SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                  FORM 10-K 405

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

For The Fiscal Year Ended:                              Commission File Number:
     December 31, 1997                                         333-36447

                            Federal Data Corporation
             (Exact name of registrant as specified in its charter)

                 DELAWARE                                 EI 52-0940566
     (State or other jurisdiction of                    (I.R.S. Employer
      incorporation or organization)                   Identification No.)

  4800 Hampden Lane, Bethesda, Maryland                       20814
 (Address of principal executive office)                    (Zip Code)

                                  301-986-0800
              (Registrant's telephone number, including area code)


Securities registered pursuant to Section 12(b) of the Act:   None

Securities registered pursuant to Section 12(g) of the Act:   None

      Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

                                 Yes |X| No |_|

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

      The aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 25, 1998 is $223,587. Because the Company is
privately held, the aggregate value of such voting stock was computed on the
basis of a $27 per share price, the price paid for the common stock of the
Company by all investors in June 1997, the time of the most recent purchase and
sale of such common stock.

      As of the close of business February 28, 1998, the registrant had
outstanding 2,910,896 shares of Common Stock, par value $.01 per share.

                       Documents Incorporated By Reference

                                      None

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PART I

Item 1. Business.

      Federal Data Corporation and its subsidiaries (collectively the "Company")
are a major supplier of information technology to a wide range of customers
within the U.S. federal government (the "Government"). The Company has
assembled, through internal growth and strategic acquisitions, comprehensive
information technology products and services capabilities to address the unique
needs of its Government clients. Management believes that the Company is
strategically positioned to benefit from the current trends in the Government
market for information technology and outsourcing of engineering, scientific and
other professional services. The Government is among the world's largest
purchasers of information technology with estimated total expenditures in fiscal
1997 in excess of $26 billion. For the year ended December 31, 1997 the
Company's total revenues were $336.3 million, income before extraordinary item
and income taxes was $1.6 million, net loss was $2.5 million and EBITDA (as
defined herein) was $18.2 million.

      Founded in 1969, the Company serves a diverse and expanding customer base
representing over 20 Government agencies including the National Aeronautics and
Space Administration ("NASA"), the Federal Aviation Administration ("FAA"), the
National Institutes of Health ("NIH"), the Department of Defense ("DoD"), the
Veterans Benefit Administration ("VBA") and the Department of State. Management
believes that the Company's established reputation and long-standing
relationships with Government customers, and the extensive knowledge gained from
those relationships, have been critical to the Company's strong record of growth
and provide a key competitive advantage in pursuing business opportunities with
new and existing customers.

      TC Group, L.L.C. d/b/a/ The Carlyle Group ("Carlyle"), a Washington
D.C.-based private merchant bank founded in 1987, through its affiliates became
the Company's controlling stockholder in a 1995 recapitalization of the Company.
Carlyle and its affiliates currently manage a $1.3 billion private equity fund.
Carlyle has made over 30 investments in select industries including aerospace,
defense, information technology and related services. Some of these investments
include BDM International, Inc. (NASDAQ: BDMI), a multinational information
technology company (later sold to TRW, Inc.); Magnavox Electronic Systems
Company, an electronics systems supplier to the Government and prime contractors
(later sold to Hughes Electronics); Howmet Corporation, a leading supplier of
investment cast turbine engine components for the jet aircraft and industrial
gas power generation markets; GDE Systems Inc., a leading supplier of mission
planning and information systems as well as test equipment to the Government and
prime contractors (later sold to Tracor, Inc.); Power Paragon Inc., a leading
supplier of power distribution systems to the Government and prime contractors
(later sold to SPD Inc.); and Vought Aircraft Company, a leading supplier of
major aircraft structures and subassemblies for commercial and military aircraft
(later sold to Northrop Grumman Corporation).

      Prior to December 1, 1995, a substantial majority of the Company's common
stock was owned by its employees. On December 1, 1995, the Company effected a
recapitalization, through which FDC Holdings, Inc. ("Holdings") merged with and
into Federal Data Corporation with Federal Data Corporation continuing as the
surviving corporation (the "Recapitalization"). Holdings was a company organized
by Carlyle to facilitate the Recapitalization and had no operating activity or


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history. Upon consummation of the Recapitalization, the shareholders of Holdings
received 85.4% of the Company's common stock and 14.6% was retained by members
of Company management who were shareholders prior to the Recapitalization. The
Recapitalization resulted in a charge to stockholders' equity of $58.8 million
to reflect redemption of certain common stock. Carlyle has supported the
Company's acquisition strategy with its financial expertise and provided a
critical source of equity capital for the implementation of the Company's growth
strategy.

      The Company financed the Recapitalization through proceeds from term loans
of $35.0 million, borrowings of approximately $6.5 million under its prior
senior credit facility (the "Prior Senior Credit Facility"), issuance of $7.0
million in the Company's notes (the "FDC Notes") and an equity investment by
Holdings of $16.1 million. These proceeds were also utilized to pay fees and
expenses related to the Recapitalization and related financing, and to provide
working capital for the Company.

ACQUISITIONS AND REFINANCING

      Consistent with its strategy of providing a complete range of information
technology offerings to its Government customers, the Company has pursued
strategic acquisitions to broaden and strengthen key skill areas. In May 1997,
the Company purchased NYMA, Inc. ("NYMA"), a provider of sophisticated
engineering and information technology services. NYMA complemented and
significantly expanded the Company's core capabilities in the technology and
engineering services sector, providing the Company with the ability to bid
effectively on new contracts with a higher component of technical services
requirements. In June 1997, the Company acquired Sylvest Management Systems
Corporation ("Sylvest"), a value-added reseller and integrator of commercial
off-the-shelf ("COTS") hardware, software and technical services supporting open
systems architectures within the Government marketplace. Through the Sylvest
acquisition, the Company has become a leading reseller of COTS hardware and
software to the Government and has substantially expanded the number of
customers to which it can market its systems integration offerings.

      To effect the acquisitions of NYMA and Sylvest and to secure the
availability of additional capital for future acquisitions, in July 1997 the
Company sold $105 million in aggregate principal amount of 10 1/8% Senior
Subordinated Notes due 2005 (the "Private Notes")in a transaction exempt from
the registration requirements of the Securities Act (the "Private Placement").
The Company used the proceeds of the Private Placement to (i) prepay $7.7
million of FDC Notes and $4.0 million of notes originally issued in connection
with the acquisition of Sylvest, (ii) repay (the "Refinancing") all amounts
(approximately $80.4 million) of long-term debt ("Refinanced Bank Debt") owing
under the Prior Senior Credit Facility, (iii) pay $7.0 million in fees and
expenses associated with the Private Placement and the new senior secured
revolving credit facility (the "New Senior Credit Facility") and (iv) generate
$5.9 million in additional cash for working capital purposes. None of the
proceeds of the Private Placement are remaining. In addition, the Company
terminated the Prior Senior Credit Facility and executed the New Senior Credit
Facility, which provides revolving borrowing availability up to $75.0 million,
subject to a borrowing base limitation. In December 1997, the Company completed
an offer to exchange $1,000 principal amount of its 10 1/8% Senior Subordinated
Notes Due 2005 (the "Exchange Notes") for each $1,000 principal amount of its
outstanding Private Notes (the "Exchange Offer"), which exchange was registered
under the Securities Act of 1933, as amended, pursuant to a registration
statement on Form S-4. As a


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result of such Exchange Offer the Company issued $105 million in aggregate
principal amount Exchange Notes in exchange for all of the issued and
outstanding Private Notes.

      The Company has continued its strategy of expanding its core customer base
and strengthening its capability to service existing customers through
acquisitions in the first quarter of 1998. In February, 1998, the Company
acquired R.O.W. Sciences, Inc. ("R.O.W."), a provider of information technology
and health science research services. The acquisition of R.O.W. expanded and
strengthened the Company's already substantial presence at the NIH and also
broadened the Company's ability to offer professional services and information
technology solutions to federal and commercial health science research
organizations. In February, 1998, the Company also acquired Telos Information
Systems ("TIS"), a division of the Telos Corporation. TIS provides information
technology and engineering services principally to NASA and the Jet Propulsion
Laboratory ("JPL"). TIS expands the Company's Pasadena, CA operations making it
one of the leading information technology contractors at JPL and provides
additional capability to service NASA, one of the Company's long-standing
customers. In March, 1998, the Company purchased Technical and Management
Assistance, Inc. ("TMA"), a provider of software development services to
Lockheed Martin, Computer Sciences Corporation ("CSC"), and the FAA. TMA
specializes in air traffic control software and complements the Company's FAA
business base.

      The acquisitions have significantly enhanced the Company's presence in the
Government marketplace. Management believes the information technology industry,
particularly the portion serving Government customers, has and will continue to
consolidate, resulting in additional opportunities for the Company to make
attractive acquisitions that complement or expand its core capabilities.

DISPOSITIONS

      During 1997, the Company sold substantially all of the assets and business
of its wholly-owned subsidiaries, DoxSys, Inc. ("DoxSys") and VAD International,
Inc. ("VAD") resulting in a pretax gain of $1.6 million. The operations of
DoxSys and VAD were not material to the Company's financial position or results
of operations.

INDUSTRY OVERVIEW

      According to Federal Sources, Inc., an independent market research firm
specializing in the Government market, the Government is the world's largest
single buyer of information technology services and products. Federal Sources,
Inc. estimated fiscal 1997 Government spending specifically designated for
information technology at $26.5 billion. The Government also spends significant
additional funds on information technology through other general budget
appropriations. According to the Electronic Industries Association, Government
agencies that are not required to report their information technology
expenditures, including agencies in the intelligence community, projected an
additional $20 billion spending on such technology in the Government's fiscal
1997.

      Despite growing budget pressures, Government outlays for third-party
technology services and outsourcing have increased steadily as the Government
has sought to control its spending and gain the efficiencies and flexibility
experienced by commercial purchasers of these services. The General Services
Administration ("GSA") anticipates a continuation of the trend toward increased
Government use of outside information technology providers and estimates that


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the majority of all Government agencies operating in-house data systems may
eventually outsource information technology services to the private sector at a
significant cost savings. The current legislative and regulatory environment
generally supports initiatives in the Government information technology sector
to change procurement practices and become more like the private sector. Several
statutory and regulatory changes have brought about a significant transition in
Government procurement practices, dramatically increasing the number of
procurement "vehicles" available to Government customers and generally reducing
the lead time required to buy information technology products and services. See
"--Government Contracts."

      In addition to its growing use of third-party providers, the Government,
like many corporate organizations, has sought to address an increasing portion
of its information technology needs through relatively inexpensive, open
architecture systems based on COTS hardware and software, which are rapidly
displacing the single purpose, custom systems historically favored by the
Government.

      These concurrent changes in the types of information technology solutions
purchased by Government agencies and the rules governing the procurement of such
solutions have dramatically changed the marketplace in the last few years and
are likely to continue doing so. Where Government agencies traditionally
procured customized information technology solutions through agency-specific
contracts awarded to a single contractor or contractor team, Government agencies
are now more likely to purchase flexible, COTS-based information technology
systems through indefinite delivery, indefinite quantity ("IDIQ") contracts
awarded to multiple contractors or teams of contractors or through established
GSA Schedules or multi-agency contracts ("MACs"). See "--Government Contracts."

BUSINESS AND GROWTH STRATEGY

      The Company's goal is to be a leading one-stop information technology
solutions supplier, providing high-quality products and services that meet the
complete needs of its Government client base. The Company's strategies to meet
this objective are the following:

    - CREATE COMPREHENSIVE SKILL AND PRODUCT BASE. The Company seeks to
      continuously add new information technology capabilities and strategically
      expand existing business areas to meet the changing information technology
      needs and buying patterns of its clients. By expanding its extensive
      technical skill base and ability to supply a broad and diverse set of COTS
      hardware and software, the Company can provide its customers with the
      widest possible range of cost effective solutions and engender a high
      level of customer satisfaction. Management believes that such
      capabilities, together with the Company's in-depth knowledge of changing
      Government procurement practices, should continue to create new
      opportunities for the Company.

    - STRONG CUSTOMER KNOWLEDGE AND FOCUS. The Company strives to understand the
      full range of each of its customers' information technology needs. This
      includes in-depth vertical expertise in selected high-potential markets
      such as space systems, air traffic management and health science research.
      The Company's strategy is to continue to leverage its strong customer
      knowledge, advanced technical skills and supplier relationships to tailor
      optimal solutions to its customers' specific needs and to offer technology
      infrastructures that anticipate its customers' rapidly evolving needs.


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<PAGE>

    - PURSUE STRATEGIC ACQUISITIONS. The Company seeks to continue expanding the
      breadth and quality of the information technology products and services it
      offers. The recently completed acquisitions have added important
      complementary skills to the Company's information technology capabilities
      and vertical customer expertise. Management expects to continue to pursue
      strategic acquisitions which it believes can contribute significantly to
      the Company's future business growth.

    - MAXIMIZE FLEXIBILITY OF GOVERNMENT CUSTOMERS. A key component of the
      Company's success has been its ability to quickly adapt to the rapidly
      evolving Government procurement process. The Company continually pursues
      means of maximizing its customers' flexibility in acquiring a range of
      products and services with competitive prices and minimal bureaucratic
      delay by selecting the best methods available in the current, more
      streamlined procurement climate.

    - CAPITALIZE ON OUTSOURCING OPPORTUNITIES. The Company seeks to pursue new
      opportunities created by changes in the Government information technology
      industry. In particular, although the Government has frequently hired
      service providers to fill specific roles in the past, the Government is
      increasingly considering opportunities to outsource entire functions to
      private industry. As part of this strategy, the Company intends to
      leverage its client relationships, technical skills and access to COTS
      hardware and software in pursuing emerging opportunities in the
      outsourcing of certain Government information technology functions.

PRODUCTS AND SERVICES

      The Company focuses on providing a comprehensive array of high technology
professional services in combination with hardware and software products from a
variety of selected manufacturers. The Science & Engineering Group (formerly
known as the Services Group) focuses primarily on providing sophisticated
technical, scientific and engineering services to enhance information technology
performance and productivity and to support the missions of its customers. The
Systems Integration Group integrates diverse hardware and software components
into a single turnkey system, usually selling COTS hardware and software
products as an element of the integrated solution. The Systems & Technology
Group (formerly known as the Products Group) provides a one-stop shop for
Government customers to procure COTS hardware and software. The Solutions Group
provides high-end, solutions-oriented consulting services.

SYSTEMS INTEGRATION GROUP

      Systems integration refers to the integration of diverse information
technology products, frequently including the combination of existing custom
systems with COTS hardware and software into a single turnkey system. The
Company's Systems Integration Group provides large-scale, tailored integrated
solutions to its customers, generally including design, construction, and
implementation, as well as the sale of any COTS hardware and software required
for completion. The Company is a prominent computer systems integrator, having
been a pioneer in systems integration for the Government since its founding in
1969. The Company has over 25 years of experience supplying custom turnkey
systems to various departments and agencies of the Government. The contracts
completed during this period have ranged from national defense programs to
administrative, payroll and inventory control functions of various Government
departments and agencies.


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<PAGE>

      The Company's systems integration projects are characterized by complex
features such as multi-year systems life, multiple vendors, technical
complexity, the application and integration of leading-edge technology and the
selection and management of subcontractors and teaming partners with expertise
specific to the system solution required by the customer. The Company acts as
both a prime contractor and as a subcontractor on a broad range of systems
integration projects for the Government. In performing these duties, the Company
generally procures equipment, software, networking components and services from
several manufacturers or suppliers to produce a single, program-specific turnkey
system. When no "off-the-shelf" solution or product exists, the Company on
occasion develops software to provide a total compliant solution. The Company
also generally provides installation, maintenance, training and technical
support services throughout the life of the contract. Most systems integration
contracts specify initial system requirements to be covered by the contract
amount; as technology and customer needs change over the life of the contracts,
they function as IDIQ contracts that permit the Company to supply equipment
upgrades and customer support in response to changing customer requirements and
improvements in technology. Management believes that such long-term contracts
have permitted the Company to develop strong partnerships with its customers and
have contributed to the Company's success with long-term programs in an
environment of rapidly changing procurement requirements and technological
growth.

      The Systems Integration Group consists of over 100 dedicated technical and
management personnel trained to provide COTS integration, mainframe, midrange
and microcomputer integration, communications and networking, software
development, and help desk and support services.

      Listed below are summary descriptions of major contracts and programs for
the Systems Integration Group. Although the future status of any contract is
uncertain after contract expiration, management believes that certain support
and service functions being provided under many of these contracts may be
subject to recompetition and rebid upon expiration, either alone or in
combination with other products and/or services. For a description of Government
contracts, see "--Government Contracts."

    U.S. NAVY SUPPLY SYSTEMS COMMAND.  This contract provides for the
    installation of computer systems at 62 NAVSUP sites worldwide. The systems
    are used for integrated wide-area and local area communications control,
    terminal emulation, data conversion and database management.

    VETERANS BENEFIT ADMINISTRATION MODERNIZATION. This contract provides for
    the modernization of the information technology environment in regional
    offices of the VBA. Products and services provided include hardware,
    software, maintenance, support desk, training, installation and technical
    support. The Company is providing LAN servers and workstations which connect
    to Honeywell mainframes.

    DEPARTMENT OF STATE. This contract calls for the Company to augment and
    replace existing IBM mainframe systems and their components at five
    Department of State processing hubs.

    DEPARTMENT OF VETERANS AFFAIRS.  This contract calls for the Company to
    provide IBM systems in support of Veterans Administration on-line
    processing systems.


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<PAGE>

  NIH CERTAN CORPORATE COMPUTING SYSTEMS. This contract involves the provision
  and support of both new and existing IBM mainframes and open systems, and the
  provision of related software. In addition, the Company will install and
  provide post-installation support of DEC AlphaServers and install Oracle
  software.

