U.S. SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549

                                  FORM 10-KSB

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

                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996

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

                        COMMISSION FILE NUMBER 0-10416

                             INFODATA SYSTEMS INC.
             ----------------------------------------------------
       (Exact name of small business issuer as specified in its charter)

                VIRGINIA                      16-0954695
         (State of Incorporation) (I.R.S. Employer Identification No.)

                 12150 MONUMENT DRIVE, FAIRFAX, VIRGINIA 22033
             (Address of registrant's principal executive office)

                 REGISTRANT'S TELEPHONE NUMBER (703) 934-5205

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

     SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE EXCHANGE ACT:
                                              Name of each exchange
           Title of each class                 on which registered
           -------------------                ---------------------
                 None                             Not applicable

     SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE EXCHANGE ACT:

                          COMMON STOCK-$.03 PAR VALUE
                          ---------------------------
                               (Title of Class)

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 [_]

Check if there is no disclosure  of delinquent  filers in response to Item 405
of Regulation S-B contained in this form, and no disclosure will be contained,
to the best of  registrant's  knowledge,  in definitive  proxy or  information
statements  incorporated  by  reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]

The revenues for the fiscal year ending December 31, 1996 are $9,560,000.

As of March 21, 1997,  there were 2,299,188 common shares  outstanding.  As of
March 21,  1997,  the  aggregate  market  value  (computed by reference to the
average  bid and asked  prices on such date) of voting  common  shares held by
non-affiliates was approximately $17,531,000.

                      DOCUMENTS INCORPORATED BY REFERENCE

The  information  called for by Part III of the Form 10-KSB is incorporated by
reference from the registrant's definitive proxy statement or amendment hereto
which will be filed not later  than 120 days after the end of the fiscal  year
covered by this report.


<PAGE>

                                    PART I

ITEM 1.  DESCRIPTION OF BUSINESS

COMPANY OVERVIEW

Infodata  Systems Inc. (the "Company" or "Infodata")  specializes in providing
complex document information  systems,  which include integration services and
software  products,  to commercial  organizations  and governmental  agencies,
especially the  intelligence  community.  All of these  organizations  share a
common  problem  -  managing  complex,  unstructured  information  across  the
enterprise.  Products include the recently announced Virtual File Cabinet (TM)
(VFC(TM)),  an Intranet-based software product that establishes a single point
of  access  and  organization  for  critical  documents  across  the  intranet
regardless  of the  repository  or document  source;  MxImage,  an  integrated
client/server  imaging,   cataloging,   and  storage  management  system;  and
WebINQUIRE(TM),  a web  browser  interface  to the  Company's  mainframe  text
retrieval product,  INQUIRE(R)/Text.  The Company, in conjunction with its own
service  offerings,  is also a value-added  reseller of partner products under
agreements  with Adobe Systems,  Inc.,  Documentum,  Inc.,  Lotus  Development
Corporation,  Netscape Communication  Corporation,  PC DOCS Inc., Verity, Inc.
and others.

The  Company has been a leader in  providing  electronic  document  management
solutions.  Prior to 1994,  substantially  all of the  Company's  business was
derived from the sale, support, and maintenance of INQUIRE/Text, which was the
leading independent  full-text retrieval product in the IBM and IBM-compatible
mainframe marketplace.

In 1994, Infodata  successfully shifted its focus to providing a broader range
of document management solutions deliverable through client/server technology.
The  Company's  shift  into  the  client/server  arena  accelerated  with  the
acquisition of the business and certain  assets of Merex,  Inc., (" Merex") in
October,  1995 (see Note 2 to the  consolidated  financial  statements  of the
Company).  Merex, a document systems solutions and integration  firm,  brought
experienced  management  and staff,  a diverse client base, and an established
market reputation to Infodata.

Infodata's  mainframe  experience  and recent  successes in the  client/server
arena,  and Merex's project  experience in client/server  document  management
technology,  combine to produce an  organization  uniquely  focused on solving
complex  information/document  management  problems.  Management believes that
Infodata's desktop-to-mainframe know-how also positions the Company to exploit
the  mainframe's  resurgence  as a server  in the  client/server  environment,
including Intranets and the Internet.

MAJOR NEW INTRANET PRODUCT

The Company's  strategy is to develop  products for the $700 million*  content
management segment of the burgeoning  Intranet market.  Zona Research projects
the Intranet market will reach $8 billion in 1998. As DataPro  reported,  "One
of the biggest  challenges facing global  organizations has been the fact that
their critical assets are often contained in documents stored in disparate and
incompatible  systems.  Accessing and sharing that information among different
departments  across the  enterprise  has been a nightmare.  Infodata now has a
viable solution based on industry  standards,  including HTTP, Java, ODMA, and
CORBA."

*According to CAP Ventures, a leading Internet marketing and research firm.


                                     -2-

<PAGE>

VFC is a  cost-effective,  Web-based  system for  accessing,  organizing,  and
sharing information across the corporate Intranet regardless of the repository
or document  source.  VFC was announced in January 1997.  Industry analyst and
press reviews have been overwhelmingly favorable.  Endorsements from Lotus, PC
DOCS Inc.,  Verity Inc.,  and Adobe  Systems,  leaders in groupware,  document
management,  full text retrieval,  and desktop publishing,  respectively,  are
helping to establish VFC as a de facto standard for sharing  documents  across
an enterprise.

Infodata's strategy is twofold: First, the Company plans to establish an early
customer  base by both  expanding  the direct  sales force and by creating VAR
(Value   Added   Reseller)   and   OEM   (Original   Equipment   Manufacturer)
relationships.  Second, Infodata is committed to maintaining its technological
leadership  with the VFC  family of  products.  To  implement  this  strategy,
Infodata will be increasing marketing and software development expenses during
1997.  Significant  marketing  expenses will be incurred for public relations,
seminars, direct mail, telemarketing, and trade shows.

Software  development  expenses  increased  in 1996 to $816,000 as compared to
$187,000 in 1995, largely due to VFC development. These expenses will continue
to rise in 1997 as the Company  implements  additional VFC  functionality  for
future versions.

While the  Company  believes  it has  sufficient  capital to launch VFC, it is
exploring  additional funding in the future to build upon the expected success
of VFC.

SERVICES AND CORE BUSINESS

The Company divides its services and core business as follows:

Client/Server Consulting Services - this group of professionals provides needs
analyses,  requirements definition,  design, development, and support services
for document systems solutions contracts. It markets to commercial and Federal
(non-intelligence  community)  clients.  The  Company is also a reseller  of a
variety of third party  products  which may be included  in  solutions.  These
include products from Documentum,  Verity, PC DOCS, Adobe, Netscape, and Lotus
Notes.  Sales of both services and third party products in this segment of the
Company's  business grew over 200% in 1996 over 1995, and  represented  38% of
the Company's 1996 revenues, up from 16% in 1995.

Intelligence  Systems - this group  provides  similar  services to  Consulting
Services,  but to  agencies  of the  U.S.  Government  which  are  part of the
intelligence  community.  The  Company's  software  engineers in this business
segment hold high-level  security  clearances and often work on-site at secure
government  facilities.  This group works with  similar  third party  software
products as well as the Company's  INQUIRE/Text  system. Sales of services and
third  party  products  to this  segment  grew  22% in  1996  over  1995,  and
represented 30% of 1996 revenues,  down slightly from 33% in 1995. In the last
two  years,  the  Company  has  secured  significant,   competitively  awarded
contracts  for  client/server   document  management  solutions  to  different
components of the intelligence community.

