<PAGE>

                                   FORM 10-Q

                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934

    For The Quarter Ended September 30, 1999

                                      OR

[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934

    For the transition period from ____________ to ____________

                       Commission File Number: 000-23585


                               SM&A CORPORATION
                               ----------------
            (Exact name of registrant as specified in its charter)


                 California                            33-0080929
                 ----------                            ----------
        (State or other jurisdiction                (I.R.S. Employer
      of incorporation or organization)            Identification No.)


      4695 MacArthur Court, Eighth Floor, Newport Beach, California 92660
-------------------------------------------------------------------------------
                   (Address of principal executive offices)


                                (949) 975-1550
-------------------------------------------------------------------------------
             (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.

                                                 Outstanding at
                 Class                         September 30, 1999
                 -----                         ------------------
             Common Stock                          16,136,239

<PAGE>

                       SM&A CORPORATION AND SUBSIDIARIES

                                     INDEX

<TABLE>
<CAPTION>
                                                                         Page
                                                                         -----
 <C>      <S>                                                            <C>
 PART I.  FINANCIAL INFORMATION


 Item 1   Consolidated Financial Statements


          Consolidated Balance Sheets as of September 30, 1999 and
           December 31, 1998...........................................      3


          Consolidated Statements of Earnings for the three months and
           nine months ended September 30, 1999 and 1998...............      4


          Consolidated Statements of Cash Flows for the nine months
           ended September 30, 1999 and 1998...........................      5


          Notes to Consolidated Financial Statements...................   6-10


 Item 2   Management's Discussion and Analysis of Financial Condition
           and Results of Operations...................................  11-21


 PART II. OTHER INFORMATION


 Item 1   Legal Proceedings............................................     22


 Item 2   Changes in Securities and Use of Proceeds....................     22


 Item 3   Defaults Upon Senior Securities..............................     22


 Item 4   Submission of Matters to Vote of Security Holders............     22


 Item 5   Other Information............................................     22


 Item 6   Exhibits and Reports on Form 8-K.............................     22


 Signature..............................................................    23
</TABLE>

                                       2
<PAGE>

                       SM&A CORPORATION AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS
                                 (In thousands)

<TABLE>
<CAPTION>
                                                     September 30, December 31,
                                                         1999          1998
                                                     ------------- ------------
                       ASSETS
                       ------
<S>                                                  <C>           <C>
Current Assets:
  Cash and cash equivalents.........................    $   442      $   454
  Accounts receivable, net of allowance for doubtful
   accounts.........................................     17,150       15,326
  Costs and estimated earnings in excess of billings
   on contracts in progress, net of allowance.......     12,023        7,545
  Prepaid income taxes..............................      3,455        2,085
  Prepaid expenses and other assets.................      1,575          559
                                                        -------      -------
    Total current assets............................     34,645       25,969

Property and equipment..............................      4,363        2,390
Notes receivable--affiliates........................      1,724        2,832
Other assets........................................      6,536        3,346
Goodwill............................................     39,147       31,787
                                                        -------      -------
    Total assets....................................    $86,415      $66,324
                                                        =======      =======

        LIABILITIES AND SHAREHOLDERS' EQUITY
        ------------------------------------

Current Liabilities:
  Trade accounts payable............................    $ 2,903      $ 2,496
  Accrued compensation and payroll taxes............      5,189        6,585
  Deferred income taxes.............................        566          265
  Other liabilities.................................        484          644
                                                        -------      -------
    Total current liabilities.......................      9,142        9,990
Deferred income taxes...............................        659          725
Other liabilities...................................        566          280
Long-term debt, excluding current portion...........     21,517          --
                                                        -------      -------
    Total liabilities...............................     31,884       10,995

Shareholders' equity:
  Common stock, no par value........................        154          165
  Additional paid in capital........................     45,294       54,164
  Retained earnings.................................      9,083        1,000
                                                        -------      -------
    Total shareholders' equity......................     54,531       55,329
                                                        -------      -------
    Total liabilities and shareholders' equity......    $86,415      $66,324
                                                        =======      =======
</TABLE>

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

                                       3
<PAGE>

                       SM&A CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF EARNINGS
                     (In thousands, except per share data)

<TABLE>
<CAPTION>
                                     Three Months Ended    Nine Months Ended
                                        September 30,        September 30,
                                     --------------------  ------------------
                                       1999       1998       1999      1998
                                     ---------  ---------  --------  --------
<S>                                  <C>        <C>        <C>       <C>
Net revenues........................ $  27,183  $  20,546  $ 79,424  $ 43,889
Cost of revenues....................    17,027     12,077    47,429    25,025
                                     ---------  ---------  --------  --------
  Gross margin......................    10,156      8,469    31,995    18,864

Selling, general and administrative
 expenses...........................     6,182      5,343    17,035     9,756
Amortization of goodwill and other
 intangibles........................       322        302       952       388
                                     ---------  ---------  --------  --------
  Operating income..................     3,652      2,824    14,008     8,720
Other income (expense):
  Interest expense..................      (300)       (28)     (522)      (87)
  Other, net........................       146        229       278     1,485
                                     ---------  ---------  --------  --------
    Income before income taxes......     3,498      3,025    13,764    10,118

Income tax expense..................     1,447      1,326     5,681     4,243
                                     ---------  ---------  --------  --------
  Income from continuing
   operations.......................     2,051      1,699     8,083     5,875
Income from operations of
 discontinued business,
  Net of income tax benefit.........       --         (86)      --        (57)
                                     ---------  ---------  --------  --------
Net income.......................... $   2,051  $   1,613  $  8,083  $  5,818
                                     ---------  ---------  --------  --------
Income per share from continuing
 operations:
  Basic............................. $    0.13  $    0.10  $   0.50  $   0.38
                                     =========  =========  ========  ========
  Diluted........................... $    0.13  $    0.10  $   0.49  $   0.37
                                     =========  =========  ========  ========
Net income per share:
  Basic............................. $    0.13  $    0.10  $   0.50  $   0.38
                                     =========  =========  ========  ========
  Diluted........................... $    0.13  $    0.10  $   0.49  $   0.37
                                     =========  =========  ========  ========
Weighted average common shares
 outstanding:
  Basic.............................    16,307     16,371    16,316    15,346
  Diluted...........................    16,371     16,794    16,420    15,674
</TABLE>

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

                                       4
<PAGE>

                       SM&A CORPORATION AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)

