FORM 10-Q
                SECURITIES AND EXCHANGE COMMISSION
                      Washington, D.C. 20549


           QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                   SECURITIES EXCHANGE ACT OF 1934


For the quarterly period ended July 2, 1998    Commission file number    1-3879
                              





                                    DynCorp
         (Exact name of registrant as specified in its charter)

                                    Delaware                   36-2408747
                         (State or other jurisdiction of      (IRS Employer
                           incorporation or organization)   Identification No.)
                                                            

            2000 Edmund Halley Drive, Reston, VA                 20191-3436
                   (Address of principal executive offices)     (Zip Code)

                                  (703)264-0330
                 Registrant's telephone number, including area code)



(Former name, former address and former fiscal year, if changed since 
  last report)


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 the number of shares  outstanding  of each of the  issuer's  classes of
common stock, as of the latest practicable date.

               Class                    Outstanding as of August 14, 1998

Common Stock, $0.10 Par Value                   10,458,358


                       DYNCORP AND SUBSIDIARIES
                             FORM 10-Q
                FOR THE QUARTER ENDED JULY 2, 1998

                               INDEX



                                                                         Page


PART I.  FINANCIAL INFORMATION

 Item 1.  Financial Statements

  Consolidated Condensed Balance Sheets at
    July 2, 1998 and December 31, 1997                                    3-4

  Consolidated Condensed Statements of Operations for
    Three and Six Months Ended July 2, 1998 and June 26, 1997             5

  Consolidated Condensed Statements of Cash Flows for
    Six Months Ended July 2, 1998 and June 26, 1997                       6

  Consolidated Statement of Permanent Stockholders' Equity                7

  Notes to Consolidated Condensed Financial Statements                    8-16

 Item 2.  Management's Discussion and Analysis of Financial Condition
            and Results of Operations                                    17-19

PART II.  OTHER INFORMATION

 Item 1.  Legal Proceedings                                              19  

 Item 4.  Submission of Matters to a Vote of Security Holders            19-20 

 Item 6.  Exhibits and Reports on Form 8-K                               20  

  Signatures                                                             20





<PAGE>



                          PART I. FINANCIAL INFORMATION

                            DYNCORP AND SUBSIDIARIES
                      CONSOLIDATED CONDENSED BALANCE SHEETS
                       JULY 2, 1998 AND DECEMBER 31, 1997
                                 (In thousands)



                                                         July 2,
                                                          1998      December 31,
                                                        Unaudited      1997
                                                        ---------   ------------
Assets
Current Assets:
 Cash and cash equivalents                              $   9,695    $  24,602
 Accounts receivable and contracts in process (Note 2)    223,886      202,758
 Inventories of purchased products and supplies,
   at lower of cost (first-in, first-out) or market           904        1,090
 Other current assets                                      12,221       11,133
                                                        ---------    ---------
     Total current assets                                 246,706      239,583

Property and Equipment (net of accumulated 
  depreciation and amortization of $25,651 in 
  1998 and $22,412 in 1997)                                19,624       19,620
 
Goodwill and Contracts Acquired (net of accumulated
  amortization of $46,453 in 1998 and $45,205 in  
  1997) (Note 7)                                           46,410       46,750

Other Assets (Notes 2 and 9)                               85,923       76,631
                                                         --------     --------
Total Assets                                             $398,663     $382,584  
                                                         ========     ========




See accompanying notes to consolidated condensed financial statements.




<PAGE>


                            DYNCORP AND SUBSIDIARIES
                      CONSOLIDATED CONDENSED BALANCE SHEETS
                       JULY 2, 1998 AND DECEMBER 31, 1997
                      (In thousands, except share amounts)

                                                         July 2,
                                                          1998      December 31,
                                                        Unaudited      1997
                                                        ---------   ------------
Liabilities and Stockholders' Equity
Current Liabilities:
 Notes payable and current portion of long-term debt     $  2,285     $    450
 Accounts payable                                          41,589       46,109
 Deferred revenue and customer advances                     2,056        2,947
 Accrued liabilities                                      117,449      105,833
                                                         --------     -------- 
     Total current liabilities                            163,379      155,339

Long-Term Debt  (Notes 2)                                 152,156      152,239

Other Liabilities and Deferred Credits  (Note 9)           77,661       77,780

Contingencies and Litigation  (Note 9)                          -            -

Temporary Equity (Note 3):
 Redeemable Common Stock -
   ESOP Shares, 7,049,100 and 6,887,119
     shares issued and outstanding in 1998 and 1997,
     respectively, subject to restrictions               170,925      151,823
   Other, 125,714 shares issued and outstanding in
     1998 and 1997                                         3,269        3,017

Permanent Stockholders' Equity (Note 4):
 Common Stock, par value ten cents per share, authorized
   20,000,000 shares; issued 5,001,997 shares in 1998
   and 4,784,770 shares in 1997                              500          478
 Common Stock Warrants                                       422        1,259
 Paid-in Surplus                                         126,191      125,412
 Reclassification to temporary equity for redemption
  value greater than par value                          (173,476)    (154,138)
 Deficit                                                 (87,978)    ( 93,837)
 Common Stock Held in Treasury, at cost; 1,714,927
  shares and 170,716 warrants in 1998 and 1,677,511 
  shares and 170,716 warrants in 1997                   (29,619)      (28,703)
 Unearned ESOP Shares                                    (4,767)       (8,085)
                                                       ---------     ---------
Total Liabilities and Stockholders' Equity             $398,663      $382,584
                                                       =========     =========




See accompanying notes to consolidated condensed financial statements.


<PAGE>



                             DYNCORP AND SUBSIDIARIES
                  CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
                      (In thousands, except per share amounts)
                                    UNAUDITED

                                      Three Months Ended     Six Months Ended
                                      ------------------     ----------------
                                       July 2,   June 26,   July 2,   June 26,
                                        1998       1997      1998       1997
                                      -------    --------   -------   --------
Revenues:                             $303,602   $288,695   $601,475   $559,832

Costs and Expenses:
   Costs of services                   287,927    276,374    571,863    536,168
   Corporate selling and                 
     administrative                      4,793      4,353     10,061      8,792 
   Interest income                        (328)      (637)      (677)      (998)
   Interest expense                      3,855      3,907      7,648      6,891
   Other                                 1,502      1,018      1,868      1,294
                                      --------   --------   --------   --------
  Total costs and expenses             297,749    285,015    590,763    552,147

Earnings before income taxes
   and minority interest                 5,853      3,680     10,712      7,685
 Provision for income taxes (Note 5)     2,130      1,442      3,906      2,728
                                      --------   --------   --------   --------
Earnings before minority interest        3,723      2,238       6,806      4,957
 Minority interest                         528        203         947        611
                                      --------   --------    --------   --------
Net earnings                          $  3,195   $  2,035    $  5,859   $  4,346
                                      ========   ========    ========   ========

Weighted average number of 
 shares outstanding for basic
 earnings per share (Note 6)            10,255      8,863      10,135      8,733

Weighted average number of 
 shares outstanding for 
 diluted earnings per share (Note 6)    10,609     10,416      10,537     10,797

Basic earnings per share              $   0.31   $   0.23    $   0.58   $   0.50

Diluted earnings per share            $   0.30   $   0.20    $   0.56   $   0.40




See accompanying notes to consolidated condensed financial statements.