INQUIRE  Systems - this segment  consists of sales of  INQUIRE/Text  upgrades,
optional features, services, and maintenance.  INQUIRE maintenance represented
25% of the  Company's  business in 1996,  down from 40%. A decline is expected
each year as customers either migrate off mainframe platforms  altogether,  or
opt not to sign up for  maintenance  contracts  because  they  plan to make no
enhancements  to  existing  applications,  even though the  applications  will
continue to operate.  Each year,  some customers who  previously  opted out of
maintenance  contracts  return, as the applications in fact need updating (for
example,  for Year 2000  compliance).  In late 1996,  the  Company  introduced
WebINQUIRETM,  a web browser  interface to  INQUIRE/Text,  with initial  sales
recorded in the first quarter of 1997.  Although  WebINQUIRE and other options
are not  expected  to  amount to a  significant  percentage  of the  Company's
revenues, they carry a high gross margin.


                                      -3-
<PAGE>


Training - in 1996,  the  Company  established  a training  division  to offer
customer training initially in the Adobe Acrobat and Verity Topic products. In
1997, the Company added training for Adobe's  Framemaker  product.  Management
expects that,  in addition,  VFC training has potential to become an important
contributor to training revenues over the next several years.

Infodata has a high rate of repeat  business  which  management  believes is a
result of the high  degree of  customer  satisfaction  with its  services  and
solutions. The Company's services,  training, and product businesses provide a
base of  business  which  will  complement  the  VFC  product  sales  segment.
Developing  custom  solutions for customers keeps our technical  professionals
grounded in the real world, facilitating the conception and development of new
products such as VFC.

Forward-looking  statements  contained in the Form 10-KSB  relating to product
development   and  revenue  and  net  income   growth  are  based  on  current
expectations that involve uncertainties and risks associated with new products
including,   but  not  limited  to,  market  conditions,   successful  product
development and acceptance, the introduction of competitive products, economic
conditions,  and the  timing of orders  for  products.  The  Company's  actual
results may differ materially from current expectations.

The  Company  employed  a total of 70 full  time  employees  and one part time
employee at December 31, 1996.

Infodata's principal offices are located at 12150 Monument Drive,  Fairfax, VA
22033.  Its telephone  number is 703-934-5205  and fax number is 703-934-7154.
Infodata's  Internet  e-mail  address  is  info@infodata.com  and the  Company
maintains a World Wide Web home page at http://www.infodata.com.

ITEM 2.  DESCRIPTION OF PROPERTY

The Company leases  approximately  25,000 square feet of  professional  office
space located at its Headquarters  Office in Fairfax,  Virginia (see Note 8 to
the Consolidated Financial Statements contained elsewhere in this report).

ITEM 3.  LEGAL PROCEEDINGS

The Company is not a party to any material pending legal proceedings.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not Applicable.

ITEM 4A.  EXECUTIVE OFFICERS

The following  information  relates to Executive Officers of the Registrant as
of March 21, 1997:

<TABLE>
<CAPTION>
               Name                    Age                   Position
               ----                    ---                   --------

<S>                                    <C>             <C>
           Harry Kaplowitz             53              President and Director

           Robert J. Loane             58              Senior Vice President

           Richard M. Tworek           40              Executive Vice President and Director
</TABLE>

Mr.  Kaplowitz is a founder of the Company and was elected  Vice  President in
1973,  Executive Vice President and Director in 1980. In 1989, he was promoted
to President and Chief  Operating  Officer of the Company's  INQUIRE Group. In
1990,  he was named  President  of the  Company.  From January 1991 to January
1993, he served as Chairman of the Board of Directors of the Company.


                                      -4-

<PAGE>

Dr. Loane joined the Company in 1968,  was elected Vice  President in 1978 and
Senior Vice President in 1980. He is the Company's Chief Scientist.

Mr.  Tworek  joined the Company in October,  1995 and was elected  Senior Vice
President.  In 1996, he was named Executive Vice President and Director of the
Company.  He was the founder and president of Merex,  Inc.  Since 1989,  Merex
designed and implemented  large,  complex  client/server  document systems and
offered its own products as part of the solution.

                                    PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Infodata's  Common Stock has been quoted on the NASDAQ  SmallCap  Market under
the symbol  "INFD" since  September 16, 1994.  The Company's  Common Stock was
previously  traded  on  the  NASDAQ  National  Market.  Market  makers  of the
Company's Common Stock include Herzog,  Heine;  Mayer and Schweizter Inc.; and
Patterson Travis Inc.

The table below shows the range of closing bid prices for the Common Stock for
the quarters indicated.

<TABLE>
<CAPTION>
                                       1996                  1995
                                  High       Low        High       Low

<S>                             <C>         <C>        <C>        <C>
       First Quarter             $3.27      $1.93      $2.57      $1.29
       Second Quarter             7.87       2.81       1.82       1.45
       Third Quarter             10.12       4.25       2.57       1.39
       Fourth Quarter            12.62       4.62       2.03       1.50
</TABLE>

The market quotations reflected above are inter-dealer prices,  without retail
mark-up, mark-down or commissions and may not represent actual transactions.

The Company has not paid cash  dividends on its Common Stock and presently has
no  intention  to do so. It believes  that  execution  of its  operating  plan
requires  the Company to retain  available  funds to support  future  business
activities.  Payment of cash  dividends  on Common Stock in the future will be
dependent upon the earnings and financial condition of the Company,  and other
factors which the Board of Directors may deem  appropriate.  See Note 7 to the
1996 Consolidated  Financial  Statements,  contained elsewhere in this report,
for information relating to cash dividends pertaining to Preferred Stock.

As of March 21, 1997, there were approximately 639 shareholders of record.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS

SUMMARY

Over the last three years,  the Company's  business  shifted from sales of its
proprietary mainframe software product, INQUIRE(R)/Text, to providing document
management  and access  solutions in the  client/server  and more recently the
intranet environment. Client/server and intranet consulting revenues increased
from 23% of the Company's  revenues in 1995 to 51% in 1996.  During 1996,  the
Company began development of a family of intranet products called Virtual File
Cabinet(TM)  (VFC(TM))  and  incurred  substantial  research  and  development
expenses.


                                      -5-

<PAGE>

REVENUES

Total revenues increased $2,511,000 (36%) for the year ended December 31, 1996
compared  to  the  prior  year.   Client/server   related  revenues  increased
$3,270,000  (204%)  over the prior  year,  in part  reflecting  a full year of
revenues  from Merex,  Inc.  ("Merex"),  which was  acquired by the Company in
October 1995.  Revenues from third party  client/server  related product sales
increased  $898,000 (357%) over the prior year as well.  INQUIRE/Text  related
revenues decreased by $773,000 (14%) from the prior year, with the bulk of the
decrease attributable to the decline in maintenance contracts.

The Company  expects  that  INQUIRE/Text  related  revenues  will  continue to
decline over time as the product ages.

GROSS PROFIT

Gross  profit  increased  to  $4,103,000  (43% margin ) from  $2,883,000  (41%
margin) at December 31, 1996 and 1995, respectively. The increase in the gross
profit  margin  was  due  primarily  to  increased  commercial   client/server
consulting  during  1996,  offset  in  part  by the  decline  in  high  margin
INQUIRE/Text maintenance revenues.

RESEARCH AND DEVELOPMENT EXPENSE

Research and development expense was $816,000 and $187,000 for the years ended
December 31, 1996 and 1995, respectively.  The principal cause of the increase
was the  development  of the Company's new VFC software  product  announced in
January  1997.  The Company  expects  research  and  development  expense will
increase  in 1997 and beyond as new  products  and  product  enhancements  are
developed.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling,  general and  administrative  expenses were $2,869,000 and $2,657,000
for the years ended December 31, 1996 and 1995, respectively. The increase was
due  primarily  to an increase  in the sales staff for the planned  release of
VFC.  The  Company   expects   sales  and   marketing   expenses  to  increase
significantly in 1997 as various releases of VFC are launched.

INTEREST INCOME AND EXPENSE

Interest income was $96,000 and $119,000 for the years ended December 31, 1996
and 1995,  respectively.  The decrease was  primarily  due to a lower  average
market  yield on cash and  cash  equivalents  in 1996  compared  to 1995.  The
company invested only in short term,  highly liquid money market  instruments.
Interest expense  decreased to $11,000 in 1996 from $24,000 in the prior year.
The expense is  primarily  related to capital  equipment  leases  which expire
through 1998.

