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)

                  (703) 934-5205 (Issuer's Telephone Number)
              --------------------------------------------------

     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  registrant's  revenues  for the fiscal year ending  December 31, 1997 are
$10,644,000.

As of March 23, 1998,  there were 4,390,509 common shares  outstanding.  As of
March 23,  1998,  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 $16,441,478.

                      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

FORWARD-LOOKING  STATEMENTS  CONTAINED IN THIS FORM 10-KSB RELATING TO PRODUCT
DEVELOPMENT,  REVENUE AND THE ADEQUACY OF WORKING CAPITAL 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 MATERIALY FROM CURRENT EXPECTATIONS.  READERS ARE CAUTIONED
NOT TO PUT UNDUE RELIANCE ON FORWARD-LOOKING STATEMENTS. THE COMPANY DISCLAIMS
ANY INTENT OR OBLIGATION TO UPDATE PUBLICLY THESE FORWARD-LOOKING  STATEMENTS,
WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.

ITEM 1.  DESCRIPTION OF BUSINESS

Infodata Systems Inc. (the "Company")  provides electronic document management
software and systems to corporate and government  workgroups,  departments and
enterprises.  The Company's newest product Virtual File Cabinet(TM) ("VFC"(R))
has  been  designed  to  address  what   DataPrOpinion,   an  industry  survey
publication,   has  called  one  of  the  biggest   problems   facing   global
organizations:  the fact that their  critical  assets are often  contained  in
documents  stored  in  disparate  and  incompatible   systems.   According  to
DataPrOpinion,   "accessing  and  sharing  that  information  among  different
departments across the enterprise has been a nightmare."

VFC is a family of  intranet-based  software  products  that,  together,  will
enable users to easily retrieve, organize and share desktop files irrespective
of the location or type of document management system in which they are stored
with  virtually  no  integration  effort  and  without  the need to  replicate
documents. The VFC family of products consists of the VFC Document Web Server,
extensions and enablers, and the Company's AMBIA(R) products. The VFC Document
Web Server is the heart of VFC,  and is  required  in order to utilize the VFC
extensions and enablers. This core package consists of software installed on a
server  that  establishes  links to  documents,  organizes  access  to  stored
information and acts as an independent  document  sharing system.  The Company
has been  shipping the VFC  Document  Web Server  since the second  quarter of
1997.  Extensions are software  components that are installed on an individual
user's  computer to add  functionality  to the VFC  Document  Web  Server.  In
October 1997,  the Company began  shipping its first  extension and expects to
introduce other extensions in the future. Enablers will provide the capability
to bridge multiple  document  management  systems or  repositories.  The AMBIA
products that are part of the VFC family include Re:mark(R),  Compose(R),  and
Aerial(R).  They have been available from the Company since its acquisition of
AMBIA in July 1997.

The Company's VFC technology has been endorsed or approved by leading industry
vendors, including Lotus Development Corporation ("Lotus"), PC DOCS, Inc. ("PC
DOCS"), Verity, Inc. ("Verity"), and NovaSoft Systems, Inc. ("NovaSoft"),  and
has received numerous favorable  industry trade analyst and press reviews.  At
the April 1997  Association of  Information  and Imaging  Management  ("AIIM")
trade show, with more than 35,000 attendees and 325 exhibitors,  Imaging World
Magazine  identified  VFC as  "#l to  Watch."  VFC  has  been  sold  to  large
organizations with significant document processing  requirements,  such as the
Department of Energy, AT&T Corp., State Street Bank and Trust Company, and the
U.S. Army Signal Corps.

In December  1997, the Company and Adobe Systems,  Incorporated  ("Adobe"),  a
major software  company with reported 1997 revenues of more than $900 million,
entered into an agreement to cross-license and co-market certain technologies.
Adobe is a significant presence in the Internet marketplace with, according to
Adobe,  more than 20 million  downloads of its Adobe  Acrobat  Reader  viewing
product.  Under the  agreement,  the  Company  expects  to  receive  more than


                                      -2-

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$700,000 in consulting fees for  modifications to certain of its technology so
that it may be incorporated  into certain Adobe  products.  Upon acceptance of
these  modifications  by  Adobe,  the  Company  will  earn  a  license  fee of
$1,000,000.  Certain  components of VFC that will be licensed to Adobe will be
incorporated  in future Adobe  products.  In addition,  certain Adobe products
will  display a "VFC  Button" that will provide a direct link to VFC or to VFC
marketing  information  if the user  does not have  VFC.  Adobe  will  receive
royalties  based on any VFC sales arising out of this  marketing  arrangement,
and will also receive commissions for any VFC sales that it makes directly.

For nearly thirty  years,  the Company has developed and sold its own products
and  acted  as  a   value-added   reseller   ("VAR")  of   client/server   and
Internet/intranet  document  systems  products.  In the past three years,  the
Company made two  acquisitions  to broaden its product and service  offerings:
Merex  Inc.  ("Merex"),  acquired  in  October  1995,  and  AMBIA  Corporation
("AMBIA"),  acquired  in July  1997.  Merex  provided a staff  experienced  in
Internet and client-server document  technologies,  and AMBIA provided both an
experienced  technical  staff and  products  focusing  on  document  creation,
collaboration, and presentation. The Company now provides a range of services,
including training, customer support, and consulting, to ensure that customers
achieve the full benefits of the Company's products.

INDUSTRY BACKGROUND

Document  management  products were  originally  introduced to solve  problems
associated with the production of complex and mission-critical  documentation,
such as new drug applications or aircraft operating  manuals.  These documents
are  characterized  not only by complex content,  such as graphs and images as
well as text, but also by a heavily  controlled or regulated  process by which
documents are written and reviewed.  These  document  management  systems have
been expensive to procure and difficult to install and implement  because they
require unique user  interfaces for which  specialized  training is necessary.
Their usage is controlled centrally, with little flexibility for the end user.

Many people who work in office environments are familiar with the difficulties
of filing and retrieving documents from their hard drives or from network file
systems.  Individuals are forced to remember  artificial file names and folder
or directory locations because the documents generally are not organized in an
intuitive  manner.  Naming and  storage  requirements  might  apply only to an
individual's  own  workgroup  or  department,  or they might apply  across the
enterprise.  Systems to address  the needs of these users need to be simple to
deploy and easy to  administer.  They also need to be scalable to  accommodate
wider deployment of applications and additional users.

With the  increasing  departmental,  as  opposed  to  enterprise-wide,  use of
document  management  systems,  it is not uncommon for  different  departments
within an enterprise to use different document  management systems or to store
electronic  documents in separate  repositories that are tailored to the needs
of the individual department.  For example, an organization's legal department
may use one document  management  system  specialized for legal  applications,
while the  engineering  department  uses  another  for  engineering  drawings.
Without a bridge to link the two systems,  the two  departments  are unable to
share information electronically.

Attempts to address these issues have included:
DEVELOPING WEB BROWSER ACCESS TO DOCUMENT MANAGEMENT SYSTEMS.  Some vendors of
document  management  systems have introduced add-on Web browser products that
allow users to access files stored on that vendor's system. The Web-based user
interface  is  familiar  to the  user,  but  this  solution  does  not  permit
information to be shared across different document management systems.

POSTING  DOCUMENTS ON THE COMPANY'S  WEB SITE.  Many  organizations  are using
their internal Web sites for electronic publication of commonly used documents
such as human resource policy manuals.  The primary drawback is that "posting"
documents to the organization's Web site typically requires  intervention of a
"Webmaster,"  whose  responsibility is to maintain the Web site. The Webmaster
may become a bottleneck as the Web site grows.  Also,  documents posted to the


                                      -3-

<PAGE>

Web site are usually not updated concurrently with the original document.  For
example,  when the human resources department updates its policy manual, there
is typically a delay  before the new version is  converted to the  appropriate
format and approved for posting on the Web site.

USING  GROUPWARE   PRODUCTS.   Groupware   products  are  designed  to  foster
collaboration  among  members of  workgroups.  Examples  include  Lotus Notes,
Novell Groupwise 5, Netscape SuiteSpot and Microsoft  Exchange.  Although some
of these products  incorporate some document  management  functionality,  they
still create "islands" of information since users are able to access only that
information residing within the groupware product's own proprietary databases.

The Company  created VFC to provide a  reasonably  priced,  easy to  implement
solution  to the  problems  associated  with  the  exchange  and  bridging  of
information,  irrespective  of where it is stored,  between  parties  that can
benefit from access to that information.

VIRTUAL FILE CABINET

VFC is a family of  intranet-based  software  products  that,  together,  will
enable users to easily retrieve, organize and share desktop files irrespective
of the location or type of document management system in which they are stored
with  virtually  no  integration  effort  and  without  the need to  replicate
documents.

The VFC family of products consists of:

o     VFC  DOCUMENT  WEB SERVER.  This is the heart of VFC, and is required in
      order to utilize all other components of VFC. This core package consists
      of software  installed on a server that establishes  links to documents,
      organizes  access  to  stored  information  and  acts as an  independent
      document sharing system.  The VFC Document Web Server interacts with the
      user's  desktop via a browser  such as Netscape  or  Microsoft  Internet
      Explorer.  The Company has been  shipping  the VFC  Document  Web Server
      since the second quarter of 1997.

o     EXTENSIONS.  Extensions are software components that are installed on an
      individual  user's  computer.  Extensions add  functionality  to the VFC
      Document Web Server. In October 1997, the Company began shipping Re:mark
      as an  extension  to  enable  seamless  electronic  annotation  of Adobe
      Acrobat Portable Document Format ("PDF") documents. Other extensions are
      expected to be introduced in the future.

o     ENABLERS.  Enablers  will  provide  the  capability  to bridge  multiple
      document management systems or repositories.

o     AMBIA PRODUCTS. Described below under Other Products.

VFC combines the following features:

o     ADAPTABILITY  TO INDIVIDUAL  USERS AND GROUPS.  Using VFC, an individual
      can search all of the servers of an enterprise for electronic  documents
      or  containers  without  leaving  his  or her  office,  then  place  the
      documents  into a private  virtual  office,  where they can be organized
      according to personal style and  preferences.  Departments or workgroups
      can organize a space that is optimal for the group.

o     INSTANT UPDATES OF DOCUMENTS.  If the original document is updated,  all
      of the  "virtual  documents"  residing  in every  virtual  location  are
      updated at the same time. Thus, every user always has access to the most
      current version of a document.