                     DYNCORP AND SUBSIDIARIES
               CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
                          (In thousands)
                            Unaudited
                                                             Six Months Ended
                                                             ----------------
                                                            July 2,    June 26,
                                                             1998        1997
                                                            -------    --------

Cash Flows from Operating Activities:
Net earnings                                                $  5,859   $  4,346
Adjustments to reconcile net earnings from operations
   to net cash provided (used):
 Depreciation and amortization                                 4,142      5,043
 Increase in reserves for divested businesses                      -        125
 Proceeds from insurance settlement for asbestos claims        1,463      1,000
 Other                                                           (58)      (344)
Changes in current assets and liabilities, net of 
   acquisitions:
 Increase in current assets except cash and cash equivalents (18,895)       (60)
 Increase in current liabilities except notes payable
   and current portion of long term debt                       5,264      1,104
                                                             --------    ------ 
    Cash provided (used) by operating activities             ( 2,225)    11,214

Cash Flows from Investing Activities:
Sale of property and equipment                                   299         51
Purchase of property and equipment                            (2,498)    (2,926)
Assets and liabilities of acquired business                  (10,241)         -
Increases in investment in unconsolidated affiliates          (1,054)      (677)
Other                                                         (3,231)      (122)
                                                            --------    ------- 
    Cash used by investing activities                       (16,725)    (3,674)

Cash Flows from Financing Activities:
Treasury stock purchased                                        (873)      (284)
Payment on indebtedness                                      (18,265)      (463)
Retirement of Contract Receivable Collateralized 
   Notes 1992-1                                                    -    (98,500)
Proceeds from Contract Receivable Collateralized
   Notes 1997-1                                               20,000     50,000
Proceeds from issuance of Senior Notes                             -     99,484
Stock released to Employee Stock Ownership Plan                3,318      2,595
Loan to Employee Stock Ownership Plan (Note 4)                     -    (10,379)
Deferred financing expenses                                        -     (4,767)
Common stock and warrants purchased from investors                 -    (37,819)
Other                                                           (137)      (361)
                                                              -------   --------
    Cash provided (used) from financing activities             4,043       (494)

Net (Decrease) Increase in Cash and Cash Equivalents         (14,907)     7,046
Cash and Cash Equivalents at Beginning of the Period          24,602     25,877
                                                            --------   --------
Cash and Cash Equivalents at End of the Period              $  9,695   $ 32,923
                                                            ========   ======== 
Supplemental Cash Flow Information:
Cash paid for income taxes                                  $  4,253   $  2,229
                                                            ========   ========
Cash paid for interest                                      $  7,311   $  5,938
                                                            ========   ========




See accompanying notes to consolidated condensed financial statements.






<TABLE>
<CAPTION>
                        DYNCORP AND SUBSIDIARIES
           CONSOLIDATED STATEMENT OF PERMANENT STOCKHOLDERS' EQUITY
                              (In thousands)

                                 UNAUDITED



                                                             Adjustment 
                                         Common              for Redemption                         Unearned
                               Common     Stock    Paid-in   Value Greater               Treasury       ESOP
                                Stock  Warrants    Surplus   than Par Value  Deficit        Stock     Shares
                               ------  --------    -------   --------------  -------     --------   --------
<S>                           <C>    <C>       <C>        <C>          <C>          <C>          <C>         <C>

Balance, December 31, 1997      $ 478    $1,259   $125,412   $(154,138)   $( 93,837)    $(28,703)   $(8,085)

 Stock issued under
  Restricted Stock Plan             2                  126
 Treasury stock issued                                                                        85
 Treasury stock purchased                             (288)                               (1,001)
 Stock warrants and options 
  exercised                        35     (837)        941
 Payment received on Employee 
  Stock Ownership Plan note                                                                          3,318
 Net earnings                                                                5,859
 Reclassification to Redeemable
  Common Stock                    (15)                         (19,338)
                            
 Balance, July 2, 1998          $ 500  $  422     $126,191   $(173,476)   $(87,978)    $(29,619)   $(4,767)
                                
</TABLE>





<PAGE>

                               DYNCORP AND SUBSIDIARIES
                    NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                                    July 2, 1998

                                    UNAUDITED

1.   The unaudited  consolidated  condensed financial statements included herein
     have been prepared by the Company  pursuant to the rules and regulations of
     the Securities and Exchange  Commission.  Certain  information and footnote
     disclosures   normally  included  in  financial   statements   prepared  in
     accordance  with  generally  accepted   accounting   principles  have  been
     condensed or omitted pursuant to such rules and  regulations,  although the
     Company  believes that the disclosures are adequate to make the information
     presented not misleading.  It is recommended that these condensed financial
     statements be read in  conjunction  with the financial  statements  and the
     notes thereto  included in the Company's latest annual report on Form 10-K.
     In the  opinion  of  the  Company,  the  unaudited  consolidated  condensed
     financial  statements included herein reflect all adjustments  necessary to
     present  fairly the financial  position,  the results of operations and the
     cash flows for such interim  periods.  The results of  operations  for such
     interim periods are not necessarily  indicative of the results for the full
     year. Prior year financial  statements have been reclassified to conform to
     the 1998 presentation.  Prior year earnings per share have been restated in
     accordance with SFAS No. 128 "Earnings Per Share," which was adopted by the
     Company on December 31, 1997 (See Note 6).

2.    At July  2,  1998,  the  Company's  wholly-owned  subsidiary  Dyn  Funding
      Corporation  ("DFC") had outstanding  borrowings of $2.0 million under the
      Floating  Rate  Contract  Receivable  Collateralized  Rates Notes,  Series
      1997-1,  Class B. The amount was  utilized to fund the  Company's  working
      capital needs.

      At July 2, 1998,  $75.3 million of accounts  receivable  are restricted as
      collateral for the Contract Receivable Collateralized Notes, Series 1997-1
      Class  A and B.  Additionally,  $1.5  million  of cash  is  restricted  as
      collateral  for the Notes  and has been  included  in Other  Assets on the
      balance sheet at July 2, 1998 and December 31, 1997.

      Accounts  receivable  are net of an allowance for doubtful  accounts of 
      $1,216,000 as of July 2, 1998 and $476,000 as of December 31, 1997.