NET INCOME

Net income was $503,000 and $131,000 for the years ended December 31, 1996 and
1995, respectively.  The increase in earnings was due to the factors discussed
above. The Company expects  substantial but sequentially  declining  operating
losses  in the  first  three  quarters  of 1997  as a  result  of  significant
increases in both  research and  development  expense and sales and  marketing
expense,  as the new Virtual File Cabinet family of products is released.  R&D
expenses will increase because succeeding versions of VFC and related products
will be introduced to maintain technological  leadership.  Sales and marketing
expenses will increase as the direct sales force is deployed to obtain initial
sales, and as reseller channels are established.

As a result of preferred  stock dividends of $58,000 and $120,000 paid in 1996
and 1995,  respectively,  net income  available  to  holders  of common  stock
amounted to $445,000, or $.20 per share ($.18 fully diluted),  and $11,000, or
$.01 per share,  respectively.  During 1996, all of the outstanding  preferred
stock was  converted  into common stock and,  therefore,  no  preferred  stock
dividends will be paid in 1997.


                                      -6-

<PAGE>

NEW ACCOUNTING PRONOUNCEMENTS

The American  Institute of Certified Public Accountants (the "AICPA") recently
approved for exposure a draft  Statement of Position  (the  "Exposure  Draft")
that would  supersede SOP 91-1,  Software  Revenue  Recognition.  The Exposure
Draft provides additional guidance with respect to multiple elements, returns,
exchanges,  and  platform  transfer  rights,   resellers,   services,   funded
software-development  arrangements,  and contract accounting. If approved, the
Exposure Draft would need to be implemented for years beginning after December
15,  1996.  The Company  believes  that the  proposed  changes will not have a
material adverse financial impact on the Company.

LIQUIDITY AND CAPITAL RESOURCES

The Company  generated  cash flow from  operating  activities of $1,140,000 in
1996  compared to $208,000  for the prior year.  The  increase  was due to the
increase  in  net  income  discussed   earlier  and  a  decrease  in  accounts
receivables at December 31, 1996.

Cash used in investing  activities  was $1,396,000 for the year ended December
31, 1996  compared to $87,000  for the prior year.  The primary  cause for the
increase  was the  purchase of  short-term  investments  and purchase of fixed
assets,  consisting primarily of computers and computer equipment. The Company
had no commitments for material capital expenditures as of December 31, 1996.

Cash provided by financing  activities was $46,000 for the year ended December
31, 1996  compared to cash used in  financing  activities  of $370,000 for the
prior year.  The primary  source of cash  provided by financing  activities in
1996 was from issuance of common stock under the Company's  stock option plan.
Working  capital was  $1,612,000 and $1,220,000 at December 31, 1996 and 1995,
respectively.  The  current  ratio  increased  to 1.70 from 1.52 over the same
period.  The Company's long term liabilities at December 31, 1996 were $52,000
relating primarily to capital leases.

Cash,  cash  equivalents  and  short-term  investments  totaled  $2,213,000 at
December  31,  1996  compared to  $1,509,000  for the prior year  period.  The
Company  believes  cash and cash  equivalents  on hand  and  cash  flows  from
operating activities will be sufficient to fund operations for the next twelve
months. In addition, the Company maintains a line of credit with Merrill Lynch
Business  Financial  Services,  Inc. for up to $1,000,000  based upon eligible
receivables  at a rate which  approximated  prime at  December  31,  1996.  No
borrowings were made in 1996 and no balance is currently outstanding.

In the longer term, the Company believes it has adequate financial flexibility
to  increase  its  borrowing  capacity  and  access the  financial  markets to
accommodate its growth strategy.

On May 17, 1996, the Company  distributed a one-for-six  stock dividend on its
common stock. On August 26, 1996, it effected a two-for-one stock split in the
form of a 100 percent stock dividend on its common stock.  During 1996, all of
the Company's outstanding shares of preferred stock were converted into common
stock.

ITEM 7.  FINANCIAL STATEMENTS

The consolidated financial statements required hereunder are listed under Item
13(a) below.

ITEM 8.  CHANGES IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
FINANCIAL DISCLOSURE

None.


                                      -7-

<PAGE>

                                   PART III

ITEM  9.  DIRECTORS,   EXECUTIVE  OFFICERS,  PROMOTERS  AND  CONTROL  PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

Pursuant to General  Instruction E(3) of Form 10-KSB,  the information  called
for by this Item regarding  directors is hereby incorporated by reference from
the  Company's  definitive  proxy  statement or  amendment  hereto to be filed
pursuant to Regulation 14A not later than 120 days after the end of the fiscal
year covered by this report.  Information  regarding the  Company's  executive
officers is set forth under Item 4a of this Form 10-KSB.

ITEM 10.  EXECUTIVE COMPENSATION

Pursuant to General  Instruction E(3) of Form 10-KSB,  the information  called
for by this  Item is  hereby  incorporated  by  reference  from the  Company's
definitive  proxy  statement  or  amendment  hereto  to be filed  pursuant  to
Regulation  14A not  later  than 120 days  after  the end of the  fiscal  year
covered by this report.

ITEM 11.  SECURITY OWNERSHIP OF BENEFICIAL OWNERS AND MANAGEMENT

Pursuant to General  Instruction E(3) of Form 10-KSB,  the information  called
for by this  Item is  hereby  incorporated  by  reference  from the  Company's
definitive  proxy  statement  or  amendment  hereto  to be filed  pursuant  to
Regulation  14A not  later  than 120 days  after  the end of the  fiscal  year
covered by this report.

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Pursuant to General  Instruction E(3) of Form 10-KSB,  the information  called
for by this  Item is  hereby  incorporated  by  reference  from the  Company's
definitive  proxy  statement  or  amendment  hereto  to be filed  pursuant  to
Regulation  14A not  later  than 120 days  after  the end of the  fiscal  year
covered by this report.

ITEM 13.  EXHIBITS, LIST AND REPORTS ON FORM 8-K

(a)  FINANCIAL  STATEMENTS.  The financial statements and exhibits required by
     Item  7  and   this   Item  13  of  Form   10-KSB   are   listed   below.


<TABLE>
     Index to Consolidated Financial Statements:
                                                                        PAGE
                                                                        ----
<S>                                                                   <C>
     Report of Independent Public Accountants                            12

     Consolidated Statements of Operations - Each of the                 13
     two years in the period ended December 31, 1996 and 1995

     Consolidated Balance Sheets - December 31, 1996 and 1995         14-15

     Consolidated Statements of Shareholders' Equity - Each of           16
     the two years ended December 31, 1996 and 1995

     Consolidated Statements of Cash Flows - Each of the two             17
     years in the period ended December 31, 1996 and 1995

     Notes to Consolidated Financial Statements - December 31, 1996   18-27
     and 1995
</TABLE>

(b)  Reports on Form 8-K.
     None.