SCIENCE & ENGINEERING GROUP

      The Company's technology services offerings are focused predominantly on
providing sophisticated professional and outsourcing services to various
Government agencies. These activities are concentrated in three key areas:
information technology services, engineering services and scientific research
services. The acquisitions of NYMA, R.O.W., TIS and TMA have created a
substantial base concentrated in three key areas: information technology,
engineering and scientific R&D skill. The Science & Engineering Group now has
recognized expertise in space systems, air traffic management, health science
research and the application of leading-edge information technology to the
requirements of customers in these segments.

      INFORMATION TECHNOLOGY SERVICES. The Company operates over 40 separate
contracts for information technology services, through which it provides project
management, software development and software maintenance functions for various
Government agencies and prime contractors to the Government. Specific activities
include providing software engineering services to support the maintenance and
modification of the FAA's Air Traffic Control Operational Computer Program at
seven FAA Enroute Centers and at the FAA Technical Center; supporting the
design, development and implementation and maintenance of systems and programs
for spacecraft mission operations at JPL; performing acceptance testing and
supporting integration and test activities and quality assurance for the Earth
Observing System Data and Information System, a network to support a
constellation of earth observing spacecraft for NASA; and development of an
online grant management system for NIH.

      SCIENTIFIC RESEARCH SERVICES. The Company, principally through R.O.W.,
performs biomedical research and supports biomedical and health research
activities for clients which include NIH, Centers for Disease Control and
Prevention, Food and Drug Administration and other federal agencies involved in
health research and policy formulation. In addition, R.O.W. has begun to provide
similar services on a small scale to commercial biotechnology organizations and
pharmaceutical companies. R.O.W. has over 250 employees engaged in health and
biomedical research support services at facilities in six states.

      ENGINEERING SERVICES. The Company provides engineering services to support
NASA, JPL, the FAA, other Government agencies and private industry. Operating
under five large NASA contracts to provide comprehensive engineering support for
NASA's Lewis Research Center in Cleveland, Ohio, Langley Research Center
("Langley") in Hampton, Virginia, and JPL in Pasadena, CA, the Company provides
engineering services in the areas of aeromechanics, aerospace technology, space
experimentation, structures, materials, instrumentation, aeronautics and space
mission operations.

      The Company has approximately 270 employees at Lewis Research Center
("Lewis"), over 35% of whom have PhDs, who perform research into rocket
propulsion, space power, space propulsion, wind tunnels and other test
facilities support, structural analysis for spacecraft materials and materials
research. Specific projects include the conceptual design and performance
modeling for the national


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aerospace plane, the advanced subsonic transport and high speed research
engines; aerodynamic and mission analysis for single- and two-stage-to-orbit
vehicles and high speed supersonic civilian transports; icing research studies;
and the design of propulsion system aeroacoustics and turbomachinery
technologies, such as an energy efficient engine. The group at Lewis is also
responsible for building space flight hardware for NASA space experiments
including hardware for microgravity experiments on the Space Shuttle, the Mir
space station, sounding rockets and the planned International Space Station. To
date, this team has been involved in the development of over 60 payloads flown
on 28 Space Shuttle missions.

      Langley research, relating mainly to aeronautics, involves approximately
100 employees, and is focused in the areas of aeronautical systems analysis,
spacecraft mission analysis and engineering and flight operations support. The
Langley unit provides a full range of systems analysis and integration studies
including systems analysis for advanced military and civil aircraft designs,
conceptual design studies of critical and high-payoff technologies,
multi-discipline studies of unique military aircraft configurations, airframe
and engine design studies on hypersonic vehicles, scramjet integrated design
studies and spacecraft mission and system performance analysis. The Company
provides engineering and operations support in such areas as the design,
engineering and development of flight projects; the development of ground test
systems and test techniques (such as the development of innovative wind
tunnels); and the maintenance and operations of aircraft and aircraft systems
including research vehicles and experimental avionics systems.

      The acquisition of TIS increased the Company's Pasadena, CA staff to
approximately 250 employees supporting JPL. Services are provided to JPL under
three contracts and include information technology support, engineering support
to space research and planning, and engineering and information technology
support to the operation of space missions such as Voyager and Mars Explorer.

      Listed below are summary descriptions of major contracts and programs of
the Science & Engineering Group. Although the future status of any contract is
uncertain after contract expiration, the Company expects the customer under each
of these contracts to continue to require the services being performed after the
contract expires and expects such services to be the subject of a new bidding
competition for a new contract, either alone or in combination with other
services. For a description of different types of Government contracts, see
"--Government Contracts."

    SCIENTIFIC, ENGINEERING, TECHNICAL AND ADMINISTRATIVE RELATED SERVICES. This
    five-year cost-plus-award-fee contract was awarded under Section 8(a) of the
    Small Business Act ("Section 8(a)") to NYMA in 1993 by NASA's Lewis Research
    Center, as described above. After the acquisition of NYMA by the Company,
    NYMA's continued participation as a prime contractor under Section 8(a)
    contracts required a waiver from the Administrator of the Small Business
    Administration. Late in 1997, NASA notified the Company that it did not plan
    to request a waiver of Section 8(a) regulations to exercise the final option
    year of the contract. A competition was conducted to select a replacement
    Section 8(a) firm to perform the work during the final year of the Company's
    contract. The Company bid as a subcontractor to a Section 8(a) firm and that
    firm's bid was unsuccessful. The firm filed a protest of the procurement
    process and that protest is currently under evaluation by the Government.
    The Company has been issued a new contract to enable it to continue to
    perform the work pending the outcome of the


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    protest. The timing and disposition of the protest will determine the
    impact on the Company's 1998 results from this contract. Revenues for 1997
    were approximately $32 million, of which, approximately $22 million were
    recorded by the Company subsequent to the acquisition of NYMA.

    HOST SOFTWARE SUPPORT. The Company is a subcontractor to Lockheed Martin
    under a fixed-price labor hour contract and provides software support to 7
    FAA Enroute Air Traffic Control Centers east of the Mississippi River. The
    Enroute system monitors and directs aircraft between airports. Approximately
    65 employees perform project activities including software engineering and
    maintenance, systems enhancements, systems programming and data reduction
    and analysis.

    MISSION OPERATIONS SUPPORT SERVICES. This cost-plus-fixed-fee contract
    provides NASA flight project mission operations support systems at the
    JPL. Company personnel support Galileo, Voyager, Topex, Cassini, New
    Millennium, Mars Global Surveyor and the Multi-Mission Ground System
    Office.

    SERVICE OPERATIONS SUPPORT. This cost-plus-fixed-fee contract was awarded
    under Section 8(a) to TMA in 1996 by the William J. Hughes Technical
    Center of the FAA. After the acquisition of TMA by the Company, TMA's
    continued participation as a prime contractor for a small business award
    required a review by the FAA counsel and submission of an updated
    statement of ownership. No final determination has been rendered as of the
    date of this report. Revenues recorded by TMA in 1997 were approximately
    $7 million.

    TECHNICAL SUPPORT EFFORT PROGRAM. This time and materials contract was
    awarded to Telos in 1995 by NASA. The contract provides for software
    development support at JPL in support of various programs including Deep
    Space Network, Cassini and Solar Dust.

    TECHNICAL AND APPLICATION PROGRAM SUPPORT. This cost-plus-fixed-fee contract
    was awarded to Telos in 1993 by NASA. The contract provides software
    engineering, systems integration, systems administration, hardware
    procurement, field installation and support of various communications
    systems at JPL.

    IMPAC/CRISP.  This cost-plus-fixed-fee contract was awarded to R.O.W. in
    1994 by NIH. The contract is in support of the modernization effort of the
    legacy mainframe system to a state-of-the-art, client/server solution. The
    IMPAC/CRISP system is a large-scale, mission critical grants
    tracking/financial database management system.

SYSTEMS & TECHNOLOGY GROUP

      The Company is a leading value-added reseller of hardware, software and
related services to the Government. Consistent with the Company's strategy of
offering solutions based on open computing architectures, the Company has
focused its reselling activities on workstations, servers, enterprise networking
hardware and related peripherals and software. Along with providing a broad
range of top quality products through supplier and teaming relationships with
hardware and software original equipment manufactures ("OEMs"), the Company
makes its technical personnel available to provide its customers with customized
"value-added" technical support services. Information technology product sales
have been a core business for the Company and have provided it with the
marketing platform to become a major open systems solutions provider in the


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Government marketplace. The Company substantially expanded its capabilities in
this area through the Sylvest acquisition.

      The Systems & Technology Group employs approximately 50 sales, marketing,
business development and contract representatives and 30 technical personnel,
each of whom has been recruited based on his or her extensive knowledge of a
particular customer group, particular products sold by the Company, or both. The
sales force's extensive training in various Government procurement rules allows
them to guide customers to the most efficient acquisition vehicle for the
Company's products, whether that vehicle is an agency-specific IDIQ contract, a
MAC contract or a GSA Schedule. See "--Government Contracts." These
representatives maintain regular contact and working relationships with a set of
vendors and existing or potential customers.

      The Company's product reselling activities add value for both information
technology manufacturers and Government customers. Manufacturers gain access to
the Company's sales force and its experience in the Government procurement and
sales process, including capabilities and experience in electronic commerce,
order entry and invoicing. Customers benefit from the Company's technical
knowledge of available products and vendors, and also from the Company's
procurement expertise, which helps them select the optimal procurement vehicle
to meet their needs. The Company's procurement personnel also make it easier for
Government customers to place orders and configure and set-up new systems.
Management believes that the new contract vehicles resulting from Government
procurement reform (see "--Government Contracts") could enhance the Company's
opportunities to provide value-added services to both suppliers and customers by
allowing the Company to demonstrate how these vehicles can be used by suppliers
to sell more products and by customers to buy more products and services.

      Management believes the Company is on the leading edge of electronic
commerce for sales of information technology to the Government. The Company has
developed Internet facilities including a World Wide Web Site to support
"paperless" contracting with the GSA Schedules and under the NIH Electronic
Computer Store II ("ECS II") contract. ECS II is a MAC contract vehicle
providing an electronic catalog from which agencies may place individual orders
ranging in value from a few thousand dollars to several million dollars. The
Company is one of 45 vendors providing products under the ECS II vehicle and is
able to quickly add new products as they become available and requested by its
customers. Customers typically select from among the participating vendors based
on prior or existing service relationships, breadth of product offerings,
reputation and price. Management believes the Company is well positioned to
benefit from its electronic commerce capabilities as more and more Government
procurement vehicles are requiring these competencies as a condition of award.

      The Company also provides expertise in the Government procurement process
as a subcontractor to OEMs, providing services including initial bid and
proposal preparation, contract management, customer support services, technical
management services and electronic commerce services. By providing these
services, the Company allows the OEMs to sell to the Government as if they were
direct marketers of hardware and software. Under a NASA Scientific and
Engineering Workstation Program II ("SEWP II") subcontract, the Company will
provide several of these subcontracting services to a leading microcomputer and
workstation manufacturer for a specified percentage of revenues.

SOLUTIONS GROUP


                                       11
<PAGE>

      The Solutions Group provides information technology solutions designed to
address five discrete customer needs: Microsoft consulting, executive management
consulting, electronic commerce, financial systems implementations and training.
In providing these solutions, the Company combines its in-house expertise with
appropriate products of different vendors. Management believes the Company's
expertise in these key substantive areas provides an effective marketing tool in
sales of other products and services.

      The executive management consulting group seeks to help Government
agencies respond to recent legislation including the Chief Financial Officer
Act, the Government Performance and Results Act and the Information Technology
Management Reform Act. Subject matter topics include integrated financial
management solutions, financial management improvement, financial management
operations, internal management controls, fraud detection and prevention,
strategic information management, software process improvement,
performance-based budgeting and strategic and performance plans. These projects
are often similar to the Company's systems integration activities but are
usually smaller and involve a higher content of pre-packaged systems or
specialized subject matter.

      The Company is a Microsoft Solutions provider. Microsoft Solutions is an
intensive program developed by Microsoft to train information technology
professionals in five key functional areas: messaging, Internet, intranet,
extranet and large data center replacement applications. The group provides
infrastructure analysis and migration to Windows NT, enterprise-wide messaging
design and implementation, Internet and intranet design and deployment and
mainframe replacement, migration and connectivity.

      In 1998 the Company became an authorized Solutions Center for Navision
software. Navision is a complete financial package that can be tailored for mid
range commercial companies. The Company provides a full range of services to
include turnkey implementation, customization and on-going support to commercial
clients.

      The Company operates an authorized and certified training and education
center for Microsoft and maintains four fully-equipped classrooms devoted to
Microsoft training. In on-site and off-site services, the Company trained over
16,500 people in 1997, including Government and private sector clients as well
as Company personnel. Management believes that these training services can play
a large role in retaining customers and key Company personnel.

COMPETITION

      In providing a broad range of services and products that address the
complete information technology needs of its clients, the Company participates,
to varying degrees, in multiple segments of the information technology market,
including markets for systems engineering, development and integration;
networking; and product and component sales. Each market segment in which the
Company operates experiences vigorous competition. Within each segment, the
Company competes against different firms of varying sizes, with different
specializations and skills. The number and size of competitors vary among
operating groups and within the individual divisions of each group. Frequently,
the number and identity of competitors vary even from program to program within
a given business area. While the recent trend toward increased use of GSA and
IDIQ contracts has changed some aspects of how companies sell to the Government,
the Company has experienced no material change in the overall competitiveness of
the federal market. Many of the Company's competitors are significantly larger


                                       12
<PAGE>

and have greater financial resources than the Company. Some of these competitors
are divisions or subsidiaries of large, diversified companies that have access
to the financial resources of their parent companies. In the Systems &
Technology Group, the Company competes with certain computer manufacturers
(including the Company's suppliers), who occasionally sell directly to the
Government market, as well as a substantial number of systems integrators,
resellers and distributors. To a lesser extent, the Company competes with
Government agencies themselves which are permitted to sell services to other
Government agencies as a result of procurement reform.

      The Company believes that the principal competitive factors in the
Government services market are technical knowledge, management capability, past
contract performance, personnel qualifications and price. During its recent
history, the Company has been successful in winning new and repeat contract
awards in each of its businesses and in getting customers to exercise contract
option years in its services business, both of which the Company believes are
attributable to the strength of its past contract performance, its technical
knowledge, and its competitive prices. Further, the Company's senior management
team has extensive, industry-specific technical and managerial experience. As a
result, the Company believes that it has generally been able to compete
successfully on each of the principal competitive factors within each of its
business lines.

BACKLOG

      The Company's total contract backlog is only a portion of the total
contract capacity (i.e., the maximum amount that the Government can purchase
under its contracts with the Company) and represents management's estimate of
the aggregate revenues that are likely to be earned by the Company over the life
of all of its contracts, including option periods. Because many of the Company's
contracts are multi-year contracts and contracts with option years, total
contract backlog represents revenues expected to be realized over a number of
years into the future. The Company's estimated total contract backlog as of
December 31, 1997 was $940 million (without giving effect to the R.O.W., TIS or
TMA acquisitions). The Company's estimates of revenue from such contracts are
based on the Company's history with such contracts and similar contracts, and
management believes such estimates to be reasonable. However, because total
contract backlog is based on management's estimate as to the future potential of
existing contracts, there can be no assurances that all of such backlog will be
recognized as revenue. In addition, the Government's ability to select multiple
winners under IDIQ contracts, as well as its right to limit orders to any
particular awardee, mean that there is no assurance that unfunded contract
backlog will result in actual orders.

      Because the Government operates under annual appropriations, agencies of
the Government typically fund contracts on an incremental basis. Accordingly,
only a portion of the Company's total contract backlog is "funded." Funded
backlog consists of the aggregate dollar portion of contracts currently
appropriated by Government customers and allocated to contracts by the
purchasing Government agencies or otherwise allocated for payment by customers
upon completion of specified work. As of December 31, 1997, the Company's funded
contract backlog was approximately $57 million. Funded backlog generally varies
depending on procurement and funding cycles and other factors beyond the
Company's control. Accordingly, period-to-period comparisons are difficult and
not necessarily indicative of any future trends in revenues.

      At December 31, 1997, R.O.W., TIS, and TMA had a combined contract backlog
of approximately $150 million, of which approximately $54 million was funded.


                                       13
<PAGE>

      The preceding information regarding contract backlog and future revenues
to be derived therefrom, is forward-looking and is subject to certain risks and
uncertainties including, but not limited to, a dependence on the continued
funding of Government programs and contract procurements and the risk of
contract termination described elsewhere in this report.

GOVERNMENT CONTRACTS

      The Company derives substantially all of its revenues from business
performed under Government contracts. These include services, systems
integration and other contracts obtained through a negotiated procurement
process, as well as product sales contracts made under GSA Schedules, MACs and
similar IDIQ vehicles.

      Traditional negotiated procurement contracts typically authorize a single
contractor or team of contractors to provide a defined set of services and
products to a single government agency. These contracts include
cost-reimbursement contracts (both cost-plus-fixed-fee and cost-plus-award-fee),
time and materials contracts, fixed-price contracts and IDIQ contracts.

      Cost-plus-fixed-fee contracts generally provide for the reimbursement of
incurred costs during contract performance, to the extent that such costs are
allowable and allocable, and the payment of a fee, the size of which is fixed in
the contract. Cost-plus-award-fee contracts typically provide for the
reimbursement of costs with a base fee and an additional fee that is based upon
a periodic evaluation of the contractor's performance against specified
criteria. Under time and materials contracts, the contractor agrees to provide
certain categories of labor and materials at negotiated rates. To the extent a
contractor's costs differ from the negotiated rates, the contractor realizes all
of the benefit or detriment resulting from the difference between the contract
price and the contractor's cost for a unit of labor or product. Risks associated
with these fluctuations have been mitigated for information technology providers
by the consistent decline in product costs over time, although these reductions
must frequently be anticipated in the proposal process. Under fixed-price
contracts, the contractor agrees to perform specified work for a fixed price
and, accordingly, realizes all the benefit or detriment resulting from decreases
or increases in the cost of performing the work.