3.    Common stock which is redeemable has been reflected as Temporary Equity at
      each balance sheet date and consists of the following:

                                   Balance at                       Balance at
                      Redeemable    July 2,             Redeemable  December 31,
               Shares   Value        1998      Shares     Value        1997
               -----  ----------   ---------   ------   ----------  ------------

ESOP Shares  3,520,037  $26.00   $ 91,520,962   3,520,037  $24.00   $ 84,480,888
             3,529,063  $22.50     79,403,918   3,367,082  $20.00     67,341,640
             ---------          ------------   ---------            ------------
             7,049,100          $170,924,880   6,887,119            $151,822,528
             =========          ============   =========            ============

Other Shares   125,714  $26.00  $  3,268,564     125,714   $24.00   $  3,017,136
             =========          ============   =========            ============

      In accordance with ERISA regulations and the Employee Stock Ownership Plan
      documents,  the  ESOP  Trust  or the  Company  is  obligated  to  purchase
      distributed  common stock shares from ESOP  participants  on retirement or
      termination  at fair value as long as the  Company's  common  stock is not
      publicly traded.  However,  under the Subscription Agreement with the ESOP
      dated September 9, 1988, the Company is permitted to defer put options if,
      under  Delaware  law,  the capital of the  Company  would be impaired as a
      result of such repurchase.

      In conjunction  with the acquisition of Technology  Applications,  Inc. in
      1993, the Company issued put options on 125,714 shares of its common stock
      to the former  owner.  The holder may, at any time  commencing on December
      31, 1998 and ending on December 31, 2000, sell these shares to the Company
      at a price per share  equal to the  greater of $17.50 or, (a) if the stock
      is publicly  traded,  the market value at a specified  date or, (b) if the
      Company's  stock is not  publicly  traded,  the fair  value at the time of
      exercise.

4.    The Company made loans to the Employee Stock  Ownership  Trust during 1997
      to purchase  shares and warrants as well as to pay off expiring  loans. At
      July 2, 1998, the unpaid balance on these loans, $4.8 million representing
      226,891 shares, is reflected as a reduction in stockholders' equity.

5.    The provision for income taxes in 1998 and 1997 is based upon an estimated
      annual effective tax rate, including the impact of differences between the
      book value of assets and  liabilities  recognized for financial  reporting
      purposes and the basis recognized for tax purposes.

6.    The Company has adopted SFAS No. 128  "Earnings  Per Share,"  which became
      effective for financial  statements  for periods ending after December 15,
      1997. The statement establishes new standards for computing and presenting
      earnings per share  ("EPS") and  requires  restatement  of prior  periods.
      Specifically, the statement replaces the presentation of primary and fully
      diluted EPS with a  presentation  of basic and diluted EPS and  requires a
      dual presentation on the face of the income statement and a reconciliation
      of basic EPS to diluted EPS.

      Basic EPS is computed by dividing  earnings by the weighted average number
      of  common  shares  outstanding  and  contingently  issuable  shares.  The
      weighted  average  number of common  shares  outstanding  includes  issued
      shares  less  shares held in treasury  and any  unallocated  ESOP  shares.
      Shares earned and vested but unissued under the Restricted  Stock Plan are
      contingently  issuable  shares  whose  condition  for  issuance  has  been
      satisfied and as such have been included in the  calculation of basic EPS.
      Diluted EPS is computed  similarly  except the denominator is increased to
      include  the  weighted  average  number  of  stock  warrants  and  options
      outstanding, assuming the treasury stock method.

The reconciliation of basic EPS to diluted EPS is as follows:
<TABLE>
<CAPTION>

                                                  Three Months Ended                        Six Months Ended
                                                  ------------------                        ----------------   
                                            July 2, 1998        June 26, 1997       July 2, 1998        June 26, 1997
                                            ------------        -------------       ------------        -------------
<S>                                     <C>          <C>     <C>         <C>     <C>         <C>     <C>          <C>

                                            Earnings   Per      Earnings   Per      Earnings   Per      Earnings   Per
                                                       Share               Share               Share               Share
Basic Earnings Per Share
Income for basic earnings per share           $3,195   $0.31      $2,035   $0.23      $5,859   $0.58      $4,346   $0.50
Weighted average shares outstanding       10,254,835           8,863,265          10,135,476           8,732,800

Diluted Earnings Per Share
Income for diluted earnings per share         $3,195   $0.30      $2,035   $0.20      $5,859   $0.56      $4,346   $0.40
Weighted average shares outstanding       10,254,835           8,863,265          10,135,476           8,732,800
 Effect of dilutive securities:
  Warrants                                   169,505           1,416,258             243,598           1,931,871
  Stock Options                              184,956             136,430             158,114             131,860
Shares for diluted earnings per share     10,609,296          10,415,953          10,537,188          10,796,531

</TABLE>

<PAGE>


7.    On February 2, 1998, the Company  acquired a majority of the net assets of
      FMAS  Corporation   ("FMAS"),  a  medical  outcome  measurement  and  data
      abstraction  services company  headquartered  in Rockville,  MD, for $10.3
      million  in  cash.  FMAS is a  leading  provider  of  proprietary  outcome
      performance  measurement  systems to DoD  treatment  facilities as well as
      other  public  and  governmental  facilities.  The  acquisition  has  been
      accounted  for as a purchase and $0.9  million of goodwill,  which will be
      amortized  over  15  years,  has  been  recorded  based  on a  preliminary
      allocation of the purchase price.

8.    New Accounting Pronouncements

      Statement of Financial  Accounting  Standards  ("SFAS") No. 130 "Reporting
      Comprehensive  Income" was issued in June 1997,  and became  effective for
      fiscal years beginning after December 15, 1997. The statement  establishes
      standards for the reporting  and display of  comprehensive  income and its
      components  in a full set of  general-purpose  financial  statements.  The
      Company has reviewed the  requirements  of SFAS No. 130 and at present the
      Company does not report any additional transactions  which would be deemed
      to be included in comprehensive income.

      In February 1998, the Financial Accounting Standards Board issued SFAS No.
      132  "Employers'  Disclosures  about  Pensions  and Other Post  Retirement
      Benefits,"  which  became  effective  for  fiscal  years  beginning  after
      December 15, 1997. The statement standardizes the disclosure  requirements
      for pensions and other post retirement  benefits.  The statement addresses
      disclosure requirements only. Because the Company does not have
      significant post retirement  benefits,  adoption of the standard is not
      expected  to  materially  change  the  Company's disclosures.

      In March 1998,  the American  Institute of  Certified  Public  Accountants
      (AICPA) issued  Statement of Position No. (SOP) 98-1,  "Accounting for the
      Costs of Computer Software  Developed or Obtained for Internal Use," which
      will be effective for fiscal years  beginning after December 15, 1998. The
      Statement  of  Position  requires  the  capitalization  of  certain  costs
      incurred in connection with developing or obtaining  software for internal
      use after the date of  adoption.  Adoption of SOP No. 98-1 will not have a
      material impact on the Company's financial statements.

      AICPA SOP No. 98-5,  "Reporting on the Costs of Start-up  Activities," was
      issued in April 1998 and is  effective  for fiscal years  beginning  after
      December  15,  1998.  The  statement  provides  guidance on the  financial
      reporting of start-up costs and organization  costs, and requires costs of
      start-up activities to be expensed as incurred. The Company estimates that
      adoption  of  this  statement  will  not  have a  material  impact  on the
      Company's financial statements.