                                      -4-

<PAGE>

o     ELIMINATES  WEBMASTER  BOTTLENECK.  Since  users  can  easily  post  new
      documents  to the VFC  Document Web Server  without  converting  them to
      special  formats,  such as  HTML,  intervention  by a  Webmaster  is not
      required and the delays typically  associated with such intervention are
      avoided.

o     OPTIMIZES USE OF SYSTEM  RESOURCES.  Each document that is placed in the
      virtual  office  is  linked to the  original.  Each  link in the  user's
      virtual office behaves and looks just like the original.  No copy of the
      document is made. This saves  significant  network and client  resources
      because only a single copy of a document  needs to be maintained  for it
      to be available to everyone who needs it.

o     MINIMAL  IMPLEMENTATION  COSTS.  VFC is  delivered  ready to plug into a
      user's network.  No programmers or developers are needed,  and users can
      capture  and share  documents  immediately.  VFC is  designed  for rapid
      implementation, requiring low overhead and a minimal amount of training.

o     UNIVERSAL  DESKTOP  ACCESS.  The  intranet   infrastructure  behind  VFC
      provides  the  interface  for  the  information-sharing   functionality.
      Essentially  a  private  Web  site,  VFC is an  intranet  solution  that
      provides all the benefits of Web access, including hypertext linking and
      cross-platform  connection via a Web browser, and allows users to "jump"
      to any location at the click of a mouse and view documents regardless of
      their original format or where they are stored.

o     EASY-TO-UNDERSTAND   ORGANIZATIONAL   SCHEME.  Under  the  VFC  document
      management format, documents are stored in a hierarchy of icons depicted
      as  buildings,  offices,  file  cabinets,  folders and  documents.  This
      hierarchy is meaningful to anyone familiar with a traditional office and
      filing system.

o     EASY-TO-USE  SEARCH TOOLS. In addition to navigating through the virtual
      office  hierarchy to locate a document,  users can employ the VFC search
      tool to locate any  document  easily and  quickly by  specifying  simple
      search  criteria such as the document's  title or author or by searching
      the document's content for words or phrases specified by the user.

o     EFFECTIVE, FLEXIBLE SECURITY MECHANISMS. VFC can be managed centrally by
      a single  system  administrator  who can  restrict  access via  password
      protection  and group  permission.  The  administrator  can also  assign
      administrative rights to certain individuals such as department heads or
      workgroup  leaders,  who  in  turn  can  grant  or  restrict  access  to
      individuals  within their groups. An individual who has not been granted
      read access to a particular  document  will not only be  prevented  from
      opening and viewing the  document,  but also will not be informed of its
      existence  since it will not appear on a results list  generated  from a
      search command.

o     EASILY  EXPANDABLE  FUNCTIONALITY.  Extensions  will  allow  VFC to take
      advantage of  functionality  in other software or systems.  For example,
      using  the  Company's  Re:mark  extension,  users  can  collaborate  and
      simultaneously annotate documents viewed with the Adobe Acrobat Reader.

o     ABILITY TO LINK  DIVERSE  DOCUMENT  SYSTEMS.  The VFC  enabler  bridging
      technology,  when  introduced,  will  permit  users to access  documents
      stored  in  multiple  and  disparate  document   management  systems  or
      repositories  from their  personal VFC desktop as if all of the separate
      systems and repositories were one.

OTHER PRODUCTS

RE:MARK.  Re:mark is a plug-in product for Adobe Acrobat software that enables
users to mark up, redline and review documents  electronically  in a workgroup
setting. By annotating any document in PDF, Re:mark enables users to type text
on the document page, draw on the document,  indicate approval of the document
itself  or  specific  sections,  attach  any file  anywhere  in the  document,
consolidate  comments  from  multiple  reviews,  personalize  comments and set


                                      -5-

<PAGE>

annotation security.  Redlining features include highlighting,  strike-through
and "sticky notes." Annotations may be shared among users.

COMPOSE.  Compose is a suite of plug-in tools for Adobe Acrobat  Exchange that
automate and streamline a variety of document  production  tasks,  such as the
creation  of tables  of  contents,  hyperlinks,  document  indexes,  and other
document navigation features.

AERIAL.  Aerial is a plug-in  product that enables  Adobe Acrobat to print any
document  that needs to be formatted  for printing on multiple  pages that are
then pieced  together to form one page,  such as a large  spreadsheet or a CAD
drawing. Aerial also enables Adobe Acrobat to format tables into spreadsheets,
and  converts PDF to a text format that can be edited with  Microsoft  Word or
other word processors.

SIGNET(TM).  Signet is a security  solution for Web or CD-ROM  publishers  who
want to permit only authorized  users to read their  documents.  Signet allows
publishers to control the time and  circumstances  of the expiration of users'
privileges.

INQUIRE(R)/TEXT.  INQUIRE/Text  is a  full-text  retrieval  product  used  for
storing, indexing,  retrieving, and managing large collections of documents on
IBM and  IBM-compatible  mainframes.  INQUIRE/Text  software is widely used by
major companies,  utilities, hospitals, and government agencies for automating
document-centered  applications such as on-line manuals,  legislative tracking
and regulatory  compliance,  library management,  litigation support,  medical
records,  and  government  and  military  intelligence.  The  system  has been
installed at over 350 sites.

WEBINQUIRE(TM).  WebINQUIRE is an extension  product that provides Web browser
access  to  INQUIRE/Text  collections.  It  enables  users  to  utilize  their
mainframe  as an  intranet  superserver  with all the search  capabilities  of
INQUIRE/Text.  WebINQUIRE  permits  users to  store  documents  created  using
desktop  software  on  a  mainframe  computer,  retrieve  documents  from  the
mainframe and edit them on their desktop using desktop  applications,  such as
Microsoft Excel and Microsoft Word. In addition,  WebINQUIRE's  search formats
and views can be easily customized. Although WebINQUIRE and other INQUIRE/Text
options  carry a high  gross  margin,  they are not  expected  to  amount to a
significant percentage of the Company's future revenues.

In addition to its proprietary  products described above, the Company,  acting
as a VAR,  also  sells  third  party  products  such as  Verity's  Search  `97
Information Server,  Adobe software and Documentum  software.  This allows the
Company to provide  document  management  solutions  that are tailored to each
customer's needs.

In conjunction with product sales, the Company provides training,  maintenance
and technical  support services,  including  business  analysis,  requirements
definition,  design and development. In some instances, the Company's services
are provided in connection  with the sale of the Company's  products and those
of third parties for whom it acts as a VAR. In other instances,  product sales
are made in connection with the solutions provided by the Company's consulting
services.

STRATEGY

The  Company's  objectives  are to  establish  VFC as  the de  facto  industry
standard for document  access and to become a leading  provider of  electronic
document management software and systems. To accomplish these objectives,  the
Company intends to:

MAINTAIN   TECHNOLOGICAL   LEADERSHIP.   The  Company's   technology   enables
organizations to effectively  manage,  share and store critical  documents and
information across the enterprise.  The Company intends to continue to develop
what it  believes  are  innovative  technologies  and  features to address the
specific  document  management  needs of  organizations.  The Company plans to


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continue to develop new products and to improve its existing products.

ADD STRATEGIC  RELATIONSHIPS.  To facilitate the adoption of VFC as a de facto
industry   standard,   the  Company  plans  to  continue  to  form   strategic
relationships  with providers of document  management  software  applications,
tools and services. The Company believes that strategic relationships, such as
that formed with Adobe,  enhance the visibility of the Company's  products and
leverage the Company's sales and marketing  efforts by expanding the number of
salespeople  marketing the Company's  products  without  burdening the Company
with the need to identify and hire a large sales force.  The Company  believes
that the development of these  relationships will enable the Company to devote
additional resources to product development and marketing activities.

EXPAND SALES AND  MARKETING  CAPABILITIES.  The Company  intends to expand its
sales and  marketing  capabilities  by creating  additional  VAR and  original
equipment  manufacturer  relationships,  expanding  its  direct  sales  force,
offering  training,  and  participating in trade shows. The Company intends to
continue  the  enhancement  of its sales  and  marketing  capabilities  in the
future.

ACQUISITIONS.  In October 1995,  the Company  acquired  Merex,  which provided
electronic document management solutions to business and government customers,
and in July 1997, the Company  acquired  AMBIA,  a leading  developer of Adobe
Acrobat add-on products and services. The acquisitions of both AMBIA and Merex
brought  experienced  management  and  staff,  a  diverse  client  base and an
established market reputation to the Company. The Company plans to continue to
pursue  acquisitions of businesses,  products and technologies that complement
the Company's existing business,  although no such acquisitions are planned at
the current time.

SALES AND MARKETING

The Company conducts its sales and marketing efforts through several channels,
including  a  network  of VARs,  its own  sales  force,  marketing  alliances,
marketing  communications  and training  programs.  The Company's VARs and its
sales  force  receive  direct  support  from the  Company's  technical  staff.
Consulting  services  leads are  provided to the Company by those  vendors for
whom it acts as a VAR.  The  Company  believes  this  diversity  of sales  and
marketing channels permits it to distribute its products and sell its services
in an efficient and effective manner, while reducing reliance on any one sales
channel.

VALUE-ADDED RESELLERS. The Company's primary sales channel for its products is
its VARs.  The  Company's  VARs market and resell the  Company's  products and
offer training,  installation,  implementation  and customization  services to
their own contacts and to prospective customers identified by the Company. The
Company  manages  a  program  to train and  certify  all of its VARs.  It also
conducts  joint  marketing  campaigns,  including  direct  mail and trade show
appearances, with its VARs. As of December 1997, the Company had relationships
with several VARs, including GE Capital IT Solutions and BTG Inc. VARs buy VFC
and other  products from the Company at a discount  from the suggested  retail
price.

COMPANY SALES FORCE. The Company has a marketing and sales force of 14 people,
including field sales, telemarketing,  channel liaisons, and sales management.
The  channel  liaisons  work   specifically   with  the  Company's  VARs.  The
telemarketing  staff  qualifies  prospective   customers,   schedules  product
demonstrations,  and refers prospective customers to a VAR or, if a VAR is not
in place in the  particular  territory,  to the  Company's  sales  force.  The
Company's  sales force also sells  upgrades  and add-on  products,  and refers
leads  for  services  opportunities  to  VARs  or to  the  Company's  services
divisions.

MARKETING  ALLIANCES.  The  Company  itself is a VAR of  products  from  other
software companies, including Adobe, Verity, Documentum Inc., and PC DOCS. The
Company  incorporates these products into its document  management  solutions.
The Company  earns a reseller  commission  ranging from 10% to 40% on sales of
these products.


                                      -7-

<PAGE>

MARKETING COMMUNICATIONS. The Company generates awareness of, and interest in,
its products and consulting services through public relations,  telemarketing,
periodic  direct mail  campaigns,  seminars,  trade shows and other  marketing
efforts. In 1997, the Company conducted joint seminars with Adobe, cooperative
direct mail  campaigns  with several of its VFC VARs,  and  exhibited at trade
shows including  Lotusphere,  AIIM,  Documation,  Seybold,  and Internet World
West.

TRAINING. The Company believes that training is an integral part of a complete
customer solution, and that people who attend training sessions offered by the
Company are potential customers for the Company's other products and services.
Consequently,  in 1996, the Company  established a training  division to offer
customer training in the Adobe Acrobat and Verity Topic products. In 1997, the
Company added training for the Company's own products, including VFC, Re:mark,
Compose,  INQUIRE/Text,  as well as Adobe's  Framemaker,  Framemaker SGML, and
Photoshop  products.  The  Company  employs  a  full-time  training  staff and
maintains a state-of-the-art  training facility at its headquarters  office in
Fairfax,  Virginia.  The  training  division  also offers  courses at customer
locations.  The Company is currently the authorized Verity East Coast Training
Center.

The Company sells its products under a variety of licensing arrangements.  For
domestic  sales of VFC,  Re:mark,  Compose,  Aerial and Signet,  a shrink-wrap
license  is used  to  protect  the  Company's  proprietary  rights  and  limit
liability.  For all other products, the Company enters into written agreements
with its customers  containing  similar  provisions.  The Company also employs
evaluation  and beta test  agreements  that provide for the  protection of the
Company's  intellectual  property. For consulting services, the Company enters
into written  agreements with its customers that provide for  indemnification,
limits on liability, payment terms, period of performance, and other terms and
conditions.

The Company is generally  required to provide a significant level of education
to  prospective  purchasers  of its software  products  and systems  solutions
services  regarding  the  use  and  benefits  of the  Company's  products  and
services, resulting in a lengthy sales cycle (typically between three and nine
months).  Additionally,  the  implementation  by  customers  of the  Company's
products may involve a significant  commitment of resources by such  customers
over an extended  period of time. For these and other  reasons,  the sales and
customer  implementation  cycles are subject to a number of significant delays
over which the Company has little or no control. Delay in the sale or customer
implementation  of the Company's  products and services  could have a material
adverse  effect  on the  Company's  business  and  operations  and  cause  the
Company's  operating  results to vary  significantly  from quarter to quarter.
Therefore,  the Company  believes  that its  quarterly  operating  results are
likely to vary in the future.

The sales cycle for initial sales of VFC has ranged from three to nine months.
The Company believes that the sales cycle for repeat sales may be shorter. VFC
is licensed at an introductory  price of $4,995 per server.  The Company plans
to  increase  the price of VFC in the first  half of 1998.  The  Company  also
provides support packages and extension  products at an additional  price. The
Company  offers  annual  maintenance  for VFC at a cost of 20% of the purchase
price.

