========
</TABLE>

                                      F-21
<PAGE>

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

<TABLE>
    <S>                                 <C>                  <C>                  <C>
    Interest expense:
      ATI                               $   186,800          $    25,600          $         -
      EISI                                        -                    -              (10,100)
      SYCOM                                   2,500                4,100                4,100
      Corporate                             143,300               51,100               67,700
                                        -----------          -----------          -----------
    Total interest expense              $   332,600          $    80,800          $    61,700
                                        ===========          ===========          ===========

    Depreciation and
     amortization expense:
      ATI                               $   386,800          $    40,800          $         -
      EISI                                    3,100                3,100                8,400
      SyCom                                     300                4,500                9,600
      VAIL                                    1,000                    -                    -
      Corporate                              66,100               48,800               16,500
                                        -----------          -----------          -----------

    Total depreciation and
    Amortization expense                $   457,300          $    97,200          $    34,500
                                        ===========          ===========          ===========

    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                               $  (158,200)         $         -          $         -
      ATI                                  (407,700)             (55,600)                   -
      EISI                                  226,100              332,200              734,900
      SYCOM                                (241,200)            (136,600)             112,000
      VAIL                                  (63,400)             (37,000)                   -
      Corporate                            (100,400)             (68,600)             (86,300)
                                        -----------          -----------          -----------
    Total net income                    $  (744,800)         $    34,400          $   760,600
                                        ===========          ===========          ===========


    Assets:
      ABS                               $   387,200          $         -          $         -
      ATI                                 3,559,600            3,594,400                    -
      EISI                                  794,000            1,135,700            1,751,400
</TABLE>

                                      F-22
<PAGE>

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

<TABLE>
    <S>                                 <C>                  <C>                  <C>
      SYCOM                                 453,200              612,100            1,163,700
      VAIL                                  647,000              868,500                    -
      Corporate                             110,100              479,000              591,900
                                        -----------          -----------          -----------
    Total assets                        $ 5,951,100          $ 6,689,700          $ 3,507,000
                                        ===========          ===========          ===========
    Fixed assets, net:
      ABS                               $    15,700          $         -          $         -
      ATI                                    90,200              102,000                    -
      EISI                                    5,400                8,500               11,600
      SYCOM                                       -                  300                4,900
      VAIL                                    1,100                4,000                    -
      Corporate                             106,700              176,100               99,800
                                        -----------          -----------          -----------
    Total fixed assets                  $   219,100          $   290,900          $   116,300
                                        ===========          ===========          ===========
</TABLE>


    Major Customers:

        Gross revenue from contracts and subcontracts with U.S. government
    agencies amounted to $14,685,000, $12,300,000 and $11,628,000, respectively,
    in fiscal years 2000, 1999 and 1998.

        Revenues from one commercial customer totaled $4,999,000, $8,103,000 and
    $9,067,000 in fiscal years 2000, 1999 and 1998, respectively.

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

<TABLE>
<CAPTION>
                              Department   Commercial
                              of Defense    Customer
                             ------------  ----------
    <S>                      <C>           <C>
         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
</TABLE>

                                      F-23