      In June 1998,  the Financial  Accounting  Standards  Board issued SFAS No.
      133,  "Accounting for Derivative  Instruments and Hedging Activities." The
      Statement  establishes  accounting and reporting  standards for derivative
      instruments,  including certain derivative  instruments  embedded in other
      contracts,  and for hedging  activities.  The Company is required to adopt
      the provisions of the standard  during the first quarter of 2000.  Because
      of the Company's  minimal use of derivatives,  the Company does not expect
      that the adoption of the new standard  will have a material  impact on the
      results of operations or financial condition.

9.   Contingencies and Litigation

     The Company and its  subsidiaries  and  affiliates  are involved in various
     claims and  lawsuits,  including  contract  disputes  and  claims  based on
     allegations of negligence and other tortuous  conduct.  The Company is also
     potentially  liable for certain personal  injury,  tax,  environmental  and
     contract  dispute  issues  related  to the  prior  operations  of  divested
     businesses.  In addition,  certain  subsidiary  companies  are  potentially
     liable for environmental,  personal injury and contract and dispute claims.
     In most cases,  the Company and its  subsidiaries  have denied,  or believe
     they have a basis to deny,  liability,  and in some cases  have  offsetting
     claims against the  plaintiffs,  third parties or insurance  carriers.  The
     total amount of damages  currently claimed by the plaintiffs in these cases
     is estimated to be  approximately  $139.6 million  (including  compensatory
     punitive damages and penalties).  The Company believes that the amount that
     will actually be recovered in these cases will be  substantially  less than
     the amount  claimed.  After taking into account  available  insurance,  the
     Company  believes it is  adequately  reserved with respect to the potential
     liability  for such claims.  The  estimates  set forth above do not reflect
     claims that may have been incurred but have not yet been filed. The Company
     has recorded such damages and penalties  that are considered to be probable
     recoveries against the Company or its subsidiaries.

     (a)   Asbestos Claims

     An acquired and inactive subsidiary,  Fuller-Austin, which discontinued its
     business  activities in 1986,  has been named as one of many  defendants in
     civil lawsuits  which have been filed in certain state courts  (principally
     Texas) beginning in 1986 against manufacturers, distributors and installers
     of   products   allegedly   containing   asbestos.   Fuller-Austin   was  a
     non-manufacturer  that installed and  occasionally  distributed  industrial
     insulation   products.   Fuller-Austin   had   discontinued   the   use  of
     asbestos-containing  products  prior to being  acquired  by the  Company in
     1974. These claims are not part of a class action.

     The  claimants   generally  allege  injuries  to  their  health  caused  by
     inhalation of asbestos fibers.  Many of the claimants seek punitive damages
     as well as compensatory  damages.  The amount of damages sought is impacted
     by a multitude  of  factors.  These  include  the type and  severity of the
     disease sustained by the claimant (i.e.,  mesothelioma,  lung cancer, other
     types of cancer,  asbestosis  or pleural  changes);  the  occupation of the
     claimant;  the duration of the claimant's  exposure to  asbestos-containing
     products;  the  number  and  financial  resources  of the  defendants;  the
     jurisdiction in which the claim is filed;  the presence or absence of other
     possible  causes  of the  claimant's  illness;  the  availability  of legal
     defenses,  such as the  statute of  limitations;  and whether the claim was
     made on an individual basis or as part of a group claim.

     Claim Exposure (number of plaintiffs, claims and per claim amounts not in 
     thousands)

     As  of  July  31,  1998,   18,739  plaintiffs  have  filed  claims  against
     Fuller-Austin  and various other  defendants.  Of these claims,  2,325 have
     been  dismissed  and 4,899  have been  resolved  without  an  admission  of
     liability at an average cost of $3,263 per claim,  excluding  legal defense
     costs.

     The  following  is  a  summary  of  the  number  of  claims  filed  against
     Fuller-Austin:

                                               Years
                          --------------------------------------------
                          1994
                          & Prior    1995      1996     1997     1998     Total
                          -------   ------   -------   ------   ------   ------
     Claims Filed          4,057    4,527     4,122    3,807    2,226    18,739
     Claims Dismissed       (113)     (51)   (1,116)    (931)    (114)   (2,325)
     Claims Resolved      (1,619)    (189)   (1,825)    (460)    (806)   (4,899)
     Claims Under Appeal              (13)                                  (13)
                                                                         -------
     Claims Outstanding,
     as of July 31, 1998                                                 11,502
                                                                         =======

     In connection with these claims, Fuller-Austin's primary insurance carriers
     have incurred approximately $29.3 million (including $13.3 million of legal
     defense  costs) to defend  and settle the claims  and,  in  addition,  jury
     verdict judgments have been entered against  Fuller-Austin in the aggregate
     amount of $6.5  million,  partially  reduced by appeal  during 1997 by $2.0
     million,   which  have  not  been  paid  and  which  are  under  appeal  by
     Fuller-Austin.

     Fuller-Austin  has  experienced  a decline in the number of claims taken to
     trial. During the 21-month period ending July 31, 1998, no cases were tried
     by plaintiffs although  approximately 1,113 cases were set for trial during
     this period. Plaintiffs have instead elected to enter into settlements with
     Fuller-Austin  for  amounts  ranging  from $250 to  $14,500  for an average
     during the period of $2,830 per claim.  In  addition,  in  connection  with
     these   settlements,   a   significant   number  of  claims  filed  against
     Fuller-Austin  were  dismissed  with no  payment  by  Fuller-Austin  or its
     insurers.   Fuller-Austin  and  its  carriers  will  continue  to  evaluate
     settlement  proposals,  but will be  prepared  to try cases that  cannot be
     settled in a manner consistent with recent settlement trends.

     During the first  quarter of 1998,  Fuller-Austin  agreed in  principle  to
     settle with  approximately 660 non-Texas  claimants who were threatening to
     amend pending lawsuits to add Fuller-Austin as a defendant. The settlement,
     if concluded,  will aggregate approximately $4.0 million, which is included
     in the estimate of future claims set forth below.  Fuller-Austin  considers
     the entire settlement to be covered by insurance.

     The number of claims filed  against  Fuller-Austin  has become  significant
     only since  1992,  and  therefore,  Fuller-Austin  has a  relatively  brief
     history  (compared to  manufacturers  and suppliers) of claims volume and a
     limited data file upon which to estimate the number or costs of claims that
     may be received in the future. Also, effective September 1, 1995, the State
     of Texas (where most of these  claims have been filed)  enacted tort reform
     legislation  which  Fuller-Austin  believes  has  curtailed  the  number of
     unsubstantiated asbestos claims filed against the subsidiary in Texas.