<TABLE>
<CAPTION>
                                                           Nine Months Ended
                                                             September 30,
                                                           ------------------
                                                             1999      1998
                                                           --------  --------
<S>                                                        <C>       <C>
Cash flows from operating activities:
  Net income.............................................. $  8,083  $  5,818
  Adjustments to reconcile net income to net cash used in
   operating activities:
   Provision for doubtful accounts........................      112        96
   Depreciation and amortization..........................    1,885       780
   Gain on sale of fixed assets...........................      --       (788)
   Changes in assets and liabilities, net of effect of
    acquisitions:
     Accounts receivable..................................   (2,193)    2,937
     Costs and estimated earnings in excess of billings...   (5,346)   (5,479)
     Prepaid expenses and other assets....................     (780)       52
     Other assets.........................................     (238)     (335)
     Deferred tax asset...................................       66        13
     Trade accounts payable...............................      305    (1,799)
     Accrued compensation and payroll taxes...............   (1,693)   (2,837)
     Income taxes.........................................   (1,216)   (1,208)
     Deferred tax liability...............................     (140)    1,154
     Other deferred liabilities...........................       23       (32)
     Other liabilities....................................     (403)     (801)
                                                           --------  --------
       Net cash used in operating activities..............   (1,535)   (2,429)
Cash flows from investing activities:
  Acquisitions, net of cash acquired......................   (5,889)  (11,874)
  Additional expenditures related to acquisitions.........     (815)      --
  Increase in capitalized software........................   (3,252)     (251)
  Purchases of property and equipment.....................   (2,264)     (314)
  Collection of advances to shareholder...................    1,108       679
                                                           --------  --------
       Net cash used in investing activities..............  (11,112)  (11,760)
Cash flows from financing activities:
  Proceeds from issuance of common stock..................      329    22,421
  Advances (repayments) of long-term debt, net............   21,517    (5,736)
  Distributions to shareholders...........................      --       (710)
  Common stock repurchases................................   (9,211)      --
                                                           --------  --------
  Net cash provided by financing activities...............   12,635    15,975
  Net increase (decrease) in cash and cash equivalents....      (12)    1,786
Cash at beginning of period...............................      454       150
                                                           --------  --------
Cash at end of period..................................... $    442  $  1,936
                                                           ========  ========
Supplemental information-Cash paid for:
  Interest................................................ $    274  $    169
  Income taxes............................................ $  6,865  $  3,378
                                                           ========  ========
Supplemental schedule of noncash investing activity:
Detail of businesses acquired and other purchase
 accounting adjustments as follows (in thousands):
  Cash consideration paid for acquisitions................ $  5,636
  Plus acquisitions expenses..............................      353
  Less cash acquired in acquisitions......................     (100)
                                                           --------
   Cash paid for acquisitions, net of cash acquired....... $  5,889
                                                           ========
</TABLE>

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

                                       5
<PAGE>

                       SM&A CORPORATION AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

    For the Three Months and Nine Months Ended September 30, 1999 and 1998

NOTE 1. GENERAL

  SM&A Corporation (formerly Steven Myers & Associates, Inc.) and Subsidiaries
("the Company") was incorporated in California on January 25, 1985. The
Company's primary business is providing proposal management and contract
support services. In January 1998, the Company completed an initial public
offering ("IPO") of Common Stock. Subsequently, in May 1998, the Company
acquired Space Applications Corporation ("SAC"). SAC provides systems
engineering, scientific research, program management support and technical
support to military and civilian space programs, the intelligence community,
and the armed services. In August 1998, the Company acquired Decision-Science
Applications, Inc. ("DSA"). DSA provides system engineering, information
systems development, scientific research and program management support to the
U.S. Government, principally the Department of Defense. In March 1999, the
Company acquired Systems Integration Software, Inc. ("SIS"). SIS provides
systems engineering, information systems development, scientific research and
program management support to the U.S. Government, principally the Department
of Defense. In September 1999, the Company acquired Kapos Associates Inc.
("KAI"). KAI provides simulation and test systems engineering services to the
U.S. Government. SAC, DSA, SIS and KAI are collectively referred to as "the
Acquisitions". These transactions were accounted for as purchases and,
accordingly, the consolidated financial statements include the financial
results of the Acquisitions from the effective dates of each such acquisition.
On December 31, 1998, SAC merged into DSA. In connection with the merger, the
surviving corporation changed its name to SM&A Corporation (East).

  The accompanying unaudited interim consolidated financial statements of the
Company have been prepared pursuant to the rules of the Securities and
Exchange Commission for quarterly Reports on Form 10-Q and do not include all
of the information and note disclosures required by generally accepted
accounting principles. The information furnished herein includes all
adjustments, consisting of normal recurring adjustments, which are, in the
opinion of management, necessary for a fair presentation of results for these
interim periods.

  The results of operations for the three months and nine months ended
September 30, 1999 are not necessarily indicative of the results to be
expected for the entire fiscal year ending December 31, 1999.

  The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany accounts and transactions
have been eliminated in consolidation.

  Goodwill, which represents the excess of purchase price over fair value of
net assets acquired, is amortized on a straight-line basis over the expected
periods to be benefited, generally 30 years. The recoverability of goodwill is
determined by comparing the carrying value of intangible assets to the
estimated future operating income of the Company on an undiscounted cash-flow
basis. Should the carrying value of goodwill exceed the estimated operating
income for the expected period of benefit, an impairment for the excess would
be recorded at that time. As of September 30, 1999, no impairment has been
recognized.

  In addition, these financial statements should be read in conjunction with
the Company's audited financial statements and notes thereto for the year
ended December 31, 1998. This supplementary information is included in Form
10-K filed by the Company with the Securities and Exchange Commission on March
31, 1999.

  Additional supplementary information which includes the historical pro-forma
financial statements of the Company prior to its IPO is included in Form S-1
filed by the Company with the Securities and Exchange Commission on January
28, 1998, as amended (the "S-1"). Due to the Company converting from an
S corporation to a C corporation, the information found in the S-1 filing
includes pro forma operating results. These pro formas reflect an adjustment
of salaries and bonuses paid to three principal executive officers (which

                                       6
<PAGE>

                       SM&A CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

    For the Three Months and Nine Months Ended September 30, 1999 and 1998

have historically been included in selling, general, and administrative
expenses) in excess or less than $2.7 million ($675,000 per quarter) in the
aggregate (the maximum salaries and bonuses payable for 1998 under the
Company's Executive Compensation Program) and adjustments for Federal and
state income taxes as if the Company had been taxed as a C corporation rather
than an S corporation during such period.

  Certain reclassifications have been made to the prior period financial
statements to conform to current period presentation.

NOTE 2. NET INCOME PER SHARE

  Basic net income per share is computed by dividing net income available to
common shareholders by the weighted average number of common shares
outstanding during the periods presented. Diluted net income per share is
computed by dividing net income available to common shareholders by the
weighted average number of common and common equivalent shares outstanding
during the periods presented assuming the exercise of all in-the-money stock
options. Common equivalent shares have not been included where inclusion would
be anti-dilutive.

  The following table illustrates the computation of basic and diluted
earnings per common share (in thousands, except per share data):

<TABLE>
<CAPTION>
                                                  Three Months     Nine Months
                                                      Ended           Ended
                                                  September 30,   September 30,
                                                 --------------- ---------------
                                                  1999    1998    1999    1998
                                                 ------- ------- ------- -------
<S>                                              <C>     <C>     <C>     <C>
Numerator:
Numerator for basic and diluted income per
 common share - net earnings...................  $ 2,051 $ 1,613 $ 8,083 $ 5,818
                                                 ======= ======= ======= =======
Denominator:
Denominator for basic income per share -
 weighted average shares outstanding during the
 period........................................   16,307  16,371  16,316  15,346
Incremental common shares attributable to
 dilutive outstanding stock options............       64     423     104     328
                                                 ------- ------- ------- -------
Denominator for diluted income per common
 share.........................................   16,371  16,794  16,420  15,674
                                                 ======= ======= ======= =======
Basic net income per common share..............  $   .13 $   .10 $   .50 $   .38
                                                 ======= ======= ======= =======
Diluted net income per common share............  $   .13 $   .10 $   .49 $   .37
                                                 ======= ======= ======= =======
</TABLE>

NOTE 3. INCOME TAX PROVISION

  The Company provides for income taxes using an asset and liability approach
that requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the
Company's financial statements or tax returns. In estimating future tax
consequences, the Company generally considers all expected future events other
than enactments of changes in the tax laws or rates.