                                      -8-

<PAGE>

<TABLE>
                                 EXHIBIT INDEX

<CAPTION>
Exhibit Number                   Description
--------------                   -----------
<S>            <C>
     3(a)      Certificate of Incorporation  (incorporated herein by reference
               to exhibit A to the  Registrant's  proxy  statement dated April
               10, 1995)


      (b)      By-Laws  (incorporated  herein by reference to exhibit B to the
               registrant's proxy statement dated April 10, 1995)

    10(a)      Executive Separation Agreement between the Registrant and Harry
               Kaplowitz (incorporated herein by reference to exhibit 10(a) to
               the  Registrant's  Annual  Report on Form 10-KSB for the fiscal
               year ended December 31, 1993)

      (b)      Executive  Separation  Agreement  between  the  Registrant  and
               Robert Loane (incorporated herein by reference to exhibit 10(b)
               to the Registrant's Annual Report on Form 10-KSB for the fiscal
               year ended December 31, 1993)

      (c)      Incentive Stock Option Plan  (incorporated  herein by reference
               to  exhibit  10(d) to the  Registrant's  Annual  Report on Form
               10-KSB for the fiscal year ended December 31, 1993)

      (d)      Non-Qualified   Stock  Option  Plan  (incorporated   herein  by
               reference to exhibit 10(z) to the registrant's annual report on
               Form 10-KSB for the fiscal year ended December 31, 1994)

      (e)      Stock Warrant Purchase Plan  (incorporated  herein by reference
               to exhibit  10(cc) to the  Registrant's  Annual  Report on Form
               10-KSB for the fiscal year ended December 31, 1994)

      (f)      Office Building  Lease,  dated April 12, 1993, for One Monument
               Drive  (incorporated  herein by reference to exhibit  10(dd) to
               the  registrant's  annual  report on Form 10-KSB for the fiscal
               year ended December 31, 1994)

      (g)      Lease for Data Processing  Services  Agreement,  dated July 29,
               1994, between the Registrant and Financial  Technologies,  Inc.
               relating to data processing  services  (incorporated  herein by
               reference to exhibit 10(ee) to the  Registrant's  Annual Report
               on Form 10-KSB for the fiscal year ended December 31, 1994)

      (h)      Commercial  Note dated February 23, 1995 between the Registrant
               and Crestar Bank  (incorporated  herein by reference to exhibit
               10(ff) to the Registrant's Annual Report on Form 10-KSB for the
               fiscal year ended December 31, 1994)

      (i)      1995 Stock  Option Plan  (incorporated  herein by  reference to
               exhibit D to the  Registrant's  proxy statement dated April 10,
               1995)

      (j)      Employment  Agreement between  Registrant and Richard M. Tworek
               dated October 11, 1995

      (k)      Asset Purchase Agreement and Plan of  Reorganization,  dated as
               of October 6, 1995, among Infodata Systems Inc.,  Merex,  Inc.,
               Richard M.  Tworek,  Mary  Margaret  Styer and Andrew M. Fregly
               (incorporated  herein by reference to the Registrant's Form 8-K
               dated October 11, 1995)


                                      -9-

<PAGE>

      21       Subsidiaries   of  the  Registrant   (incorporated   herein  by
               reference to exhibit 21 to the  Registrant's  Annual  Report on
               Form 10-KSB for the fiscal year ended December 31, 1995)

      27       Financial Data Schedule
</TABLE>


                                     -10-

<PAGE>

                                  SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934,  the  registrant  has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

INFODATA SYSTEMS INC.

BY:    /s/HARRY KAPLOWITZ               Date: March 28, 1997
       ------------------
       Harry Kaplowitz
       President

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

<TABLE>
<CAPTION>
SIGNATURE                               TITLE                         DATE
<S>                                     <C>                           <C>

Richard T. Bueschel                     Chairman of the Board         March 28, 1997
---------------------
Richard T. Bueschel

Laurence C. Glazer                      Director                      March 28, 1997
---------------------
Laurence C. Glazer

Harry Kaplowitz                         President and Director        March 28, 1997
---------------------
Harry Kaplowitz

Robert M. Leopold                       Director                      March 28, 1997
---------------------
Robert M. Leopold

Isaac Pollak                            Director                      March 28, 1997
---------------------
Isaac Pollak

Millard Pryor                           Director                      March 28, 1997
---------------------
Millard Pryor

Richard Tworek                          Executive VP and Director     March 28, 1997
---------------------
Richard Tworek
</TABLE>


                                     -11-

<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Infodata Systems Inc.:

We have  audited  the  accompanying  consolidated  balance  sheets of Infodata
Systems Inc. (a Virginia corporation) and subsidiaries as of December 31, 1996
and 1995, and the related consolidated statements of operations, shareholders'
equity,  and cash flows for the years then ended.  These financial  statements
are the responsibility of the Company's  management.  Our responsibility is to
express an opinion on these financial statements based on our audits.

We  conducted  our  audits in  accordance  with  generally  accepted  auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable  assurance  about  whether  the  financial  statements  are free of
material misstatement.  An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial  statements.  An audit
also  includes  assessing  the  accounting  principles  used  and  significant
estimates  made by  management,  as well as evaluating  the overall  financial
statement presentation.  We believe that our audits provide a reasonable basis
for our opinion.

In our opinion,  the financial statements referred to above present fairly, in
all material  respects,  the financial  position of Infodata  Systems Inc. and
subsidiaries  as of  December  31,  1996  and  1995,  and the  results  of its
operations  and its cash  flows for the years then  ended in  conformity  with
generally accepted accounting principles.

Washington, D.C.                                  Arthur Andersen LLP
March 5, 1997


                                     -12-

<PAGE>


<TABLE>
                    INFODATA SYSTEMS INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS
             (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

<CAPTION>
                                                        YEAR ENDED DECEMBER 31,
                                                         1996            1995
                                                         ----            ----

<S>                                                      <C>             <C>
Revenues............................................     $9,560          $7,049

Cost of revenues....................................      5,457           4,166
                                                         -------         -------

     Gross profit...................................      4,103           2,883
                                                         -------         -------

Operating expenses:
  Research and development..........................        816             187
  Selling, general, and administrative..............      2,869           2,657
                                                         -------         -------
                                                          3,685           2,844

     Operating income...............................        418              39
                                                         -------         -------

  Interest income...................................         96             119
  Interest expense..................................        (11)            (24)
                                                         -------         -------

  Income before income taxes........................        503             134

  Provision for income taxes........................         --               3
                                                         -------         -------

  Net income........................................     $  503          $  131
                                                         =======         =======

  Preferred dividends................................        58             120
                                                         -------         -------

  Net income available to common shareholders........    $  445          $   11
                                                         =======         =======


  Per share:
    Net income available to common shareholders per
    common and equivalent share-
      Primary.......................................     $  .20          $  .01
                                                         =======         =======
      Fully Diluted.................................     $  .18          $  .01
                                                         =======         =======
</TABLE>


       The accompanying notes are an integral part of these statements.


                                     -13-

<PAGE>

<TABLE>
                    INFODATA SYSTEMS INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS
                         (DOLLAR AMOUNTS IN THOUSANDS)

<CAPTION>
ASSETS

                                                                         DECEMBER 31,
                                                                     1996            1995
                                                                    ------          ------
<S>                                                                  <C>             <C>
Current assets:

      Cash and cash equivalents.................................     $1,266          $1,476
      Short-term investments....................................        947              33
      Accounts receivable, net of allowance of $80 in 1996
       and $30 in 1995..........................................      1,522           1,901
      Prepaid royalties.........................................         --              18
      Other current assets......................................        185             146
                                                                     -------         -------


            Total current assets................................      3,920           3,574
                                                                     -------         -------

Property and equipment, at cost:
      Furniture and equipment...................................      2,373           2,046
      Less accumulated depreciation and amortization............     (1,897)         (1,633)
                                                                     -------         -------
                                                                        476             413


Goodwill, net of amortization of  $31 in 1996 and $6 in 1995....        274             264


Other assets....................................................        137              68


Software development costs, net of accumulated
 amortization of $2,052 in 1996 and $2,010 in 1995 (Note 3).....         84             126
                                                                     -------         -------


Total assets....................................................     $4,891          $4,445
                                                                     =======         =======
</TABLE>

       The accompanying notes are an integral part of these statements.