     Fuller-Austin's  defense counsel has analyzed the 11,502 claims outstanding
     as of July 31, 1998. Based on this analysis and consultation with its other
     professional  advisors,  Fuller-Austin  has estimated  its cost,  including
     legal  defense  costs,  to be $9.5  million  for  claims  filed  and  still
     unsettled  and $40.7  million as its minimum  estimate  of future  costs of
     claims and  settlements,  including  legal defense costs. No upper limit of
     exposure can presently be reasonably  estimated.  The Company cautions that
     these  estimates are subject to  significant  uncertainties,  including the
     future effect of tort reform legislation enacted in Texas and other states,
     the  success  of  Fuller-Austin's  litigation  strategy,  the  size of jury
     verdicts, success of appeals in process, the number and financial resources
     of future  plaintiffs,  and the  actions  of other  defendants.  Therefore,
     actual  claim  experience  may  vary  significantly  from  such  estimates,
     especially   if  certain   Texas   appeals  are  decided   unfavorably   to
     Fuller-Austin  and/or the level of claims filed in other states  increases.
     Fuller-Austin recorded an estimated liability for future indemnity payments
     and  defense  costs  related to  currently  unsettled  claims  and  minimum
     estimated  future  claims of $50.2 million at July 2, 1998 and December 31,
     1997 (recorded as long-term liability).

     Insurance Coverage

     Defense  has been  tendered  to and  accepted  by  Fuller-Austin's  primary
     insurance  carriers,  and by certain  of the  Company's  primary  insurance
     carriers  that issued  policies  under which  Fuller-Austin  is named as an
     additional  insured;  however,  only one such primary carrier has partially
     accepted defense without a reservation of rights. The Company believes that
     Fuller-Austin  has at least $2.7 million in  unexhausted  primary  coverage
     (net of deductibles and  self-insured  retentions,  but including  disputed
     coverage)  under its  liability  insurance  policies to cover the unsettled
     claims,  verdicts  and future  unasserted  claims and  defense  costs.  The
     primary carriers also have unlimited liability for defense costs (presently
     running at an average annual rate of approximately $1.3 million) until such
     time as the primary  limits under these  policies are  exhausted.  When the
     primary  limits  are  exhausted,  liability  for both  indemnity  and legal
     defense will be tendered to the excess coverage carriers, all of which have
     been  notified of the  pendency  of the  asbestos  claims.  The Company and
     Fuller-Austin  have  approximately  $390.0 million of additional excess and
     umbrella  insurance that is generally  responsive to asbestos  claims after
     taking into  consideration  certain  pending carrier  settlements  that are
     discussed  below.  This  amount  excludes  approximately  $92.0  million of
     coverage  issued  by  insolvent   carriers.   After  the  $2.7  million  of
     unexhausted primary coverage, the Company has first tier excess coverage of
     $39.0  million  excluding  a $40.0  million  first tier  excess  segment of
     insolvent  coverage  for policy  years 1979  through  1984 (the  "Insolvent
     Segment").  All of the Company's and  Fuller-Austin's  liability  insurance
     policies cover indemnity  payments and defense fees and expenses subject to
     applicable policy terms and conditions.

     Coverage Litigation

     The Company and  Fuller-Austin  have  instituted  litigation in Los Angeles
     Superior  Court,  California,  against their  primary and excess  insurance
     carriers  to obtain  declaratory  judgments  from the court  regarding  the
     obligations of the various carriers to defend and pay asbestos claims.  The
     issues in this litigation include the aggregate  liability of the carriers,
     the  triggering  and  drop-down of excess  coverage to cover the  Insolvent
     Segment  and  allocation  of  losses  among  multiple  carriers   including
     insolvent  carriers and various other issues related to the  interpretation
     of the policy contracts.  All of the carrier  defendants have filed general
     denial answers.

     Although  there can be no assurances as to the outcome of this  litigation,
     management  believes that it is probable that Fuller-Austin will prevail in
     obtaining  judicial  rulings  confirming the  availability of a substantial
     portion of the coverage.  Based on a review of the  independent  ratings of
     these carriers,  the Company and  Fuller-Austin  believe that a substantial
     portion of this  coverage will continue to be available to meet the claims.
     Fuller-Austin  recorded in Other Assets $49.0  million and $50.2 million at
     July 2, 1998 and December 31, 1997  respectively,  representing  the amount
     that it expects to recover from its  insurance  carriers for the payment of
     currently unsettled and estimated future claims.

     The Company cautions, however, that even though the existence and aggregate
     dollar  amounts  of  insurance  are  not  generally  being  disputed,  such
     insurance coverage is subject to interpretation by the court and the timing
     of the availability of insurance payments could, depending upon the outcome
     of the litigation and/or carrier settlement negotiations, delay the receipt
     of  insurance   company  payments  and  require   Fuller-Austin  to  assume
     responsibility for making interim payment of asbestos defense and indemnity
     costs at a time when it may not have adequate cash funds.

     While the Company  believes  that  Fuller-Austin  has  recorded  sufficient
     liability  to  satisfy  Fuller-Austin's  reasonably  anticipated  costs  of
     present and future asbestos claimants' suits, it is not possible to predict
     the  amount  or  timing  of  future   suits  or  the  future   solvency  of
     Fuller-Austin's insurers. In the event that currently unresolved and future
     claims  exceed the  recorded  liability of $50.2  million,  the Company and
     Fuller-Austin  believe that the  judicially  determined  and /or negotiated
     amounts of excess and umbrella insurance coverage that will be available to
     cover additional claims will be significant;  however,  it is impossible to
     predict  whether  or not  such  amounts  will  be  adequate  to  cover  all
     additional claims without further contribution by Fuller-Austin.

     Possible Global Settlement/Bankruptcy Filing

     Representatives   of  Fuller-Austin   are  currently  in  discussions  with
     representatives of more than 75% of the asbestos claimants and a designated
     but not confirmed  representative  of potential  future asbestos  claimants
     regarding the possibility of a global  settlement of all present and future
     asbestos claims against  Fuller-Austin.  If successful,  these  discussions
     could lead to the preparation and filing by  Fuller-Austin  of a bankruptcy
     proceeding  under  the U.S.  Bankruptcy  Code  (the  "Code")  that has been
     previously  approved by the asbestos  claimants.  It is  contemplated  that
     presently negotiated  settlements with certain of the carrier-defendants in
     the   coverage   litigation   would  also  be  achieved  by   Fuller-Austin
     concurrently with the confirmation of the Fuller-Austin reorganization plan
     as part of the bankruptcy proceeding.  The contemplated plan would call for
     Fuller-Austin and certain of its insurance proceeds and rights to be placed
     in a  bankruptcy  trust to be  administered  by  unrelated  parties for the
     benefit of present and future asbestos claimants.

     In  furtherance  of the  proposed  global  settlement,  representatives  of
     Fuller-Austin,  its parent and sole stockholder,  the Company,  the present
     asbestos claimants,  and the representative of the future unknown claimants
     have  reached a separate  agreement  in  principle  ("Release  Agreement"),
     contingent on approval of the Plan by the Bankruptcy Court, under which the
     Company would be released from any and all present and future liability for
     Fuller-Austin  asbestos  liability  in  consideration  of the  transfer  of
     certain  Company  property  and  insurance  rights  to  the   Fuller-Austin
     bankruptcy   trust,   and  the  payment  to  the  trust  of  certain   cash
     consideration. The total amount reserved for this purpose was $14.0 million
     at December  31, 1997.  During the first six months of 1998,  approximately
     $2.0 million was used for legal and other related costs.