NOTE 4. ACQUISITIONS

  In March 1999, the Company purchased all the outstanding common shares of
SIS. The transaction was for cash of $3,263,000 and a one-year earn-out,
contingent upon the achievement of certain operating results. This transaction
was accounted for under the purchase method of accounting and, accordingly,
the consolidated

                                       7
<PAGE>

                       SM&A CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

    For the Three Months and Nine Months Ended September 30, 1999 and 1998

financial statements of the Company for the nine months ended September 30,
1999, include the financial results of SIS from March 1, 1999, the beginning
of the accounting period in which the purchase transaction was finalized.

  In September 1999, the Company purchased all of the outstanding shares of
KAI for cash of $2,373,000 and a two-year earn out, contingent upon
achievement of certain operating results. The transaction was accounted for
under the purchase method of accounting and, accordingly, the consolidated
financial statements of the Company for the three months and nine months ended
September 30, 1999 include the financial results of KAI from September 1,
1999, the beginning of the accounting period in which the transaction was
finalized.

  In August 1998, the Company issued 714,839 unregistered shares of common
stock valued at approximately $14.4 million, and $14 million cash for all the
outstanding common stock and options of DSA. This transaction was accounted
for as a purchase and, accordingly, the consolidated financial statements of
the Company for twelve months ended December 31, 1998 include the financial
results of DSA from August 1, 1998, the beginning of the accounting period in
which the purchase transaction was finalized.

  In May 1998, the Company issued 819,743 unregistered shares of common stock
valued at approximately $14.7 million, and stock options with a fair value of
$2.7 million for all the outstanding common stock of SAC. This transaction was
accounted for as a purchase and, accordingly, the consolidated financial
statements of the Company for the twelve months ended December 31, 1998,
include the financial results of SAC from May 18, 1998, the date of the
private placement memorandum for SAC. Due to certain price protection
provisions relating to the shares of common stock issued in connection with
the acquisition of SAC and the recent market price of the Company's common
stock, the Company issued 703,530 additional shares of common stock to former
shareholders of SAC based upon the market price of the common stock at certain
defined liquidation dates.

  The shareholders of common stock issued in the SAC and DSA acquisitions had
demand registration rights. Substantially all of the shareholders exercised
such demand rights on February 1, 1999 and on April 29, 1999, the Company
filed a registration statement with the SEC on Form S-3 to register these
common shares.

  The Company recorded goodwill of approximately $40.5 million as a result of
the Acquisitions. The Company incurred costs and expenses in connection with
the Acquisitions, including legal and accounting, and other various expenses.
Eligible costs will be capitalized as part of goodwill in accordance with
generally accepted accounting principles (GAAP). The allocation of the
purchase price for the Acquisitions and other purchase accounting adjustments
is as follows (in thousands):

<TABLE>
      <S>                                                              <C>
      Total purchase price, net....................................... $ 51,403
      Net assets acquired.............................................  (12,615)
      Acquisition costs...............................................    1,759
                                                                       --------
      Goodwill........................................................   40,547
      Less accumulated amortization...................................   (1,400)
                                                                       --------
      Goodwill, net................................................... $ 39,147
                                                                       ========
</TABLE>

                                       8
<PAGE>

                       SM&A CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

    For the Three Months and Nine Months Ended September 30, 1999 and 1998

  The following table presents unaudited historical results of operations for
the three months and nine months ended September 30, 1999 and unaudited pro
forma results of operations for three months and nine months ended September
30, 1998 assuming the acquisitions of SAC and DSA occurred as of January 1,
1998 (in thousands, except per share data):

<TABLE>
<CAPTION>
                                                Three Months      Nine Months
                                                    Ended            Ended
                                                September 30,    September 30,
                                               ---------------  ---------------
                                                1999    1998     1999    1998
                                               ------- -------  ------- -------
<S>                                            <C>     <C>      <C>     <C>
Net revenue................................... $27,183 $23,019  $79,424 $71,882
                                               ======= =======  ======= =======
Income from continuing operations.............   2,051   1,578    8,083   5,468
Income from discontinued operations...........     --      (86)     --      (25)
                                               ------- -------  ------- -------
Net income.................................... $ 2,051 $ 1,492  $ 8,083 $ 5,443
                                               ======= =======  ======= =======
Net income per share:
  Basic....................................... $   .13 $   .09  $   .50 $   .33
                                               ======= =======  ======= =======
  Diluted..................................... $   .13 $   .09  $   .49 $   .32
                                               ======= =======  ======= =======
Weighted average shares outstanding:
  Basic.......................................  16,307  16,371   16,316  16,346
  Diluted.....................................  16,371  16,794   16,420  16,674
</TABLE>

  The pro forma data includes adjustments which have been applied to reflect
the purchases of SAC and DSA and the addition of amortization related to
intangible assets acquired. The pro forma data adjustments also include the
presentation of Staminet, Inc. (a subsidiary of the Company) as a discontinued
operation as of January 1, 1998.

  For the combined pro forma basic earnings per share figures, it is assumed
that 12,900,000 shares of SM&A common stock were outstanding since January 1,
1998 along with 819,743 shares issued in the SAC acquisition and 714,839
shares issued in the DSA acquisition. The pro forma results presented above
may not be indicative of future performance.

NOTE 5. LONG-TERM DEBT

  In September 1998, the Company entered into a credit agreement with a bank
which provided for a $25.0 million revolving line of credit. Subsequently, in
June 1999, the Company renegotiated with its lenders to increase the amount
provided under the agreement to $50.0 million. The credit agreement, which is
secured by a first priority interest in substantially all of the assets of the
Company, matures in May 2004 and has two interest rate options; the Bank's
Prime rate or LIBOR plus 1.25% to 2.0%, based on the ratio of total
indebtedness to earnings before interest and taxes. The credit agreement
requires payment of fees on the unused portion of the facility and contains
certain covenants. The most restrictive covenant requires the Company to
maintain minimum consolidated net worth, as defined in the credit agreement.
As of September 30, 1999, the Company was in compliance with all covenants.
The Company had $21,517,000 outstanding under the credit agreement at
September 30, 1999 at an effective interest rate of 7.75%.

NOTE 6. SHARES REPURCHASED

  During the first nine months of 1999 the Company purchased 680,000 shares of
its common stock through open market transactions. The aggregate cost of these
shares was $4.9 million for an average price of $7.28 per share. Additionally,
the Company purchased 549,000 shares of its common stock from the former chief
executive officer of SAC for an aggregate cost of $4.4 million for an average
price of $8.00 per share.


                                       9
<PAGE>

                       SM&A CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

    For the Three Months and Nine Months Ended September 30, 1999 and 1998

NOTE 7. SEGMENT REPORTING DATA

  SM&A Corporation classifies its operations into three lines of business,
each offering a distinct set of services. These lines of business are
summarized as follows; Proposal Management, which involves assisting clients
with the procurement of government and commercial programs; Systems Solutions,
which includes systems engineering, scientific research, program management
and technical support services; and Information Technology Solutions, which
focuses on information systems development.

  The Company evaluates performance based on several factors, of which a
primary financial measure is business segment revenue earned. The revenue
recognition policies of the business segments vary according to the type of
contract being worked.