      The IDIQ contracts historically negotiated by the Company typically
specify the prices at which certain services and/or products are to be provided.
These contracts have been and continue to be used for large-scale Government
purchases of integrated systems that include a significant service or
maintenance component, along with the provision of computer hardware and
software. These IDIQ contracts are typically awarded to a single bidder or team
of bidders chosen through a formal competitive bid process. The periods of
performance for IDIQ contracts typically span a base year and a number of option
years. IDIQ contracts do not obligate the Government to purchase goods or
services at the levels set out in the request for proposal, and allow the
Government to terminate the contract if it is dissatisfied with the contractor's
pricing or performance, or simply for convenience. Alternatively, IDIQ vehicles
offer both the Government and the contractor flexibility to introduce new
products and services as technology changes over the life of the contract.

      Over the past few years, reforms of the Government procurement process
have introduced a dramatic increase in the flexibility and alternatives
available to the federal information technology buyer. Onerous regulations that


                                       14
<PAGE>

effectively encouraged large scale, long term, single award procurements have
given way to a more "commercial" buying approach. Government customers,
particularly those buying computer hardware and software without a custom
service element, are spending an increasing share of their procurement budgets
through smaller scale, shorter term, multiple award, multiple agency contract
vehicles. While each of these flexible contractual vehicles has its own unique
characteristics, they have several major elements in common. Because these
vehicles do not require the Government to make specific purchases, they are
generally characterized as IDIQ contracts, and function as procurement
"schedules" or catalogs. Although contractors must compete for the right to
participate in these multi-agency, multi-vendor vehicles, winning the right to
participate does not guarantee revenues, which require an effective post-award
sales effort.

      In addition to purchasing from multiple IDIQ contracts, Government
agencies may also purchase from GSA Schedules or MACs. Historically, the GSA
would produce schedules for each agency, after extensive bidding and review
processes, that would dictate the products, prices and vendors for all purchases
by that agency. As a result of recent changes to the rules governing use of GSA
Schedules for Government agency purchases of hardware, software and services,
GSA Schedules now frequently act as broadly defined IDIQ contracts under which
multiple Government agencies may procure hardware, software or related services
from contractors authorized to sell under such GSA Schedules without minimum or
maximum order limitations. Contractors participating in the GSA Schedule program
are eligible to market their products to a broad range of Government customers.
The GSA Schedules together with related basic purchasing agreements for larger
volume purchases at reduced prices ("BPAs") offer Government agencies the
advantage of an established contracting infrastructure including staff who are
expert in the technologies offered by various vendors, volume driven pricing,
access to the latest technology and streamlined purchasing mechanisms.

      At the time of initial award, prices to the end-users under the Company's
GSA Schedules are set, either at a specified level for the duration of the
contract or at specified levels varying over time. In addition, under certain
circumstances, the Company is required under the terms of its GSA Schedules to
pass on any savings, resulting from supplier discounts or other price
reductions, to the Government in the form of corresponding price reductions. GSA
Schedules do not have pre-set delivery schedules or minimum purchase levels. The
uncertainties related to future contract performance costs, quantities to be
shipped and dates of delivery make it difficult to predict the future revenues
and profitability performance that may be associated with any particular GSA
Schedule.

      Similar to GSA Schedules, MACs offer multiple agencies the opportunity to
procure products from a broad range of vendors. For example, 45 contractors,
including the Company and Sylvest, now hold MACs through the NIH's ECS II, which
is a series of electronic hardware and software catalogs from which any
Government agency that elects to participate may order. MACs specify products
and prices and are issued by a specific government agency to multiple
contractors. The agency which selects the vendors and maintains the products
list and takes a small percentage of each order for administering the contract,
and multiple agencies are permitted to place orders under the MAC.

      The evolution of procurement methods has had the effect of making the
procurement of information technology in the Government more similar to that in
the commercial sector. The new procurement methods allow for more timely
purchases of information technology products and for multiple vendors selling


                                       15
<PAGE>

the same products and services, resulting in increasing competition for contract
orders. Thus, whereas historically a contract award typically assured the
winning bidder of a predictable amount of revenue, in the current environment
the contractor's post-award sales, marketing, and customer service effectiveness
frequently dictate the amount and timing of all revenue to be realized under the
contract or schedule. In effect, the new vehicles necessitate two selling
cycles: one to win participation as a vendor under the umbrella contract and a
second to actually win specific orders after contract award.

SUPPLIERS

      The Company maintains strong relationships with many of its key suppliers.
These relationships allow the Company to work with these suppliers to fashion
joint solutions for its customers. Management believes that the Company provides
significant value to its suppliers by allowing them to take advantage of the
Company's extensive knowledge of the Government and its procurement regulations.
In addition, the Company's sales and marketing capabilities allow its suppliers
to access new end-user markets without expanding their marketing functions. The
Company currently has relationships with most leading hardware and software
suppliers. The Company does not rely on any single supplier of products or
services.

SALES AND MARKETING

      Sales and marketing efforts are split into contract pre-award and
post-award activities. Employees in the Corporate Marketing Group focus on
pre-award sales and marketing, including identifying new contracts, qualifying
the Company to bid on such contracts and then bidding on such contracts. Once a
contract is awarded, the business unit responsible for the new contract leads
the technical performance and/or post-award sales and marketing effort intended
to maximize sales. Under IDIQ contracts, the Company's post-award activities are
the most significant factor in determining the amount of revenue realized.

      Within the Corporate Marketing Group, senior management and the Company's
own professional staff of engineers, analysts and other personnel conduct the
Company's sales and marketing activities. The Corporate Marketing Group employs
approximately 35 people, the majority of which are engaged in the preparation
and negotiation of major proposals.

MAJOR CUSTOMERS

      The Company has derived and expects to continue to derive substantially
all of its total revenues from Government contracts. Contracts with NASA, NIH,
and the U.S. Navy represented approximately 16%, 15% and 15% of 1997 revenues,
respectively. Sales utilizing GSA schedules accounted for approximately 11% of
1997 revenues. The various Government customers exercise independent purchasing
decisions, and sales to the Government are generally not regarded as
constituting sales to one customer. Instead, each contracting entity is
considered to be a separate customer.

EMPLOYEES

      On December 31, 1997, the Company employed 996 persons, 717 of these
employees were technical personnel, 120 were marketing/sales personnel and 159
were other administrative staff. The Company believes that it is competitive in
hiring and retaining qualified personnel. Less than 2% of the Company's
employees are covered by collective bargaining agreements with labor unions. The
Company


                                       16
<PAGE>

considers its relations with its employees to be good and has not experienced
any significant labor problems. R.O.W., TIS and TMA had 789 employees as of
December 31, 1997.

Item 2. Facilities.

      The Company leases all of the offices and facilities used in connection
with its operations. The following table sets forth information relating to the
significant facilities leased by the Company. In addition, the Company leases
several other customer support offices near customer facilities in various
states.
                                                                      Expiration
                                                                          of
Location        Purpose                              Square Footage    Lease(s)

Bethesda, MD    Corporate Headquarters                       67,602    12/31/04
Cleveland, OH   NASA Lewis Support Facility                  90,000    12/31/98
Greenbelt, MD   Systems & Technology Group and
                Science & Engineering Group Headquarters     66,746    12/31/04

With the acquisitions of R.O.W., TIS and TMA, the Company has an additional
132,168 square feet of leased facilities.

Item 3. Legal Proceedings.

      The Company is not involved in any material legal proceedings. From time
to time, the Company or its competitors file protests, as permitted under
procurement regulations, in connection with specific contract awards.
Historically, these proceedings have not had any material effect on the
Company's financial condition, results of operations, or cash flow. There can be
no assurance that the Company will not become involved in material legal
proceedings or contract bid protest proceedings in the future.

Item 4. Submission Of Matters To A Vote Of Security Holders.

None.

                                     PART II

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

      The Company's common stock is not traded on any established public trading
market. As of March 25, 1998, there were 28 holders of record and approximately
22 beneficial owners of the Company's common stock. Substantially all of the
shares of the Company's common stock are owned of record and beneficially by
affiliates of TC Group, L.L.C. d/b/a/ The Carlyle Group ("Carlyle") or the
directors and officers of the Company. The Company has not paid a cash dividend
on its common stock for the two years ended March 25, 1998. The Company has no
present intention to pay cash dividends on its common stock for the foreseeable
future in order to retain all earnings for investment in the Company's business


                                       17
<PAGE>

and the repayment of the Company's current indebtedness. The Company's Senior
Credit Facility and the trust indenture for the Exchange Notes include certain
restrictions on the Company's ability to pay cash dividends on the Company's
common stock including, without limitation an aggregate limitation on all
dividends since July 25, 1997 in excess of 50% of the Company's consolidated net
income since the date thereof.

Recent Sales of Unregistered Securities

      Since January 1, 1997, the Company has sold and issued the following
unregistered securities:

      On May 7, 1997, the Company issued 555,556 shares of the Company's common
      stock for an aggregate offering price of $15,000,000.

      On June 30, 1997, the Company issued 444,444 shares of the Company's
      common stock for an aggregate offering price of $12,000,000.

      No underwriters were engaged in connection with the foregoing sales of
securities. Such sales were made in reliance upon the exemption from the
registration provisions of the Securities Act set forth in Section 4(2) thereof
as transactions not involving a public offering, the respective purchasers
thereof having acquired such shares for their respective accounts without a
view to the distribution thereof.

Item 6. Selected Financial Data.

      The consolidated statement of operations data set forth below with respect
to the years ended December 31, 1993, 1994, 1995, 1996 and 1997 and the
consolidated balance sheet data at December 31, 1993, 1994, 1995, 1996 and 1997
have been derived from, and are qualified by reference to, the Company's
consolidated financial statements and notes thereto audited by Price Waterhouse
LLP, independent accountants. The selected consolidated financial data set forth
below should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the consolidated financial
statements and notes thereto in Items 7 and 8.


                                       18

<PAGE>

<TABLE>
<CAPTION>
                                                                         Year Ended December 31,
                                                          1993        1994        1995         1996         1997
                                                        ---------   ---------   ---------    ---------    ---------
(In thousands)
<S>                                                     <C>         <C>         <C>          <C>          <C>
Income Statement Data:
    Revenues ........................................   $ 112,441   $ 143,527   $ 129,819    $ 151,108    $ 336,306
                                                        ---------   ---------   ---------    ---------    ---------

    Expenses:
      Cost of sales and services ....................      86,623     114,038     107,366      114,248      280,903
      Selling, general and administrative ...........      14,395      20,546      20,943       21,366       37,804
      Amortization of goodwill
          and intangible assets......................          --          --          --           --        5,031
      Interest (a) ..................................       5,389       3,580       3,663        7,564       10,947
                                                        ---------   ---------   ---------    ---------    ---------

                   Total expenses ...................     106,407     138,164     131,972      143,178      334,685
                                                        ---------   ---------   ---------    ---------    ---------

    Income (loss) before extraordinary
        item and income taxes .......................       6,034       5,363      (2,153)       7,930        1,621

    Income tax provision (benefit) ..................         369       1,171      (3,950)       3,202        1,368
                                                        ---------   ---------   ---------    ---------    ---------

    Income before extraordinary item ................       5,665       4,192       1,797        4,728          253

    Extraordinary loss from early retirement of debt,
        net of income tax benefit (b) ...............          --          --          --           --       (2,770)
                                                        ---------   ---------   ---------    ---------    ---------

    Net income (loss)................................   $   5,665   $   4,192   $   1,797    $   4,728    $  (2,517)
                                                        =========   =========   =========    =========    =========


Operating Data(f):
    EBITDA (c) ......................................   $   7,509   $   6,734   ($    847)   $  14,082    $  18,213
    Net recourse interest expense (d) ...............         109          44          40        5,370        9,493
    Net cash recourse interest expense(e) ...........         109          44          40        3,926        8,689
    Depreciation and amortization ...................       1,366       1,327       1,266          782        7,099

Balance Sheet Data at End of Period:
    Working capital .................................   $  14,422   $  17,195   $  11,025    $  16,249    $  47,566
    Total assets ....................................     115,094     120,947     150,102       83,286      192,966
    Long-term debt ..................................      35,753      20,077      43,412       50,170      113,359
    Stockholders' equity (deficit) (g) ..............      15,310      19,399     (25,962)     (22,826)       1,017
</TABLE>


                                       19
<PAGE>

(a) Interest expense includes interest on both recourse and nonrecourse notes
payable and obligations under capital leases.

(b) During the year ended December 31, 1997, the Company wrote off the deferred
financing fees related to the Recapitalization and the NYMA and Sylvest
acquisition debt that was refinanced in July 1997.

(c) EBITDA represents the sum of income (loss) before extraordinary item and
income taxes, net recourse interest expense and depreciation and amortization.
EBITDA is not a measure of performance or financial condition under generally
accepted accounting principles, but is presented to provide additional
information related to debt service capability. EBITDA should not be considered
in isolation or as a substitute for other measures of financial performance or
liquidity under generally accepted accounting principles. While EBITDA is
frequently used as a measure of operations and the ability to meet debt service
requirements, it is not necessarily comparable to other similarly titled
captions of other companies due to the potential inconsistencies in the method
of calculation.

(d) Net recourse interest expense is interest expense minus interest expense on
nonrecourse notes payable and nonrecourse obligations under capital leases of
$4,910, $3,188, $2,669, $2,015 and $1,161 and minus interest income on cash
balances of $370, $348, $954, $179 and $293 for the years ended December 31,
1993, 1994, 1995, 1996 and 1997, respectively.

(e) Net cash recourse interest expense is net recourse interest expense minus
amortization of deferred financing costs of $817 and $804 for the years ended
December 31, 1996 and 1997, respectively, and minus interest expense of $627 for
the year ended December 31, 1996 on FDC Notes that was paid through the issuance
of payment in kind notes.

(f) Net cash flows from (for) operating activities was $12,258, $19,242,
$(2,767), $1,452 and $20,907 for the years ended December 31, 1993, 1994, 1995,
1996 and 1997, respectively. Net cash flows (for) from investing activities was
$(8,093), $(7,558), $(52,841), $49,703 and $(58,471) for the years ended
December 31, 1993, 1994, 1995, 1996 and 1997, respectively. Net cash flows from
(for) financing activities was $(4,155), $(3,529), $50,327, $(60,275) and
$42,700 for the years ended December 31, 1993, 1994, 1995, 1996 and 1997,
respectively.

(g) Stockholders' equity (deficit) includes the effect of the Recapitalization
which included a charge to stockholders' equity of $58.8 million. In connection
with the Recapitalization and the acquisitions of NYMA and Sylvest, Carlyle and
management have contributed approximately $43.1 million of cash to the Company.
See Notes 2 and 4 to the Company's consolidated financial statements.

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

      THE FOLLOWING DISCUSSION AND ANALYSIS OF THE COMPANY'S CONSOLIDATED
FINANCIAL CONDITION AND CONSOLIDATED RESULTS OF OPERATIONS SHOULD BE READ IN
CONJUNCTION WITH THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS AND NOTES
THERETO APPEARING ELSEWHERE IN THIS REPORT. EXCEPT AS EXPRESSLY INDICATED, THE
FOLLOWING DISCUSSION DOES NOT GIVE EFFECT TO THE PRE-ACQUISITION OPERATIONS OF
NYMA, SYLVEST, R.O.W., TIS AND TMA OR INCLUDE PRO FORMA FINANCIAL INFORMATION.

GENERAL

      The Company is a major supplier of information technology to a wide range
of customers within the Government. The Company has assembled, through internal
growth and strategic acquisitions, comprehensive information technology product
and services capabilities to address the unique needs of its Government clients.


                                       20
<PAGE>

      Prior to December 1, 1995, the majority of the Company's common stock was
owned by its employees. On December 1, 1995, the Company effected the
Recapitalization wherein Holdings merged with and into the Company with the
Company continuing as the surviving corporation. Holdings was a company
organized by Carlyle to facilitate the Recapitalization and had no operating
activity or history. Upon consummation of the Recapitalization, Holdings
received 85.4% of the Company's outstanding common stock and 14.6% was retained
by members of the Company's management who were shareholders prior to the
Recapitalization. The merger was accounted for as a recapitalization, which
resulted in a charge to stockholders' equity of $58.8 million to reflect the
redemption of common stock.

      In May 1997, the Company purchased all of the outstanding shares of common
stock of NYMA for $31.6 million. The purchase price consists of $26.6 million in
cash and $5.0 million in subordinated notes. The agreement also provides for
additional cash payments of up to $3.0 million if certain operating objectives
related to new business activity through May 1998 are met. Such payments, if
any, will be accounted for as adjustments to the purchase price. The Company
financed the acquisition of NYMA through additional borrowing of $28.0 million
and the sale of 555,556 shares of the Company's common stock, primarily to
existing stockholders, for $15.0 million. A portion of the new borrowings was
used to retire existing Company and NYMA working capital debt. NYMA is a
provider of high technology engineering and information technology services
under contracts with various Government agencies and subcontracts with large
government contractors.

      In June 1997, the Company purchased all of the outstanding shares of
common stock of Sylvest for $41.0 million. The purchase price consists of $33.0
million in cash and subordinated notes of $8.0 million of which $1.0 million was
issued during 1998 after certain earnings objectives were met. Subordinated
notes of $4.0 million were paid in August 1997. The Company financed the
acquisition of Sylvest through additional borrowing of $27.4 million and the
sale of 444,444 shares of the Company's common stock, primarily to existing
stockholders, for $12.0 million. A portion of the new borrowings was used to
retire existing Sylvest working capital debt. Sylvest is a leading reseller and
technical services vendor supporting open systems architecture within the
federal marketplace. Of the total fees and expenses related to these
transactions, $1.0 million was paid to an affiliate of Carlyle.

      In December 1997, the Company sold substantially all of the assets of its
wholly-owned subsidiary, DoxSys, Inc. for $4.2 million. The sale price may be
increased by up to $6.0 million if certain earnings objectives during 1998 are
met and is subject to adjustment based on an audit of the closing balance sheet.