                                     -14-

<PAGE>


                    INFODATA SYSTEMS INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS
                         (DOLLAR AMOUNTS IN THOUSANDS)

<TABLE>
LIABILITIES AND SHAREHOLDERS' EQUITY
<CAPTION>

                                                                         DECEMBER 31,
                                                                     1996            1995
                                                                    ------          ------
<S>                                                                  <C>             <C>
Current liabilities:

    Current portion of capital lease obligations................     $   46          $  106
    Current portion of note payable.............................         --               2
    Accounts payable............................................        327             335
    Accrued expenses............................................        823             677
    Deferred revenue............................................      1,079           1,171
    Preferred dividend payable..................................         --              30
    Current portion of deferred rent............................         33              33
                                                                     -------         -------

         Total current liabilities..............................      2,308           2,354
                                                                     -------         -------

Capital lease obligations.......................................         33              82
Deferred revenue................................................         75             192
Deferred rent...................................................         19              52
                                                                     -------         -------

         Total liabilities......................................      2,435           2,680
                                                                     -------         -------

Commitments and contingencies (Note 8)

Shareholders' equity:
       Preferred stock, $1.00 par value, 500,000
       shares authorized; none and 131,500 issued
       and outstanding ($0 and $1,523 involuntary
       liquidation preference) in 1996 and 1995,
       respectively.............................................         --             132

       Common stock, $.03 par value, 6,666,666
       shares authorized; 2,277,865 and 1,465,336
       shares issued and outstanding in 1996 and
       1995, respectively.......................................         68              44

       Additional paid-in capital...............................      9,055           8,056

       Accumulated deficit......................................     (6,667)         (6,467)
                                                                     -------         -------
Total shareholders' equity......................................      2,456           1,765
                                                                     -------         -------
Total liabilities and shareholders' equity......................     $4,891          $4,445
</TABLE>


       The accompanying notes are an integral part of these statements.


                                     -15-

<PAGE>

<TABLE>
                    INFODATA SYSTEMS INC. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                         (DOLLAR AMOUNTS IN THOUSANDS)


<CAPTION>
                                                                                     Additional
                                           Preferred Stock          Common Stock        Paid-In       Accumulated     Shareholders'
                                          Shares     Amount     Shares      Amount      Capital         Deficit          Equity
                                          ------     ------     ------      ------      -------       -----------     -------------

<S>                                       <C>        <C>        <C>           <C>       <C>            <C>                <C>
Balance at December 31, 1994.........     133,500    $ 134      1,204,748     $37       $7,768         $(6,478)          $1,461

  Conversion of preferred stock
  for common stock...................      (2,000)      (2)         5,146      --            2              --               --

  Issuance of shares for business
  acquisition........................          --       --        210,000       6          230              --              236

  Issuance of shares for services....          --       --          8,000      --            9              --                9

  Exercise of stock options..........          --       --         37,442       1           47              --               48

  Dividends on preferred stock.......          --       --             --      --           --            (120)            (120)

  Net income.........................          --       --             --      --           --             131              131
                                         ---------    -----      ----------   ----      -------        --------         --------

  Balance at December 31, 1995.......     131,500      132       1,465,336     44        8,056          (6,467)           1,765

  1:6 Common stock dividend..........                              241,063      7          636            (643)              --

  Redemption of preferred shares for
  common.............................    (131,500)    (132)        394,614     12          120                               --

  Fractional share redemption........          --       --              --     --           --              (2)              (2)

  Exercise of stock options..........          --       --         176,852      5          243              --              248

  Dividends on preferred stock.......          --       --              --     --           --             (58)             (58)

  Net income.........................          --       --              --     --           --             503              503
                                         ---------    -----      ----------   ----      -------        --------         --------
  Balance at December 31, 1996.......          --     $ --       2,277,865    $68       $9,055         $(6,667)          $2,456
                                         ---------    -----      ----------   ----      -------        -------          --------
</TABLE>

The accompanying notes are an integral part of these statements.


                                     -16-

<PAGE>

                    INFODATA SYSTEMS INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       As of December 31, 1996 and 1995

                    INFODATA SYSTEMS INC. AND SUBSIDIARIES
                    CONSOLIDATED STATEMENTS OF CASH FLOWS

                         (DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>

                                                                                          YEAR ENDED DECEMBER 31,
                                                                                           1996            1995
                                                                                          ------          ------
<S>                                                                                       <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:

   Net income..........................................................................   $   503         $   131
   Adjustments to reconcile net income to net cash provided by operating activities-
       Depreciation and amortization...................................................       264             275
       Software amortization...........................................................        42             373
       Goodwill and other intangible amortization......................................        48              10
       Cancellation of note payable....................................................        --             (85)
       Write-down of leased assets.....................................................        --              20
       Changes in operating assets and liabilities:
            Accounts receivable........................................................       379            (464)
            Prepaid royalties and other current assets.................................       (21)            124
            Accounts payable...........................................................        (8)             94
            Accrued expenses...........................................................       175             (12)
            Deferred revenue...........................................................      (209)           (226)
            Deferred rent..............................................................       (33)            (32)
                                                                                          --------        --------
                 Net cash provided by operating activities.............................     1,140             208
                                                                                          --------        --------

CASH FLOWS FROM INVESTING ACTIVITIES:
       Software development costs capitalized..........................................        --              (3)
       Purchases of property and equipment, net........................................      (357)            (84)
       Business acquisition............................................................       (23)            (47)
       Loan to officer ................................................................       (70)             --
       Purchases of short-term investments.............................................      (943)             --
       Proceeds from maturity of short-term investments................................        29              47
       Other...........................................................................       (32)             --
                                                                                          --------        --------
                 Net cash used in investing activities.................................    (1,396)            (87)
                                                                                          --------        --------

CASH FLOWS FROM FINANCING ACTIVITIES:
       Payments on capital lease obligations...........................................      (108)           (122)
       Payments of notes payable.......................................................        (2)            (21)
       Retirement of acquisition-related note payable..................................        --            (155)
       Preferred stock dividends.......................................................       (88)           (120)
       Issuance of common stock........................................................       244              48
                                                                                          --------        --------
                 Net cash provided by (used in) financing activities...................        46            (370)
                                                                                          --------        --------

Net decrease in cash and cash equivalents..............................................      (210)           (249)

Cash and cash equivalents at beginning of year.........................................   $ 1,476         $ 1,725
                                                                                          --------        --------
Cash and cash equivalents at end of year...............................................   $ 1,266         $ 1,476
                                                                                          ========        ========
</TABLE>

        The accompanying notes are an integral part of these statements


                                     -17-

<PAGE>

                    INFODATA SYSTEMS INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       As of December 31, 1996 and 1995

NOTE 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

The accompanying  consolidated  financial  statements include the accounts of
Infodata  Systems  Inc. and its wholly owned  subsidiaries,  Infodata  Systems
International  Inc. and Infodata Research and Development  Corporation.  These
entities are collectively referred to herein as the "Company". All significant
intercompany accounts and transactions have been eliminated in consolidation.

Certain  reclassifications  have been made to 1995  balances to conform to the
current-year presentation.

NATURE OF BUSINESS

The Company provides complete  Electronic  Document Management System ("EDMS")
solutions  through the sale of products  and  software  integration  services.
Sales to the U.S. government  represent a significant portion of the Company's
revenue.

RISKS AND UNCERTAINTIES

The Company is in the process of releasing a new proprietary software product,
the Virtual  File  Cabinet  ("VFC").  In doing so, the  Company  has  incurred
significant  costs  related to this  product and will  continue to incur these
costs in the future.  Although management expects to generate revenues on this
product in the future,  no sales were made during 1996.  Also, there can be no
assurance of VFC revenues in the future.  Management has identified  potential
contingency plans to mitigate the Company's future liquidity risk and believes
that such plans would be effective.

The Company has made a number of  estimates  and  assumptions  relating to the
reporting of assets and liabilities, the disclosure of contingent liabilities,
and the  reporting  of  revenues  and  expenses  to  prepare  these  financial
statements in conformity with Generally Accepted Accounting Principles. Actual
results could differ from those estimates.

REVENUE RECOGNITION

Software  Licenses--The  Company  recognizes  revenue  from sales of  software
licenses  upon  delivery  of the  software  product  to the  customer  or upon
customer acceptance if a trial period exists.

Post  Contract  Customer  Support and  Software  Services--Revenues  from post
contract support,  including revenue bundled with the initial license fee, are
recognized  ratably over the period  customer  support  services are provided.
Software services revenue is recognized as performed.