     In the event  Fuller-Austin is unsuccessful in concluding such negotiations
     for a global  settlement  of all present and future  asbestos  claims,  and
     depending on the progress of the coverage  litigation,  the extent to which
     carriers agree to voluntarily pay Fuller-Austin asbestos claims pending the
     resolution  of the  coverage  litigation,  and the interim  cash demands on
     Fuller-Austin  in  connection  with  pending  and future  asbestos  claims,
     Fuller-Austin  may seek protection under the Code without a global or other
     settlement with the asbestos  claimants.  Fuller-Austin has been advised by
     its  bankruptcy  counsel that,  upon filing for such  protection  under the
     Code,  all pending  claims  against  Fuller-Austin  (including all asbestos
     claims)  would  be  stayed,  and the  disposition  of such  claims  and all
     Fuller-Austin  assets,  including its insurance assets, would be subject to
     the  jurisdiction  of the U.S.  Bankruptcy  Court in which  Fuller-Austin's
     petition is filed.

     There can be no assurance at this time that the global  settlement  will be
     concluded. Also, it is impossible to determine whether it will be necessary
     for   Fuller-Austin   to  otherwise  seek  protection  from  its  creditors
     (including asbestos claimants) under the Code.

     (b)   General Litigation

     The Company has  retained  certain  liability in  connection  with its 1989
     divestiture  of its  major  electrical  contracting  business,  Dynalectric
     Company  ("Dynalectric").  The Company and Dynalectric were sued in 1988 in
     Bergen County Superior Court,  New Jersey,  by a former  Dynalectric  joint
     venture  partner/subcontractor   (subcontractor).   The  subcontractor  has
     alleged that its  subcontract to furnish  certain  software and services in
     connection  with  a  major  municipal  traffic  signalization  project  was
     improperly  terminated by  Dynalectric  and that  Dynalectric  fraudulently
     diverted  funds due,  misappropriated  its trade  secrets  and  proprietary
     information,  fraudulently  induced  it to enter  the  joint  venture,  and
     conspired  with other  defendants  to commit acts in  violation  of the New
     Jersey Racketeering  Influenced and Corrupt Organization Act. The aggregate
     dollar  amount  of  these  claims  has not  been  formally  recited  in the
     subcontractor's complaint. Dynalectric has also filed certain counterclaims
     against the former subcontractor.  The Company and Dynalectric believe that
     they have valid  defenses,  and/or  that any  liability  would be offset by
     recoveries under the counterclaims.  The Company and Dynalectric were found
     by a Special  Master to have committed  certain  discovery  abuses,  but no
     monetary  amount  of  sanctions  has yet been  assessed.  The  Company  and
     Dynalectric expect to file an appeal with respect to this finding.  In late
     1997, the state court granted  Dynalectric's  Motion to Compel  Arbitration
     that originally had been filed in 1988. The  arbitration  commenced in July
     1998 and is expected to be completed during 1998. The Company believes that
     it has established adequate reserves for the contemplated defense costs and
     for the cost of obtaining  enforcement of arbitration  provisions contained
     in the contract.

     In November,  1994, the Company acquired an information technology business
     which was involved in various  disputes  with  federal and state  agencies,
     including  two  contract  default  actions  and a qui tam  suit by a former
     employee alleging improper billing of a federal government agency customer.
     The Company has contractual rights to indemnification from the former owner
     of the acquired  subsidiary  with respect to the defense of all such claims
     and litigation, as well as all liability for damages when and if proven. In
     October,  1995,  one of the federal  agencies  asserted a claim against the
     subsidiary  and  gave the  Company  notice  that it  intended  to  withhold
     payments  against the contract  under which the claim arose.  To date,  the
     agency has withheld approximately $3.0 million due the Company under one of
     the  aforementioned  disputes.  This  subsidiary has submitted a demand for
     indemnification  to the  former  owner of the  subsidiary,  which  has been
     denied.  The subsidiary  recently  received an arbitration award confirming
     that it is entitled to indemnification.

     As  to  environmental   issues,   neither  the  Company,  nor  any  of  its
     subsidiaries,  is named a Potentially  Responsible Party (as defined in the
     Comprehensive  Environmental  Response,   Compensation  and  Liability  Act
     (CERCLA)) at any site. The Company,  however, did undertake, as part of the
     1988 divestiture of a petrochemical  engineering subsidiary,  an obligation
     to install and operate a soil and water remediation  system at a subsidiary
     research  facility site in New Jersey and also is required to pay the costs
     of continued operation of the remediation system. In addition, the Company,
     pursuant  to  the  1995  sale  of  its  Commercial  Aviation  Business,  is
     responsible  for the  costs of  clean-up  of  environmental  conditions  at
     certain designated sites. Such costs may include the removal and subsequent
     replacement of contaminated soil, concrete, tanks, etc., that existed prior
     to the sale of the Commercial Aviation Business.

     The Company is a party to other civil and  contractual  lawsuits which have
     arisen in the normal  course of  business  for which  potential  liability,
     including costs of defense,  constitute the remainder of the $139.6 million
     discussed  above.  The  estimated  probable  liability  for these issues is
     approximately $10.0 million and is substantially covered by insurance.  All
     of the insured  claims are within  policy  limits and have been tendered to
     and  accepted by the  applicable  carriers.  The  Company  has  recorded an
     offsetting  asset (Other  Assets) and  liability  (long-term  liability) of
     $10.0 million at July 2, 1998 and December 31, 1997 for these items.

     The Company has recorded its best estimate of the aggregate  liability that
     will result from these  matters.  While it is not  possible to predict with
     certainty the outcome of litigation and other matters  discussed  above, it
     is the opinion of the Company's management,  based in part upon opinions of
     counsel, insurance in force and the facts currently known, that liabilities
     in excess of those  recorded,  if any,  arising from such matters would not
     have a material  adverse effect on the results of operations,  consolidated
     financial position or liquidity of the Company over the long-term. However,
     it is possible that the timing of the resolution of individual issues could
     result in a significant  impact on the operating  results and/or  liquidity
     for one or more future reporting periods.

     The major  portion of the  Company's  business  involves  contracting  with
     departments and agencies of, and prime contractors to, the U.S. Government,
     and such contracts are subject to possible  termination for the convenience
     of the  government  and to audit and possible  adjustment to give effect to
     unallowable  costs  under  cost-type   contracts  or  to  other  regulatory
     requirements affecting both cost-type and fixed-price  contracts.  Payments
     received by the Company for allowable direct and indirect costs are subject
     to  adjustment  and  repayment  after audit by  government  auditors if the
     payments  exceed  allowable  costs.  Audits  have  been  completed  on  the
     Company's  incurred  contract  costs  through 1986 and are  continuing  for
     subsequent  periods.  The Company  has  included  an  allowance  for excess
     billings and contract  losses in its financial  statements that it believes
     is adequate based on its interpretation of contracting regulations and past
     experience. There can be no assurance, however, that this allowance will be
     adequate.  The  Company  is  aware  of  various  costs  questioned  by  the
     government,  but cannot determine the outcome of the audit findings at this
     time.   In   addition,   the  Company  is   occasionally   the  subject  of
     investigations  by  the  Department  of  Justice  and  other  investigative
     organizations,  resulting  from  employee and other  allegations  regarding
     business  practices.  In  management's  opinion,  there are no  outstanding
     issues of this  nature at July 2,  1998 that will have a  material  adverse
     effect  on  the  Company's  consolidated  financial  position,  results  of
     operations or liquidity.