      In February and March 1998, the Company purchased all of the outstanding
common stock of R.O.W. Sciences, Inc. ("R.O.W.") and Technical and Management
Assistance, Inc. ("TMA") and also in February purchased all of the assets of
Telos Corporation's Telos Information Systems Division ("TIS"), (collectively,
the "Acquisitions"). The aggregate purchase price of the Acquisitions was $32.7
million. The purchase price consisted of $30.7 million in cash and $2.0 million
in subordinated notes. The agreements also provide for additional cash payments
up to $1.0 million if certain revenue objectives are met. Such payments, if any,
will be accounted for as adjustments to the purchase price. The purchase prices
for all of the Acquisitions are subject to adjustment based on an audit of the
closing balance sheets. The Company financed the Acquisitions through borrowing
under its existing revolving line of credit facility. R.O.W. provides services
that combine expert knowledge in life and health sciences with state-of-the-art
computer based technologies principally to Government agencies. TMA provides
information technology services principally to the air traffic management
function within the Federal Aviation Administration. TIS provides


                                       21
<PAGE>

engineering and information technology services to the Jet Propulsion Laboratory
and other Government customers.

      Management believes the continuing consolidation within the information
technology industry, particularly among companies serving Government customers,
should result in additional opportunities for the Company to make attractive
acquisitions. As a result, the Company is continually involved in the
investigation and evaluation of potential acquisition candidates. Any such
transactions are typically subject to numerous conditions, including due
diligence investigations, contract reviews and negotiation of a definitive
purchase agreement in addition to arranging acceptable financing. In evaluating
acquisition targets, the Company considers, among other things, their
competitive market position, management teams, growth potential, technical
skills and contract base. As of March 25, 1998, the Company is not a party to
any definitive binding acquisition, however at any time the Company may have one
or more offers outstanding and may have executed one or more letters of intent.
There can be no assurance, however, that any such understandings, letters of
intent or discussions will result in any particular transaction being
consummated, or that acceptable financing will be available.

      The Government accounted for approximately 95%, 97% and 97% of total
revenues during 1995, 1996 and 1997, respectively. Revenue from sales and
sales-type leases (capital leases on which the lessor derives profit on the
underlying product as well as on the financing feature of the lease) is
generally recognized upon installation at the customer's site. The Company
pioneered the lease-to-ownership-plan ("LTOP"), a capital lease transaction,
which allows customers the flexibility to use operating lease funds to acquire
equipment and software and convert the transaction to an installment purchase if
the contract equipment meets its longer-term technological requirements. Under
an LTOP, the title of the equipment or software passes to the Government after
the Government makes the final lease payment. The Company typically discounts
payments to be received from the Government on a nonrecourse basis with
independent financial institutions. Accordingly, the Company's net investment in
sales-type leases are pledged as collateral for these nonrecourse obligations,
which are reflected as nonrecourse indebtedness on the Company's consolidated
balance sheet. The Company considers LTOPs to be sales-type leases in those
instances where the Company believes that the risk of cancellation of the
Government lease is remote.

      The Company's operating performance is affected by the number of
Government contracts held, the types of contracts, the timing of installation or
delivery and the relative margins of the services performed or products sold, as
the case may be. In general, the Company earns its highest margins on its most
specialized systems integration work and lower margins on cost-plus services
contracts and on sales of COTS products by its Systems & Technology Group, which
tend to have a lower services component associated with such sales and a more
competitive after-award sales environment. However, profitability regularly
varies from contract to contract and product to product over the contract term.

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996


                                       22
<PAGE>

REVENUES

      Revenues for the year ended December 31, 1997 were $336.3 million, up
$185.2 million or 123% over 1996. The NYMA and Sylvest acquisitions accounted
for $147.6 million of the increase in revenue over 1996. Revenue from equipment
and software sales was $196.7 million, up $109.2 million or 125% from 1996. The
NYMA and Sylvest acquisitions accounted for $86.1 million of the increase in
equipment and software sales revenue over 1996. The remaining increase in
revenue from equipment and software sales is principally due to increased
emphasis on the Company's COTS products. Revenue from maintenance and support
services was $134.5 million, up $74.7 million or 125% from 1996. The NYMA and
Sylvest acquisitions accounted for $61.4 million of the increase in maintenance
and support services revenue over 1996. The remaining increase in revenue from
maintenance and support services is principally due to increased professional
services performed under existing contracts and additional contracts under
maintenance plans.

COST OF SALES AND SERVICES

      Cost of sales and services for the year ended December 31, 1997 was $280.9
million, up $166.7 million or 146% over 1996. The NYMA and Sylvest acquisitions
accounted for $131.7 million of the increase in cost of sales and services over
1996. Cost of sales and services in 1997 was 85% of sales and services revenues
compared with 78% of sales and services revenues for the comparable period in
1996. The decrease in the gross margin percentage primarily relates to increased
influence of the COTS products sold through the Systems & Technology Group
including Sylvest, which generally have lower gross margin percentages than
product sales by the Systems Integration Group and Solutions Group, and the
lower margins on NYMA's cost-plus-award fee business. This decrease was
partially offset by the improved margins from the professional services
business, a greater percentage of which is now being performed by the Company's
employees instead of being subcontracted to third parties. Cost of sales and
services and margin analysis do not reflect the current year's amortization of
the present value of the contract profits acquired in the NYMA and Sylvest
acquisitions.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSE

      Selling, general and administrative expense for the year ended December
31, 1997 was $37.8 million, up $16.4 million or 77% over 1996. The NYMA and
Sylvest acquisitions accounted for $9.6 million of the increase in selling,
general and administrative expenses over 1996. The remaining increase in
selling, general and administrative expense was due primarily to an increase in
the number of personnel. Excluding the effect of the NYMA and Sylvest
acquisitions, selling, general and administrative expense for the year ended
December 31, 1997 was 15% of revenues, compared with 14% in 1996.

AMORTIZATION OF GOODWILL AND INTANGIBLE ASSETS

      The excess of the cost of acquiring NYMA and Sylvest over the fair value
of identifiable net tangible and intangible assets acquired was $48.5 million
and is being amortized on a straight-line basis over fifteen years. The present
value of the contract profits of $10.7 million acquired in the NYMA and Sylvest
acquisitions is being amortized over the remaining terms of the acquired
contracts in relation to the recognition of related contract revenue.
Amortization of goodwill and intangible assets for 1997 was $5.0 million.

INTEREST EXPENSE

      Interest expense for the year ended December 31, 1997 was $10.9 million,
up $3.4 million, or 45% over 1996. Recourse interest expense increased $4.3
million for the year ended December 31, 1997 over 1996 primarily due to
increased


                                       23
<PAGE>

recourse debt balances including term debt used to partially finance the
acquisitions of NYMA and Sylvest. Interest expense on nonrecourse debt declined
$0.9 million for the year ended December 31, 1997 from 1996 due to a reduced
level of capital leases. Interest expense is expected to be higher in 1998 than
in 1997, reflecting the higher level of indebtedness to be outstanding for the
full year, as a result of the acquisitions of NYMA, and Sylvest, and the
additional indebtedness incurred to finance the acquisitions of R.O.W., TIS and
TMA.

INCOME TAXES

      The effective tax benefit rate for the year ended December 31, 1997 was
12% as compared with the effective tax provision rate of 40% for 1996. The
1997 tax benefit resulted from the effect of the taxable loss incurred during
the year and other items which were partially offset by the nondeductibility of
the amortization of goodwill and the value assigned to contract backlog
associated with the NYMA acquisition during 1997. The Company believes that the
nondeductibility of the additional amortization of goodwill and the value
related to contract backlog associated with the R.O.W acquisition will cause
future tax rates to be higher.

EXTRAORDINARY LOSS

      In 1997, the Company recorded a charge to earnings of $4.5 million related
to deferred financing fees associated with the debt incurred to finance the
Prior Senior Credit Facility and the NYMA and Sylvest acquisitions. This debt
was refinanced with proceeds from the Senior Subordinated Notes. This charge to
earnings was reduced by an income tax benefit of $1.7 million which produced an
extraordinary loss of $2.8 million.

NET LOSS/INCOME

      Net loss for the year ended December 31, 1997 was $2.5 million, a $7.2
million decrease from the net income of $4.7 million recorded in 1996 based on
the reasons discussed above.

YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995

REVENUES

      Revenues for the year ended December 31, 1996 were $151.1 million, up
$21.3 million or 16% over 1995. Revenue from equipment and software sales was
$87.5 million, up $6.5 million or 8% from 1995. The increase in revenue from
equipment and software sales was principally due to increased emphasis on the
Company's COTS products business. Revenue from maintenance and support services
was $59.9 million, up $16.1 million or 37% from 1995. The increase in revenue
from maintenance and support services was principally due to increased
professional services performed under existing contracts and additional
contracts under maintenance plans.

      COST OF SALES AND SERVICES

      Cost of sales and services for the year ended December 31, 1996 was $114.2
million, up $6.9 million or 6% compared with 1995. Cost of sales and services
for 1996 was 78% of sales and services revenues compared with 86% of sales and
services revenues in 1995. The increase in gross margin percentage primarily
relates to efficiencies recognized on the higher revenue base in the maintenance
and support services businesses and to a $6.3 million loss recorded in 1995 on a
single fixed-price government contract. The loss resulted when expected cost


                                       24
<PAGE>

reductions associated with the introduction of new technology were not realized.
Excluding the effect of the $6.3 million loss, cost of sales and services for
1995 was 81% of sales and services revenues.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSE

      Selling, general and administrative expense for the year ended December
31, 1996 was $21.4 million, up $0.4 million or 2% over 1995. Selling, general
and administrative expense for the year ended December 31, 1996 was down to 14%
of revenues compared with 16% of revenues for 1995. This decrease as a percent
of revenues was due primarily to $5.4 million of expenses incurred during 1995
in connection with the Recapitalization. These expenses included the forgiveness
of $3.1 million of indebtedness from certain of the Company's officers, special
discretionary bonuses of $1.4 million and $0.9 million of other one-time
charges. Excluding the effect of expenses incurred in connection with the
Recapitalization, selling, general and administrative expenses as a percent of
revenues would have been 11% in 1995. The increase in recurring selling, general
and administrative expenses during 1996 primarily relates to increased personnel
as the Company expanded its sales force in the products and professional
services areas.

INTEREST EXPENSE

      Interest expense for the year ended December 31, 1996 was $7.6 million, up
$3.9 million or 106% over 1995. The increase in interest expense primarily
relates to the interest on the indebtedness which was issued in connection with
the Recapitalization. The increase in interest expense on such indebtedness more
than offset the decrease in interest expense resulting from reduced capital
leases.

INCOME TAXES

      The effective tax provision rate for the year ended December 31, 1996 was
40% as compared with the effective tax benefit rate of 184% for 1995. The 1995
tax benefit resulted from the Company's elimination of its deferred tax asset
valuation allowance of $3.3 million based on management's belief that there was
sufficient assurance that the Company's deferred tax assets would be realized,
offset by $0.6 million of nondeductible expenses. Excluding the effect of the
elimination of the deferred tax asset valuation allowance and the nondeductible
expenses, the Company would have had an effective tax benefit rate for the year
ended December 31, 1995 of 36%.

NET INCOME

      Net income for the year ended December 31, 1996 was $4.7 million, up $2.9
million or 163% over 1995 based on the reasons discussed above.

LIQUIDITY AND CAPITAL RESOURCES

      The Company's primary source of liquidity is cash provided by operations.
The Company's liquidity requirements generally vary seasonally with revenues,
which are generally higher in the third and fourth quarters of each year.
Historically, cash flow from the collection of accounts receivable from the
Government has generally been predictable and dependable. Cash and cash
equivalents were $6.3 million at December 31, 1997, up $5.1 million from
December 31, 1996 primarily as a result of net cash flow from operating
activities of $20.9 million and net cash flows from financing activities of


                                       25
<PAGE>

$42.7 million being offset by net cash flow used in investing activities of
$58.5 million. Net cash flow from operating activities was primarily a result of
decreases in accounts receivable and net investments in sales-type leases of
$11.5 million and $5.7 million, respectively. An increase in accounts payable
and accrued expenses of $1.6 million was offset, in part, by an increase of $1.3
million in inventory. In addition, net change in other assets and liabilities
represented a use of cash of $2.8 million. Net cash flow from financing
activities was $42.7 million for 1997 primarily as a result of issuance of
$105.0 million of Senior Subordinated Notes due in 2005, issuance of other term
notes in connection with the NYMA and Sylvest acquisition of $55.4 million due
in 2004, and $27.0 million from the issuance of additional common stock. This
cash was used to retire existing term debt of $99.7 million, repay and retire
line of credit balances of acquired companies of $18.3 million, repay other line
of credit balances of $10.8 million, repayments of capital lease obligations of
$5.0 million and costs associated with the issuance of stock and debt
acquisition costs of $11.0 million. Net cash used in investing activities
amounted to $58.5 million for 1997, primarily as a result of acquisition costs
of NYMA and Sylvest totaling $54.2 million and the purchases of equipment for
sales-type leases and property and equipment totaling $4.3 million.

      As of December 31, 1997, the Company had outstanding recourse debt of
$113.0 million. This amount excludes $3.5 million of nonrecourse notes payable
and obligations under capital leases, which the Company has recorded in
connection with the financing of certain equipment sales and leases.

      The Company's Senior Credit Facility includes certain restrictions as to
the Company's ability, among other things, to acquire or dispose of assets, to
pay dividends and to incur additional indebtedness. In addition, the Company is
required to maintain a minimum net worth and certain operating ratios,
including, among others, interest and leverage coverage. Such requirements could
limit the Company's ability to incur debt and could thereby limit the Company's
liquidity and ability to make certain acquisitions. All of the Company's assets
not otherwise pledged are utilized as collateral under the Company's credit
agreements. The Senior Credit Facility also provides for a maximum availability
based upon a borrowing base comprised of 85% of Eligible Receivables and 60% of
Eligible Inventory (as defined in the Senior Credit Facility), up to a maximum
availability of $75.0 million. At March 25, 1998 there were $4.0 million of
undrawn letters of credit and borrowings of $28.9 million outstanding under the
revolving line of credit. The Senior Credit Facility bears interest at the
Company's option at the base rate in effect from time to time plus 1.25% or the
eurodollar rate plus 2.25% plus an additional 2.0% on overdue amounts.

      The Company also maintains an inventory and receivables financing facility
with an asset-based lender to facilitate the purchase of inventory from approved
vendors for prompt resale to customers. The Company pays no interest on accounts
drawn under such Floor Plan Financing Facility for negotiated periods and such
drawn amounts are reflected in accounts payable and accrued contract expenses
during such periods.

      Upon the closing of the acquisitions, all outstanding balances of NYMA,
Sylvest and R.O.W. under their respective lines of credit were repaid in full by
the Company and all lines of credit related to NYMA, Sylvest, R.O.W. and TMA
have been cancelled. TMA had no borrowing outstanding under its line of credit
upon closing.

      Stockholders' equity amounted to $1.0 million at December 31, 1997, an
increase in stockholders' equity of $23.8 million from December 31, 1996. This


                                       26
<PAGE>

increase is principally due to proceeds from the sale of common stock of $27.0
million, less issuance costs of $0.9 million and the net loss for 1997 of $2.5
million. The stockholders' deficit amounted to $22.8 million at December 31,
1996, a reduction of $3.1 million from December 31, 1995. This reduction is
principally due to the net income of $4.7 million for 1996, net of a charge to
retained earnings of $1.6 million, to fund future additional distributions for
the benefit of the selling shareholders in the Recapitalization. The
stockholders' deficit amounted to $26.0 million at December 31, 1995, a change
of $45.4 million from stockholders' equity at December 31, 1994. The reduction
is principally due to the redemption of common stock in the Recapitalization of
$58.8 million and other redemption's of common stock of $1.8 million, offset in
part by net income of $1.8 million and net proceeds from the sale of common
stock of $13.9 million.

      As of December 31, 1997, the Company had no significant capital
expenditure commitments.

      Based on the Company's current level of operations, management believes
that available cash, together with the available borrowings under the Senior
Credit Facility and the Floor Plan Financing Facility, should be adequate to
meet the Company's anticipated future requirements for working capital, capital
expenditures and scheduled payments of interest on its debts through at least
the next twelve months.

INFLATION AND GENERAL ECONOMIC CONDITIONS

      Although the Company cannot accurately anticipate the effect of inflation
on its operations, it does not believe that inflation has had, or is likely in
the foreseeable future to have, a material impact on its results of operations.
Unlike other service providers, the Company does not have a significant number
of fixed price service contracts where the Company bears the risk of cost
increases. The Company's operating results would be adversely affected by
increases in interest rates which would result in higher interest payments by
the Company under its variable rate credit facilities. As of March 25, 1998, the
Company had borrowings of $28.9 million outstanding and $4.0 million of undrawn
letters of credit under its variable rate credit facilities. If interest rates
rise, the Company's cost of capital and debt service requirements would
increase. The Company has not historically entered into hedging transactions
with respect to its variable rate debt, but may do so in the future.

RECENT ACCOUNTING PRONOUNCEMENTS

      In June 1997, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" and
No. 131, "Disclosure about Segments of an Enterprise and Related Information."
These statements become effective for the Company's 1998 financial statements.
The Company is evaluating these statements to determine the impact on its
reporting and disclosure requirements.

YEAR 2000 COMPLIANCE

      To the extent that the Company's internal business systems and
applications will not accommodate the turn of the century, the Company plans to


                                       27
<PAGE>

implement the necessary vendor upgrades and modifications to ensure continued
functionality beyond December 31, 1999. At present, management does not expect
that material incremental costs will be incurred in the aggregate or in a single
year by addressing the "Year 2000" issue.