  Information as to the net revenues of the lines of business is set forth
below. The information presented for the three months and nine months ended
September 30, 1998 and 1999 represents historical supplemental data as
described on the statements of income (in thousands):

<TABLE>
<CAPTION>
                                              Three Months       Nine Months
                                                  Ended             Ended
                                              September 30,     September 30,
                                             ----------------  ----------------
                                              1999     1998     1999     1998
                                             -------  -------  -------  -------
<S>                                          <C>      <C>      <C>      <C>
Net Revenues:
Proposal Management Group................... $ 7,804  $ 7,236  $30,155  $28,207
Systems Solutions Group.....................  13,454    7,125   33,191    9,497
Information Technology Solutions Group......   5,925    6,185   16,078    6,185
                                             -------  -------  -------  -------
  Total revenues............................ $27,183  $20,546  $79,424  $43,889
                                             =======  =======  =======  =======
Operating income (loss):
Proposal Management Group................... $ 2,134  $ 2,388  $10,081  $ 9,193
Systems Solutions Group.....................   3,440    1,853    8,560    2,963
Information Technology Solutions Group......   1,696    1,732    5,325    1,732
Executive Group.............................  (3,618)  (3,149)  (9,958)  (5,168)
                                             -------  -------  -------  -------
  Total operating income.................... $ 3,652  $ 2,824  $14,008  $ 8,720
                                             =======  =======  =======  =======
Income (loss) from continuing operations:
Proposal Management Group................... $ 1,248  $ 1,337  $ 5,132  $ 5,389
Systems Solutions Group.....................   2,012    1,037    5,835    1,698
Information Technology Solutions Group......     992      970    3,122      970
Executive Group.............................  (2,201)  (1,645)  (6,006)  (2,182)
                                             -------  -------  -------  -------
  Total income from continuing operations... $ 2,051  $ 1,699  $ 8,083  $ 5,875
                                             =======  =======  =======  =======
</TABLE>

  In July 1999, a number of employees and their related projects were
transferred from the Proposal Management Group to the Systems Solutions Group.
Had the transfer not been made, PMG revenues would have been $1,186,000 higher
for the quarter and nine months ended September 30, 1999 and cost of revenues
would have been $688,000 higher. Correspondingly, SSG revenues and costs would
have been lower by these amounts for the same period. There was no effect on
the 1998 amounts.

  Certain reclassifications have been made to prior period information to
conform to current period presentation.

                                      10

<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS

  From time to time, the Company through its management, may make forward-
looking public statements, such as statements concerning then expected future
revenues or earnings or concerning projected plans, performance, contract
procurement as well as other estimates relating to future operations. Forward-
looking statements may be in reports filed under the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), in press releases or informal
statements made with the approval of an authorized executive officer. The
words or phrases "will likely result," "are expected to," "will continue," "is
anticipated," "estimate," "project," or similar expressions are intended to
identify "forward-looking statements" within the meaning of Section 21E of the
Exchange Act and Section 27A of the Securities Act of 1933, as amended, as
enacted by the Private Securities Litigation Reform Act of 1995.

  The Company wishes to caution readers not to place undue reliance on these
forward-looking statements which speak only as of the date on which they are
made. In addition, the Company wishes to advise readers that the factors
listed below, as well as other factors not currently identified by management,
could affect the Company's financial or other performance and could cause the
Company's actual results for future periods to differ materially from any
opinions or statements expressed with respect to future periods or events in
any current statement.

  The Company will not undertake and specifically declines any obligation to
publicly release any revisions which may be made to any forward-looking
statements to reflect events or circumstances after the date of such
statements or to reflect the occurrence of anticipated or unanticipated events
which may cause management to re-evaluate such forward-looking statements.

  In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company is hereby filing cautionary
statements identifying important factors that could cause the Company's actual
results to differ materially from those projected in forward-looking
statements of the Company made by or on behalf of the Company.

                                 RISK FACTORS

There are risks associated with our acquisition strategy

  An element of our growth strategy is to expand our operations through the
acquisition of complementary businesses. We cannot be sure that we will be
able to identify suitable acquisition candidates. If identified, we are not
sure we will be able to acquire such companies on suitable terms. Also, other
companies which may have greater resources than us may compete for acquisition
candidates. Such competition could result in an increase in the price of
acquisition targets and a decrease in the number of attractive companies
available for acquisition by us.

  There can be no assurance that the anticipated economic, operational and
other benefits of the Acquisitions or any future acquisitions will be
realized. We cannot be sure that we will be able to successfully integrate
acquired businesses in a timely manner without substantial costs, delays or
other operational or financial problems. The difficulties of such integration
may initially be increased by our need to integrate personnel with different
business backgrounds and corporate cultures. In addition, acquisitions may
involve our spending significant funds. Our failure to effectively integrate
the acquired companies may adversely affect our ability to bid successfully on
certain engagements and otherwise grow our business. Client dissatisfaction or
performance problems at a single acquired company could have an adverse effect
on our reputation as a whole, and this could result in increased difficulty in
marketing services or acquiring companies in the future. In addition, we
cannot be certain that the acquired companies will operate profitably or will
not otherwise hurt operating results. There are other risks with acquisitions.
These include diversion of management attention, potential loss of key clients
or personnel, risks associated with unanticipated problems, liabilities or
contingencies and risks of entering markets in which we have limited or no
direct expertise. The occurrence of some or all of the events described in
these risks could have a material adverse effect on our business, operating
results and financial condition.

                                      11
<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS--(Continued)

We may fail to manage our future growth effectively

  We are currently experiencing significant growth and we intend to pursue
further growth as part of our business strategy. Our ability to manage the
growth of our operations will require us to continue to improve our
operational, financial and other internal systems and to attract, develop,
motivate and retain our employees. Our rapid growth has presented and will
continue to present numerous operational challenges, such as the assimilation
of financial reporting systems and increased pressure on our senior management
and will increase the demands on our systems and internal controls. In
addition, our success depends in large part upon our ability to attract,
develop, motivate and retain highly-skilled professionals and administrative
employees. Our growth strategy will require an increase in our personnel,
particularly skilled systems engineers and program managers. Qualified
professionals are currently in great demand and there is significant
competition for employees with the requisite skills from other major and
boutique consulting firms, research firms, government contractors, proposal
management or business acquisition departments of major corporations and other
professional services firms. There can be no assurance that we will be able to
attract and retain the qualified personnel necessary to pursue our growth
strategy. There can be no assurance that we will be able to maintain or
increase our current rate of growth, effectively manage our expanding
operations or achieve planned growth on a timely or profitable basis. To the
extent that we are unable to manage our growth effectively and efficiently,
our business, financial condition and results of operations could be
materially and adversely affected.

Our business depends substantially on the defense industry

  Approximately 56.3% of our revenues were derived from Proposal Management
Group services related to government procurement contracts for the fiscal year
ended December 31, 1998. In addition, a significant portion of our revenues
are derived from contracts or subcontracts with the U.S. Government. For the
foreseeable future, we expect that the percentage of revenues attributable to
such contracts will continue to be substantial. U.S. Government expenditures
for defense products may decline in the future with such reductions having an
effect on our clients, or, indirectly, on us. A number of trends may
contribute to such a decline, including:

  . large weapon systems being replaced with smaller, more precise high
    technology systems

  . multiple procurements for similar weapons being consolidated into joint
    service procurements, such as the Joint Strike Fighter

  . threat scenarios evolving away from global conflicts to regional
    conflicts

  . the continuing draw down of U.S. military forces in response to the end
    of the Cold War

  In the event expenditures for products of the type manufactured by our
clients are reduced and not offset by other new programs or products, there
will be a reduction in the volume of contracts or subcontracts to be bid upon
by our clients and, as a result, a reduction in the volume of proposals
managed by us. Unless offset, such reductions could materially and adversely
affect our business, operating results and financial condition.