Consulting and Professional  Service  Contracts--Revenues  from consulting and
professional service contracts are recognized on the  percentage-of-completion
method  for  fixed-price  contracts  and on the  basis  of hours  incurred  at
contract   rates  for   time-and-material   contracts.   Revenues   from  cost
reimbursement contracts are recognized as costs are incurred.


                                     -18-

<PAGE>

                    INFODATA SYSTEMS INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       As of December 31, 1996 and 1995

The American  Institute of Certified Public Accountants (the "AICPA") recently
approved for exposure a draft  Statement of Position  (the  "Exposure  Draft")
that would  supersede SOP 91-1,  Software  Revenue  Recognition.  The Exposure
Draft provides additional guidance with respect to multiple elements, returns,
exchanges,  and  platform  transfer  rights;   resellers;   services;   funded
software-development  arrangements;  and contract accounting. If approved, the
Exposure Draft would need to be implemented for years beginning after December
15,  1996.  The Company  believes  that the  proposed  changes will not have a
material adverse financial impact on the Company.

Revenues from foreign  customers totaled  approximately  $361,000 and $594,000
for the years ended December 31, 1996 and 1995, respectively.

CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

All highly liquid  investments with an original maturity of 90 days or less at
time of purchase are considered to be cash  equivalents.  At December 31, 1996
and 1995,  the Company had  $768,000  and  $1,269,000,  respectively,  of cash
equivalents invested in commercial paper. Short-term investments available for
sale at December 31, 1996,  totaled  approximately  $943,000 and  consisted of
commercial paper and U.S. Treasury Bills with maturities  greater than 90 days
for which  carrying  value  approximated  market value.  There were no similar
short-term investments at December 31, 1995. Available-for-sale securities are
carried at fair value, with unrealized gains and losses reported as a separate
component of stockholders'  equity.  Realized gains and losses and declines in
value judged to be other than temporary on  available-for-sale  securities are
included in other income.

Additionally,  at December 31, 1996 and 1995, certificates of deposit included
in  short  term  investments   totaled   approximately   $4,000  and  $33,000,
respectively,   which  were  restricted  pursuant  to  certain  capital  lease
obligations.

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

Cash  payments  for  interest  totaled  $11,000  and $22,000 in 1996 and 1995,
respectively. Cash payments for income taxes totaled $4,000 and $7,000 in 1996
and 1995, respectively.

PROPERTY AND EQUIPMENT

Property  and  equipment  is  depreciated  using  the  straight-line   method.
Computers and related equipment are depreciated over three years and furniture
and equipment  are  depreciated  over six years.  Leasehold  improvements  are
amortized over the shorter of the useful life of the asset or the lease term.

GOODWILL

Goodwill is amortized using the straight-line method over a life of ten years.
On a periodic basis, the expected future  undiscounted cash flows are compared
with the  carrying  value of goodwill to test for  potential  impairment.  The
amount  of  goodwill  impairment,  if any,  would  be  measured  based  on the
projected discounted cash flows using a discount rate reflecting the Company's
average cost of funds.  As of December 31, 1996,  the Company does not believe
there has been an impairment of goodwill.


                                     -19-

<PAGE>

                    INFODATA SYSTEMS INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       As of December 31, 1996 and 1995

Additional  goodwill  incurred in 1996 totaled  approximately  $42,000,  which
resulted from final  adjustments  relating to the Merex acquisition in October
1995.

RESEARCH AND DEVELOPMENT

Research and development costs are expensed as incurred.

NET INCOME PER COMMON SHARE

For the years ended December 31, 1996 and 1995, the weighted-average number of
common and common  equivalent  shares used in the  calculation  of primary net
income per share was approximately 2,162,000 and 1,694,000. On a fully diluted
basis for the year ended  December 31, 1996,  the  weighted-average  number of
common and common equivalent shares was  approximately  2,718,000.  Net income
for the years  ended  December  31,  1996 and  1995,  has been  decreased  for
preferred stock dividends of $58,000 and $120,000,  respectively, to arrive at
net income available to common shareholders.

SIGNIFICANT CUSTOMERS

Sales  to  U.S.  government  agencies  totaled  approximately  $4,255,000  and
$2,586,000 in 1996 and 1995,  respectively.  As of December 31, 1996 and 1995,
accounts   receivable   due  from  U.S.   government   agencies   amounted  to
approximately $655,000 and $678,000, respectively.

NOTE 2. BUSINESS ACQUISITION

On October 11, 1995, the Company consummated its purchase of substantially all
the assets and the assumption of certain liabilities of Merex, Inc. ("Merex"),
in consideration  for 210,000 shares of the Company's common stock (restricted
as to sale) with a fair value estimated by the Company's Board of Directors at
$1.125 per  share.  The final  acquisition  cost was  approximately  $361,000,
including direct costs of acquisition.  Approximately $60,000 was allocated to
identified  acquired  intangibles,  $312,000 to goodwill,  including  purchase
accounting adjustments of approximately $25,000 relating to termination of the
Merex office lease, and $35,000 relating to SEC registration costs the company
is  obligated  to pay on behalf of the former  Merex  shareholders.  Merex was
engaged in the business of marketing and  delivering  of  electronic  document
management solutions to businesses and U.S. government agencies.

The unaudited pro forma  financial  information  presented  below reflects the
acquisition  of Merex as if the  acquisition  had occurred on January 1, 1995.
These results are not necessarily indicative of future operating results or of
what would have occurred had the acquisitions been consummated at that time.

<TABLE>
<CAPTION>
                                                                  YEAR ENDED
                                                              DECEMBER 31, 1995
                                                                  (Unaudited)

<S>                                                                <C>
     Revenue......................................                 $  8,888
     Net income...................................                       89
     Less - Preferred dividend....................                     (120)
     Net loss available to common shareholders....                      (31)
     Net loss per share...........................                  $ (0.02)
</TABLE>


                                     -20-

<PAGE>

                    INFODATA SYSTEMS INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       As of December 31, 1996 and 1995


NOTE 3.  SOFTWARE DEVELOPMENT COSTS

Capitalization of software  development costs begins upon the establishment of
technological  feasibility.   Capitalization  ceases  when  the  products  are
available for general release to customers. The establishment of technological
feasibility  and the continuing  assessment of  recoverability  of capitalized
software  development costs require  considerable  judgment by management with
respect  to  certain  external  factors,   including,   but  not  limited  to,
anticipated  future gross  revenue,  estimated  economic  life, and changes in
software and hardware  technologies.  Amortization expense is determined on an
individual  product  basis  and is  computed  as  the  greater  of the  amount
calculated on a revenue basis or straight-line basis over the economic life of
the  product,   generally  three  to  five  years.  Amortization  of  software
development  costs  is  included  in  cost  of  revenues  in the  accompanying
consolidated statements of operations.

Capitalized  costs totaled $0 and $3,000 for the years ended December 31, 1996
and 1995, respectively.

Periodically,  the Company reviews the estimated lives of and amounts assigned
to software  development costs. In light of changing  technology,  the Company
makes  revisions  to  estimated   lives  and  adjusts   amounts   assigned  as
appropriate.  On  December  31,  1995,  the  Company  extended  the  remaining
amortization  period to expire in 1998 to reflect the  continued  longevity of
the INQUIRE product as reflected by the substantial  revenue stream associated
with maintenance renewals.  The impact of such revision in estimated remaining
useful life increased net income by approximately $22,000 in 1996.

NOTE 4.  INCOME TAXES

At  December  31,  1996,  the  Company  had  approximately  $5,347,000  in net
operating loss carryforwards for income tax reporting purposes.  The operating
loss  carryforwards  expire in varying  amounts  from 1998  through  2011.  In
addition,  at December  31,  1996,  the  Company  had $70,000 in research  and
development  tax  credit  carryforwards   expiring  in  1997  and  $55,000  in
investment tax credit carryforwards expiring in 1997 through 2000.