                                       ***

      The foregoing discussion of various factors that may impact 1998
performance contains certain forward-looking statements. In addition, the
Company or its representatives from time to time may make or have made certain
forward-looking statements. Those forward looking statements made by the Company
or its representatives are qualified in their entirety by reference to the
discussion in this document, other public documents, and the discussion of
important factors that could cause the Company's actual results to differ
materially from those projected or discussed in those forward looking
statements. It is intended that the foregoing constitute meaningful cautionary
statements so as to obtain the protections of the safe harbor established for
such statements by the Private Securities Litigation Reform Act of 1995.

                                       ###


Item 8. Consolidated Financial Statements.


                          INDEX TO FINANCIAL STATEMENTS

Report of Independent Accountants............................................F-1

Consolidated Balance Sheets as of December 31, 1996 and 1997.................F-2

Consolidated Statements of Operations for the Years
Ended December 31, 1995, 1996 and 1997.......................................F-3

Consolidated Statements of Stockholders' (Deficit) Equity for the
Years Ended December 31, 1995, 1996 and 1997.................................F-4

Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995, 1996 and 1997.............................................F-5

Notes to Consolidated Financial Statements...................................F-6

Financial statement schedules are omitted because they are not applicable or the
required information is shown in the consolidated financial statements or notes
thereto.


                                       28
<PAGE>

                        REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders
   of Federal Data Corporation

In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
Federal Data Corporation and its subsidiaries at December 31, 1996 and 1997, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1997, in conformity with generally accepted
accounting principles. 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 of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.



PRICE WATERHOUSE LLP

Washington, D.C.
March 18, 1998


                                      F-1
<PAGE>

                         Federal Data Corporation
                        Consolidated Balance Sheets
                     (In thousands, except share data)

<TABLE>
<CAPTION>
                                                                              December 31,
                                                                         ----------------------
                                                                           1996         1997
                                                                         ---------    ---------
Assets
<S>                                                                      <C>          <C>
     Cash and cash equivalents .......................................   $   1,191    $   6,327
     Accounts receivable .............................................      54,379       96,074
     Net investment in sales-type leases .............................       9,251        6,839
     Inventory .......................................................          --        6,346
     Other assets ....................................................       4,629        8,376
                                                                         ---------    ---------

                  Total current assets ...............................      69,450      123,962

     Net investment in sales-type leases .............................       8,609        1,203
     Leased and other property and equipment .........................       1,462        3,746
     Goodwill and intangible assets ..................................          --       54,161
     Other assets ....................................................       3,765        9,894
                                                                         ---------    ---------

                  Total assets .......................................   $  83,286    $ 192,966
                                                                         =========    =========

Liabilities and stockholders' (deficit) equity

     Notes payable - recourse ........................................   $   4,235    $       0
     Notes payable - nonrecourse .....................................       5,177          478
     Obligations under capital leases - recourse .....................       1,614           --
     Obligations under capital leases - nonrecourse ..................       4,255        2,636
     Accounts payable and other liabilities ..........................      37,920       73,282
                                                                         ---------    ---------

                  Total current liabilities ..........................      53,201       76,396

     Notes payable - recourse ........................................      40,250      113,000
     Notes payable - nonrecourse .....................................       5,032           --
     Obligations under capital leases - recourse .....................       2,586           --
     Obligations under capital leases - nonrecourse ..................       2,302          359
     Other liabilities ...............................................       2,741        2,194
                                                                         ---------    ---------

                  Total liabilities ..................................     106,112      191,949
                                                                         ---------    ---------

     Stockholders' (deficit) equity

     Common stock, $.01 par value: 8,000,000 shares authorized;
          shares issued and outstanding, 1,910,896 in 1996 and
          2,910,896 in 1997 ..........................................          19           29
     Capital in excess of par value ..................................      13,950       40,300
     Accumulated deficit .............................................     (36,795)     (39,312)
                                                                         ---------    ---------

                  Total stockholders' (deficit) equity ...............     (22,826)       1,017
                                                                         ---------    ---------

Commitments

                  Total liabilities and stockholders' (deficit) equity   $  83,286    $ 192,966
                                                                         =========    =========
</TABLE>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.


                                      F-2
<PAGE>

                            Federal Data Corporation
                      Consolidated Statements of Operations
                                 (In thousands)

<TABLE>
<CAPTION>
                                                          Year Ended December 31,
                                                    ----------------------------------
                                                      1995         1996        1997
                                                    ---------    ---------   ---------
<S>                                                 <C>          <C>         <C>
Revenues
     Equipment and software sales ...............   $  81,038    $  87,543   $ 196,735
     Maintenance and support services ...........      43,750       59,871     134,533
     Interest and other .........................       5,031        3,694       5,038
                                                    ---------    ---------   ---------

                  Total revenues ................     129,819      151,108     336,306
                                                    ---------    ---------   ---------

Expenses
     Cost of sales and services .................     107,366      114,248     280,903
     Selling, general and administrative ........      20,943       21,366      37,804
     Amortization of goodwill and
          intangible assets......................          --           --       5,031
     Interest ...................................       3,663        7,564      10,947
                                                    ---------    ---------   ---------

                  Total expenses ................     131,972      143,178     334,685
                                                    ---------    ---------   ---------

(Loss) income before extraordinary item and
      income taxes ..............................      (2,153)       7,930       1,621

Income tax (benefit) provision ..................      (3,950)       3,202       1,368
                                                    ---------    ---------   ---------

Income before extraordinary item ................       1,797        4,728         253

Extraordinary loss from early retirement of debt,
     net of income tax benefit of $1,697 ........          --           --      (2,770)
                                                    ---------    ---------   ---------

Net income (loss) ...............................   $   1,797    $   4,728   $  (2,517)
                                                    =========    =========   =========
</TABLE>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.


                                      F-3
<PAGE>

                            Federal Data Corporation
            Consolidated Statements of Stockholders' (Deficit) Equity
                        (In thousands, except share data)

<TABLE>
<CAPTION>
                                                                                            Retained
                                                Common Stock               Capital in       Earnings
                                         ---------------------------       Excess of      (Accumulated
                                           Shares         Par Value        Par Value        Deficit)          Total
                                         ----------       ----------       ----------     ------------       ----------

<S>                                       <C>             <C>              <C>              <C>              <C>
Balance, December 31, 1994 ........       5,738,312       $       57       $    5,845       $   13,497       $   19,399
Net income ........................              --               --               --            1,797            1,797
Redemptions of common stock from
     Merger .......................      (5,313,814)             (53)          (4,094)         (54,648)         (58,795)
Other redemption of common stock ..        (164,831)              (1)          (1,816)              --           (1,817)
Shares exchanged, net .............          16,229               --               --               --               --
Proceeds from sale of common stock,
     net of expenses of $2,158 ....       1,635,000               16           13,926               --           13,942
Distribution to liquidating trust .              --               --               --             (559)            (559)
Deferred compensation .............              --               --               71               --               71
                                         ----------       ----------       ----------       ----------       ----------

Balance, December 31, 1995 ........       1,910,896               19           13,932          (39,913)         (25,962)
Net income ........................              --               --               --            4,728            4,728
Additional Merger expenses ........              --               --              (53)              --              (53)
Distribution to be made to former
     stockholders .................              --               --               --           (1,610)          (1,610)
Deferred compensation .............              --               --               71               --               71
                                         ----------       ----------       ----------       ----------       ----------

Balance, December 31, 1996 ........       1,910,896               19           13,950          (36,795)         (22,826)
Net loss ..........................              --               --               --           (2,517)          (2,517)
Proceeds from sale of common stock,
     net of expenses of $882 ......       1,000,000               10           26,108               --           26,118
Deferred compensation .............              --               --              242               --              242
                                         ----------       ----------       ----------       ----------       ----------

Balance, December 31, 1997 ........       2,910,896       $       29       $   40,300       ($  39,312)      $    1,017
                                         ==========       ==========       ==========       ==========       ==========
</TABLE>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.


                                      F-4
<PAGE>

                            Federal Data Corporation
                      Consolidated Statements of Cash Flows
                                 (In thousands)

<TABLE>
<CAPTION>
                                                               Year Ended December 31,
                                                         -----------------------------------
                                                           1995         1996         1997
                                                         ---------    ---------    ---------
<S>                                                      <C>          <C>          <C>
Cash flows from operating activities:
     Net income (loss)................................   $   1,797    $   4,728    $  (2,517)
     Adjustments to reconcile net income to
           net cash flows from operating activities:
     Extraordinary loss from early retirement of debt,
           net of income tax benefit of $1,697 .......          --           --        2,770
     Depreciation and amortization ...................       1,266          782        7,099
     Gain on sale of subsidiaries ....................          --           --       (1,600)
     (Income) loss recorded on sales-type leases .....      (4,062)      (1,738)         465
     Collections from sales-type leases ..............      12,372        6,075        5,655
     Increase in inventory ...........................          --           --       (1,347)
     Decrease (increase) in accounts receivable ......       6,712       (5,569)      11,511
     (Decrease) increase in accounts payable
          and accrued expenses .......................     (18,839)       2,180        1,626
     Net change in other assets and liabilities ......      (2,013)      (5,006)      (2,755)
                                                         ---------    ---------    ---------

     Net cash flows from operating activities ........      (2,767)       1,452       20,907
                                                         ---------    ---------    ---------

Cash flows from investing activities:
     (Purchase) sale of short-term investments .......     (51,762)      51,762           --
     Acquisitions of businesses, net of cash
          received ...................................          --           --      (54,175)
     Proceeds from sale of equipment .................       1,503           --           --
     Proceeds from sale of division ..................         890           --           --
     Purchase of equipment for sales-type leases .....      (2,786)      (1,156)      (2,151)
     Purchase of property and equipment ..............        (686)        (903)      (2,145)
                                                         ---------    ---------    ---------

     Net cash flows from investing activities ........     (52,841)      49,703      (58,471)
                                                         ---------    ---------    ---------

Cash flows from financing activities:
     Proceeds from borrowings ........................      61,478        1,916      160,400
     Repayments of borrowings ........................     (13,451)     (15,797)     (99,650)
     Net borrowings (repayments) under lines of
          credit .....................................          --       10,800      (29,058)
     Payments to selling stockholders ................          --      (51,762)          --
     Proceeds from sale of common stock ..............      16,100           --       27,000
     Recapitalization, stock issuance and debt
          acquisition costs ..........................      (5,294)          --      (10,988)
     Redemption of common stock ......................      (1,817)          --           --
     Repayments of capital lease obligations .........      (6,689)      (5,432)      (5,004)
                                                         ---------    ---------    ---------

     Net cash flows from financing activities ........      50,327      (60,275)      42,700
                                                         ---------    ---------    ---------

Net change in cash and cash equivalents ..............      (5,281)      (9,120)       5,136

Cash and cash equivalents, beginning of year .........      15,592       10,311        1,191
                                                         ---------    ---------    ---------

Cash and cash equivalents, end of year ...............   $  10,311    $   1,191    $   6,327
                                                         =========    =========    =========
</TABLE>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.


                                      F-5
<PAGE>

                            Federal Data Corporation
                   Notes to Consolidated Financial Statements
                        (In thousands, except share data)

Note 1 - Nature of Business

The accompanying consolidated financial statements include the accounts of
Federal Data Corporation and its wholly-owned subsidiaries (collectively, the
Company). The Company operates in one business segment and principally engages
in the sale and integration of commercially available data processing solutions
and professional services to the United States Government (the Government). The
Government accounted for approximately 95%, 97%, and 97% of total revenue during
1995, 1996, and 1997, respectively. The Company pursues this business as a
computer/network systems integrator, reseller and professional services
provider. The traditional integration business focuses on configuring various
types of computer hardware, software and peripherals obtained from one or more
manufacturers or suppliers, combined with data networking components, to produce
a single turnkey system designed to accommodate the data processing requirements
of the customer. This business is generally oriented toward mission-critical
business applications. The Company generally provides ongoing maintenance and
other consulting and support services related to the solutions installed by the
Company. The Company also establishes relationships with providers of hardware
and software components and offers these products under a variety of contract
offerings such as GSA schedules and competitive contract vehicles.

The data processing solutions are sold or leased to the Government under various
types of agreements providing for, in certain cases, purchase options or other
lease to ownership arrangements. Most contracts with Government agencies expire
on September 30 of each year (the Government's fiscal year end) and are
renewable for additional fiscal years subject to the appropriation of funding.
While the Company's Government contracts provide for fiscal funding termination,
the Company has not experienced any early terminations of significant contracts
since its inception.

================================================================================

Note 2 - Merger

In December 1995, FDC Holdings, Inc. (Holdings) merged with and into the Company
with the Company continuing as the surviving corporation (the Merger). Holdings
was a company organized by The Carlyle Group (Carlyle) to facilitate the Merger
and had no operating activity or history. Upon consummation of the Merger,
Holdings received 85.4% of the Company's common stock and 14.6% was retained by
members of Company management who were shareholders prior to the Merger.
Existing shareholders exchanged 259,667 shares of the Company's common stock for
275,896 shares of common stock of the surviving corporation, 164,831 shares of
common stock were purchased and retired and the remaining 5,313,814 shares of
common stock were redeemed with the Merger consideration. The Merger was
accounted for as a recapitalization which resulted in a charge to stockholders'
equity of $58,795 to reflect the redemption of common stock.

The Company financed the Merger through proceeds from term loans of $35,000,
borrowings under a revolving line of credit of $6,500 and an equity purchase of
1,635,000 shares of common stock by Holdings for $16,100. These proceeds were
also utilized to pay fees and expenses related to the Merger and acquisition of
the debt, and to provide working capital for the Company. Of the total fees and
expenses, $1,500 was paid to an affiliate of Carlyle. At December 31, 1995, the
Merger consideration was invested in money market funds. In January 1996, the
Company liquidated this investment and paid the selling shareholders $49,448 of
the Merger consideration in cash and issued subordinated notes amounting to
$7,033. The remaining balance of the Merger consideration of $2,315 was paid in
cash in April 1996. The subordinated notes were paid in full in August 1997.

As part of the consideration for the purchase of the common stock of the selling
stockholders outlined in the Merger agreement, the Company prepaid $1,610 of
premiums during 1996 under a Split Dollar life insurance policy to fund future
additional distributions to the selling shareholders. The Company recorded a
reduction of $1,610 in retained earnings during 1996 based on the distribution
that will be made to the selling shareholders in 1999 when the Split Dollar
payments are received.


                                      F-6
<PAGE>

As a condition of the Merger, the Company was required to dispose of certain
nonessential assets and related liabilities. These assets and related
liabilities consisted of an airplane, land and building in South Carolina,
certain artwork, the Company's Financial Services Division and a 10% limited
partnership interest in a bankrupt partnership that previously held title to the
office building in which the Company is located. An entity controlled by the
former majority shareholder purchased the airplane, the Company's Financial
Services Division and the 10% limited partnership interest and assumed the
related liabilities for $2,393, the aggregate independent appraised value of the
airplane and the Financial Services Division. The Company attributed no value to
the partnership interest. The Company has placed the artwork and the land and
building in South Carolina into a liquidating trust. The liquidating trust is
required to sell these assets and distribute the net proceeds to the selling
shareholders. The disposition of these nonessential assets and liabilities did
not have a significant impact on the Company's consolidated financial
statements.

The Merger agreement generally required the Company to complete the distribution
of the assets held by the Federal Data Corporation Employee Stock Ownership Plan
(the ESOP). These assets consisted principally of shares of the Company's common
stock. The Company had previously terminated the ESOP in May 1994 and received
approval from the Internal Revenue Service to distribute the assets in October
1995. In October and November 1995, the Company distributed the assets of the
ESOP to the participants. The ESOP distribution had no effect on the Company's
consolidated financial statements.

Concurrent with the acquisition of a controlling interest in the Company by
Carlyle in 1995, the Company entered into a management agreement with an
affiliate of Carlyle for certain management and financial advisory services to
be provided to the Company and its subsidiaries. The agreement provides for the
payment of annual management fees in an amount equal to $300. In addition,
concurrent with the acquisition of Carlyle `s controlling interest, the Company
entered into a three year consulting agreement with the former majority
shareholder and a three year agreement to lease a corporate aircraft with an
affiliate of the former majority shareholder. The consulting agreement provides
for annual payments of $200 and the lease of the aircraft provides for annual
payments of $300 plus a usage charge which amounted to $56 and $48 during 1996
and 1997, respectively.

================================================================================

Note 3 - Summary of Significant Accounting Policies

The accounting policies of the Company conform to generally accepted accounting
principles. All significant intercompany accounts and transactions have been
eliminated in consolidation. Those policies significantly affecting the
consolidated financial statements are summarized below.

Use of Estimates

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 and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.

Revenue Recognition

Revenue from fixed price sales and sales-type leases is recorded upon
installation or shipment to the customer's site, depending on contractual terms.
On cost reimbursable contracts, revenue is recorded as contract costs are
incurred, plus a proportionate amount of the fee expected to be realized on the
contract. Maintenance and other support service revenue is recognized as
services are provided.

Depreciation and Amortization

Leased and other property and equipment are stated at original cost, net of
accumulated depreciation and amortization, and are depreciated and amortized by
the Company using the straight-line method over their estimated useful lives.
The estimated useful lives of principal items of computer, furniture, office and
other equipment range from 3 to 10 years. Leasehold improvements are amortized
over the term of the related lease. Deferred financing fees are being amortized
over the terms of the related notes payable.


                                      F-7
<PAGE>

Cash, Cash Equivalents and Short-term Investments

Cash and cash equivalents consist primarily of short-term, highly liquid
investments with insignificant interest rate risk and original maturities of 3
months or less at date of acquisition. Similar investments with original
maturities beyond 3 months are considered short-term investments and are carried
at cost, which approximates market value.

Inventory

Inventory of computer equipment and software is carried at the lower of cost or
market, using the specific identification method.

Fair Value of Financial Instruments

The fair value of cash and cash equivalents, receivables, accounts payable, and
accrued expenses approximate their carrying value because of their short-term
nature. The fair value of long-term debt has been estimated using quoted market
prices or discounted cash flow analysis using rates currently available to the
Company for debt with similar terms and maturities.