There are risks associated with government contracting

  We are subject to compliance with governmental regulations, both directly
and through government-contractor clients. Fines and penalties could result
from noncompliance or suspension or debarment from the bidding process for
future government contracts. We rely for the continuance and expansion of our
business on a facility security clearance from the U.S. Government, and
individual security clearances, at various levels, for nearly all members of
our staff. There can be no assurance that necessary security clearances will
continue to be made available by the U.S. Government.

                                      12
<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS--(Continued)

  In addition, a significant portion of our revenues are derived from
contracts or subcontracts with the U.S. Government. Our services are performed
pursuant to the following types of contracts:

  . cost reimbursable

  . time-and-materials

  . fixed-price contracts and subcontracts

  Under fixed-price contracts and time-and-materials contracts, we bear any
risk of increased or unexpected costs that may reduce our profits or cause us
to sustain a loss.

  Our U.S. Government contracts and subcontracts are subject to termination,
reduction or modification as a result of changes in the U.S. Government's
requirements or budgetary restrictions, or at the convenience of the U.S.
Government. When we participate as a subcontractor, we are also subject to the
risk that the primary contractor may fail or become unable to perform its
duties and responsibilities as a prime contractor. If a contract were to be
terminated for convenience, we would be reimbursed for allowable costs
incurred up to the date of termination and would be paid a proportionate
amount of the stipulated profits or fees attributable to the work actually
performed.

  Contracts with the U.S. Government are generally complex in nature, and
require us to comply with numerous U.S. Government regulations regarding
discrimination in the hiring of personnel, fringe benefits for employees,
safety, safeguarding classified information, responsibility for U.S.
Government property, fire prevention, equipment maintenance, record keeping
and accounting, management qualifications, drug free work place and numerous
other matters.

  Under certain circumstances the U.S. Government can suspend or bar
individuals or firms from obtaining future contracts with the U.S. Government
for specified periods of time. Any such suspension or disbarment of us or of
our major clients could have a material adverse effect upon us. Our books and
records are subject to annual audit by the Defense Contract Audit Agency,
which can result in adjustments to contract costs and fees. If any costs are
improperly allocated to a contract, such costs are not reimbursable and, if
already reimbursed, will require us to refund such amounts to the government.
If improper or illegal activities are discovered in the course of any audits
or investigations, the contractor may also be subject to various civil and
criminal penalties and administrative sanctions, including termination of
contracts, forfeitures of profits, suspension of payments, fines and
suspension or disqualification from doing business with the government. If we
become subject to penalties or sanctions, such penalties or sanctions could
have a material adverse effect on our business, financial condition and
results of operations.

We rely on a relatively limited number of clients

  We derive a significant portion of revenues from a relatively limited number
of clients. For example, our revenues from the ten most significant clients
accounted for approximately 76.0%, 90.3%, 98.0%, 92.9% and 91.2% of our total
revenues for the years ended December 31, 1998, 1997, 1996, 1995 and 1994,
respectively. The U.S. Government, Lockheed Martin Corporation, and Raytheon
Company accounted for approximately 57.2% of our total revenues in 1998 and
33.3% of our total revenues in 1997. Lockheed Martin Corporation was our
single largest commercial client, accounting for approximately 16.6%, 22.5%
and 22.9% of our total revenues for the years ended December 31, 1998, 1997
and 1996, respectively. For the nine months ended September 30, 1999 Raytheon
Company is our largest commercial customer accounting for approximately 21% of
total revenues.

  Clients typically retain us for major proposals as needed on an engagement
basis rather than pursuant to long-term contracts, and a client can usually
terminate our engagement at any time without a significant penalty.

                                      13
<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS--(Continued)


  Moreover, there can be no assurance that our existing clients will continue
to engage us for additional assignments or do so at the same revenue levels.
The loss of any significant client could materially and adversely affect our
business, financial condition and results of operations. In addition, the
level of our services required by an individual client may diminish over the
life of our relationship and there can be no assurance that we will be
successful in establishing relationships with new clients as this occurs.

The markets in which we compete are highly competitive

  The market for proposal management services in the procurement of government
and commercial contracts for aerospace and defense is a niche market with a
number of competitors. We are the largest provider of such services and
principally compete with numerous smaller proposal management companies in
this highly specialized industry. We also compete with some of our clients'
internal proposal development resources.

  We recently entered and seek to achieve significant growth in the contract
support services market, however, there can be no assurance that we will be
successful in such efforts. The market for services in the contract support
industry is highly competitive, highly fragmented and subject to rapid change.
Such competition is likely to increase in the future. Many of our competitors
have greater personnel, financial, technical and marketing resources. Such
competitors include many larger management consulting firms such as McKinsey &
Company, Booz Allen & Hamilton, and Science Applications International Corp.,
as well as the consulting arms of major accounting firms. We also compete with
our clients' in-house resources. This source of competition may increase as
consolidation of the aerospace and defense industry creates larger
organizations. In addition, there can be no assurance that we will be
successful in such efforts. In addition, significant further expense for sales
and marketing may require us to promote a major expansion of our services in
such area. If we are unsuccessful in our efforts to penetrate further the
market for such services, or our current win rate of approximately 90% in the
proposal management business drops significantly, our growth prospects could
be materially and adversely affected.

Because we believe our proprietary rights are material to our success,
misappropriation of such rights or claims of infringement or legal actions
related to intellectual property could adversely impact our financial
condition

  We rely upon a combination of nondisclosure and other contractual
arrangements and trade secret, patent, copyright and trademark laws to protect
our proprietary rights. There can be no assurance that the steps taken by us
to protect our proprietary rights will be adequate to deter misappropriation
of proprietary information or that we will be able to detect unauthorized use
and take appropriate steps to enforce our intellectual property rights.

  Although we believe that our services do not infringe on the intellectual
property rights of others and that we have all rights necessary to utilize the
intellectual property employed in our business, we are subject to the risk of
claims alleging infringement of third-party intellectual property rights. Any
such claims could require us to spend significant sums in litigation, pay
damages, develop non-infringing intellectual property or acquire licenses to
the intellectual property which is the subject of asserted infringement.

Capitalized software development costs may not be recovered

  At September 30, 1999 the Company had capitalized software development costs
amounting to $4.4 million. While the Company anticipates substantial revenues
from these products, there can be no assurance that such revenues would be
sufficient to fully recover this investment in software development.

We rely heavily upon our key employees

  Our success is highly dependent upon the efforts, abilities, business
generation capabilities and project execution of our executive officers, in
particular those of Steven S. Myers, our Chief Executive Officer and Chairman
of the Board and Michael A. Piraino, our President and Chief Operating
Officer. We entered into a two-year employment agreement with Mr. Myers in
November 1997, and a three-year employment agreement with Mr. Piraino in
December 1998. The loss of the services of either of these individuals for any
reason could materially and adversely affect our business, operating results
and financial condition, including our ability to

                                      14
<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS--(Continued)

secure and complete engagements. We currently maintain a key-man life
insurance policy in the amount of $2.0 million on Mr. Myers and have obtained
a similar policy on Mr. Piraino.

Our quarterly results may fluctuate significantly

  We may experience significant fluctuations in future quarterly operating
results due to a number of factors, including the size, timing and duration of
client engagements and mix of revenue.