CUSTOMERS

The Company  targets both  commercial  and government  markets.  The Company's
products and consulting  services are used by many major companies,  including
Ford, Allen-Bradley, Boeing, Nabisco, AT&T, Chase, State Street Bank and Riggs
Bank,  and by government  organizations,  including  NASA,  the  Department of
Energy,  the U.S.  Army Signal Corps,  the  Government  Accounting  Office and
various  agencies  within  the  intelligence  community.  Sales to  government
customers represented  approximately 45% of revenues in 1996 and approximately
53% in 1997;  however,  no one  customer  accounted  for more  than 10% of the
Company's revenues in either period.


                                      -8-

<PAGE>

The Company has repeat business from a number of its customers, and management
believes  that  there  is a high  degree  of  customer  satisfaction  with its
products,  services and solutions. The Company's existing services,  training,
and  products  provide  a base of  business  that  the  Company  expects  will
complement VFC product sales.  Developing custom solutions for customers keeps
the  Company's  technical   professionals   abreast  of  client  needs,  which
facilitates the conception and  development of new products,  such as VFC, and
the improvement of existing products.

Certain  of  the  Company's   contracts  with  government   organizations  are
competitively  awarded  after a  formal  bid and  proposal  competition  among
qualified bidders. These government contracts may be either cost-reimbursement
contracts  (both  cost-plus-fixed-fee  and   cost-plus-award-fee),   time  and
materials contracts, and fixed price contracts.  Cost-plus-fixed-fee contracts
provide for the  reimbursement of incurred costs during contract  performance,
to the extent that such costs are allowable and allocable,  and the payment of
a fixed fee.  The size of the fee is limited  by federal  guidelines  to a set
proportion  of the contract  value.  Cost-plus-award-fee  contracts  typically
provide  for  the  reimbursement  of  costs  and  fee  based  upon a  periodic
evaluation of the Company's performance against specified criteria. Under time
and materials  contracts,  the Company agrees to provide certain categories of
labor that satisfy  established  education and experience  qualifications at a
fixed hourly rate.  In these cases,  the Company bears the risk that costs may
differ  from the  fixed  hourly  rate,  and the  Company  realizes  all of the
benefits or  detriment  resulting  from  decreases or increases in the cost of
performing  the work.  Under  fixed-price  contracts,  the  Company  agrees to
perform  certain  work for a fixed price and,  accordingly,  realizes  all the
benefit or  detriment  resulting  from  decreases  or increases in the cost of
performing the work.

The Company's  government  contracts contain standard termination clauses that
permit the  government to terminate the contracts at any time,  without cause,
for the convenience of the  government.  The Company has not had any contracts
terminated  for  convenience.   In  addition,   government  contracts  require
compliance  with  various  procurement  regulations.  The  adoption  of new or
modified procurement regulations could materially adversely affect the Company
or increase its costs of competing for or performing government contracts. Any
violation  of  these  regulations  could  result  in  the  termination  of the
contracts,  imposition  of fines,  and/or  debarment  from award of additional
government   contracts.   Most  government   contracts  are  also  subject  to
modification  or  termination  in the event of  changes  in  funding,  and the
Company's  contractual costs and revenue are subject to adjustment as a result
of audits by the DCAA and other government auditors. The DCAA routinely audits
cost-reimbursement  contracts to verify that costs have been properly  charged
to the  government.  Further,  government  contract  awards  may be subject to
protest by competitors.

Many of the Company's  government contracts require the Company and certain of
its employees to maintain security clearances  complying with the requirements
of various government agencies.

RESEARCH AND DEVELOPMENT

The Company's research and development programs are intended to anticipate and
take  advantage of new  technologies,  and to anticipate and respond to market
requirements.  The Company  believes  that its future  success  will depend in
large part on its ability to maintain and enhance its  leadership  in document
management and related  technologies  and to develop new products that meet an
expanding range of customer requirements.

The market for the Company's products is characterized by rapid  technological
developments,  evolving industry standards,  changes in customer requirements,
and frequent new product  introductions and enhancements,  which often lead to
product  obsolescence.  The Company  believes that the speed of  technological
advancement in its industry requires a significant  investment in research and
development in order to maintain its competitive product position. The Company
will continue to invest  substantially  in product  development as it believes
that its future success will depend upon its ability to develop and market new


                                      -9-

<PAGE>

products and enhancements to existing products on a cost-effective  and timely
basis.  Software  development  expenses  increased  from  $816,000  in 1996 to
$2,472,000 in 1997.

Due to the complexity and  sophistication of the Company's  software products,
the Company's products from time to time contain defects or "bugs" that can be
difficult  to correct.  Furthermore,  as the Company  continues to develop and
enhance its products,  there can be no assurance that the Company will be able
to  identify  and  correct  defects in such a manner as will permit the timely
introduction  of such  products.  Moreover,  the Company may from time to time
discover  defects  only after its  systems  have been used by many  customers.
There can be no assurance that, in the future, software defects will not cause
delays in product  introductions  and  shipments,  result in increased  costs,
require  design  modifications,  or  impair  customer  satisfaction  with  the
Company's products. Any such event could have a material adverse effect on the
Company's business, operating results and financial conditions.

COMPETITION

The market for the  Company's  products and services is intensely  competitive
and  subject to rapid  change  caused by new product  introductions  and other
market activities of industry  participants.  The Company currently encounters
direct and indirect  competition from a number of public and private companies
involved  in  groupware,  document  management,  and  collaboration  software,
including  Xerox,  Open  Text,   Net-It  Software,   Hummingbird  and  Fulcrum
Technologies.  The  Company  is aware  that  other  companies  have  announced
products with some features similar to VFC. In addition,  the Company may face
competition  from new market  entrants.  Competitors may have longer operating
histories,  significantly  greater  financial,  marketing,  service,  support,
technical and other  resources  and name  recognition  and a larger  installed
customer base than the Company.  As a result,  such competitors may be able to
respond more quickly to new or emerging  technologies  and changes in customer
requirements or to devote greater resources to the development,  promotion and
sale of their products than the Company.

The Company  also faces  indirect  competition  from system  integrators.  The
Company relies on a number of system  integration firms for implementation and
other  services,  as well as for  recommendations  of its products  during the
evaluation  stage of the  purchasing  process.  Although the Company  seeks to
maintain close relationships with these service providers, many of these third
parties have similar,  and often more established,  relationships with some of
the  Company's  competitors.  It is also  possible  that  new  competitors  or
alliances among competitors may emerge and rapidly acquire  significant market
share. In addition, the Company expects competition to increase as a result of
software industry consolidation.

The Company believes that the competitive factors affecting the market for its
products  and  services  include  vendor and  product  reputation,  ability to
attract and retain quality personnel,  product quality, performance and price,
the  availability  of  products  on multiple  platforms,  product  salability,
product integration with other enterprise applications,  product functionality
and  features,  product  ease-of-use,  and the  quality  of  customer  support
services  and  training.  The  relative  importance  of each of these  factors
depends upon the specific  customer  involved.  While the Company  believes it
competes  favorably in each of these areas,  there can be no assurance that it
will continue to do so. Moreover,  the Company's present or future competitors
may be able to develop products comparable or superior to those offered by the
Company, offer lower priced products or adapt more quickly than the Company to
new technologies or evolving customer requirements. In order to be successful,
the Company must respond to technological  change,  customer  requirements and
competitors' current products and innovations.  There can be no assurance that
the  Company  will  be able  to  compete  effectively  in its  market  or that
competition will not have a material adverse effect on its business, operating
results and financial condition.

PROPRIETARY RIGHTS

The Company has a registered service mark to protect its proprietary rights in
the name Infodata and it has registered  trademarks  with respect to the marks
INQUIRE and AMBIA.  The Company also has  registered  trademarks  for its VFC,


                                     -10-

<PAGE>

Aerial,  Re:mark and Compose  products.  In addition,  the Company has filed a
trademark  application  in order to protect its Virtual File Cabinet name. The
Company relies primarily on a combination of copyrights and trademarks,  trade
secrets,  confidentiality procedures and contractual provisions to protect its
proprietary  rights.  For example,  the Company licenses rather than sells its
software.  The licenses impose certain  restrictions on the licensees' ability
to utilize the software. In addition, the Company seeks to avoid disclosure of
its trade secrets,  including, but not limited to, (i) requiring those persons
with   access   to  the   Company's   proprietary   information   to   execute
confidentiality agreements with the Company and (ii) restricting access to the
Company's  source codes.  Trade secret and copyright  laws afford only limited
protection.  Despite the Company's efforts to protect its proprietary  rights,
unauthorized  parties may attempt to copy the Company's  products or to obtain
and use  information  that the Company  regards as  proprietary.  Although the
Company may apply for certain patents, the Company presently has no patents or
patent  applications  pending.  Policing  unauthorized  use of  the  Company's
products is  difficult,  and while the Company may be unable to determine  the
extent to which piracy of its software products exists, software piracy can be
expected to be a persistent  problem.  In  addition,  the laws of some foreign
countries  do not  protect  the  Company's  proprietary  rights to as great an
extent as the laws of the United  States.  There can be no assurance  that the
Company's means of protecting its proprietary  rights will be adequate or that
the Company's  competitors will not develop similar technology  independently.
There can be no assurance  that third parties will not claim  infringement  by
the Company with respect to current or future  products.  The Company  expects
software product developers  increasingly to be subject to infringement claims
as the number of products and  competitors in the Company's  industry  segment
grows  and the  functionality  of  products  in  different  industry  segments
overlaps.  Any such claims,  with or without merit,  could be  time-consuming,
result in costly  litigation,  cause  product  shipment  delays or require the
Company  to enter  into  royalty  or  licensing  agreements.  Such  royalty or
licensing agreements, if required, may not be available on terms acceptable to
the  Company or at all,  which could have a material  adverse  effect upon the
Company's business,  operating results and financial  condition.  In addition,
the  Company  also  relies on certain  software  that it  licenses  from third
parties,  including  software that is  integrated  with  internally  developed
software and used in the Company's  products to perform key  functions.  There
can be no assurance  that such firms will remain in  business,  that they will
continue to support  their  products  or that their  products  will  otherwise
continue to be available to the Company on commercially reasonable terms.

EMPLOYEES

As of March 20, 1998,  the Company had a total of 109  employees,  of which 78
were technical professionals,  14 comprised the sales and marketing staff, and
the remainder were involved in management, administration, and accounting. The
Company's  employees are not represented by any unions and the Company has not
experienced any work stoppages.

MANUFACTURING

The Company is currently  in the process of  conducting a review of the impact
of Year 2000 on its  information  systems,  as well as reviewing its impact on
relationships  with key  customers  and  vendors.  Based  on this  preliminary


                                     -11-

<PAGE>

review, the information systems in place will be modified with the appropriate
upgrades provided by the original software vendors.  Currently,  the aggregate
costs associated with these upgrades have not been estimated.

The Company  contracts for the manufacture of its software and packaging.  The
Company believes that there are adequate  sources of supply and  manufacturing
capacity to address the Company's requirements.

YEAR 2000

The Company is currently  in the process of  conducting a review of the impact
of Year 2000 on its  information  systems,  as well as reviewing its impact on
relationships  with key  customers  and  vendors.  Based  on this  preliminary
review, the information systems in place will be modified with the appropriate
upgrades provided by the original software vendors.  Currently,  the aggregate
costs associated with these upgrades have not been estimated.

ITEM 2.  DESCRIPTION OF PROPERTY

The  Company  leases  professional  office  space  for  its  headquarters  and
operations in Fairfax,  Virginia and recently  expanded its space and extended
the term of its lease  through July 31, 2003.  Leased space now totals  25,950
square feet. Payments under the lease were approximately $370,000 in 1997, are
expected to be $492,000 in 1998, and will increase to  approximately  $599,000
by 2003.