The carrying and fair value of the Company's long-term debt including current
maturities consist of the following as of December 31:

<TABLE>
<CAPTION>
                                                         1996                   1997
                                                  ------------------     ------------------
                                                   Carrying    Fair      Carrying      Fair
                                                    Value      Value      Value       Value
                                                  ------------------     ------------------
<S>                                                <C>        <C>        <C>         <C>
Long-term debt including current maturities........$54,694    $54,694    $113,478    $110,853
</TABLE>

Income Taxes

The Company recognizes deferred income taxes for the expected future tax
consequences of "temporary differences" by applying enacted statutory tax rates
to differences between the financial statement carrying amounts and the tax
basis of existing assets and liabilities.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentrations of
credit risk consist of cash and accounts receivable. The Company maintains its
cash principally in one United States bank. Accounts receivable result primarily
from contracts with the Government. Contracts with the Government do not require
collateral or other arrangements. The Company does not believe significant
credit risk exists at December 31, 1997.

Goodwill and Intangible Assets

Goodwill represents the excess of the cost of acquiring businesses over the fair
value of identifiable net tangible and intangible assets acquired. Goodwill is
amortized on a straight-line basis over the period for which the Company
estimates it will benefit directly from the acquisition. Although the period of
benefit from the goodwill can be difficult to estimate, the Company considers
goodwill to be recoverable as long as the acquisition generates positive cash
flow from operations after implementation of the Company's strategic plan or
completion of reorganization efforts, if any. Recoverability of goodwill is
evaluated periodically based on current undiscounted cash flow projections of
each specific acquired business. Goodwill related to the acquisitions described
in Note 4 amounted to $48,491 and is being amortized over fifteen years.
Goodwill amortization expense for the year ended December 31, 1997 was $1,784.

Other intangible assets represent contract backlog at the acquisition date and
is recorded at the present value of the projected pretax profits. The present
value of the contract profits relating to the acquisitions described in Note 4
of $10,701 is being amortized over the remaining terms of the acquired contracts
in relation to the recognition of related contract revenue. The amortization of
this intangible asset amounted to $3,247 for the year ended December 31, 1997.

Earnings per share

The Company has adopted Statement of Financial Accounting Standards No. 128,
"Earnings per Share" (SFAS 128). Under SFAS 128, the Company is not required to
present earnings per share for as long as the Company is not publicly held.

================================================================================

Note 4 - Acquisitions

In May 1997, the Company purchased all of the outstanding shares of common stock
of NYMA, Inc. (NYMA) for $31,587. The purchase price consists of $26,587 in cash
and $5,000 in subordinated notes. The


                                      F-8
<PAGE>

agreement also provides for additional cash payments of up to $3,000 if certain
operating objectives related to new business activity are met. Such payments, if
any, will be accounted for as adjustments to the purchase price. The Company
financed the acquisition of NYMA through additional borrowing of $28,000 and the
sale of 555,556 shares of the Company's common stock for $15,000. A portion of
the new borrowings was used to retire existing Company and NYMA working capital
debt. NYMA is a provider of high technology engineering and information
technology services under contracts with various U.S. Government agencies and
subcontracts with large government contractors. In June 1997, the Company also
purchased all of the outstanding shares of common stock of Sylvest Management
Systems Corporation (Sylvest) for $41,017. The purchase price consists of
$33,017 in cash and subordinated notes of $8,000 of which $1,000 was issued
during 1998 after certain earnings objectives were met. Subordinated notes of
$4,000 were paid in August 1997. The Company financed the acquisition of Sylvest
through additional borrowing of $27,400 and the sale of 444,444 shares of the
Company's common stock for $12,000. A portion of the new borrowings was used to
retire existing Sylvest working capital debt. Sylvest is a leading reseller and
technical services vendor supporting open systems architecture within the
federal marketplace. Of the total fees and expenses related to these
transactions, $1,000 was paid to an affiliate of Carlyle.

Condensed unaudited pro forma operating data which gives effect to the
acquisitions of NYMA and Sylvest for the year ended December 31, 1996 and 1997
is provided below. Such unaudited pro forma operating data has been prepared as
if the acquisitions occurred as of the beginning of the reporting period.

                                                      1996        1997
                                                    ---------   ---------

Revenue .........................................   $ 332,822   $ 432,993
                                                    =========   =========
Income (loss) before extraordinary item
   and income taxes .............................   $   3,076   $  (2,806)
                                                    =========   =========
Net income (loss) ...............................   $   1,258   ($  5,978)
                                                    =========   =========

In the opinion of management, the unaudited pro forma combined results of
operations are not indicative of the actual results that would have occurred had
the acquisitions been consumated at the beginning of 1996 or at the beginning of
1997 or of future operations of the combined companies under the ownership and
management of the Company.

================================================================================

Note 5 - Accounts Receivable

Accounts receivable consists of the following as of December 31:

                                                      1996         1997
                                                    --------     --------
Billed .........................................    $ 38,546     $ 85,240
Unbilled .......................................      16,169       11,462
Less allowance for doubtful accounts ...........        (336)        (628)
                                                    --------     --------
Total accounts receivable ......................    $ 54,379     $ 96,074
                                                    ========     ========

Unbilled accounts receivable consisted primarily of revenue not yet billable
because of contract terms, differences between actual and provisional indirect
rates for years open to Government audit and contract retainages. Retainages are
generally billable upon acceptance of work by customers or completion of
contract audits by the Government.

================================================================================


                                      F-9
<PAGE>

Note 6 - Net Investment in Sales-Type Leases

Net investment in sales-type leases consists of the following as of December 31:

                                                  1996        1997
                                                --------    --------

Minimum lease payments receivable ...........   $ 20,683    $  8,782
Less unearned income ........................     (2,823)       (740)
                                                --------    --------

Total net investment in sales-type leases ...     17,860       8,042

Less current portion ........................      9,251       6,839
                                                --------    --------

Long-term net investment in sales-type leases   $  8,609    $  1,203
                                                ========    ========

Future minimum lease payments receivable as of December 31, 1997 are due as
follows:

                         1998 ................  $7,545
                         1999 ................   1,237

================================================================================

Note 7 - Other Assets

Other assets consist of the following as of December 31:

                                              1996                  1997
                                      -------------------    -------------------
                                      Current   Long-term    Current   Long-term
                                      -------   ---------    -------   ---------

Deferred financing fees ..........    $    0      $2,319     $    0      $7,196
Receivable from sale of subsidiary        --          --      4,000         215
Prepaid expenses .................     1,895          --      2,716         403
Refundable income taxes ..........        --          --      1,448          --
Deferred taxes ...................     2,105       1,092         --       1,237
Other ............................       629         354        212         843
                                      ------      ------     ------      ------

Total other assets ...............    $4,629      $3,765     $8,376      $9,894
                                      ======      ======     ======      ======

In 1997, the Company recorded a charge to earnings of $4,467 related to deferred
financing fees associated with the debt incurred to finance the Merger and the
NYMA and Sylvest acquisitions. This debt was refinanced with proceeds from the
Senior Subordinated Notes. This charge to earnings was reduced by an income tax
benefit of $1,697 which produced an extraordinary loss of $2,770. Amortization
of deferred financing fees which is included in interest expense amounted to
$817 and $804 during 1996 and 1997, respectively.

During 1997, the Company sold substantially all the assets and business of its
wholly-owned subsidiaries, DoxSys, Inc. (DoxSys) and VAD International, Inc.
(VAD) resulting in a pretax gain of $1,600. The operations of DoxSys and VAD
were not material to the Company's financial condition or results of operations.

================================================================================


                                      F-10
<PAGE>

Note 8 - Leased and Other Property and Equipment

Leased and other property and equipment consist of the following as of December
31:

                                                              1996         1997
                                                             ------       ------

Furniture, office and other equipment, net of
     accumulated depreciation of $3,798 and $8,845 ...       $1,364       $3,600
Leasehold improvements, net of accumulated
     amortization of $3,678 and $3,675 ...............           98          146
                                                             ------       ------

Total leased and other property and equipment ........       $1,462       $3,746
                                                             ======       ======


Total depreciation and amortization expense related to leased and other property
and equipment during 1995, 1996 and 1997 was $1,266, $782 and $1,326,
respectively.

================================================================================

Note 9 - Notes Payable

Recourse notes payable consist of the following as of December 31:

                                                            1996          1997
                                                          --------      --------

Senior Subordinated Notes payable in August 2005 ...      $      0      $105,000
Term A note payable in quarterly installments
      through December 2000 ........................        17,647            --
Revolving line of credit ...........................        10,800            --
Term B note payable in quarterly installments
      through December 2002 ........................         8,319            --
Other subordinated notes ...........................         7,350         8,000
Notes payable in monthly installments through
      October 1997, with interest at 7.34% to 10.73%           369            --
                                                          --------      --------

Total recourse notes payable .......................        44,485       113,000

Less current portion ...............................         4,235            --
                                                          --------      --------

Long-term recourse notes payable ...................      $ 40,250      $113,000
                                                          ========      ========

In July 1997, the Company issued $105,000 of Senior Subordinated Notes and
utilized the proceeds to repay its indebtedness under its existing term loans as
well as the additional borrowings incurred to finance the NYMA and Sylvest
acquisitions. All of the Company's direct and indirect wholly-owned subsidiaries
have fully and unconditionally guaranteed, on a joint and several basis, the
Company's obligations under the Senior Subordinated Notes. The Company is a
holding company with no assets or operations other than its investments in its
subsidiaries. The separate financial statements of the subsidiary guarantors are
not presented because the Company's management believes that such financial
statements are not material to investors.

The Senior Subordinated Notes bear interest at 10.125% per annum with interest
payable semi-annually in February and August of each year, commencing in
February 1998. The principal of the Senior Subordinated Notes is due in August
2005. The Company may redeem a portion of the Senior Subordinated Notes at any


                                      F-11
<PAGE>

time prior to August 2001 with the net proceeds of one or more public equity
offerings. At any time after August 2001, the indenture provides that a portion
of the Senior Subordinated Notes may be redeemed upon a change of control and
also provides for other optional redemptions. All redemptions prior to August
2005 require the Company to pay a premium. The indenture includes certain
restrictions as to the Company's ability, among other things, to acquire or
dispose of assets, incur additional debt, or to pay dividends. In addition, the
Company is required to maintain a minimum net worth and certain operating
ratios, including among others, interest and leverage coverage.

At December 31, 1997, the Company had a $75,000 revolving line of credit
facility which expires in July 2002. Interest accrues on borrowings under the
revolving line of credit at 1.25% plus the highest of (a) the rate which is 1/2
of 1% in excess of the Federal Funds Effective Rate (5.8% at December 31, 1997)
or (b) the prime lending rate (8.5% at December 31, 1997). In addition, the
Company pays a commitment fee of 0.5% of the unused line of credit facility. The
Company's revolving line of credit agreement includes certain restrictions as to
the Company's ability, among other things, to acquire or dispose of assets or to
pay dividends. In addition, the Company is required to maintain a minimum net
worth and certain operating ratios, including among others, interest and
leverage coverage. All of the Company's assets not otherwise pledged are
utilized as collateral under the Company's credit agreements.

The other subordinated notes outstanding as of December 31, 1997 were issued by
the Company in connection with the NYMA and Sylvest acquisitions. The other
subordinated notes bear interest payable semi-annually at increasing rates
starting at 9% per annum and increasing to 13% per annum. The principal of the
notes are due in 2004 and can be repaid at any time without penalty at the
option of the Company.

The Company finances certain equipment leases to Government customers with
borrowings or capital leases that are recourse only to the related payment
stream and property leased. In most circumstances, the Company's future
obligation under nonrecourse agreements, in the event of default by the end user
lessee, would be limited to ensuring the return of the associated assets to the
lender.

Nonrecourse notes payable consist of the following as of December 31:

<TABLE>
<CAPTION>
                                                                           1996         1997
                                                                          -------      -------
<S>                                                                       <C>          <C>
Notes secured by equipment and minimum lease payments receivable from
     customers, repayable through March 1998, with interest at
     6.75% to 12.75% ...............................................      $10,209      $   478

Less current portion ...............................................        5,177          478
                                                                          -------      -------

Long-term nonrecourse notes payable ................................      $ 5,032      $     0
                                                                          =======      =======
</TABLE>

================================================================================


                                      F-12
<PAGE>

Note 10 - Obligations under Capital Leases

Obligations under recourse capital leases consist of the following as of
December 31:

                                                            1996       1997
                                                         -------    -------

Minimum lease payments ..............................    $ 4,919    $     0
Less deferred interest ..............................       (719)        --
                                                         -------    -------

Total obligations under recourse capital leases .....      4,200         --

Less current portion ................................      1,614         --
                                                         -------    -------

Long-term obligations under recourse capital leases .    $ 2,586    $     0
                                                         =======    =======

Obligations under nonrecourse capital leases consist of the following as of
December 31:

                                                            1996       1997
                                                         -------    -------

Minimum lease payments ...............................   $ 7,239    $ 3,167
Less deferred interest ...............................      (682)      (172)
                                                         -------    -------

Total obligations under nonrecourse capital leases ...     6,557      2,995

Less current portion .................................     4,255      2,636
                                                         -------    -------

Long-term obligations under nonrecourse capital leases   $ 2,302    $   359
                                                         =======    =======

Future minimum lease payments under capital leases as of December 31, 1997 are
due as follows:

                                                    Recourse    Nonrecourse
                                                    --------    -----------

                1998 .............................  $    0          $2,808
                1999 .............................      --             359

================================================================================


                                      F-13
<PAGE>

Note 11  - Accounts Payable and Other Liabilities

Accounts payable and other liabilities consist of the following as of December
31:

<TABLE>
<CAPTION>
                                              1996                      1997
                                      ---------------------     ---------------------
                                      Current     Long-term     Current     Long-term
                                      -------     ---------     -------     ---------
<S>                                   <C>          <C>          <C>          <C>
Accrued contract expenses ......      $19,289      $     0      $29,143      $     0
Accounts payable ...............        8,042           --       23,425           --
Other accrued expenses .........        3,368           --        7,809        1,164
Accrued interest payable .......          508           --        5,030           --
Deferred income ................        3,121        2,272        4,608        1,030
Deferred income taxes payable ..           --           --          843           --
Income taxes payable ...........        1,660           --          733           --
Other ..........................        1,932          469        1,691           --
                                      -------      -------      -------      -------
Total accounts payable and other
liabilities ....................      $37,920      $ 2,741      $73,282      $ 2,194
                                      =======      =======      =======      =======
</TABLE>

As of December 31, 1997 accounts payable and accrued contract expenses include
approximately $2,841 in amounts payable to an asset-based lender under an
arrangement established to facilitate the purchase of inventory. Under this
arrangement, the lender directly pays the vendors for purchases made by the
Company. The arrangement provides the Company with up to $30,000 in credit from
the lender for inventory purchases. The terms of the arrangement enable the
Company to repay outstanding amounts paid by the lender, interest free, within a
stipulated time period from the initial purchase from the vendors. After the
stipulated time period, interest under this arrangement accrues at the prime
rate plus 2.0% as determined by the lender (10.50% at December 31, 1997). This
arrangement requires the Company to maintain a minimum net worth and certain
operating ratios, including among others, interest and leverage coverage.

In connection with this arrangement, the asset-based lender entered into an
Intercreditor and Subordination Agreement (the Intercreditor Agreement) with
the bank group that has extended the Company a revolving line of credit facility
(see Note 9). Under the Intercreditor Agreement, all advances made by the
asset-based lender are collateralized by the Company's inventory and accounts
receivable resulting from the sale of inventory purchased under the above
arrangement.

================================================================================


                                      F-14
<PAGE>

Note 12 - Income Taxes

The income tax (benefit) provision consists of the following for the years ended
December 31:

                                                 1995       1996      1997
                                                -------    -------   -------
Current income tax provision:

Federal .....................................   $   153    $ 1,370   $   364
State .......................................       508        418       157
                                                -------    -------   -------

Total current income tax provision ..........       661      1,788       521
                                                -------    -------   -------

Deferred income tax (benefit) provision:

Federal .....................................    (4,365)     1,228      (723)
State .......................................      (246)       186      (127)
                                                -------    -------   -------

Total deferred income tax (benefit) provision    (4,611)     1,414      (850)
                                                -------    -------   -------

Total income tax (benefit) provision ........   ($3,950)   $ 3,202   ($  329)
                                                =======    =======   =======

Income tax (benefit) provision as reflected on the consolidated statements of
operations consist of the following:

                                                1995         1996        1997
                                               -------      -------     -------

(Loss) income before extraordinary item
      and income taxes....................     ($3,950)     $ 3,202     $ 1,368
Extraordinary loss .......................          --           --      (1,697)
                                               -------      -------     -------

Total income tax (benefit) provision .....     ($3,950)     $ 3,202     ($  329)
                                               =======      =======     =======

                                      F-15
<PAGE>

Deferred tax assets and liabilities consist of the following as of December 31:

                                                              1996      1997
                                                             ------    ------

Deferred tax assets:
     Deferred income ....................................    $2,049    $2,143
     Compensation and employee benefits .................       904     1,502
     Accounts receivable reserves .......................       128       239
     Goodwill and intangible assets .....................        --       226
     Property and equipment .............................       131        45
     Other ..............................................        77       321
                                                             ------    ------

     Total deferred tax assets ..........................     3,289     4,476
                                                             ------    ------

Deferred tax liabilities:
     Contractually unbilled revenue .....................        --     2,797
     Accrual to cash conversion .........................        --     1,118
     Other ..............................................        92       167
                                                             ------    ------

     Total deferred tax liabilities .....................        92     4,082
                                                             ------    ------

Net deferred tax asset ..................................    $3,197    $  394
                                                             ======    ======

Net deferred income taxes as reflected on the consolidated balance sheets
consist of the following as of December 31:

                                                             1996        1997
                                                            -------     -------

       Current deferred income tax asset (liability) ...    $ 2,105     ($4,082)
       Less current deferred income tax asset ..........         --       3,239
                                                            -------     -------

       Net current deferred income tax asset
       (liability) .....................................      2,105        (843)


       Long-term deferred income tax asset .............      1,184       1,237
       Less long-term deferred income tax liability ....        (92)         --
                                                            -------     -------

       Net long-term deferred income tax asset .........      1,092       1,237
                                                            -------     -------

       Net deferred income tax asset ...................    $ 3,197     $   394
                                                            =======     =======


                                      F-16
<PAGE>

A reconciliation between the provision for income taxes computed on income
before tax at the statutory federal tax rate and the provision for income taxes
is as follows for the years ended December 31:

<TABLE>
<CAPTION>
                                                                     1995        1996      1997
                                                                    -------     -------   -------

<S>                                                                 <C>         <C>        <C>
Statutory federal income tax rate ...............................    -34.0%       34.0%    -34.0%
State income taxes, net of federal benefit ......................     -4.5%        2.6%      3.6%
Nondeductible goodwill ..........................................       --          --      37.8%
Other nondeductible expenses ....................................      6.2%        0.2%      1.4%
Reduction in valuation allowance ................................   -154.0%         --        --
Other ...........................................................      2.8%        3.5%    -20.4%
                                                                    -------     -------   -------

                                                                    -183.5%       40.3%    -11.6%
                                                                    =======     =======   =======
</TABLE>

During 1995, the Company reduced the tax valuation allowance by $3,313, to
reflect management's assessment that the realization of these benefits was more
likely than not. At December 31, 1996 and 1997, the Company has not recorded any
tax valuation allowance.