Our stock price is subject to significant volatility

  Our common stock was first publicly traded on January 29, 1998 after our
initial public offering at $12.00 per share. Between January 29, 1998 and
September 30, 1999 the closing sale price has ranged from a low of $6.06 per
share to a high of $31.13 per share. The market price of our common stock
could continue to fluctuate substantially due to a variety of factors,
including:

  . quarterly fluctuations in results of operations

  . adverse circumstances affecting the introduction or market acceptance of
    new services offered by us

  . announcements of new services by our competitors

  . our loss of key employees

  . changes in the regulatory environment or market conditions affecting the
    defense and aerospace industry

  . changes in earnings estimates ratings by analysts

  . lack of market liquidity resulting from a relatively small amount of
    public stock float

  . changes in generally accepted accounting principles

  . sales of common stock by existing holders

  . the announcement and market acceptance of proposed acquisitions

  The market price for our common stock may also be affected by our ability to
meet analysts' expectations, and any failure to meet such expectations, even
if minor, could have a material adverse effect on the market price of our
common stock. In addition, the stock market is subject to extreme price and
volume fluctuations. This volatility has had a significant effect on the
market prices of securities issued by many companies for reasons unrelated to
the operating performance of these companies. In the past, following periods
of volatility in the market price of a company's securities, securities class
action litigation has often been instituted against such a company. Any such
litigation instigated against us could result in substantial costs and a
diversion of management's attention and resources, which could have a material
adverse effect on our business, operating results and financial condition.

Year 2000 issues could affect our business

  The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of our programs
that have time-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in major system failure or
miscalculations. We have performed a review of our internal systems to
identify and resolve the effect of Year 2000 software issues on the integrity
and reliability of our financial and operational systems.

  Based on this review, our management believes that our internal systems are
substantially compliant with Year 2000 issues. In addition, we are also
communicating with our principal service providers to ensure

                                      15
<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS--(Continued)

Year 2000 issues will not have an adverse impact on us. If we, and third
parties upon which we rely, are unable to address this issue in a timely
manner, it could result in a material financial risk. In order to assure that
this does not occur, we plan to devote all resources required to resolve any
significant Year 2000 issues in a timely manner.

  Additionally, we noted some risk with legacy products marketed and
maintained by us, the vast majority of which have been delivered to the U.S.
Government. Information which we have collected to-date regarding such legacy
products indicates that while some products were designed with date and time
functions, most of our products have been heavily modified by the licensee or
by a third party integrator with whom we have no obligatory agreement.
Consequently, management believes the exposure has been reduced. However, we
will continue to evaluate these products and implement remediation plans, as
deemed appropriate. These products do not affect our internal operations.

Our principal shareholder has significant control over SM&A

  Steven S. Myers, our Chief Executive Officer and Chairman of the Board,
beneficially owns approximately 44.7% of our outstanding common stock at
September 30, 1999 and will have the ability to control or significantly
influence the election of directors and the results of other matters submitted
to a vote of shareholders. Such concentration of ownership may have the effect
of delaying or preventing a change in control of SM&A and may adversely affect
the voting or other rights of other holders of common stock. Our board of
directors is currently comprised entirely of individuals supported by Mr.
Myers.

If we issue preferred stock, the rights of holders of common stock will be
subject to the rights of holders of preferred stock

  Our board of directors has the authority to issue up to ten million shares
of preferred stock and to determine the price, rights, preferences, privileges
and restrictions, including voting rights, of those shares without any vote or
action by the shareholders. The rights of the holders of the common stock will
be subject to, and may be adversely affected by, the rights of the holders of
any preferred stock that may be issued in the future. The issuance of the
preferred stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
making it more difficult for a third party to acquire a majority of the
outstanding voting stock. We have no present plan to issue any shares of
preferred stock.

The number of shares available for future sale could adversely affect the
price of our publicly traded stock

  As of September 30, 1999, we had 16,136,239 shares of common stock
outstanding. As of September 30, 1999, we had outstanding options to acquire,
subject to certain vesting requirements, 2,182,450 shares of common stock
pursuant to our 1997 Stock Option Plan. Additionally, in connection with our
acquisition of SAC, options were granted to purchase an aggregate of 145,008
shares of common stock.

  We have registered on a registration statement on Form S-8 all 2,500,000
shares of common stock underlying the options outstanding or issuable under
our 1997 Stock Option Plan. The possibility that substantial amounts of common
stock may be sold in the public market would likely have a material adverse
effect on prevailing market prices of our common stock and could impair our
ability to raise capital through the sale of our equity securities.

Overview

  The Company is the largest provider of proposal management and high-end
contract support services. The Company's proposal management services help its
clients achieve a higher probability of winning government and commercial
contracts while its high-end contract support services enhance its clients'
ability to successfully and efficiently perform on such contracts. The
Company's clients include leading firms in the aerospace, defense and
communications industries.

                                      16
<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS--(Continued)

  The 1998 acquisitions of SAC and DSA, and the 1999 acquisitions of SIS and
KAI, which collectively added approximately 510 employees to the Company's
workforce, provide for a greater percentage of the Company's revenues derived
from high-end contract support services. The majority of these services are
with the U.S. Government. Within high-end contract support services, two new
lines of business were established, the Information Technology Solutions Group
("ITSG") and the Systems Solutions Group ("SSG"). ITSG provides information
systems development, scientific research and program management support to the
U.S. Government, principally the Department of Defense. SSG provides systems
engineering, program management support and technical support to military and
civilian space programs, the intelligence community, wargaming and simulation
and the armed services.

THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1998

  Net Revenues. Net revenues for the three months ended September 30, 1999
were $27.2 million compared to $20.5 million for the three months ended
September 30, 1998, an increase of $6.7 million or 32.7%. Net revenues from
Proposal Management Services were $7.8 million for the three months ended
September 30, 1999 compared to $7.2 million for the comparable three months of
the prior year. Net revenues from high-end contract support services,
specifically SSG and ITSG were $13.5 million and $5.9 million, respectively,
for the three months ended September 30, 1999 compared to $7.1 million and
$6.2 million for the same three months of the prior year. Revenues from high-
end contract support services in total increased $6.1 million or 45.9% due to
the Company expanding their scope of high-end contract support services as a
result of the acquisitions of SAC, DSA, SIS and KAI in May and August 1998,
and March and September 1999, respectively. In July 1999, a number of
employees and their related projects were transferred from PMG to SSG. Had the
transfer not been made, PMG revenues would have been $1,186,000 higher for the
quarter ended September 30, 1999 and cost of revenues would have been $688,000
higher. SSG revenues and costs would have been correspondingly lower by these
amounts for the same period. There was no effect on the 1998 amounts.

  Gross Margin. Gross margin was $10.2 million for the three months ended
September 30, 1999 compared to $8.5 million for the three months ended
September 30, 1998, an increase of $1.7 million or 20%. This increase in gross
margin was primarily attributable to the increase in high-end contract support
services provided as a result of the acquisitions of SAC, DSA, SIS and KAI in
May and August 1998, and March and September 1999, respectively. As a
percentage of net revenues, gross margin decreased to 37.2% compared to 41.5%
for the prior year period. The decrease in gross margin as a percentage of net
revenues was primarily attributable to a higher mix in revenues of lower
margin business such as subcontracts and other billable costs, and its
inability to pass through certain annual merit increases for its labor force
to time and material contracts. The decrease in gross margin was also caused
in part by the decrease in the revenue contribution by PMG, a higher margin
business and increases in employee health benefit costs.