10.  The Company has three  reportable  segments:  Information  and  Engineering
     Technology  (I&ET),  Aerospace  Technology  (AT) and Enterprise  Management
     (EM).

     Revenues, operating profit and identifiable assets by segment are presented
     below:

                                        Three Months Ended     Six Months Ended
                                        ------------------     ----------------
                                       July 2,     June 26,   July 2,   June 26,
                                         1998        1997       1998       1997
                                       -------     --------   -------   --------
Revenues
--------
 I&ET                                $ 77,866   $ 69,023    $152,024   $131,588
 AT                                   119,915    113,441     236,412    218,035
 EM                                   105,821    106,231     213,039    210,209
                                     --------   --------    --------   --------
                                     $303,602   $288,695    $601,475   $559,832
                                     ========   ========    ========   ========
Operating Profit
----------------
 I&ET                                 $ 3,677    $ 2,963     $ 8,089    $ 6,811
 AT                                     4,936      4,881       8,976      7,961
 EM                                     5,586      4,037      10,633      8,953
                                      -------    -------     -------    -------
                                       14,199     11,881      27,698     23,725

Corporate selling and administrative    4,793      4,353      10,061      8,793
Interest (net expense)                  3,527      3,270       6,971      5,893
Goodwill amortization                     401        389         939        783
Minority interest included in 
   operating profit                      (528)      (203)       (947)      (611)
Acquisition costs                         177        318         357      1,212
Other miscellaneous                       (24)        74        (395)       (30)
                                      --------    -------   ---------   --------
Earnings from continuing operations 
  before income taxes and minority
  interest                           $  5,853   $  3,680    $ 10,712   $  7,685
                                     ========   ========    ========   ========


                                  July 2,                   December 31,
                                    1998                           1997
                                  -------                   ------------
Identifiable Assets
-------------------
 I&ET                           $120,582                       $118,016
 AT                               79,328                         75,239
 EM                               96,183                         70,026
 Other (a)                        51,195                         51,575
 Corporate                        51,375                         67,728
                                --------                       --------
                                $398,663                       $382,584
                                ========                       ========




(a)  Includes  assets  related to   probable   insurance indemnification
     recoveries  pertaining to a former  subsidiary
                                 (See Note 9).

<PAGE>


                 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATIONS

The following discussion of financial condition and results of operations should
be read in conjunction with the 1997 Form 10-K.

Working  capital at July 2, 1998 was $83.3  million  compared to $84.2  million
at December  31,  1997,  a decrease of $0.9 million.

Cash used by  operations  was $2.2  million in the first six months of 1998,  as
compared to $11.2  million  cash  provided  in the first six months of 1997,  an
increase  in cash used of $13.4  million.  The  increase  resulted  mostly  from
increases in accounts receivable,  primarily from increase revenues and start-up
of new contracts such as Department of Justice  contract for the Immigration and
Naturalization  Service.  Excluding the effect of changes in current  assets and
liabilities, operating activities produced a positive cash flow of $11.4 million
in 1998 as  compared  to  $10.2  million  in 1997.  The  increase  in cash  flow
attributable  to increased  earnings from  continuing  operations  was partially
offset  by  a  decrease  in  non-cash   charges,   primarily   depreciation  and
amortization.

Investing  activities  used funds of $16.7 million in the first six months 1998,
principally for the acquisition of FMAS, the purchase of property and equipment,
and for the purchase of new  software for internal use as part of the  Company's
year 2000 plan.  The  Company  has  capitalized  $3.1  million of  internal  use
software and anticipates  capitalizing  another $8.0 million over the next year.
During the first six months of 1997, cash used by investing  activities was $3.7
million, principally for the purchase of property and equipment.

Financing  activities  provided funds of $4.0 million in the first six months of
1998.  During the first half of 1998,  the Company  borrowed  $20.0  million and
repaid $18.0 million of the Contract Receivable  Collateralized Class B Variable
Rate  Notes to finance  working  capital  needs.  During the first half of 1997,
financing  activities used funds of $0.5 million. The proceeds from the issuance
of the 9.5% Senior Notes and the Contract Receivable Collateralized Notes Series
1997-1 were used to retire the Contract Receivable  Collateralized  Notes Series
1992-1,  to a make a loan to the  Employee  Stock  Ownership  Plan  to fund  the
purchase  of the Class C  Preferred  Stock,  to fund the  Company's  purchase of
common stock and warrants from investors and to pay transaction  fees associated
with the placement of the Senior Notes.

In the second half 1998,  the Company  anticipates  a global  settlement  of the
Fuller-Austin  Asbestos  lawsuits under which the Company would be released from
any and all present and future liability for Fuller-Austin asbestos liability in
consideration  of the transfer of certain Company  property and insurance rights
to the Fuller Austin  bankruptcy trust, and payment to the trust of certain cash
considerations.  This settlement is expected to use cash of  approximately  $8.5
million to $10.5 million in the last six months of 1998.

At July 2,  1998,  $75.3  million  of  accounts  receivable  are  restricted  as
collateral for the Contract Receivable Collateralized Notes Series 1997-1.

At July 2, 1998,  backlog  (including option years on government contracts) was
$3.5 billion  compared to $3.6 billion at December 31, 1997, a net decrease of
$0.1 billion.

Results of Operations

Revenues for the second  quarter and first half of 1998 were $303.6  million and
$601.5 million,  respectively,  as compared to $288.7 million and $559.8 million
for the  comparable  periods in 1997,  an  increase  of $14.9  million and $41.6
million, respectively.  Information and Engineering Technology (I&ET), Aerospace
Technology  (AT) and  Enterprise  Management  (EM)  reported  revenues  of $77.9
million, $119.9 million and $105.8 million, respectively, for the second quarter
of 1998 as compared to $69.0 million,  $113.4 million and $106.2 million for the
same quarter in 1997.  Revenues  for the first half of 1998 for I&ET,  AT and EM
were  $152.0  million,  $236.4  million  and $213.0  million,  respectively,  an
increase of $20.4 million,  $18.4 million and $2.8 million,  respectively,  over
the same  period in 1997.  Increases  in I&ET's  second  quarter  and first half
revenues were  attributable to increased  tasking and level of effort on several
existing  contracts and to the win of a new contract for  Connecticut  Medicaid.
AT's second  quarter and first half revenue  increases  resulted  primarily from
three new contract  wins in Kuwait,  Angola,  and Qatar.  Increased  services on
existing  contracts and the  installation  of a new  information  system at Fort
Rucker also  contributed  to second  quarter and first half  revenue  increases.
Partially  reducing  these  increases were reduced  business  volumes on several
existing contracts and a contract completion. Revenues increased slightly for EM
for the first half of 1998. Increases in revenues due to a Department of Justice
contract  (Immigration  and  Naturalization   Service),   the  addition  of  the
operations of a seventh ship in the marine services area, and the acquisition of
FMAS Corporation,  a medical outcome  measurement and data abstraction  services
company,  were offset by reduced level of services on several  contracts as well
as completion of several  contracts.  For the second quarter 1998,  decreases in
revenues  were  attributable  to  the   aforementioned   completion  of  several
contracts,  coupled  with the  reduction  in the  level of  effort  on  existing
contracts.