================================================================================

Note 13 - Stockholders' Equity and Transactions with Stockholders

During 1984, a principal stockholder of the Company transferred shares of the
Company's common stock to certain key employees. The Company has accounted for
this transaction as if the Company, and not the principal stockholder, had
transferred the stock. At December 31, 1997, the Company has fully amortized the
compensation expense related to this transaction.

In June 1987, the Company adopted a Stock Incentive Plan (the Plan) under which
stock options were granted to officers and key employees at an exercise price
established at the discretion of the Plan Committee at the date of award.
Options granted under the Plan were nontransferable and were exercisable
immediately for a period of 10 years following the date of grant. Prior to the
Merger, options to purchase 93,500 shares of the Company's common stock at
exercise prices ranging from $7.50 to $9.00 per share were outstanding under the
Plan. Subject to the provisions of the Merger agreement, these options are to be
replaced with new options to acquire shares of common stock of the surviving
corporation. The terms of the new options, including the number of shares and
exercise price will be equitably adjusted to reflect the consummation of the
Merger, provided that the new options will provide substantially the same
economic benefits to the option holders as the benefits provided prior to the
Merger. During 1997, options to purchase 20,000 shares at an exercise price of
$9.00 per share were cancelled. As of March 18, 1998, the new options related to
the remaining 73,500 shares have not been issued.

In February 1996, the Company adopted a new Stock Option Plan for Executives and
Key Employees of Federal Data Corporation. Under the plan, options may be
granted at fair value to purchase up to 257,000 shares of common stock. Options
granted under the plan vest ratably over 5 years and expire 10 years from the
date of grant or in accordance with other terms as specified by the Company's
Board of Directors. Of the options outstanding as of December 31, 1997, under
the variable component of the plan 161,700 options for shares will vest only if
certain financial measures are met. As of December 31, 1997, none of the
financial measures had been met and accordingly, no compensation has been
recorded. As of December 31, 1997, options to purchase 27,720 shares at a price
of $10.00 per share were exercisable and options to purchase 26,000 shares were
available for granting. The Company has adopted the disclosure-only provisions
of Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-based Compensation" (SFAS 123). Accordingly, no compensation cost has been
recognized for the stock option plan. Had compensation cost for the Company's
stock option plan been determined based on the fair value at the grant date for
awards in 1995, 1996 and 1997, there would not have been a material impact on
the Company's results of operations. To determine fair value under SFAS 123, the
Company used the Present Value Approach and the following weighted-average
assumptions for 1995, 1996 and 1997: a risk-free interest rate of 5.67%,
expected lives of 5 years and expected dividends of zero.


                                      F-17
<PAGE>


The following is a summary of stock option activity for outstanding options:

                                                      Option Price     Number of
                                                        Per Share       Shares
                                                      ------------     ---------

Balance at December 31, 1994 ...............          $7.50-$9.00        90,000

Granted ....................................                 7.50         8,500
Exercised ..................................                 7.50        (5,000)
Forfeited ..................................                   --            --
Cancelled ..................................                   --            --
                                                     ------------       -------

Balance at December 31, 1995 ...............            7.50-9.00        93,500

Granted ....................................                10.00       253,000
Exercised ..................................                   --            --
Forfeited ..................................                10.00       (10,000)
Cancelled ..................................                   --            --
                                                     ------------       -------

Balance at December 31, 1996 ...............           7.50-10.00       336,500

Granted ....................................                   --            --
Exercised ..................................                   --            --
Forfeited ..................................                10.00       (12,000)
Cancelled ..................................                 9.00       (20,000)
                                                     ------------       -------

Balance at December 31, 1997 ...............         $7.50-$10.00       304,500
                                                     ============       =======

================================================================================

Note 14 - Supplemental Disclosure of Cash Flow Information

During 1995, 1996 and 1997, the Company paid interest costs of $3,124, $7,546
and $5,621, respectively. During the same years, the Company paid income taxes
of $1,097, $628 and $1,452, respectively.

During 1995, 1996 and 1997, the Company financed through capital leases the
acquisition of computer equipment which was sold to customers of $6,700, $779
and $0, respectively.

================================================================================

Note 15 - Commitments

The Company leases office space and equipment under various operating lease
agreements. Leases for principal office space typically have terms of five to
seven years and carry optional renewal periods of three to five years. Most
leases include provisions for fixed annual increases to base rent payments and
escalations based on increases in operating expenses and real estate taxes.


                                      F-18
<PAGE>

Future minimum payments at December 31, 1997, for all noncancellable operating
leases with initial terms of one year or more are as follows:

              1998 .................................        $5,048
              1999 .................................         3,226
              2000 .................................         3,279
              2001 .................................         3,325
              2002 .................................         3,408
              Thereafter ...........................         6,629

Operating lease expense was $1,532, $1,782 and $3,879 during 1995, 1996 and
1997, respectively. The Company received $368, $146 and $0 from sublease rentals
during 1995, 1996 and 1997, respectively.

The Company is subject to contract audits by Government agencies. Completed and
future audits may result in various billed and unbilled costs being disallowed.
At December 31, 1997, audits have been completed through 1993. In the opinion of
management, adequate reserves have been provided for the remaining open audit
periods.

================================================================================

Note 16 - Retirement Plans

The Company sponsors several defined contribution plans that provide all
salaried employees that meet certain age and minimum length of service
requirements and certain hourly employees an opportunity to accumulate funds for
their retirement. The Company's contributions to these plans are based on either
a percentage of employee contributions or an amount at the discretion of the
Company. The Company recognized expense of $258, $302 and $1,029 during 1995,
1996 and 1997, respectively.

================================================================================

Note 17 - Subsequent Events (Unaudited)

In February and March 1998, the Company purchased all of the outstanding common
stock of R.O.W. Sciences, Inc. ("R.O.W.") and Technical and Management
Assistance, Inc. ("TMA") and also in February purchased all of the assets of
Telos Corporation's Telos Information Systems Division ("TIS"), (collectively,
the "Acquisitions"). The aggregate purchase price of the Acquisitions was
$32,675. The purchase price consisted of $30,675 in cash and $2,000 in
subordinated notes. The agreements also provide for additional cash payments up
to $1,000 if certain revenue objectives are met. Such payments, if any, will be
accounted for as adjustments to the purchase price. The purchase prices for all
of the Acquisitions are subject to adjustment based on an audit of the closing
balance sheets. The Company financed the Acquisitions through borrowing under
its existing revolving line of credit facility. R.O.W. provides information
technology and health science research services to federal and commercial
clients. TMA provides software development services principally to the air
traffic management function within the Federal Aviation Administration. TIS
provides information technology and engineering services principally to NASA and
the Jet Propulsion Laboratory.


                                      F-19
<PAGE>

Item 9. Disagreements on Accounting and Financial Disclosure.

        None

                                    PART III

Item 10. Directors and Executive Officers of the Registrant.

The following table sets forth certain information with respect to the members
of the Board of Directors and the executive officers of the Company. Executive
officers of the Company are chosen by the Board of Directors and serve at its
discretion. Directors of the Company serve until the election and qualification
of their successors.

Name                       Title                                            Age

William E. Conway, Jr..... Chairman                                          48
C. Robert Hanley.......... Director and Chairman Emeritus                    65
Daniel R. Young........... Vice Chairman and CEO                             64
Harry T. Marren........... Director and President                            63
Peter J. Clare............ Director                                          32
Allan M. Holt............. Director                                          46
Peter C. Belford, Sr...... Senior Vice President, Science & Engineering
                             Group                                           51
Paul A. Taltavull......... Senior Vice President, Solutions Group            43
John W. Wayne............. Senior Vice President, Systems Integration
                             Group                                           41
James M. Dean............. Vice President, Chief Financial Officer and
                             Treasurer                                       50
Charles M. Mathews, Jr.... Vice President, Systems & Technology Group        38
Sterling E. Phillips, Jr.. Vice President, Corporate Marketing               51

      William E. Conway, Jr. was elected as a Director of the Company in 1996.
He has been a Managing Director of The Carlyle Group, a Washington, D.C.-based
private merchant bank, since 1987. Mr. Conway was Senior Vice President and
Chief Financial Officer of MCI Communications Corporation from 1984 until 1987,
and was a Vice President and Treasurer of MCI from 1981 to 1984. Mr. Conway
presently serves on the Board of Directors of GTS Duratek, Inc., Nextel
Communications, Inc., Tracor Inc., Howmet International Inc. and several
privately held companies.

      C. Robert Hanley has been a Director of the Company since its founding in
1969. Mr. Hanley was President and Chief Executive Officer of the Company from
1969 until 1985, when he became its Chairman and Chief Executive Officer. He
retired in January 1996 and now serves as a consultant to the Company.

      Daniel P. Young has been a Director of the Company since 1977 and was
named Vice Chairman of the Board of Directors in 1998. He has been the Chief
Executive Officer since 1996 and its President from 1985 through 1998. Mr. Young
joined the Company in 1976 as its Executive Vice President and became its
President and Chief Operating Officer in 1985. Prior to joining the Company, Mr.
Young was employed by Data Transmission Company as Executive Vice President and
held various management positions at Texas Instruments Incorporated.

      Harry T. Marren was elected as a Director of the Company in 1997 and
became its President in 1998. He has been President of FDC Technologies, Inc.
and its predecessor organization, Federal Data Systems Corporation, since 1989.
Mr. Marren joined the Company in 1977 as General Manager of Operations and was
promoted to Vice President in 1980 and Senior Vice President in 1988.


                                       29
<PAGE>

      Peter J. Clare was elected as a Director of the Company in 1996. He is
currently a Principal with The Carlyle Group, a Washington, D.C.-based private
merchant bank which he joined in 1992. Mr. Clare was previously with First City
Capital, a private investment group. From 1987 to 1989, he worked in the
mergers and acquisitions and merchant banking groups at Prudential-Bache. Mr.
Clare currently serves on the boards of several privately held companies.

      Allan M. Holt was elected as a Director of the Company in 1996. He is a
Managing Director of The Carlyle Group, a Washington, D.C.-based private
merchant bank which he joined in 1991. He was previously with Avenir Group, a
private investment and advisory group, and from 1984 to 1987 was Director of
Planning and Budgets at MCI Communications Corporation, which he joined in 1982.
Mr. Holt currently serves on the boards of several privately held companies.

      Peter C. Belford, Sr. has been Senior Vice President of the Science &
Engineering Group since 1997 and President and Chief Operating Officer of NYMA,
Inc. since 1994. Mr. Belford joined NYMA in 1985 as its Executive Vice
President. Mr. Belford was previously employed by Computer Sciences Corporation
("CSC") as Vice President, Product Management and Product Assurance. He joined
CSC in 1977 as a Program Manager and became Assistant to the President of the
System Sciences Division of that company, with executive management
responsibilities.

      Paul A. Taltavull has been Senior Vice President of the Solutions Group
since April 1997. Mr. Taltavull joined the Company in 1982 as a Federal
Marketing Representative and has held a series of marketing management
positions with the Company, including Senior Vice President of Marketing from
1992 to 1997. Before joining the Company, Mr. Taltavull was a sales
representative for Hewlett-Packard Company and a practicing engineer for the
U.S. Government.

      John W. Wayne has been Senior Vice President of the Systems Integration
Group since 1998, having previously been Vice President of the Systems
Integration Group since 1990. He previously directed the Company's systems
design and engineering group. He joined Federal Data Corporation in 1981 as an
Operations Project Manager and was subsequently promoted to Director of
Technical Services. Prior to joining the Company, Mr. Wayne was employed as a
Systems Engineer with Inforex Incorporated and by TRW Data Systems as a Customer
Engineer.

      James M. Dean has been Vice President and Chief Financial Officer of the
Company since 1986 and its Treasurer since 1987. Mr. Dean joined Federal Data
Corporation in 1983 as its Controller. He was previously employed by Price
Waterhouse from 1969 through 1983.

      Charles M. Mathews, Jr. has been Vice President of the Systems &
Technology Group since 1996. From 1990 through 1994, Mr. Mathews was President
of Bohdan Associates, Inc. and President of the Atlantic region of AmeriData,
Inc. from 1994 through 1995.

      Sterling E. Phillips, Jr. has been Vice President of corporate marketing
since April 1997. He joined FDC Technologies, Inc. in 1996 as Vice President of
its Services Group. He was previously employed as Chief Operating Officer of
TRI-COR Industries, Inc. and President of Business Development of the federal
business unit of Computer Sciences Corporation. From 1968 through 1992, Mr.
Phillips held various positions in management, sales and marketing with The IBM
Corporation.


                                       30
<PAGE>

      The Company does not currently pay any fees or remuneration to its
directors for service on the Board and the Board has not established committees
of the Board of Directors.

CONSULTING AGREEMENTS

      In January 1996, the Company and C. Robert Hanley entered into a 3-year
consulting agreement. Under the terms of the agreement, Mr. Hanley consults on
certain aspects of the Company's business and receives a consulting fee of
$200,000 per year, maintains an office at the Company's Bethesda headquarters
and participates in the Company's health insurance plan. The consulting
agreement requires Mr. Hanley to be available to provide such consulting
services as the Company may reasonably request. Mr. Hanley regularly provides
consulting services to the Company pursuant to the consulting agreement and
serves as director to the Company without compensation.


Item 11. Executive Compensation.

      The following table sets forth information with respect to the
compensation paid by the Company for services rendered during the years ended
December 31, 1995, 1996 and 1997 to the Chief Executive Officer and to each of
the four other most highly compensated executive officer of the Company (the
"Named Executive Officers").


                                       31
<PAGE>

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                              Annual Compensation                    Long-Term Compensation
                                 ---------------------------------------------  ------------------------------
                                                                                      Awards          Payouts
                                                                                ------------------------------
                                                                                           Securities
                                                                        Other                Under-
                                                                        Annual  Restricted   Lying                 All Other
                                                                        Compen-    Stock    Options/     0LTIP      Compen-
                                  Year       Salary      Bonus (1)     sation(2)  Award(s)   SARs(3)    Payouts     sation(4)
            Name                               ($)          ($)           ($)       ($)        (#)        ($)          ($)
                                --------  ------------  ------------  --------- ---------- -----------  -------    ---------
<S>                               <C>        <C>           <C>            <C>      <C>       <C>           <C>      <C>
Daniel R. Young ............      1997       300,000       200,000        --        --           --        --            --
     Chief Executive Officer      1996       225,012       300,000        --        --       75,000        --       430,351
                                  1995       225,000     1,373,945        --        --           --        --            --
Harry T. Marren ............      1997       200,000       175,000        --        --           --        --            --
     Senior Vice President        1996       150,000       250,000        --        --       40,000        --       168,086
                                  1995       150,000       905,362        --        --           --        --            --
Paul A. Taltavull ..........      1997       175,000       100,000        --        --           --        --            --
     Senior Vice President        1996       150,000       150,000        --        --       25,000        --            --
                                  1995       150,000       391,633        --        --           --        --            --
John W. Wayne ..............      1997       150,000       156,432        --        --           --        --            --
     Senior Vice President        1996       102,000       160,000        --        --       15,000        --            --
                                  1995       102,000       327,636        --        --           --        --            --
Charles M. Mathews, Jr .....      1997       150,000       130,923        --        --           --        --            --
     Vice President ........      1996       118,200        60,000        --        --       10,000        --            --
                                  1995            --                      --        --           --        --            --
</TABLE>

      (1) Bonus awards are reflected in the year to which they are attributable
      and not the year in which they are actually paid. Bonuses are awarded at
      the discretion of management subject to review by the Board of Directors.

      (2) Fringe benefit amounts are omitted to the extent the aggregate value
      of such benefits is less than 10% of the salary and bonus, or $50,000.

      (3) The options listed were awarded in 1996 pursuant to the Company's
      Stock Option Plan for Executives and Other Key Employees (the "Plan").
      Under the Plan, 6% of the options granted become exercisable on December
      31 of each year beginning on December 31, 1996 and ending December 31,
      2001. The remaining 70% of the options granted become exercisable
      throughout a five-year period beginning December 31, 1996 based on
      satisfaction of certain financial criteria, including earnings and cash
      flow targets.

      (4) Amounts shown include the dollar value of life insurance premiums paid
      on behalf of Messrs. Young ($430,351) and Marren ($168,086).

                        OPTION GRANTS IN LAST FISCAL YEAR

No options were granted during 1997.