  Selling, General & Administrative Expenses. Selling, General and
Administrative expenses for the three months ended September 30, 1999 were
$6.2 million compared to $5.3 million for the three months ended September 30,
1998, an increase of $0.9 million or 17%. The increase was primarily the
result of increased overhead and facility expenses related to the
Acquisitions, an increase in senior management staff to position the Company
for continued growth, and an increase in facility lease costs. As a percentage
of total revenues, Selling, General and Administrative expenses decreased from
25.7% in the 1998 third quarter to 22.8% in 1999.

  Goodwill Amortization. Amortization of goodwill was $322,000 for the three
month period ended September 30, 1999 and $302,000 for the same 1998 period.

  Operating Income. Operating income from continuing operations for the three
months ended September 30, 1999 was $3.7 million compared to $2.8 million for
the three months ended September 30, 1998, an increase of $0.9 million or
32.1%. As a percentage of total revenues, operating income was 13.6% for both
periods.

                                      17
<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS--(Continued)


  Other Income (Expense). Other expense, net was $154,000 for the three months
ended September 30, 1999 compared to other income, net of $201,000 for the
same three months of 1998. The decrease in income was a result of higher
interest expense attributable to increased bank borrowings required to finance
share purchases, acquisitions and working capital in the three months ended
September 30, 1999 and lower interest income due to fewer cash equivalents in
1999 compared to the same three month period of 1998.

  Income From Continuing Operations. Income from continuing operations was
$2.1 million for the three months ended September 30, 1999 compared to $1.7
million for the three months ended September 30, 1998, an increase of $0.4
million or 23.5%.

NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1998

  Net Revenues. Net revenues for the nine months ended September 30, 1999 were
$79.4 million compared to $43.9 million for the nine months ended September
30, 1998, an increase of $35.5 million or 80.9%. Net revenues from Proposal
Management Services were $30.2 million for the nine months ended September 30,
1999 compared to $28.2 million for the comparable nine months of the prior
year, an increase of $2.0 million or 7.0%. This increase was attributable to
continued strong demand for the Company's proposal management services and an
increased customer base. Net revenues from high-end contract support services,
specifically SSG and ITSG were $33.2 million and $16.1 million, respectively,
for the nine months ended September 30, 1999 compared to $9.5 million and $6.2
million for the same nine months of the prior year. Revenues from high-end
contract support services in total increased $33.6 million or 2,140.1% due to
the Company expanding the scope of high-end contract support services as a
result of the acquisitions of SAC, DSA, SIS and KAI in May and August 1998 and
March and September 1999, respectively. In July 1999, a number of employees
and their related projects were transferred from PMG to SSG. Had the transfer
not been made, PMG revenues would have been $1,186,000 higher for the nine
month period ended September 30, 1999 and cost of revenues would have been
$688,000 higher. SSG revenues and costs would have been correspondingly lower
by these amounts for the same period. There was no effect on the 1998 amounts.

  Gross Margin. Gross margin was $32.0 million for the nine months ended
September 30, 1999 compared to $18.9 million for the nine months ended
September 30, 1998, an increase of $13.1 million or 69.3%. This increase in
gross margin was primarily attributable to the increase in high-end contract
support services provided as a result of the acquisitions of SAC, DSA, SIS and
KAI in May and August 1998 and March and September 1999, respectively. As a
percentage of net revenues, gross margin decreased to 40.3% compared to 43.0%
for the prior year period. The decrease in gross margin as a percentage of net
revenues was primarily attributable to lower gross margin contributions from
the newly acquired entities.

  Selling, General & Administrative Expenses. Selling, General and
Administrative expenses for the nine months ended September 30, 1999 were
$17.0 million compared to $9.8 million for the nine months ended September 30,
1998, an increase of $7.2 million or 73.5%. The increase was primarily the
result of increased overhead and facility expenses related to the
Acquisitions, an increase in senior management staff to position the Company
for continued growth, and an increase in facility lease costs. As a percentage
of total revenues, Selling, General and Administrative expenses were 21.4% for
the nine months ended September 30, 1999, down from 22.3% for the nine months
ended September 30, 1998.

  Goodwill Amortization. Amortization of goodwill was $952,000 for the nine
months ended September 30, 1999 and $388,000 for the nine months ended
September 30, 1998.

  Operating Income. Operating income from continuing operations for the nine
months ended September 30, 1999 was $14.0 million compared to $8.7 million for
the nine months ended September 30, 1998, an increase of $5.3 million or
60.9%. As a percentage of total revenues, operating income decreased to 17.6%
for the nine months ended September 30, 1999 from 19.8% for the nine months
ended September 30, 1998.

                                      18
<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS--(Continued)


  Other Income (Expense). Other expense, net was $244,000 for the nine months
ended September 30, 1999 compared to other income, net of $1,185,000 for the
same nine months of 1998. The 1998 amount included income of $880,000 from the
sale of an aircraft. The balance of the decrease was a result of higher
interest expense attributable to increased bank borrowings in the nine months
ended September 30, 1999 and lower interest income due to fewer cash
equivalents in 1999 compared to the same nine month period of 1998.

  Income From Continuing Operations. Income from continuing operations was
$8.1 million for the nine months ended September 30, 1999 compared to $5.9
million for the nine months ended September 30, 1998, an increase of $2.2
million or 37.3%.

                        LIQUIDITY AND CAPITAL RESOURCES

  For the nine months ended September 30, 1999, the Company's net cash used in
operating activities was approximately $1.5 million, compared to net cash used
in operating activities of $2.4 million in the same period of the prior year.
The decrease resulted primarily from increases in income before depreciation,
offset by increased investment in accounts receivable and costs and estimated
earnings in excess of billings on contracts in progress.

  Net cash used in investing activities was $11.1 million for the nine months
ending September 30, 1999, compared to net cash used in investing activities
of $11.8 million for the same period of the prior year. The Company's primary
uses during the nine months ended September 30, 1999 were the acquisitions of
SIS and KAI, expenses related to the acquisitions of DSA and SAC, increases in
capitalized software due to a higher level of software development activity,
and purchases of new office furniture and computer equipment related to the
east coast operations move into new facilities. Previously completed
acquisitions obligate the Company to make earnout payments contingent upon
obtaining specific thresholds. The Company expects earnouts obligations will
be made

  Net cash provided by financing activities was $12.6 million for the nine
months ended September 30, 1999, compared to $16.0 million for the same period
of the prior year. The primary source for the nine months ended September 30,
1999, was advances on the bank line of credit of $21.5 million used to fund
the deterioration of days sales outstanding ("DSO") in receivables. DSO has
increased from 75 days at December 31, 1998 to approximately 99 days at
September 30, 1999. The Company has initiated a program to dramatically
improve its billing processes, to reduce unbilled accounts receivable and to
intensify its collection efforts. The primary use of cash in financing
activities was the payment of $9.2 million for purchase of 1.2 million shares
of the Company's outstanding common stock.

  The Company believes that funds generated by operations will provide
adequate cash to fund its anticipated operating cash needs for at least the
next twelve months. The Company has a $50 million revolving line of credit
facility with three banks. The revolving line of credit will be used, as
considered necessary, for operating cash and for future acquisitions. As of
September 30, 1999, the Company had $21.5 million of borrowings outstanding on
the line.

                                   INFLATION

  The Company does not believe that inflation had a significant impact on the
Company's results of operations for the periods presented. On an ongoing
basis, the Company attempts to minimize any effects of inflation on its
operating results by controlling operating costs and, whenever possible,
seeking to insure that billing rates reflect increases in costs due to
inflation.