The actual income tax expense attributable to pretax income for the year ended
December 31, 1996,  and December  31, 1995,  respectively,  differed  from the
amount  computed by applying  the  Federal  statutory  rate of 34 percent as a
result of the following:

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

<S>                                                                <C>          <C>
        Tax at statutory rate...........................           $ 171,000    $  46,000
        Benefit of operating loss carryforwards.........                  --      (55,000)
        Benefit of stock options exercised..............            (192,000)          --
        Nondeductible amortization......................              16,000        3,000
        Miscellaneous items.............................               5,000        6,000
        Alternative Minimum Tax.........................                  --        3,000
                                                                   ----------   ----------
                                                                   $       0    $   3,000
                                                                   ==========   ==========
</TABLE>

The 1995  provision for income taxes relates  solely to the currently  payable
Federal alternative minimum tax.


                                     -21-

<PAGE>

                    INFODATA SYSTEMS INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       As of December 31, 1996 and 1995

The  significant  components of net deferred tax  (liabilities)  assets are as
follows as of December 31, 1996 and 1995:

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

<S>                                                                <C>             <C>
 Deferred tax liabilities:

    Net software development costs.....................            $       --      $  (48,000)
                                                                      (32,000)
    Other..............................................                    --         (10,000)
                                                                   -----------     -----------
                                                                      (32,000)        (58,000)

 Deferred tax assets:

    Net operating loss carryforward....................             2,030,000       1,974,000
    Investment tax credit and research and
      development tax credits carry forward............               125,000         207,000
    Other..............................................                92,000          55,000
                                                                   -----------     -----------
                                                                    2,247,000       2,236,000

 Net deferred tax asset before valuation allowance.....             2,215,000       2,178,000

 Valuation allowance...................................            (2,215,000)     (2,178,000)
                                                                   -----------     -----------
 Net deferred tax asset................................            $       --      $       --
                                                                   ===========     ===========
</TABLE>

Under the provisions of SFAS No. 109, the tax effect of the net operating loss
and  investment  tax  credit   carryforwards,   together  with  net  temporary
differences,  represents a net deferred tax asset against which management has
fully  reserved  due  to  the  uncertainty  of  future  taxable  income.   The
carryforwards will be benefited for financial reporting purposes when utilized
to offset future taxable income.

NOTE 5.  DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

Financial  instruments are defined as cash,  evidence of an ownership interest
in an entity,  or a contract  that  imposes an  obligation  to deliver cash or
other financial instruments to a second party. The carrying amounts of current
assets  and  current  liabilities  approximate  fair  value  due to the  short
maturity of these instruments.

NOTE 6.  NOTES PAYABLE

During 1993, the Company entered into an agreement with Open Text  Corporation
("OTC"),  whereby  the  Company  acted as a reseller  of OTC's text  retrieval
software.  Under the  terms of the  agreement,  the  Company  incurred  a note
payable for certain  non-refundable  royalties.  Due to the Company's  concern
with OTC's  product  performance  and timely  delivery of new releases and the
attendant  customer  dissatisfaction,  the  Company  terminated  the  reseller
agreement during the second quarter of 1995 and negotiated cancellation of the
remaining balance of the note during the third quarter of 1995.

In November  1996, the Company  entered into a working  capital line of credit
with  Merrill  Lynch  Business  Financial  Services  Inc.  This loan  facility
provides  the Company  with up to a  $1,000,000  line of credit at a


                                     -22-
<PAGE>

                    INFODATA SYSTEMS INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       As of December 31, 1996 and 1995

per annum rate  equal to the sum of 2.9  percent  plus the  30-day  commercial
paper rate. Currently, this per annum rate approximates prime. Advances on the
facility are based on eligible  billed  accounts  receivable less than 90 days
old.  The facility  expires in November  1997.  As of December  31, 1996,  the
Company has made no borrowings under this line of credit.

NOTE 7.  SHAREHOLDERS' EQUITY

PREFERRED STOCK

During 1996, all the outstanding shares of preferred stock were converted into
common stock,  and all  dividends in arrears were  satisfied by issuance of an
equivalent number of common shares.

At December 31,  1995,  131,500  shares of  convertible  preferred  stock were
outstanding. The preferred shares had the following provisions:

     o    Cumulative, preferential dividends paid quarterly if declared by the
          Board of Directors at an annual rate of 9 percent ($.90 per share).
     o    The option to convert one share of preferred  stock for 1.111 common
          shares.
     o    Full  voting  rights,  to the extent of common  shares that would be
          held upon  conversion.  Pre-emptive  rights relating to future stock
          offerings.
     o    Preference in the  distribution of corporate assets up to $10.00 per
          share plus cumulative unpaid dividends.
     o    All the preferred  stock was redeemable at the option of the Company
          at a price of $10.00 per share.

Dividends  on  preferred  stock  were  paid upon  declaration  by the Board of
Directors.  Cash dividends of $58,000 ($0.45 per preferred share) and $120,000
($0.90 per preferred share) were declared during 1996 and 1995, respectively.

OPTIONS AND WARRANTS

In April 1995,  the Company's  shareholders  approved the adoption of the 1995
Stock Option Plan (the "1995 Plan") which consolidates and is the successor to
the Company's Incentive Stock Option Plan approved by shareholders in 1991 and
the  Non-Qualified   Stock  Option  Plan  approved  in  1992  (together,   the
"Predecessor  Plans").  Options  have been  granted to employees as well as to
members  of the  Board of  Directors.  The 1995  Plan  also  provides  for the
automatic  granting of a fixed  number of options  each year to members of the
Compensation  Committee of the Company's  Board of Directors and increases the
total number of shares  authorized  for issuance  upon the exercise of options
from the 777,779 shares previously authorized to 1,011,000 shares.

Under the 1995  Plan,  options  may be  granted  at  prices  not less than 100
percent of the fair  market  value of the  common  stock at the date of grant.
Options vest over varying  years of service.  Vested  options are  exercisable
until the  earlier of ten years from the date of grant or three  months  after
termination of employment  for options  granted under the  Predecessor  Plans,
five years from the date of grant or one month after termination of employment
for options  issued  under the 1995 Plan.  At December  31,  1996,  options to
purchase 397,000 shares of common stock were exercisable.


                                     -23-

<PAGE>

                    INFODATA SYSTEMS INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       As of December 31, 1996 and 1995

As of  December  31,  1996,  warrants  remained  outstanding  for the right to
purchase 15,556 shares of common stock issued to certain former members of the
Board of Directors and to certain non-affiliated parties.

These warrants,  which are exercisable for seven years from date of grant, are
exercisable  upon grant.  Warrants to purchase an  additional  7,777 shares of
common stock are authorized for future issuance.

As of December  31, 1996,  the Company has  reserved a total of  approximately
1,042,000  shares of common  stock for future  issuance  upon the  exercise of
stock options and exercise of stock warrants.

A  summary  of  option  and  warrant  activity  under  the  1995  Plan and the
Predecessor Plans is presented below:
<TABLE>
<CAPTION>

                                                                          NUMBER OF EQUIVALENT SHARES
                                                                   INCENTIVE       NON-QUALIFIED     WARRANTS
                                                                     STOCK            STOCK
                                                                    OPTIONS          OPTIONS

<S>                                                               <C>             <C>             <C>
    Outstanding at December 31, 1994                                526,146           87,112          15,556
        Granted....................................                  29,166           14,000             --
        Exercised..................................                 (43,681)              --             --
        Expired or canceled........................                (142,770)              --             --
                                                                   ---------        ---------        --------
    Outstanding at December 31, 1995...........                     368,861          101,112          15,556
        Granted....................................                 246,655           92,998              --
        Exercised..................................                 (52,322)        (124,530)             --
        Expired or canceled........................                 (13,196)              --              --
                                                                   ---------        ---------        --------
    Outstanding at December 31, 1996                                549,998           69,580          15,556
                                                                   =========        =========        ========
        Exercise price.............................               $1.08 to $7.87  $1.31 to $5.03  $2.17 to $2.73
</TABLE>



The Company adopted the disclosure  requirements of SFAS No. 123,  "Accounting
for Stock-Based Compensation",  effective for the Company's December 31, 1996,
financial  statements.  The  Company  applies  APB  Opinion No. 25 and related
Interpretations  in accounting for its plans.  Accordingly,  compensation cost
has been  recognized  for its stock plans based on the intrinsic  value of the
stock option at date of grant (i.e., the difference between the exercise price
and the fair value of the  Company's  stock).  Had  compensation  cost for the
Company's  stock-based  compensation  plans been determined  based on the fair
value at the grant  dates for awards  under those  plans  consistent  with the
method of SFAS No. 123, the  Company's net income and earnings per share would
have been reduced to the pro forma amounts indicated below.