                                       32
<PAGE>

            AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
                          FISCAL YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
                                     Number of Securities               Value of Unexercised
                                    Underlying Unexercised                  In the Money
                                           Options                        Options at Fiscal
                                     At Fiscal Year-End (#)                Year-End ($) (1)
                                 -----------------------------       -----------------------------
Name                             Exercisable     Unexercisable       Exercisable     Unexercisable
------------------------         -----------     -------------       -----------     -------------
<S>                                  <C>              <C>              <C>             <C>
Daniel R. Young ........             9,000            66,000           153,000         1,122,000
Harry T. Marren ........             4,800            35,200            81,600           598,400
Paul A. Taltavull (2) ..             3,000            22,000            51,000           374,000
John W. Wayne (3) ......             1,800            13,200            30,600           224,400
Charles M. Mathews, Jr .             1,200             8,800            20,400           149,600
</TABLE>

      (1) As a privately held Company not then engaged in any transaction
      requiring a current valuation of its shares, the Company did not determine
      the value of its common stock at year-end. Accordingly, the Company has
      assumed for purposes of this table a value of $27.00 per share, the price
      paid for the common stock by all investors at the time of the Sylvest
      acquisition in June 1997.

      (2) Excludes options to purchase 30,000 shares granted prior to the
      Recapitalization pursuant to the Company's 1987 Stock Incentive Plan,
      which options will be replaced with immediately exercisable options to
      purchase shares of the Company in a quantity and at a price that will
      preserve the economic value of the options prior to the Recapitalization.

      (3) Excludes options to purchase 5,000 shares granted prior to the
      Recapitalization pursuant to the Company's 1987 Stock Incentive Plan,
      which options will be replaced with immediately exercisable options to
      purchase shares of the Company in a quantity and at a price that will
      preserve the economic value of the options prior to the Recapitalization.

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

      The following table sets forth the ownership of common stock of the
Company by each person known by the Company to be the owner of 5% or more of the
Company's outstanding common stock, by each person who is a director or Named
Executive Officer of the Company and by all directors and executive officers of
the Company as a group.



                                       33
<PAGE>

<TABLE>
<CAPTION>
                                                                                PERCENTAGE OF
                                                               ALL OUTSTANDING     NUMBER
BENEFICIAL OWNER(1)                                             COMMON STOCK      OF SHARES
-----------------------------------------------------------    ---------------  -------------
<S>                                                               <C>                <C>
TCG Holdings, L.L.C.(2) ....................................      2,447,272          84.1
William E. Conway, Jr.(3) ..................................             --            --
C. Robert Hanley(4) ........................................         73,172           2.5
Daniel R. Young(5)(6) ......................................        155,407           5.3
Harry T. Marren(6) .........................................         31,000           1.1
Peter J. Clare(3) ..........................................             --            --
Allan M. Holt(3) ...........................................             --            --
Paul A. Taltavull(6) .......................................         14,880             *
John W. Wayne(6) ...........................................         12,000             *
Charles M. Mathews, Jr.(6) .................................          3,000             *
All directors and executive officers as a group (12 persons)        345,288          11.9
</TABLE>

*     less than one percent

      (1) Except as otherwise indicated, each beneficial owner has the sole
      power to vote, as applicable, and to dispose of all units owned by such
      beneficial owner.

      (2) TCG Holdings, L.L.C., a Delaware limited liability company, is the
      sole managing member of TC Group, L.L.C., a Delaware limited liability
      company, which is the sole general partner of Carlyle Partners II, L.P., a
      Delaware limited partnership, Carlyle Partners III, L.P., a Delaware
      limited partnership, Carlyle International Partners II, L.P., a Cayman
      Islands limited partnership, Carlyle International Partners III, L.P., a
      Cayman Islands limited partnership, and certain other partnerships formed
      by Carlyle. The address of TCG Holdings L.L.C. is c/o The Carlyle Group,
      1001 Pennsylvania Avenue, N.W., Washington, D.C. 20004. James A. Baker
      III, Frank C. Carlucci, William E. Conway, Jr., Daniel A. D'Aniello,
      Richard G. Darman, David W. Dupree, Allan M. Holt, Jerome H. Powell and
      David M. Rubenstein, as the managing members of TCG Holdings, L.L.C., may
      be deemed to share beneficial ownership of the shares shown as
      beneficially owned by TCG Holdings, L.L.C. Such persons disclaim such
      beneficial ownership.

      (3) The address of such person is c/o The Carlyle Group, 1001 Pennsylvania
      Avenue, N.W., Washington, D.C. 20004.

      (4) The address of C. Robert Hanley is 2808 Tarflower Way, Naples, Florida
      34105.

      (5) 7,000 of these shares (0.3% of the total outstanding shares of the
      Company) are owned by the Daniel R. Young Irrevocable Unitrust U/A dated
      November 16, 1994, for which Daniel R. Young is the trustee.

      (6) The address of such person is 4800 Hampden Lane, Bethesda, Maryland
      20814.

Item 13. Certain Relationships and Related Transactions.

      Concurrently with the acquisition of the Company by Carlyle in 1995, the
Company entered into a management agreement (the "Management Agreement") with TC
Group, L.L.C. for certain management and financial advisory services to be
provided to the Company and its subsidiaries. In consideration of the management
and financial advisory services, the Company pays TC Group, L.L.C. an annual
management fee of $300,000. Based on fees being paid by comparably situated
companies, the Company believes that this Management Agreement is on terms no


                                       34
<PAGE>

less favorable to the Company than could have been obtained from an independent
third party.

      Carlyle received fees of $1.5 million and $0.5 million for advisory and
other services rendered in connection with the Recapitalization and the NYMA
acquisition, respectively. Carlyle received a fee of $1.5 million for advisory
and other services rendered in connection with the Sylvest acquisition, the
offering of the Private Notes and the Refinancing.

      In connection with the Recapitalization, the Company sold an airplane, the
Company's financial services division, and a 10% limited partnership interest in
a bankrupt partnership that previously held title to an office building in
which the Company is located to an entity controlled by C. Robert Hanley, a
Director of the Company and its former chief executive officer. Mr. Hanley
purchased the above-described assets and assumed the related liabilities for
approximately $2.4 million, the aggregate estimated value of the airplane and
the financial services division. The Company attributed no value to the
partnership interest. The Company entered into a three-year consulting agreement
with Mr. Hanley and a three-year agreement for use of the airplane from an
affiliate of Mr. Hanley. The consulting agreement provides for annual payments
of $200,000, and the lease of the airplane provides for annual payments of
$300,000 plus a usage charge which amounted to approximately $48,000 during the
year ended December 31, 1997. The consulting agreement requires Mr. Hanley to be
available to provide such consulting services as the Company may reasonably
request. Mr. Hanley regularly provides consulting services to the Company
pursuant to the consulting agreement and serves as director to the Company
without compensation.

      In connection with the Recapitalization, the stockholders of the Company
executed a Holders Agreement dated as of November 30, 1995 (as amended,
supplemented or replaced, the "Holders Agreement"). The Holders Agreement
restricts transfer of the common stock of the Company (except to affiliates, to
the public in a registered offering or pursuant to Rule 144 under the Securities
Act, transfers in a merger or sale of the Company, or transfer pursuant to
certain rights under the Holders Agreement). The Holders Agreement also provides
for tag-along rights on transfers of more than 15% of the common stock, bring
along rights with respect to more than 50% of the common stock and registration
rights.

                                     PART IV

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


(1) -- Financial Statements

The following Consolidated Financial Statements of the Company and its
subsidiaries are included in this Report:

 1. Financial Statements:

      Report of Independent Accountants

      Consolidated Balance Sheets as of December 31, 1996 and 1997


                                       35
<PAGE>

      Consolidated Statements of Operations for the years ended
            December 31, 1995, 1996 and 1997

      Consolidated Statements of Stockholders' (Deficit) Equity for the years
            ended December 31, 1995, 1996 and 1997

      Consolidated Statements of Cash Flows for the years ended
            December 31, 1995, 1996 and 1997

      Notes to Consolidated Financial Statements

2. Financial Statement Schedules:

      All schedules are omitted because they are not applicable or the required
      information is shown in the Consolidated Financial Statements or the notes
      thereto under Item 8.

3. Exhibits:

EXHIBIT
NUMBER      DESCRIPTION
--------------------------------------------------------------------------------

(b)2.1      Agreement and Plan of Merger dated as of April 9, 1997 by and among
            Azmat Ali, Peter Belford, Arthur Verbin, Peter Belford, as Holder
            Representative, NYMA and NYMA Acquisition, Inc.

(b)2.2      First Amendment, dated as of May 2, 1997, to the Agreement and Plan
            of Merger dated as of April 9, 1997 by and among Azmat Ali, Peter
            Belford, Arthur Verbin, Peter Belford, as Holder Representative,
            NYMA and NYMA Acquisition, Inc.

(b)2.3      Post-Closing Amendment, dated as of May 2, 1997, to the Agreement
            and Plan of Merger dated as of April 9, 1997 by and among Azmat Ali,
            Peter Belford, Arthur Verbin, Peter Belford, as Holder
            Representative, NYMA and NYMA Acquisition, Inc.

(b)2.4      Stock Purchase Agreement dated June 18, 1997 among Federal Data
            Corporation and Gary S. and Areather T. Murray, William S. Strang,
            Holton B. Shipman, Jr., James K. White, Peter A. Perucci, Myron P.
            Erkiletian and Sylvest

(d)2.5      Stock Purchase Agreement by and among Federal Data Corporation and
            Ralph O. Williams, Frederic M. Cullen, Trustees of R.O.W. Sciences
            ESOP, John C. Smith, Paul H. Tardif and R.O.W. Sciences, Inc. dated
            as of February 17, 1998

(e)2.5      Asset Purchase Agreement dated as of February 20, 1998 by and among
            Telos Corporation and NYMA, Inc.

(e)2.6      Interim Agreement dated as of February 28, 1998 by and among Telos
            Corporation and NYMA, Inc.

 * 2.7      Stock Purchase Agreement among Federal Data Corporation and Harry
            P. Headley, as Trustee, Dorothy Headley, as Trustee, Michael K.
            Headlry, Kathleen Kowis, George Kowis and Technical and Management
            Assistance, Inc. dated March 11, 1998


                                       36
<PAGE>

(a)3.1      Certificate of Incorporation of Federal Data Corporation

(a)3.2      By-laws of Federal Data Corporation

(a)3.3      Certificate of Incorporation of FDCT Corp.

(a)3.4      By-laws of FDCT Corp.

(a)3.5      Articles of Incorporation of NYMA, Inc.

(a)3.6      By-laws of NYMA, Inc.

(a)3.7      Articles of Incorporation of Sylvest Management Systems Corporation

(a)3.8      By-laws of Sylvest Management Systems Corporation

(a)3.9      Certificate of Incorporation of FDC Technologies, Inc.

(a)3.10     By-laws of FDC Technologies, Inc.

(a)3.11     Certificate of Incorporation of DoxSys, Inc.

(a)3.12     By-laws of DoxSys, Inc.

(a)3.13     Articles of Incorporation of VAD International, Inc.

(a)3.14     By-laws of VAD International, Inc.

 * 3.15     Certificate of Incorporation of R.O.W. Sciences, Inc.

 * 3.16     By-laws of R.O.W. Sciences, Inc.

 * 3.17     Articles of Incorporation of Technical and Management Assistance,
            Inc.

 * 3.18     By-laws of Technical and Management Assistance, Inc.

(a)4.1      Indenture dated as of July 15, 1997 among Federal Data Corporation,
            FDCT Corp., NYMA, Inc., Sylvest Management Systems Corporation, FDC
            Technologies, Inc., DoxSys, Inc., VAD International, Inc. and
            Norwest Bank Minnesota, National Association

(a)4.2      Specimen Certificate of 10 1/8% Senior Subordinated Notes due 2005
            (included in Exhibit 4.1 hereto)

(a)4.3      Purchase Agreement dated as of July 18, 1997 among Federal Data
            Corporation, BT Securities Corporation and Lehman Brothers

(a)4.4      Registration Rights Agreement dated as of July 25, 1997 among
            Federal Data Corporation, BT Securities Corporation and Lehman
            Brothers

(b)4.5      Credit Agreement dated as of July 25, 1997 among Federal Data
            Corporation, various lending institutions signatories thereto and
            Bankers Trust Company as Agent, as amended by First Amendment to
            Credit Agreement dated as of August 4, 1997 among Federal Data


                                       37
<PAGE>

            Corporation, various lending institutions signatory thereto and
            Bankers Trust Company as Agent

 (a)4.6     Form of 9% Increasing Rate Subordinated Note due 2004 dated May 21,
            1997

 (a)4.7     Form of 9% Increasing Rate Subordinated Note due 2004 dated June
            30, 1997

  * 4.8     Form of 9% Increasing Rate Subordinated Note due 2000 dated
            February 17, 1998

  * 4.9     Form of 9% Increasing Rate Subordinated Note due 2000 dated March
            13, 1998

   4.10     The Company is a party to several non-recourse financing agreements
            evidenced by promissory notes, none of which exceed 10 percent of
            the total assets of the Company and its subsidiaries on a
            consolidated basis. The Company hereby agrees to furnish a copy of
            such agreements to the Commission upon request.

(c)4.11     Security Agreement-Inventory dated September 5, 1997 among Federal
            Data Corporation, Sylvest Management Systems Corporation, FDC
            Technologies, Inc. and Nationscredit Commercial Corporation of
            America

(c)4.12     Intercreditor Agreement dated as of September 11, 1997 between
            Bankers Trust Company, as Agent, and Nationscredit Commercial
            Corporation of America

(c)4.13     First Supplemental Indenture dated as of December 19, 1997 between
            Federal Data Corporation and Norwest Bank, Minnesota, National
            Association

(a)10.1 +   Employment Agreement dated April 30, 1997 between NYMA, Inc. and
            Peter C. Belford

(b)10.2 +   Stock Option Plan dated February 16, 1996 for Executives and Other
            Key Employees

(b)10.3 +   Form of Executive Management Incentive Stock Option Agreement

(a)10.4     Agreement of Lease dated December 5, 1984 between Federal Data
            Corporation and Community Motor Property Associates Limited
            Partnership

(a)10.5     Lease Agreement dated January 6, 1989 between TechPark Limited
            Partnership and NYMA, Inc., as modified by First Modification to
            Lease dated as of December 21, 1990, that certain Second
            Modification to Lease dated as of December 20, 1990, that certain
            Third Modification to Lease dated as of January 31, 1994 and that
            Landlord Consent and Estoppel Certificate dated as of May 2, 1997

(a)10.6     Lease Agreement dated February 2, 1988 between Second Trade Center
            Office Associates Limited Partnership and NYMA, Inc., as modified by
            Lease Modification Agreement dated December 22, 1988 between Second
            Trade Center Office Associates Limited Partnership and NYMA, Inc.


                                       38
<PAGE>

*  10.7     Lease Assignment, Modification and Extension Agreement

(c)10.8 +   Consulting Agreement dated December 1, 1995 between Federal Data
            Corporation and C. Robert Hanley

(a)10.9     Trust Agreement dated December 27, 1994 among Federal Data
            Corporation, Charles R. Hanley, II, Daniel Young, Harry Marren,
            Marvin Haber and Paul Taltavull

(b)10.10 +  Management Agreement dated as of December 1, 1995 among FDC
            Technologies, Inc., the subsidiaries listed on Schedule A thereto
            and TC Group, L.L.C.

* 21.1      Subsidiaries of Federal Data Corporation

* 27        Financial Data Schedule

*           Filed herewith

(a)         Incorporated by reference to exhibits to the Company's
            Registration Statement on Form S-1, filed on September 26, 1997.
(b)         Incorporated by reference to exhibits to the Company's Amendment
            No. 1 to Registration Statement on Form S-1, filed on November 26,
            1997.
(c)         Incorporated by reference to exhibits to the Company's Amendment
            No. 2 to Registration Statement on Form S-1, filed on December 19,
            1997.
(d)         Incorporated by reference to the exhibits to the Company's Report on
            form 8-K, filed on March 3, 1998.
(e)         Incorporated by reference to the exhibits to the Company's Report on
            form 8-K, filed on March 16, 1998.
+           Executive Compensation Plan or Arrangement


(4) The Company filed Form 8-K's dated March 3, 1998, March 16, 1998 and March
24, 1998 related to the acquisition of R.O.W. Sciences, Inc., Telos Information
Systems, a division of Telos Corporation and Technical and Management
Assistance, Inc.

                                   SIGNATURES

Pursuant to the requirements of the 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 be the undersigned, thereunto duly authorized, in Bethesda, Maryland
on March 25, 1998.


                                       39
<PAGE>

                                FEDERAL DATA CORPORATION

                                By                /s/ JAMES M. DEAN
                                      ------------------------------------------
                                                    James M. Dean
                                       VICE PRESIDENT, CHIEF FINANCIAL OFFICER
                                                AND TREASURER



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


          SIGNATURE                         TITLE                      DATE
------------------------------  ------------------------------  --------------


 /s/ WILLIAM E. CONWAY, JR.                                     March 25, 1998
------------------------------  Chairman of the Board
   William E. Conway, Jr.


     /s/ DANIEL R. YOUNG        Vice Chairman and Chief         March 25, 1998
------------------------------    Executive Officer
       Daniel R. Young

                                Vice President, Chief
      /s/ JAMES M. DEAN           Financial Officer and         March 25, 1998
------------------------------    Treasurer (Principal
        James M. Dean             Financial and Accounting
                                  Officer)


      /s/ ALLAN M. HOLT                                         March 25, 1998
------------------------------  Director
        Allan M. Holt


     /s/ PETER J. CLARE                                         March 25, 1998
------------------------------  Director
        Peter J. Clare


                                       40
<PAGE>

     /s/ HARRY T. MARREN                                        March 25, 1998
------------------------------  President and Director
         Harry T. Marren


    /s/ C. ROBERT HANLEY                                        March 25, 1998
------------------------------  Director
       C. Robert Hanley


                                       41