                                   YEAR 2000

  The Company completed its assessment of the impact of the Year 2000 on the
processing of date-sensitive information by the Company's computerized
information systems ("Year 2000 Issues"). The Year 2000 problem is the result
of computer programs being written using two digits (rather than four) to
define the applicable year.

                                      19
<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS--(Continued)

Among other issues, any of the Company's programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000, which could result in miscalculations or system failures.

  The Company completed its assessment of the impact of Year 2000 Issues on
its business, including the Company's operational, information and financial
systems (e.g. general ledger, payroll, accounts receivable and payable, etc.).
Similarly, non informational systems, such as communication systems and
security systems were also assessed. A detailed work plan was developed to
ensure that each area requiring remedy was adequately and timely addressed. At
this time, the Company's work plan continues to indicate that most significant
areas have been or are scheduled to be remedied by December 1999. Such work
plan includes adequate time for remediation of the area, as well as testing to
ensure the remediation efforts are complete. Additionally, the Company has
established an Executive Oversight Committee to monitor implementation plans
and to determine whether all areas have been assessed and evaluated, resources
identified and remediation completed on a timely basis.

  The Company has initiated communications with significant suppliers and
vendors on which the Company relies in an effort to determine the extent to
which the Company's business is vulnerable to the failure by these third
parties' to remediate their Year 2000 problems. While the Company has not been
informed of any material risks associated with Year 2000 Issues of these
entities, there can be no assurance that the computerized information systems
of these third parties will be Year 2000 compliant on a timely basis. The
inability of these third parties to remediate their Year 2000 problems could
have a material adverse impact on the Company.

  Additionally, management noted some risk with legacy products marketed and
maintained by the Company, the vast majority of which have been delivered to
the U.S. Government. Information collected to-date regarding such legacy
products indicates that while some products were designed with date and time
functions, most products have been heavily modified by the licensee or by a
third party integrator with whom the Company has no obligatory agreement.
Consequently, the Company's exposure has been reduced. However, the Company
will continue to evaluate these products and implement remediation plans, as
deemed appropriate. Costs to remediate these products, if any, will not be
material. These products do not affect internal operations.

  To date, management estimates that the total cost (including hardware,
software and services) incurred by the Company to evaluate, assess and remedy
Year 2000 Issues, has been approximately $350,000. The expected future cost to
complete evaluation, assessment and remediation of Year 2000 Issues, including
replacement if necessary, is expected to range from $200,000 to $400,000. The
Company has expensed all internal costs related to the remediation of Year
2000 Issues.

  The cost and the date on which the Company plans to complete the Year 2000
Issues modifications are based on management's best estimates, which were
derived utilizing numerous assumptions of future events including the
continued availability of certain resources, third party modification plans
and other factors. However, there can be no guarantee that these estimates
will be achieved and actual results could differ materially from those plans.
Specific factors that might cause such material differences include, but are
not limited to, the availability and cost of personnel trained in this area,
the ability to locate and correct all relevant computer codes, and similar
uncertainties. The Company's total Year 2000 Issues project cost and estimates
to complete exclude the estimated costs and time associated with the impact of
a third party's Year 2000 Issues, which are not yet determinable.

  It is difficult to accurately project what the potential risks and
ramifications to the Company may be, in the event timely remediation efforts
are not completed by either the Company or significant third parties. In such
an event, it is possible that the ability to maintain accurate and complete
financial records of the Company's activities and transactions may be
impaired. Such events, should they occur, may significantly impair the
Company's ability to operate as it does today, creating business interruption,
potential loss of business, and earnings and liquidity difficulties. The
Company presently believes that with current and planned modifications

                                      20
<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS--(Continued)

to existing software and conversions to new software, the risk of potential
loss associated with the Year 2000 Issue can be mitigated. However, if such
modifications and conversions are not made, or are not completed on a timely
basis, the Year 2000 Issues could have a material impact on the operations of
the Company.

  Though the Company's preliminary Year 2000 Issue work plan is believed to be
adequate to achieve compliance on a timely basis, there may be circumstances
that could prevent timely implementation. Accordingly, the Company is
designing its work plan to address this potential occurrence. First, the work
plan is being designed to ensure that the most critical systems and areas are
addressed first, and in a manner that provides adequate time to remediate and
test. Second, the Company has secured external expert resources to assist in
evaluation, assessment, prioritization and implementation of the work plan to
further ensure its success. The Company will continue to monitor and adjust
its contingency plan needs in conjunction with the progress made on the
primary work plan.

FUTURE ACCOUNTING CHANGES

  In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"). In July 1999, the
FASB issued SFAS 137 deferring the effective date of SFAS 133 until June 30,
2000. SFAS 133 establishes accounting and reporting standards for derivative
instruments embedded in other contracts and for hedging activities.
Application of this accounting standard is not expected to have a material
impact on the Company's consolidated financial position, results of operations
or liquidity.

  In October 1997, the American Institute of Certified Public Accountants
("AICPA") released Statement of Position 97-2, "Software Revenue Recognition"
("SOP 97-2"). Among other things, SOP 97-2 eliminates the distinction between
significant and insignificant vendor obligations promulgated by SOP 91-1 and
requires each element of a software arrangement to meet certain criteria in
order to recognize revenue allocated to that element. Additionally, SOP 97-2
requires that total fees under an arrangement be allocated to each element in
the arrangement based upon vendor-specific objective evidence, as defined.

  As a result of certain issues raised in applying SOP 97-2, in March 1998,
the AICPA issued a SOP which will delay for one year the effective date of
certain provisions of SOP 97-2 with respect to what constitutes vendor-
specific objective evidence of fair value of the delivered software element in
certain multiple-element arrangements that include service elements entered
into by entities that never sell the software elements separately. The Company
does not anticipate that the adoption of SOP 97-2 and the subsequent SOP will
have a material effect on the Company's results of operations. However, the
ultimate resolution of the implementation issues referred to above could
change the Company's expectation.

                                      21
<PAGE>

PART II--OTHER INFORMATION

Item 1. Legal Proceedings

  Not applicable

Item 2. Changes in Securities and Use of Proceeds

  On June 8, 1999 the Company announced the amendment of its open market Stock
Repurchase Program to provide authority for the repurchase of up to 1,300,000
shares of its issued and outstanding common stock. As of September 30, 1999
the Company has repurchased 1,229,000 shares at an average purchase price of $
7.49. These repurchases are made at the sole discretion of the Company's
management.

Item 3. Defaults Upon Senior Securities

  Not applicable

Item 4. Submission of Matters to Vote of Security Holders

  Not applicable

Item 5. Other Information

  Not applicable

Item 6. Exhibits and Reports on Form 8-K

  (a) Exhibits

<TABLE>
<CAPTION>
   Exhibit No.
   -----------
   <C>         <S>
   10.1*       Stock Purchase Agreement dated September 20, 1999 among the
               Company, Kapos Associates Inc, Ervin Kapos and June Kapos.

   10.2*       Escrow Agreement dated September 20, 1999 among the Company,
               Kapos Associates Inc. Ervin Kapos and June Kapos.

   27.1*       Financial Data Schedule
</TABLE>

  (b) Reports on Form 8-K

      None

-----------
 *  filed herewith

                                      22
<PAGE>

                                   SIGNATURE

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

                                          SM&A CORPORATION


Date: November 12, 1999                   By:      /s/ Daniel P. O'Connell
                                              ----------------------------------
                                                      Daniel P. O'Connell
                                                   Corporate Controller and
                                                      Assistant Secretary
                                                (Principal Accounting Officer)

                                       23