The Company  also  maintains an office of  approximately  3,400 square feet in
Mountain View, California. Payments under the lease were approximately $72,968
in 1997 (Infodata was  responsible  for  approximately  $37,000 in 1997).  The
lease expires May 31, 1998 and the Company is discussing  the  possibility  of
extending the lease with the landlord.  The Company believes the lease will be
extended and that payments under the lease will approximate $130,000 in 1998.

ITEM 3.  LEGAL PROCEEDINGS

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

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

An amendment to the  Company's  1995 Stock Option Plan was approved (by a vote
of  1,657,437  shares  for,   118,817  shares  against,   with  19,380  shares
abstaining)  during a Special  Meeting of  Shareholders  held at the Company's
corporate  headquarters  on November 5, 1997.  The amendment to the 1995 Stock
Option Plan reserved 500,000  additional  shares of the Company's common stock
for issuance to employees, officers,  consultants,  directors and others under
such Plan. Shareholders of record as of the close of business on September 25,
1997, were entitled to notice of, and to vote at, the meeting.

ITEM 4A.  EXECUTIVE OFFICERS

The following  information  relates to Executive Officers of the Registrant as
of March 20, 1998:

<TABLE>
<CAPTION>
             NAME                       AGE                 POSITION
<S>                                     <C>           <C>
       James A. Ungerleider             48            President and Chief Executive Officer

       Harry Kaplowitz                  54            Executive Vice President

       Richard M. Tworek                41            Executive Vice  resident
                                                       and Chief Technology Officer

       Christopher P. Dettmar           44            Chief Financial Officer

       Robert J. Loane                  59            Senior Vice President

       Razi Mohiuddin                   36            Vice President

       Curtis D. Carlson                33            Secretary
</TABLE>

James  Ungerleider has been the President and Chief  Executive  Officer of the
Company  since  November  1997.  From 1973  until  joining  the  Company,  Mr.
Ungerleider was associated with American  Management  Systems,  Inc. (AMS) and
served as its Vice President,  European  Finance  Industry  Business Area from


                                     -12-

<PAGE>

1991 to November  1997.  Prior to joining  AMS, Mr.  Ungerleider  was a senior
research  scientist  with  the  National  Biomedical  Research  Foundation  in
Washington,  D.C.  He  has  a BS  in  Electrical  Engineering  from  Princeton
University and an MBA from the Harvard Business School.

Harry  Kaplowitz,  a  founder  of the  Company,  has  been an  Executive  Vice
President of the Company since November 1997 and a director  since 1980.  From
1991 to  January  1993,  Mr.  Kaplowitz  served  as  Chairman  of the Board of
Directors  and from  1991 to  November  1997 he  served  as  President  of the
Company.  From 1980 to 1989,  he served as  Executive  Vice  President  of the
Company.  From  1973 to 1980,  he was a Vice  President  of the  Company.  Mr.
Kaplowitz has a BS in Electrical Engineering from the Massachusetts  Institute
of Technology and an MBA from the Wharton Graduate School.

Richard M. Tworek has been an Executive  Vice  President of the Company  since
October 1995, a director  since July 1996 and Chief  Technology  Officer since
April 1997.  Mr.  Tworek was the founder of Merex and served as its  President
from April 1987 to October 1995. Mr. Tworek  originated the VFC concept and is
responsible  for its  development.  Mr. Tworek holds a BS in Mathematics  from
Eastern Michigan University and an MS (equivalent) in Nuclear Engineering from
the U.S. Navy Nuclear Power School.

Christopher P. Dettmar has been Chief  Financial  Officer of the Company since
May 1997. From November 1993 to April 1997, he served as Vice President, Chief
Financial  Officer and a Director of TWS,  Inc. and its  predecessor  company,
Encompass,  Inc.,  both of which are  telecommunications  service firms.  From
November 1989 to November 1993, he served as Vice  President,  Chief Operating
Officer and a director of the Hunter  Companies,  an asset management and real
estate  brokerage  firm.  From 1984 to 1989,  Mr. Dettmar served as a regional
controller with Cincinnati Bell Information  Systems and from 1979 to 1983, he
worked for Price Waterhouse & Co. He is a certified public accountant, holds a
BS  in  Commerce  from  the  University  of  Virginia  and  an  MBA  from  the
Pennsylvania State University.

Dr. Robert J. Loane has been Senior Vice President and Chief  Scientist of the
Company since 1981. He is the principal architect and developer of the INQUIRE
family  of  products  and in now  involved  with the  architecture  of  future
products and provides consulting services to many of the Company's  customers.
Dr. Loane has a PhD in Computer  Sciences from Princeton  University and a BEE
from Cornell University.

Razi  Mohiuddin has been a Vice  President of the Company since  February 1998
and a manager of the Company's  West Coast  facilities  since July 1997.  From
1988 to July 1997, he served as Vice President of Software  Partners,  Inc., a
firm that developed products for online services, and was the parent of AMBIA,
and from 1995 to July  1997,  Mr.  Mohiuddin  also  served as Vice  President,
Engineering,  of AMBIA.  In 1994, Mr.  Mohiuddin  co-founded  ONSALE,  Inc., a
publicly held  Web-based  service that  specializes  in selling  computers and
consumer   electronics   using  auctions,   markdowns,   and  other  close-out
techniques.  Mr. Mohiuddin has a BS in Computer Science from the University of
Illinois, Chicago.

Curtis D. Carlson has been the Secretary of the Company since  February  1998.
From 1991 until joining the Company in August 1994, Mr. Carlson was associated
with the Federal Systems  Division of  International  Business  Machines (IBM)
Corporation  and  served in the  Business  Practices  and  Contracts  function
supporting the U.S. Navy and Radiation-Hardened  Semiconductor business areas.
Since 1994,  Mr. Carlson has been Chairman of the Board of Synergy One Federal
Credit Union.  He has a BS in Finance from  Rochester  Institute of Technology
and is  completing  coursework  at Virginia  Polytechnic  Institute  and State
University for his MBA.


                                     -13-

<PAGE>

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>
                                               1997                      1996
                                        High          Low         High          Low
                                        ----          ---         ----          ---
<S>                                     <C>          <C>          <C>           <C>
        First Quarter                   $12.63       $6.75        $ 3.27        $1.93
        Second Quarter                    8.63        6.00          7.87         2.81
        Third Quarter                    10.38        7.00         10.12         4.25
        Fourth Quarter                   12.75        8.50         12.62         4.62
</TABLE>

The market quotations reflected above are inter-dealer prices,  without retail
mark-up, markdown 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
1997 Consolidated  Financial  Statements,  contained elsewhere in this report,
for information relating to cash dividends pertaining to Preferred Stock.

As of March 23, 1998, there were  approximately  1,650  beneficial  holders of
record.

On July 22, 1997,  the Company issued an aggregate of 400,000 shares of Common
stock to Alan Fisher and Razi Mohiuddin,  the former shareholders of AMBIA, as
consideration  for the  purchase of all of the  outstanding  shares of capital
stock of AMBIA, pursuant to an Agreement of Merger and Plan of Reorganization.
The Company relied on Section 4(2) of the Securities  Act, as the basis for an
exemption  from  registration,  because  the  transaction  did not involve any
public offering.


                                     -14-

<PAGE>

On October 11, 1995,  the Company  issued an  aggregate  of 210,000  shares to
Richard  Tworek,  Mary Margaret Styer and Andrew Fregly,  the  shareholders of
Merex,  as  consideration  for the  acquisition  of Merex pursuant to an Asset
Purchase Agreement and Plan of  Reorganization.  The Company relied on Section
4(2) of the Securities  Act as the basis for an exemption  from  registration,
because the transaction did not involve any public offering.

The Company has agreed to issue shares of Common Stock on a quarterly basis to
each of Richard Bueschel, Laurence Glazer, Robert Leopold, Millard Pryor, Jr.,
Isaac Pollak and Alan Fisher,  the non-employee  directors of the Company,  as
payment of consulting fees for 1997 in the amount of $10,000 per  non-employee
director. For the year ended December 31, 1997, each non-employee director was
entitled to 1,100 shares of Common Stock.  Certificates evidencing such shares
and the number of shares to which the non-employee  directors will be entitled
for the last  quarter of 1997 were  issued in  January,  1998.  The Company is
relying on Section  4(2) of the  Securities  Act as the basis for an exemption
from  registration,  because these shares will be issued by the Company solely
to its non-employee directors, and thus will not involve any public offering.

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

COMPANY OVERVIEW

The Company provides  electronic  document  management software and systems to
corporate and government  workgroups,  departments and  enterprises.  Prior to
1994,  substantially all of the company's  business was derived from the sale,
support,  and maintenance of INQUIRE/Text,  a full-text retrieval product used
for storing, indexing,  retrieving and managing large collections of documents
on IBM  and  IBM-compatible  mainframes.  INQUIRE/Text  revenue  of all  types
(licenses, maintenance and consulting) accounted for approximately 49% and 40%
of revenues for the years ended December 31, 1996, and 1997, respectively. The
Company  expects  INQUIRE/Text  revenues  to  decrease  over  time  due to the
decreasing  reliance of users on  mainframe  hardware  and the maturity of the
market. In 1994, the Company shifted its focus to providing a broader range of
document   and   information    management   solutions   deliverable   through
client/server and intranet technology.  As a result,  client/server,  intranet
consulting revenues,  third-party software product revenues,  and VFC revenues
increased from 51% of the Company's revenues in 1996 to 60% in 1997.

In January 1997,  the Company  introduced  VFC, and began to market VFC in the
second quarter of 1997. The Company  anticipates  that VFC will  constitute an
increasing  percentage of the Company's revenue for the foreseeable future. In
December 1997, the Company entered into an agreement with Adobe Systems,  Inc.
to cross  license  and  co-market  certain  technologies  (the  "Cross-License
Agreement").  The Company  expects to receive more than $700,000 in consulting
fees pursuant to a consultant agreement ("Consulting  Agreement") entered into
in connection with the Cross-License Agreement for modifications to certain of
its technologies so that it can be incorporated into future Adobe products. Of
the fees payable under the Consulting Agreement,  $350,000 has been recognized
by the Company as of December 31, 1997. Of this, $225,000 was paid in 1997 and
$125,000 was paid in January  1998.  Another  $125,000 was paid by January 31,
1998,  $125,000 becomes due upon Adobe's  acceptance of the initial version of
the  modifications,  and the balance of $129,000  becomes due and payable upon
Adobe's  acceptance  of the final  product.  The  Consulting  Agreement may be
terminated  by Adobe upon 30 days'  written  notice and  payment of 10% of the
next  unpaid  installment  of  the  consulting  fee.  Upon  acceptance  of the
modifications  by Adobe,  the Company  will earn a license fee of  $1,000,000.
Although the Company has received  approximately  50% of the license fee under
the  Cross-License  Agreement,  any license  fees  received by the Company are
subject to refund if the Company fails to deliver an acceptable  final product
to Adobe.  The Company  will not  recognize  any revenue with respect to these
license  fees until the product has been  accepted  and the fees are no longer
refundable, which is expected to occur in the second half of 1998. The Company
recognizes revenue from its product development services in both 1997 and 1998
on a percentage of completion  basis.  Certain  components of VFC that will be
licensed to Adobe will be incorporated in future Adobe products.  In addition,
certain Adobe  products will display a "VFC Button" that will provide a direct
link to VFC or to VFC  marketing  information  if the user  does not have VFC.
Adobe will  receive  royalties  based on any sales of VFC  arising out of this
marketing  arrangement,  and will also receive  commissions  for any VFC sales
that it makes directly.  The Company  estimates that the total effort required
to develop the features to be included in the initial  version of the modified
technology to be 133 person-weeks and the time to develop the initial and beta
versions  will be 52  person-weeks  over a six-month  period.  The Company has
assigned 12 engineers to develop the modifications.  The Company has completed
a substantial portion of the modifications.