In July  1998,  EM was  informed  that its  customer  at Rocky  Flats  would not
exercise the remaining two one-year options on its contract. This event will not
have a  significant  financial  impact on 1998.  This  contract  was expected to
generate revenues of $35 million to $50 million per year and operating profit of
$2.0 million to $3.0 million for the next two years.  Management anticipates the
award of two significant contract wins in EM that will substantially offset this
lost business in those future years.

Cost of  Services  for the second  quarter  and first half of 1998 was 94.8% and
95.1% of revenue as  compared to 95.7% and 95.8% for the  comparable  periods in
1997.  This  resulted in gross  margins of $15.7  million  (5.2%) for the second
quarter of 1998 as compared to $12.3  million  (4.3%) for the second  quarter of
1997 and $29.6  million  (4.9%) and $23.7  million  (4.2%) for the first half of
1998 and 1997,  respectively.  Contract  wins and  increased  level of effort on
existing contracts contributed to the improvement in gross margin and offset any
decreases  attributable to contract  losses.  Additionally,  the Company charged
$0.5 million to Cost of Services in the first  quarter of 1997,  representing  a
partial write-off of certain purchased software as the result of net realization
concerns and $0.4 million of residual  losses  recorded in conjunction  with the
closure of the Company's operations in Mexico.

Interest expense was $3.9 million in the second quarter of 1998,  unchanged from
the comparable period in 1997. For the first half of 1998,  interest expense was
$7.6  million,  up $0.7  million  compared to $6.9 million for the first half of
1997, primarily due to increased levels of indebtedness.

The  provision  for  income  taxes in 1998 and 1997 is based  upon an  estimated
annual effective tax rate,  including the impact of differences between the book
value of assets and liabilities  recognized for financial reporting purposes and
the basis recognized for tax purposes.

Year 2000

The "Year 2000" issue ("Y2K")  concerns the inability of some computer  software
and  hardware to  accommodate  "00" in the two digit data field used to identify
the year. An analysis of the Company's  core systems  (financial,  payroll,  and
human  resources)  software  has been  completed  and a  replacement  of current
software with a new enterprise resource planning software is underway. Projected
completion  of the  replacement  of all core  systems  is  September  1999.  The
implementation  phase of the  project  is on  schedule  at the end of the second
quarter  of  1998.  Total  expenditures  of $15  million  in 1998  and  1999 are
anticipated to complete this resystemization of which $11 million is expected to
be capitalized.

In the event the replacement of core systems cannot be completed  before the end
of the  millennium,  a contingency  plan calling for  remediation of the current
commercial  software  packages  is in place.  This  remediation  has either been
completed  by the vendors of the  commercial  packages,  or is in  process,  and
compliant packages can be obtained if necessary.

A Year  2000  Program  Management  Plan has been  developed  and put in place to
address  all  other Y2K  compliance  issues.  A  multifunctional  task  group is
overseeing  assessment and  remediation  or replacement  efforts in the areas of
core systems, network and office automation and field IT and non-IT systems. The
assessment and  remediation/replacement  phases are well underway,  and no major
problems have been identified that would materially affect the company's ability
to perform on any of its current contracts.

An  employee  awareness  program has been  initiated  that is intended to inform
employees  and  managers of the  potential  for Y2K  problems.  This  program is
intended to address "home grown" office automation systems.  None of these types
of systems is considered mission critical to the company as a whole.

Infrastructure  items  that may have Y2K  compliance  problems  such as  desktop
workstations,   network  components,  servers,  etc.  are  being  systematically
replaced as part of the normal infrastructure  replacement strategy.  The annual
expenditures for these components are not significantly above levels that can be
expected  in the  normal  course  of  business.  Depreciation  and  amortization
expenses for the  resystemization  and for these  infrastructure  components are
allowable costs under government contracts.

Forward Looking Statements

This  Form 10-Q  contains  statements  which,  to the  extent  that they are not
recitations of historical fact, constitute "forward looking-statements" that are
based on management's  expectations,  estimates,  projections  and  assumptions.
Words  such  as  "expects,"  "anticipates,"  "plans,"  "believes,"  "estimates,"
variations of such words and similar  expressions  are intended to identify such
forward-looking  statements that include, but are not limited to, projections of
future  performance,  assessment  of  contingent  liabilities  and  expectations
concerning  liquidity,  cash  flow and  contract  awards.  Such  forward-looking
statements  are  made  pursuant  to the safe  harbor  provision  of the  Private
Securities Litigation Reform Act of 1995. These statements are not guarantees of
future  performance  and  involve  certain  risks  and  uncertainties  that  are
difficult to predict.  Therefore,  actual  future  results and trends may differ
materially from what is forecast in forward-looking  statements due to a variety
of factors, including the Company's successful execution of internal performance
plans;  the outcome of  litigation  in  process;  labor  negotiations;  changing
priorities or reductions in the U.S.  Government defense budget; and termination
of government contracts due to unilateral government action.

PART II - OTHER INFORMATION

ITEM 1.  Legal Proceedings

This item is  incorporated  herein by  reference  to Note 9 to the  Consolidated
Condensed  Financial  Statements  included elsewhere in this quarterly Report on
Form 10-Q.

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

At the  annual  meeting  of  stockholders,  held on July 1, 1998,  at  DynCorp's
headquarters in Reston, Virginia, the stockholders of DynCorp:

(a) Re-elected the following individuals to the Board of Directors for
    three-year terms:

                                 Votes Cast For             Votes Withheld

  Dan R. Bannister                  9,121,351                     522,263
  Paul G. Kaminski                  9,131,038                     522,576
  David L. Reichardt                9,171,936                     481,678

(b) Ratified the  appointment of Authur  Andersen LLP,  public  accountants,  to
  audit the consolidated  financial  statements of the Company as of and for the
  fiscal year ending  December  31,  1998.  There were  9,109,921  votes for the
  appointment, 248,337 votes withheld, and 295,355 abstentions.


ITEM 6.  Exhibits and Reports on Form 8-K

(a)  Exhibits

     None filed

(b)  Reports on Form 8-K

     None filed



                                   SIGNATURES


Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
Registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.

                                     DYNCORP



                                                  /s/ P. C. FitzPatrick
Date:  August 17, 1998
                                                 P.C. FitzPatrick
                                                 Senior Vice President
                                                 and Chief Financial Officer




                                                  /s/ J. J. Fitzgerald

Date:  August 17, 1998                           J.J. Fitzgerald
                                                 Vice President and Controller