<TABLE>
<CAPTION>
                                                            1996        1995
                                                            ----        ----
<S>                                                       <C>         <C>
    Net income as reported................................$  503      $  131
    Pro forma compensation expense........................   134           3
    Pro forma net income..................................$  369      $  128
</TABLE>

<PAGE>

                                     -24-

<PAGE>

                    INFODATA SYSTEMS INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       As of December 31, 1996 and 1995

<TABLE>
Per share:

     Net income  available to common  shareholders  per
     common and equivalent share:

<S>                                                 <C>             <C>
     Primary, as reported.......................... $   .20         $   .01
     Primary, pro forma............................ $   .14         $   .01
     Fully diluted, as reported.................... $   .18         $   .01
     Fully diluted, pro forma... .................. $   .13         $   .01
</TABLE>


The weighted  average fair value of options granted in 1996 and 1995 was $4.31
and $1.61,  respectively.  The fair value of each option is  estimated  on the
date of grant using the Black-Scholes  option-pricing model with the following
assumptions  used for grants in 1996 and 1995:  no  dividend  yield,  expected
volatility  of 63.0  percent,  risk-free  interest  rate of 6.21  percent  and
expected life of five years.

Because SFAS No. 123 has not been applied to options  granted prior to January
1, 1995, the resulting pro forma  compensation  cost may not be representative
of that to be expected in future years.

On March 15, 1996, the Board of Directors  declared a one for six common stock
dividend  payable  to  shareholders  of  record  as of  April  17,  1996,  and
distributed  on May 17, 1996.  Accordingly,  the fair market value (based upon
quoted market prices, as adjusted) of the additional  241,063 shares issuable,
which totaled $643,000,  was charged to accumulated deficit and the respective
amount was credited to common stock and additional paid-in-capital.

On July 30, 1996,  the  Company's  Board of Directors  approved a  two-for-one
common  stock  split  in the form of a 100  percent  stock  distribution.  The
distribution was made on August 26, 1996, to common  shareholders of record as
of August 12,  1996.  The  stated par value per share of common  stock was not
changed  from  $.03 and the  number  of  authorized  shares  of  common  stock
increased from 3,333,333 to 6,666,666  shares.  Accordingly,  the par value of
the additional  shares issued was transferred from additional  paid-in capital
to common  stock,  and all share and per share  amounts have been  restated to
retroactively reflect the stock split.

NOTE 8.   COMMITMENTS AND CONTINGENCIES

CAPITAL LEASE OBLIGATIONS

The  Company  leases  certain  fixed  assets  under  long-term  capital  lease
agreements. These assets are included in the accompanying consolidated balance
sheets as follows:

<TABLE>
<CAPTION>
                                                                December 31,
                                                          1996               1995
<S>                                                     <C>                <C>
 Property and equipment.................................$549,000           $580,000
 Less  - Accumulated depreciation and amortization......(474,000)          (403,000)
                                                        ---------          ---------
                                                        $ 75,000           $177,000
                                                        =========          =========
</TABLE>


                                     -25-

<PAGE>

                    INFODATA SYSTEMS INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       As of December 31, 1996 and 1995

Depreciation   and   amortization  of  these  assets  is  computed  using  the
straight-line method over the shorter of the useful lives of the assets or the
term of the lease obligation.

The future  maturities of capital lease  obligations  as of December 31, 1996,
are as follows:

        1997......................................       $  51,000
        1998......................................          28,000
        1999......................................           6,000
                                                         ----------
                     Total minimum payments.......          85,000
     Less - Amounts representing interest.........          (6,000)
                                                         ----------
     Present value of minimum lease payments......          79,000
     Less - Current portion.......................         (46,000)
                                                         ----------
     Long-term portion............................       $  33,000
                                                         ==========


OPERATING LEASES

Effective  August 1, 1993, the Company  entered into a lease for its corporate
headquarters facility in Fairfax,  Virginia. This lease expires July 31, 1998.
Under the terms of the lease, the landlord provided various incentives,  which
have  been  deferred  and  classified  as  deferred  rent in the  accompanying
consolidated  balance sheets. These amounts will be amortized over the life of
the lease.  During 1996 and 1995, the Company  incurred an annual rent expense
of $290,000 and $297,000 for office facilities. Commitments under the Fairfax,
Virginia office  facilities lease amount to approximately  $300,000  annually.
During 1996, the company incurred $52,500 of rent expense related to space and
equipment for an off-site training facility under a month-to-month lease.

Effective September 1994, the Company entered into a three-year agreement with
a third party to procure outside  mainframe-related  data processing services.
The new  agreement  is  non-cancelable  over the first  two years and  becomes
cancelable  beginning in the third year,  with a penalty equal to $4,000 times
the number of months remaining in the third year. The minimum commitment under
this agreement amounts to $32,000 until termination in August 1997.

EMPLOYEE BENEFIT PLAN

In 1988, the Company established an employee benefit plan (the "Benefit Plan")
which qualifies under Section 401(k) of the Internal Revenue Code. The Benefit
Plan allows  salaried  employees to  contribute  a part of their  compensation
toward  their   retirement  on  a  tax  deferred   basis.   Required   Company
contributions  equate to 10  percent  of the  employee's  contribution  to the
Benefit Plan and totaled approximately $32,000 in 1996 and $23,000 in 1995. In
addition  to the  aforementioned  contributions,  the  Company,  at  the  sole
discretion of its Board of Directors, may make profit-sharing contributions to
the Benefit Plan; no contributions were made in 1996 or 1995.


                                     -26-

<PAGE>

                    INFODATA SYSTEMS INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       As of December 31, 1996 and 1995

CONTINGENCIES

A customer  has  asserted  that the Company did not perform on a contract  and
seeks a $90,000  refund.  The  Company  vigorously  denies the  assertion  and
management  believes that based upon the current facts it is not probable that
a loss will  occur.  Accordingly,  no accrual  has been made for this claim at
December 31, 1996.

Costs  charged to cost type U.S.  government  contracts  are subject to annual
audit  by  the  Defense   Contract  Audit  Agency  or  other  duly  authorized
representatives of the Federal  government.  No audits have been completed for
any  periods  commencing  after  September  30,  1987,  and in the  opinion of
management,  adjustments  resulting from the completion of such audits are not
expected  to have a material  impact on the  Company's  financial  position or
results of future operations.

RELATED-PARTY TRANSACTIONS

The Company incurred management consulting fees of approximately  $195,000 and
$168,000  in 1996 and 1995,  respectively,  for  services  rendered by certain
Directors  of the  Company.  Amounts  payable for these  services to companies
employing  these  Directors  were $12,500 and $15,000 at December 31, 1996 and
1995, respectively. Amounts receivable from a company employing a director was
$13,000 at December 31, 1996.

In October 1996, the Company  executed a note  receivable  from an officer and
shareholder  for $70,000  due in full on  September  30,  1999 with  quarterly
interest  payments  at an annual rate of 1 percent  over prime  (approximately
9.25 percent at December 31, 1996) adjusted quarterly.

The Company issued 8,000 shares of restricted common stock to a Director for a
total  compensation  expense of $9,000 in consideration  for services rendered
during 1995.

                                     -27-