As of  December  31,  1997,  VFC has  been  sold to large  organizations  with
significant  document  processing  requirements,  such  as the  Department  of
Energy, AT&T, State Street Bank and the U.S. Army Signal Corps. Due to limited
sales and support  resources and the recent  introduction  of VFC, the Company
has focused on selling VFC to customers  that have  multiple  servers that can
utilize VFC.  The Company  expects  that these  customers  will help it in the
future both as  references  and through  further  sales within the  customers'


                                     -15-

<PAGE>

organizations.  Evaluation  copies of VFC  software  have been  installed at a
number of large  organizations.  Most of these  installations have resulted in
orders, although a few customers have returned the evaluation software without
placing an order.  The sales  cycle for  initial  sales of VFC has ranged from
three to nine  months.  The Company  believes  that the sales cycle for repeat
sales to customers may be shorter. VFC is licensed at an introductory price of
$4,995 per server. The Company plans to increase the price of VFC in the first
half of 1998.  The  Company  also  provides  support  packages  and  extension
products at an additional price. The Company offers annual maintenance for VFC
at a cost of 20% of the  purchase  price.  As of  December  31,  1997,  annual
maintenance sales for VFC were immaterial.

On July 22,  1997,  the Company  acquired  all of the common stock of AMBIA in
consideration  for 400,000  shares of the  Company's  Common Stock with a fair
value of $7.75 per share,  which was  equivalent  to the trading  price of the
Company's  Common  Stock  on  such  date.  As a  result  of  the  acquisition,
outstanding  options to purchase  390,000  shares of AMBIA  common  stock were
converted into options to acquire approximately 35,000 shares of the Company's
Common  Stock at an exercise  price of $1.69 per share.  The fair value of the
options is recorded as part of the  acquisition  cost.  The total  acquisition
cost  was  approximately  $3,461,000,   including  the  direct  costs  of  the
acquisition.  Approximately $3,292,000 was allocated to goodwill,  $25,000 was
allocated to acquired  tangible  assets and $144,000 was allocated to acquired
intangible  assets,  which did not include AMBIA's work force. The Company did
not allocate any amount to AMBIA's work force because of the Company's  belief
that  businesses  located in Silicon  Valley,  such as AMBIA,  experience high
personnel  turnover.  The  acquired  intangible  assets and goodwill are being
amortized over two years and seven years,  respectively.  The  acquisition was
treated  as a  purchase.  For the year  ended  December  31,  1996  (AMBIA was
incorporated on May 1, 1996), AMBIA's revenues were $835,000, and its net loss
was $676,000. AMBIA is now a subsidiary of the Company.

At December 31, 1997, the Company had a net operating loss ("NOL") aggregating
approximately  $8,447,000  available to affect future  taxable  income.  Under
Section  382 of the  Internal  Revenue  Code of  1986,  as  amended  ("Code"),
utilization of prior NOLs is limited after an ownership  change, as defined in
Section  382,  to an  amount  equal to the  value  of the  loss  corporation's
outstanding  stock  immediately  before  the  date  of  the  ownership  change
multiplied by the federal long-term tax-exempt rate in effect during the month
that the ownership change occurred. As a result of the AMBIA acquisition,  the
Company is  subject to  limitations  on the use of its NOL as  provided  under
Section 382.  Accordingly,  there can be no assurance the Company will be able
to utilize a significant amount of NOLs.

Any amounts paid by customers prior to the actual  performance of services are
recorded as deferred  revenue until earned,  at which time they are recognized
in accordance with the type of contract.  The margins realized on transactions
involving  deferred  revenue  depend on the type of  service  rendered  by the
Company.   In  general,   most  deferred  revenue  is  generated  by  software
maintenance  contracts.  These  contracts  have  high  margins.  Most  of  the
Company's  maintenance  revenue  pertains to  INQUIRE/Text,  which is an older
software product. The Company's costs under maintenance  contracts are low and
consequently,  the gross  margin is high.  The  balance  of  deferred  revenue
generally  relates to  consulting  services,  which carry lower  margins  than
maintenance contracts.

The  components  of the  Company's  cost of revenue  depend on the  product or
service. For consulting, the most significant item is the direct labor cost of
the  consultants.  Other  components  include  any  subcontractor  costs,  any
non-labor direct costs such as travel and any associated indirect costs (e.g.,
office rent,  administration,  etc.)  allocated to the consulting  engagement.
Indirect costs are allocated  based on head count and square footage of office
space.  For third-party  product sales,  the cost of revenue includes the cost
incurred by the Company to acquire the product, shipping and delivery charges,
associated taxes, any customization work done by the Company,  and any special
packaging  costs incurred prior to shipment.  The cost of maintenance  revenue
includes the customer service and software  engineering  personnel  supporting
the product and an allocation of associated indirect costs based on head count
and square  footage of office  space.  For products  that have been  developed
internally, the Company includes shipping,  delivery,  packaging,  production,


                                     -16-

<PAGE>

the direct  labor of  personnel  involved in  delivering  and  installing  the
product and any associated expenses involved with the installation.

Future operating  results will depend upon many factors,  including the demand
for the Company's  products,  the  effectiveness  of the Company's  efforts to
integrate  various  products it has  developed  or acquired and to achieve the
desired  levels of sales from such product  integration,  the level of product
and price competition, the length of the company's sales cycle, seasonality of
individual  customer  buying  patterns,  the size  and  timing  of  individual
transactions, the delay or deferral of customer purchases and implementations,
the  budget  cycles of the  Company's  customers,  the  timing of new  product
introductions and product enhancements by the Company and its competitors, the
mix of sales by products, services and distribution channels,  acquisitions by
competitors, the ability of the Company to develop and market new products and
control costs, and general domestic economic and political conditions.

RESULTS OF OPERATIONS
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996

REVENUES

Total revenue  increased by $1,084,000,  or 11%, from  $9,560,000 for the year
ended December 31, 1996 to  $10,644,000  for the year ended December 31, 1997.
The Company derived  revenues from consulting  services,  sales of third party
products, sales of INQUIRE/Text-related  products and services and maintenance
related thereto,  and sales of the Company's software products.  Revenues from
consulting services and third party products,  as well as training,  increased
by $612,000,  or 9%, from  $6,765,000  for the year ended December 31, 1996 to
$7,377,000  for the year  ended  December  31,  1997,  due to an  increase  in
third-party  product  sales and  training.  The VFC family of  products  which
includes the Company's VFC and AMBIA software  products were introduced during
1997 and produced  $644,000 in revenue during the third and fourth quarters of
1997,  including $569,000 in AMBIA revenues.  The first sale of these products
was   recorded   in  July  of   1997.   Revenue   generated   primarily   from
INQUIRE/Text-related  products and maintenance  decreased by $169,000,  or 6%,
from  $2,794,000  for the year ended  December 31, 1996 to $2,625,000  for the
year ended  December 31, 1997. The Company  expects that  INQUIRE/Text-related
revenues will continue to decline over time as customers move applications off
mainframes.

GROSS PROFIT

Gross profit increased by $379,000,  or 9%, from $4,103,000 for the year ended
December 31, 1996 to  $4,482,000  for the year ended  December  31, 1997.  The
increase in gross profit was due primarily to increased revenue,  particularly
in the high margin VFC family of products.  This was  partially  offset by the
decline in high margin INQUIRE/Text-related revenues.

Gross  margin as a percent of revenues  decreased  by 1% from 43% for the year
ended  December  31, 1996 to 42% for the year ended  December  31,  1997.  The
decrease  was due to the growth of  lower-margin  third  party  product  sales
during 1997.

RESEARCH AND DEVELOPMENT EXPENSES

Research and development expenses increased $1,656,000, or 203%, from $816,000
for the year ended December 31, 1996 to $2,472,000 for the year ended December
31, 1997. The principal  cause of the increase was the  development of the VFC
family of products.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES


                                     -17-

<PAGE>

Selling,  general and administrative  expenses increased  $2,630,000,  or 92%,
from  $2,869,000  for the year ended  December 31, 1996 to $5,499,000  for the
year ended  December 31, 1997.  The increase was due primarily to increases in
the sales staff and in marketing  expenditures  related to the introduction of
the VFC family of products.

INTEREST INCOME AND EXPENSE

Interest  income  decreased  $33,000,  or 34%, from $96,000 for the year ended
December  31,  1996 to  $63,000  for the year ended  December  31,  1997.  The
decrease was due to lower balances of cash, cash  equivalents,  and short term
investments  during the year ended December 31, 1997. The Company  invested in
short-term, highly liquid money market instruments only.

Interest expense increased  $33,000,  or 300%, from $11,000 for the year ended
December  31,  1996 to  $44,000  for the year ended  December  31,  1997.  The
increase was due to the increased utilization of the line of credit during the
year ended December 31, 1997.

NET INCOME

Net income decreased $3,968,000, from $503,000 for the year ended December 31,
1996 to a net loss of  $3,465,000  for the year ended  December 31, 1997.  The
decrease  was due to the factors  discussed  above.  As a result of  preferred
stock  dividends of $58,000 paid in 1996,  net income  available to holders of
common stock amounted to $445,000 or $0.23 per share basic and $0.22 per share
on a diluted basis for the year ended  December 31, 1996.  During 1996, all of
the outstanding  preferred  stock was converted into common stock.  Therefore,
there were no preferred  stock  dividends in 1997. For the year ended December
31, 1997, the net loss allocated to holders of common stock was $3,465,000, or
$1.39 per share on both a basic and diluted basis.

ACCOUNTS RECEIVABLE

Accounts  receivable  increased  $1,250,000,  or 82%,  from  $1,522,000  as of
December 31, 1996 to  $2,772,000  as of December 31, 1997.  The reason for the
increase was due to the  increase in sales  during the fourth  quarter of 1997
compared to the fourth quarter of 1996. Fourth quarter 1997 sales increased by
$1,408,000 over the fourth quarter of 1996.

ACCOUNTS PAYABLE

Accounts  payable  increased  $1,155,000 or 353%, from $327,000 as of December
31, 1996 to  $1,482,000  as of December 31,  1997.  The increase was due to an
increase in expenses during the fourth quarter of 1997 of $1,191,000  compared
to the fourth  quarter of 1996 and an  increase  in the aging of the  accounts
payable.

NOTES PAYABLE

Notes payable increased $880,000,  from $0 as of December 31, 1996 to $880,000
as of December 31, 1997. The increase was due to interim  borrowings  incurred
under a line of credit to help  finance the  development  of the VFC family of
products until more permanent financing could be put in place in 1998.

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 1997, the Company had cash,  cash  equivalents  and short-term
investments  of $288,000  and a working  capital  deficit of  $1,693,000.  The
Company  had  borrowings  of $880,000 as of  December  31,  1997.  The Company
maintains a line of credit with Merrill  Lynch  Business  Financial  Services,
Inc. for up to $1,000,000  based upon eligible  receivables.  Interest on this
debt is  calculated  at a per  annum  rate  equal to the sum of 2.9%  plus the


                                     -18-

<PAGE>

30-day  commercial  paper rate.  Currently,  this per annum rate  approximates
prime.  The facility  expires in July 1998.  The line of credit is  contingent
upon the Company  continuing  to meet certain  general  funding  requirements,
including the absence of any material adverse change in the Company's business
or   financial   condition,   the   continued   accuracy   of  the   Company's
representations  and  warranties  and the  provision  of annual and  quarterly
financial  information.  The Company is  currently  in  compliance  with these
funding  requirements.  Subsequent to year-end  1997, the Company paid off the
line of credit in full.

Net cash used in operating  activities for the year ended December 31, 1997 of
$2,579,000 was due to the Company's net loss for the period of $3,465,000,  an
increase in accounts receivable of $1,249,000, partially offset by an increase
in accounts payable of $1,155,000,  depreciation  and amortization  expense of
$323,000,  goodwill  amortization  of  $266,000,  and an  increase in deferred
revenue of $438,000.

Net cash  provided by  investing  activities  of  $486,000  for the year ended
December  31,  1997 was derived  primarily  from the  maturity  of  short-term
investments, offset by purchases of property and equipment.

Net cash provided by financing activities of $1,111,000 came from the proceeds
of short-term  borrowing and the issuance of common stock through stock option
exercises  offset by the payments of notes payable for the year ended December
31, 1997.

Net cash flow from  operating  activities for the year ended December 31, 1997
were not  sufficient to fund the  operations of the business.  However,  based
upon the  Company's  expectations  of growth in future  revenues from both its
consulting  business  and  its  VFC  family  of  products,  and  based  on the
successful  financing  consummated on February 20, 1998,  management  believes
that available and projected  resources will be sufficient to meet its working
capital requirements through at least December 31, 1998.

Net cash provided by operating activities for the year ended December 31, 1996
of $1,140,000  was due  primarily to the  Company's net income,  a decrease in
accounts  receivable,  significant  non-cash expenses such as depreciation and
amortization,  and an  increase  in accrued  expenses,  partially  offset by a
decrease in deferred  revenue.  Net cash used in investing  activities for the
year ended  December 31, 1996 of  $1,396,000  was due to the purchase of short
term  investments  and property and equipment.  Net cash provided by financing
for the year ended  December  31, 1996 of $46,000  was due to the  issuance of
stock,  offset by payments on capital lease  obligation  and  preferred  stock
dividends.  At December 31, 1996, the Company had cash, cash equivalents,  and
short-term investments of $2,213,000.

Effective  February 17, 1998 and  consummated  February 20, 1998,  the Company
sold 1,600,000 shares of common stock in an underwritten public offering for a
price of $5.00 per share, or a total of $8.0 million. The Company plans to use
the  approximately  $6.65  million of net proceeds from the offering to expand
the Company's sales and marketing  activities,  for research and  development,
for the repayment of approximately  $1.0 million of institutional debt and for
working capital and general corporate purposes.

Since  December  31,  1997,  the Company  has  continued  to incur  losses and
management's  projections  indicate that the Company will continue to generate
operating losses and negative cash flow through the third quarter of 1998. The
Company  anticipates,  based on its current  plans for the  proceeds  from the
financing  together with its operating cash flows,  to meet  anticipated  cash
requirements  through  the end of 1999.  The  Company  expects to operate on a
positive cash flow basis  beginning in the fourth quarter of 1998, as a result
of  increased  sales of VFC. The Company  estimates  that VFC will account for
approximately 25% to 30% of the Company's revenues in 1998. However, there can
be no assurance that this will be the case. The Company expects that, on a per
product  basis,  the gross margin on VFC related  sales will range from 60% to
75%,  although there can be no assurance that this will be the case.  Although
sales of VFC,  including AMBIA products,  accounted for less than $700,000 for
the year ended December 31, 1997, the first sale of VFC was not recorded until
the third  quarter of 1997.  The  Company  believes  VFC sales  will  increase
through the end of the year 2000. There can be no assurance,  however that VFC


                                     -19-

<PAGE>

sales will  increase,  or if they  increase,  that they will continue to do so
through  the year  2000 or that  revenues  from  such  sales  will  grow.  The
Company's actual cash  requirements may vary materially from those now planned
and will depend upon numerous factors, including the general market acceptance
of the  Company's new and existing  products and  services,  the growth of the
Company's  distribution channels, the technological advances and activities of
competitors, and other factors. If the Company is not successful in developing
and marketing  VFC, the Company's  cash flow will be materially  and adversely
affected,  and the Company may need to implement certain cost control measures
or obtain additional financing.  There can be no assurance such financing will
be available on reasonable terms or at all. If such financing is not available
the Company will be materially and adversely affected.  Even if such financing
is  available,  it may involve  significant  dilution  to the then  holders of
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.

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  Item  9 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  Item  10 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  Item  11 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  Item  12 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.


                                     -20-

<PAGE>

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.

(b)   Index to Consolidated Financial Statements:                      PAGE

      Report of Independent Public Accountants                           25

      Consolidated Statements of Operations - Each of the                26
      two years in the period ended December 31, 1997

      Consolidated Balance Sheets - December 31, 1997 and 1996           27-28

      Consolidated Statements of Shareholders' Equity - Each of          29
      the two years in the period ended December 31, 1997

      Consolidated Statements of Cash Flows - Each of the two            30
      years in the period ended December 31, 1997

      Notes to Consolidated Financial Statements - December 31, 1997     31-40
      and 1996

(b)   REPORTS ON FORM 8-K.

On August 6, 1997,  the Company filed a Current Report on Form 8-K, dated July
22,  1997,  as amended on October 6, 1997,  to report under Item 2 thereof the
Company's  acquisition of 100% of the issued and outstanding  capital stock of
AMBIA  Corporation  and to  include,  under Items 7(a) and 7(b)  thereof,  the
financial  statements  and pro forma  financial  information  relating to such
acquisition transaction.


<TABLE>
EXHIBIT INDEX
<CAPTION>
 Exhibit Number                             Description
 --------------                             -----------
<S>               <C>
 2.1              Plan and Agreement of Merger, dated as of March 10, 1995, by
                  and between  Infodata  Systems Inc.  and  Virginia  Infodata
                  Systems  Inc.  (incorporated  herein by reference to Exhibit
                  2.1 to the  Company's  Registration  Statement  on Form SB-2
                  (Registration  No.  333-42611)  dated  December 18, 1997, as
                  amended).

 2.2              Asset Purchase Agreement and Plan of  Reorganization,  dated
                  as of October 6, 1995,  among the Company,  Merex,  Inc. and
                  Richard M. Tworek,  Mary Margaret Styer and Andrew M. Fregly
                  (incorporated  by reference to the Company's  Current Report
                  on Form 8-K dated October 11, 1995).

 2.3              Agreement of Merger and Plan of Reorganization,  dated as of
                  July 22, 1997, by and among the Company,  AMBIA Corporation,
                  Alan Fisher and Razi Mohiuddin,  Software Partners, Inc. and
                  Ambia Acquisition Corporation  (incorporated by reference to
                  the  Company's  Current  Report on Form 8-K dated  August 6,
                  1997 and Form 8-K/A dated October 6, 1997).

 3.1              Articles of  Incorporation  (incorporated  by  reference  to
                  Exhibit A of the Company's  Proxy  Statement dated April 10,
                  1995).


                                     -21-

<PAGE>

 3.2              Articles of  Amendment of Articles of  Incorporation  of the
                  Company, dated as of August 12, 1996 (incorporated herein by
                  reference  to  Exhibit  3.2  of the  Company's  Registration
                  Statement on Form SB-2  (Registration  No.  333-42611) dated
                  December 18, 1997, as amended). 3.3 By-Laws (incorporated by
                  reference  to  Exhibit B to the  Company's  Proxy  Statement
                  dated April 10, 1995).

 4.1              Form of Underwriters' Purchase Option  (incorporated  herein
                  by  reference to Exhibit 4.1 to the  Company's  Registration
                  Statement on Form SB-2  (Registration  No.  333-42611) dated
                  December 18, 1997, as amended).

10.1              Cross  License  Agreement,  dated as of December 3, 1997, by
                  and  between  the  Company  and Adobe  Systems  Incorporated
                  (incorporated  herein by  reference  to Exhibit  10.1 to the
                  Company's  Registration Statement on Form SB-2 (Registration
                  No. 333-42611) dated December 18, 1997, as amended).

10.2              Office  Building  Lease,  dated as of April 12, 1993, by and
                  between the Company and Monument Fairfax  Associates for One
                  Monument Drive  (incorporated by reference to Exhibit 10(dd)
                  to the Company's Annual Report on Form 10-KSB for the fiscal
                  year ended December 31, 1994).

10.3              Lease  Agreement,  dated as of July 20,  1993,  between  The
                  Landmark  and  Software  Partners,  Inc.  for 2013  Landings
                  Drive,  Mountain View,  California  (incorporated  herein by
                  reference  to  Exhibit  10.3 to the  Company's  Registration
                  Statement on Form SB-2  (Registration  No.  333-42611) dated
                  December 18, 1997, as amended).

10.4              Lease for Data  Processing  Service  Agreement,  dated as of
                  July  29,   1994,   between  the   Company   and   Financial
                  Technologies  Inc.  (incorporated  by  reference  to Exhibit
                  10(ee) to the Company's Annual Report on Form 10-KSB for the
                  fiscal year ended December 31, 1994).

10.5              Executive  Separation  Agreement,  dated as of  October  20,
                  1986, between the Company and Harry Kaplowitz  (incorporated
                  by reference to Exhibit 10(a) to the Company's Annual Report
                  on Form 10-KSB for the fiscal year ended December 31, 1993).

10.6              Executive  Separation  Agreement,  dated as of  October  20,
                  1986, between the Company and Robert Loane  (incorporated by
                  reference to Exhibit 10(b) to the Company's Annual Report on
                  Form 10-KSB for the fiscal year ended December 31, 1993).

10.7              Employment and Non-Compete  Agreement,  dated as of July 22,
                  1997, as amended, between the Company, AMBIA Corporation and
                  Razi Mohiuddin  (incorporated herein by reference to Exhibit
                  10.7 to the  Company's  Registration  Statement on Form SB-2
                  (Registration  No.  333-42611)  dated  December 18, 1997, as
                  amended).

10.8              Employment and  Non-Compete  Agreement,  dated as of October
                  11,  1995,  as  amended,  between the Company and Richard M.
                  Tworek  (incorporated herein by reference to Exhibit 10.8 to
                  the   Company's   Registration   Statement   on  Form   SB-2
                  (Registration  No.  333-42611)  dated  December 18, 1997, as
                  amended).


                                     -22-

<PAGE>

10.9              Letter Employment  Agreement,  dated as of November 5, 1997,
                  as  amended,  between  the  Company  and  James  Ungerleider
                  (incorporated  herein by  reference  to Exhibit  10.9 to the
                  Company's  Registration Statement on Form SB-2 (Registration
                  No. 333-42611) dated December 18, 1997, as amended).

10.10             Note, Loan and Security  Agreement,  dated as of October 31,
                  1997,   between  the  Company  and  Merrill  Lynch  Business
                  Financial Services Inc. (incorporated herein by reference to
                  Exhibit  10.10 to the  Company's  Registration  Statement on
                  Form SB-2  (Registration  No.  333-42611) dated December 18,
                  1997, as amended).

10.11             Loan and Registration  Right Agreement,  dated as of October
                  3,  1996,   between   the  Company  and  Richard  M.  Tworek
                  (incorporated  herein by reference  to Exhibit  10.11 to the
                  Company's  Registration Statement on Form SB-2 (Registration
                  No. 333-42611) dated December 18, 1997, as amended).

10.12             1995 Stock Option Plan (incorporated by reference to Exhibit
                  4(a) to the  Company's  Registration  Statement on Form S-8,
                  dated as of June 13, 1995).

10.13             1997 Employee  Stock Purchase Plan  (incorporated  herein by
                  reference  to  Exhibit  4(a) to the  Company's  Registration
                  Statement on Form S-8 dated as of June 27, 1997).

10.14             Letter Agreement,  dated as of December 14, 1997,  extending
                  the Employment and Non-Compete Agreement between the Company
                  and Richard M. Tworek  (incorporated  herein by reference to
                  Exhibit  10.14 to the  Company's  Registration  Statement on
                  Form SB-2  (Registration  No.  333-42611) dated December 18,
                  1997, as amended).

10.15             Agreement on Confidential Information, Inventions and Ideas,
                  dated as of December 17, 1997, between the Company and James
                  Ungerleider  (incorporated  herein by  reference  to Exhibit
                  10.15 to the Company's  Registration  Statement on Form SB-2
                  (Registration  No.  333-42611)  dated  December 18, 1997, as
                  amended).

10.16             Consulting Agreement,  dated as of October 24, 1997, between
                  the Company  and Adobe  Systems  Incorporated  (incorporated
                  herein  by  reference  to  Exhibit  10.16  to the  Company's
                  Registration   Statement  on  Form  SB-2  (Registration  No.
                  333-42611) dated December 18, 1997, as amended).

21.1              Subsidiaries   of  the  Company   (incorporated   herein  by
                  reference  to  Exhibit  21.1 to the  Company's  Registration
                  Statement on Form SB-2  (Registration  No.  333-42611) dated
                  December 18, 1997, as amended).

23.1              Consent of Arthur Andersen, L.L.P.

27.1              Financial Data Schedule
</TABLE>


                                     -23-

<PAGE>

SIGNATURES

In  accordance  with Section 13 or 15(d) of the Exchange Act , the  registrant
caused  this report to be signed on its behalf by the  undersigned,  thereunto
duly authorized.

Dated:  March 30, 1998
                                      INFODATA SYSTEMS INC.

                                      BY: /s/JAMES A. UNGERLEIDER
                                          -----------------------
                                          James A. Ungerleider
                                          President and Chief Executive Officer

In accordance with the Exchange Act , 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>

 /s/RICHARD T. BUESCHEL                 Chairman of the Board                  March 30, 1998
 -------------------------
 Richard T. Bueschel

 /s/CHRISTOPHER P. DETTMAR              Chief Financial Officer (Principal     March 30, 1998
 -------------------------              Accounting and Financial Officer)
 Christopher P. Dettmar

 /s/ALAN S. FISHER                      Director                               March 30, 1998
 -------------------------
 Alan S. Fisher

 /s/LAURENCE C. GLAZER                  Director                               March 30, 1998
 -------------------------
 Laurence C. Glazer

 /s/HARRY KAPLOWITZ                     Executive Vice President and Director  March 30, 1998
 -------------------------
 Harry Kaplowitz

/s/ROBERT M. LEOPOLD                    Director                               March 30, 1998
 -------------------------
Robert M. Leopold

 /s/ISAAC M. POLLAK                     Director                               March 30, 1998
 -------------------------
 Isaac M. Pollak

 /s/MILLARD H. PRYOR, JR.               Director                               March 30, 1998
 -------------------------
 Millard H. Pryor, Jr.

 /s/RICHARD M. TWOREK                   Executive Vice President and Director  March 30, 1998
 -------------------------
 Richard M. Tworek

 /s/JAMES A. UNGERLEIDER                President, Chief Executive Officer     March 30, 1998
 -------------------------              and Director
 James A. Ungerleider
</TABLE>


                                     -24-

<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, 1997
and 1996, 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,  1997  and  1996,  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.                                  /s/ARTHUR ANDERSEN LLP
March 6, 1998


                                     -25-

<PAGE>

                    INFODATA SYSTEMS INC. AND SUBSIDIARIES
<TABLE>
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

<CAPTION>
                                                                            Year Ended December 31,
                                                                              1997          1996
                                                                              ----          ----
<S>                                                                          <C>           <C>
       Revenues.......................................................       $10,644       $9,560

       Cost of revenues...............................................         6,162        5,457
                                                                             --------      -------

              Gross profit............................................         4,482        4,103
                                                                             --------      -------

       Operating expenses:
         Research and development :...................................         2,472         816
         Selling, general, and administrative.........................         5,499        2,869
                                                                             --------      -------
                                                                               7,971        3,685

              Operating income........................................        (3,489)         418
                                                                             --------      -------


       Interest income................................................            63           96
       Interest expense...............................................           (44)         (11)
                                                                             --------      -------

       Income before income taxes.....................................        (3,470)         503

       Provision for income taxes.....................................            (5)          --
                                                                             --------      -------

       Net income.....................................................       $(3,465)      $  503
                                                                             ========      =======

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

       Net income available to common shareholders....................       $(3,465)      $  445
                                                                             ========      =======

       Per share:
         Net income available to common shareholders
           Basic......................................................       $ (1.39)      $  .23
                                                                             ========      =======
           Diluted....................................................       $ (1.39)      $  .22
                                                                             ========      =======

       Weighted average shares outstanding ...........................         2,498        1,945

</TABLE>

The accompanying notes are an integral part of these statements.


                                     -26-

<PAGE>

                    INFODATA SYSTEMS INC. AND SUBSIDIARIES
<TABLE>
                          CONSOLIDATED BALANCE SHEETS
                                (IN THOUSANDS)

                                                                           DECEMBER 31,
                                                                       1997           1996
                                                                       ----           ----
<S>                                                                  <C>            <C>
ASSETS
Current assets:
      Cash and cash equivalents.................................     $  284         $1,266
      Short-term investments....................................          4            947
      Accounts receivable, net of allowance of $43 in 1997......
        and $80 in 1996.........................................      2,772          1,522
      Other current assets......................................        174            185
                                                                     -------        -------
                  Total current assets..........................      3,234          3,920
                                                                     -------        -------

Property and equipment, at cost:
      Furniture and equipment...................................      2,817          2,373
      Less: accumulated depreciation and amortization...........     (2,220)        (1,897)
                                                                     -------        -------
                                                                        597            476


Goodwill, net of accumulated amortization of $296 in 1997 and
      $31 in 1996...............................................      3,371            274

Other assets....................................................        309            137

Software development costs, net of accumulated
      amortization of $2,094 in 1997 and $2,052 in 1996
      (Note 3)..................................................         42             84


Total assets....................................................     $7,553         $4,891
                                                                     =======        =======
</TABLE>


The accompanying notes are an integral part of these balance sheets.


                                     -27-

<PAGE>

                    INFODATA SYSTEMS INC. AND SUBSIDIARIES
<TABLE>
                          CONSOLIDATED BALANCE SHEETS
                                (IN THOUSANDS)


                                                                           DECEMBER 31,
                                                                       1997           1996
                                                                       ----           ----
<S>                                                                  <C>            <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
      Current portion of capital lease obligations..............     $    26        $    46
      Current portion of note payable...........................         880             --
      Accounts payable..........................................       1,482            327
      Accrued expenses..........................................         928            823
      Deferred revenue..........................................       1,592          1,079
      Current portion of deferred rent..........................          19             33
                                                                     --------       --------

                  Total current liabilities.....................       4,927          2,308
                                                                     --------       --------

Capital lease obligations.......................................           6             33
Deferred revenue................................................          --             75
Deferred rent...................................................          --             19
                                                                     --------       --------
                  Total liabilities.............................       4,933          2,435
                                                                     --------       --------

Commitments and contingencies (Note 8)

Shareholders' equity:
      Preferred stock ..........................................          --             --
      Common stock, $.03 par value, 6,666,666 shares
         authorized; 2,754,784 and 2,277,865 shares issued and
         outstanding in 1997 and 1996, respectively.............          82             68

      Additional paid-in capital................................      12,670          9,055
      Accumulated deficit.......................................     (10,132)        (6,667)
                                                                     --------       --------
Total shareholders' equity......................................       2,620          2,456
                                                                     --------       --------
Total liabilities and shareholders' equity......................     $ 7,553        $ 4,891
                                                                     ========       ========
</TABLE>


The accompanying notes are an integral part of these balance sheets.


                                     -28-

<PAGE>

                    INFODATA SYSTEMS INC. AND SUBSIDIARIES
<TABLE>
                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                                (IN THOUSANDS)

<CAPTION>
                                                                                      Additional                         Total
                                           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, 1995.......     131,500    $ 132       1,465,336    $44       $ 8,056       $ (6,467)         $ 1,765

  1:6 Common stock dividend..........                              241,063      7           636           (643)               0

  Redemption of preferred shares for
  common.............................    (131,500)    (132)        394,614     12           120            --                 0

  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

  Employee stock purchase plan ......                                3,952     --            26             --               26

  AMBIA acquisition .................                              400,000     12         3,339             --            3,351

  Exercise of stock options .........          --       --          72,967      2           239             --              241

  Other .............................          --       --              --     --            11             --               11

  Net loss ..........................          --       --              --     --           --          (3,465)          (3,465)
                                         ---------    -----      ----------   ----      -------       ---------         --------
  Balance at December 31, 1997.......          --     $ --       2,754,784    $82       $12,670       $(10,132)         $ 2,620
                                         ---------    -----      ----------   ----      -------       ---------         --------
</TABLE>

The   accompanying   notes  are  an   integral   part  of  these   statements.


                                     -29-

<PAGE>

                    INFODATA SYSTEMS INC. AND SUBSIDIARIES

<TABLE>
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (IN THOUSANDS)
<CAPTION>
                                                                            Year Ended December 31,
                                                                              1997           1996
                                                                            --------       --------
<S>                                                                         <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
         Net (loss) income................................................  $(3,465)       $   503
         Adjustments to reconcile net income to net cash provided by
            operating activities-
            Depreciation and amortization.................................      323            264
            Software amortization.........................................       42             42
            Goodwill and other intangible amortization....................      266             48
            Changes in operating assets and liabilities:
               Accounts receivable........................................   (1,249)           379
               Prepaid royalties and other current assets.................       11            (21)
               Other assets ..............................................     (172)            --
               Accounts payable ..........................................    1,155             (8)
               Accrued expenses...........................................      105            175
               Deferred revenue...........................................      438           (209)
               Deferred rent..............................................      (33)           (33)
                                                                            --------       --------
                  Net cash (used in) provided by operating activities.....   (2,579)         1,140
                                                                            --------       --------

CASH FLOWS FROM INVESTING ACTIVITIES:
         Purchases of property and equipment, net.........................     (457)          (357)
         Business acquisition.............................................       --            (23)
         Loan to officer .................................................       --            (70)
         Purchases of short-term investments..............................       --           (943)
         Proceeds from maturity of short-term investments.................      943             29
         Other............................................................       --            (32)
                                                                            --------       --------
                  Net cash provided by (used in) investing activities.....      486         (1,396)
                                                                            --------       --------

CASH FLOWS FROM FINANCING ACTIVITIES:
         Payments on capital lease obligations............................      (47)          (108)
         Proceeds from short-term borrowings..............................    1,627             --
         Payments of notes payable........................................     (747)            (2)
         Preferred stock dividends........................................       --            (88)
         Issuance of common stock.........................................      278            244
                                                                            --------       --------
                  Net cash provided by financing activities...........        1,111             46
                                                                            --------       --------

Net decrease in cash and cash equivalents.................................     (982)          (210)
Cash and cash equivalents at beginning of year............................    1,266          1,476
                                                                            --------       --------
Cash and cash equivalents at end of year..................................  $   284        $ 1,266
                                                                            ========       ========
</TABLE>


The accompanying notes are an integral part of these statements.


                                     -30-

<PAGE>

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., Infodata Research and Development  Corporation,  and AMBIA
Corporation.  These  entities  are  collectively  referred  to  herein  as the
"Company".  All significant  inter-company accounts and transactions have been
eliminated in consolidation.

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

During 1997 the Company released a new proprietary  software product,  Virtual
File Cabinet ("VFC").  The Company has incurred  significant  costs related to
this product.  As a result of these costs,  the Company had a working  capital
deficit  of  approximately  $1.7  million  and  had  incurred  a net  loss  of
approximately $3.5 million as of and for the year ended December 31, 1997. The
Company  will  continue to incur  these  costs in the  future.  To finance its
investment  in VFC and to mitigate its  liquidity  risk,  the Company sold 1.6
million shares of common stock in a public offering in February 1998. At $5.00
per share,  the offering  generated gross proceeds of $8 million (see Note 8).
Additionally,  the Company has developed a plan to increase  revenues  through
sales of its VFC product  line;  however,  there can be no assurance  that the
Company will be able to adequately  increase  product  sales.  Therefore,  the
Company has also developed a plan to implement  certain cost control  measures
during 1998. Also, the Company's operations are subject to certain other risks
and  uncertainties,   including   uncertainty  of  future  operating  results,
fluctuations  in  quarterly  results,  change in mix of  products,  decline in
INQUIRE/Text  sales and  reliance  on VFC,  lengthy  sales and  implementation
cycles,  rapid technological  changes and product  obsolescence,  competition,
risks associated with sales channels,  and dependence on government  contracts
and security clearances.

USE OF ESTIMATES

The preparation of financial  statements in conformity with generally accepted
accounting  principles  requires  management to make estimates and assumptions
that affect the reported  amounts of assets and  liabilities and disclosure of
contingent assets and liabilities at the date of the financial  statements and
the reported  amounts of revenues and expenses  during the  reporting  period.
Actual results could differ from those estimates.

REVENUE RECOGNITION

The Company  recognizes  revenue from  software  licenses upon delivery of the
software  product to the  customer  or upon  customer  acceptance,  if a trial
period exists. Revenues from post contract support,  including revenue bundled
with the initial  license  fee,  are  recognized  ratably over the period that
customer support services are provided. Software service revenue is recognized
as performed.


                                     -31-

<PAGE>

Revenues from consulting and professional services 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 materials contracts. Revenues
from cost  reimbursement  contracts are recognized as costs are incurred.  Any
amounts  paid by  customers  prior to the actual  performance  of services are
recorded as deferred  revenue until earned,  at which time they are recognized
in accordance with the type of contract.

The American Institute of Certified Public Accountants has issued Statement of
Position ("SOP") 97-2,  "Software  Revenue  Recognition",  that supersedes SOP
91-1. SOP 97-2 provides additional guidance with respect to multiple elements,
returns, exchanges, and platform transfer rights; resellers;  services; funded
software-development  arrangements; and contract accounting. SOP 97-2 is to be
implemented  for fiscal years  beginning  after December 15, 1997. The Company
believes that the adoption of SOP 97-2 will not have a material  impact on the
Company's financial statements.

Revenues from foreign  customers totaled  approximately  $382,000 and $361,000
for the years ended December 31, 1997 and 1996, respectively.

CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

All highly liquid investments with an original maturity of 90 days or less are
considered to be cash equivalents.  At December 31, 1997 and 1996, the Company
had $0 and $768,000,  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.  Available-for-sale  securities are carried at fair
value,  with unrealized  gains and losses reported as a separate  component of
stockholders'  equity.  There were no unrealized gains or losses for the years
ended  December 31, 1997 and 1996.  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, 1997 and 1996, certificates of deposit included
in   short-term   investments   totaled   approximately   $4,000  and  $4,000,
respectively,   which  were  restricted  pursuant  to  certain  capital  lease
obligations.

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

Cash  payments  for  interest  totaled  $37,000  and $11,000 in 1997 and 1996,
respectively. Cash payments for income taxes totaled $0 and $4,000 in 1997 and
1996, 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 created by the Merex,  Inc.  acquisition is being amortized using the
straight-line  method over a life of ten years.  Goodwill created by the AMBIA
acquisition  (see Note 2) is being  amortized using the  straight-line  method
over seven years. On a periodic basis, the expected future  undiscounted  cash
flows are compared  with the carrying  value of goodwill to test for potential


                                     -32-

<PAGE>

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, 1997, the Company does not
believe there has been an impairment of goodwill.

RESEARCH AND DEVELOPMENT

Research and development costs are expensed as incurred.

EARNINGS PER SHARE

The Company implemented Statement of Financial Accounting Standards (SFAS) No.
128,  "Earnings  Per Share," at December 31,  1997.  SFAS No. 128 replaces the
presentation  of primary and fully  diluted  earnings per share with basic and
diluted earnings per share and requires a reconciliation  of the numerator and
denominator  of basic  earnings per share to diluted  earnings per share.  The
1996 earnings per share amount has been  restated in accordance  with SFAS No.
128. The  implementation of SFAS No. 128 did not have a material impact on the
Company's  financial  statements.  Earnings per share have been computed using
the weighted average number of common shares outstanding.

<TABLE>
<CAPTION>
FOR THE YEAR ENDED                                     1997                                        1996
                                       Income         Shares       Per-share       Income         Shares       Per-share
                                    (Numerator)   (Denominator)     Amount      (Numerator)   (Denominator)     Amount
                                    -----------------------------------------   -----------------------------------------
<S>                                 <C>           <C>              <C>          <C>           <C>              <C>
Net (loss) income                     $(3,465)                                     $503
Less: Preferred Dividends                                                           (58)

BASIC EPS
Income available to
Common stockholders                    (3,465)        2,498         (1.39)          445           1,945           $.23

EFFECT OF DILUTIVE SECURITIES
Common stock equivalents                   --            --                          --             217
Convertible Preferred shares               --            --                          58             146

DILUTED EPS
Income available to
common stockholders +
assumed conversions                   $(3,465)        2,498         (1.39)         $503           2,308           $.22
</TABLE>

      The effect of options has not been  considered for 1997 as it would have
been antidilutive.

SIGNIFICANT CUSTOMERS

Sales  to  U.S.  government  agencies  totaled  approximately  $5,640,000  and
$4,255,000 in 1997 and 1996,  respectively.  As of December 31, 1997 and 1996,
accounts  receivable  due from U.S.  government  agencies  were  approximately
$1,304,000 and $655,000, respectively.


                                     -33-

<PAGE>

NEW ACCOUNTING PRONOUNCEMENTS

In June 1997, the Financial  Accounting  Standards  Board issued SFAS No. 130,
"Reporting  Comprehensive Income" and SFAS No. 131, "Disclosure about Segments
of an  Enterprise  and Related  Information."  SFAS No. 130  requires  that an
enterprise (a) classify items of other  comprehensive  income  separately from
retained  earnings and additional  paid-in-capital  in the equity section of a
statement of financial positon. The Company plans to adopt SFAS No. 130 in the
first  quarter of 1998.  The  Company  does not expect  SFAS No. 130 to have a
significant  impact on its  financial  statements.  SFAS No. 131  requires the
Company to report financial and descriptive  information  about its reportable
operating  segments.  The  Company  will adopt  SFAS No.  131 at its  year-end
December 31, 1998. The Company is currently  evaluating the impact of SFAS No.
131 on its financial statements.

NOTE 2. BUSINESS ACQUISITION

On July 22, 1997, the Company consummated its purchase of substantially all of
the assets and the assumption of certain liabilities of AMBIA, Inc. ("AMBIA"),
in consideration  for 400,000 shares of the Company's common stock (restricted
as to sale) with a fair value estimated by the Company's Board of Directors at
$7.75  per  share.  As a result of the  acquisition,  outstanding  options  to
purchase  390,000  shares of AMBIA common stock were converted into options to
acquire  34,665 shares of the Company's  common stock at an exercise  price of
$1.69 per share.  The fair value of the  options  is  recorded  as part of the
acquisition  cost. The total  acquisition  cost was  approximately  $3,461,000
including  the direct  costs of the  acquisition.  Approximately  $25,000  was
allocated to acquired tangible assets, $144,000 to acquired intangible assets,
and  $3,292,000  to  goodwill.  Subsequent  to the  acquisition,  the  Company
determined   that  the  fair  value  of  acquired   accounts   receivable  was
approximately  $96,000;  as a result,  goodwill  was  adjusted  by  $96,000 to
reflect the  allocation  of the  purchase  price to accounts  receivable.  The
acquired intangible assets and goodwill are being amortized over two years and
seven years,  respectively.  The acquisition was treated as a purchase and was
accomplished by means of a merger of a wholly-owned  subsidiary of the Company
into AMBIA. AMBIA develops, markets and sells software products and consulting
services, which are complementary to those being developed,  marketed and sold
by the Company.

The unaudited pro forma  financial  information  presented  below reflects the
acquisition  of AMBIA as if the  acquisition  had occurred on January 1, 1996.
These results are not necessarily  indicative of the future operating  results
or of what would have occurred had the  acquisition  been  consummated at that
time.

<TABLE>
<CAPTION>
                                                           For the Year Ended        For the Year Ended
                                                           ------------------        ------------------
                                                           December 31, 1996         December 31, 1997
                                                           -----------------         -----------------
                                                                           (Unaudited)
<S>                                                           <C>                       <C>
    Revenue..........................................         $10,395,000               $11,569,000
    Net loss available to common shareholders........            (743,000)               (3,581,000)
    Net loss per share ..............................         $     (0.32)              $     (1.43)
</TABLE>


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,


                                     -34-

<PAGE>

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.  There were no software  development
costs capitalized for the years ended December 31, 1997 and 1996.

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 both 1996 and
1997.

NOTE 4.  INCOME TAXES

At  December  31,  1997,  the  Company  had  approximately  $8,447,000  in net
operating loss carryforwards for income tax reporting purposes.  The operating
loss  carryforwards  expire in varying  amounts  from 1998 through  2012.  The
acquisition  of AMBIA  during 1997 could limit the extent to which the Company
may utilize these carryforwards in any one year. In addition,  at December 31,
1997, the Company had $55,000 in investment tax credit carryforwards  expiring
in 1998 through 2000.

The actual income tax expense attributable to pretax income for the year ended
December 31, 1997,  and December  31, 1996,  respectively,  differed  from the
amount  computed by applying  the  Federal  statutory  rate of 34 percent as a
result of the following:
<TABLE>
<CAPTION>
                                                              1997            1996
                                                             ------          ------
<S>                                                         <C>              <C>
       Tax at statutory rate...........................     $(1,178,000)     $ 171,000
       Change in Valuation Allowance...................       1,076,000       (192,000)
       Nondeductible amortization......................          92,000         16,000
       Miscellaneous items.............................          10,000          5,000
                                                            ------------     ----------
                                                            $        -0-     $      -0-
                                                            ============     ==========
</TABLE>


The  significant  components of net deferred tax  (liabilities)  assets are as
follows as of December 31, 1997 and 1996:
<TABLE>
<CAPTION>
                                                              1997            1996
                                                             ------          ------
<S>                                                         <C>              <C>
       Deferred tax liabilities:
           Net software development costs..............     $   (16,000)     $  (32,000)
       Deferred tax assets:
           Net operating loss carryforward.............       3,206,000       2,030,000
           Investment tax credit and research and
             development tax credits carryforward......          55,000         125,000
           Other.......................................         111,000          92,000
                                                            ------------     -----------
                                                              3,372,000       2,247,000
       Net deferred tax asset before valuation allowance      3,356,000       2,215,000
       Valuation allowance.............................      (3,356,000)     (2,215,000)
                                                            ------------     -----------
       Net deferred tax asset..........................     $        --      $       --
                                                            ============     ===========
</TABLE>


                                     -35-

<PAGE>

Under the provisions of SFAS No. 109,  "Accounting  for Income Taxes," 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

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 per annum
rate equal to the sum of 2.9 percent  plus the 30-day  commercial  paper rate.
Currently,  this per annum rate  approximates the prime rate.  Advances on the
facility are based on eligible  billed  accounts  receivable less than 90 days
old. The facility  expires in July 1998. As of December 31, 1997,  the Company
had borrowed $880,000 against this line of credit.  The balance on the line of
credit was paid in full in February 1998.

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. There was no preferred stock issued and/or
outstanding in 1997.

OPTIONS AND WARRANTS

As a result of the acquisition of AMBIA, each outstanding option ("AMBIA Stock
Option")  to purchase  shares of AMBIA  common  stock  under the former  AMBIA
Equity Incentive Plan (as defined in the Merger  Agreement) was converted into
an option ("Replacement  Option") to acquire, on the same terms and conditions
as were  applicable  under such AMBIA Stock Option,  4/45 of a share of Common
Stock of the  Company,  at an exercise  price of $1.69 per share with the same
expiration  date as each such  AMBIA  Stock  Option.  Replacement  Options  to
purchase a total of 34,665 shares of the  Company's  Common Stock were granted
to replace the previously granted AMBIA Stock Options.  Pursuant to the Merger
Agreement,  each Replacement Option is to be treated as a non-qualified  stock
option and, if possible,  as granted  pursuant to the terms and  conditions of
the 1995 Plan and the AMBIA Stock Option  agreement  entered into by AMBIA and
the  participant in the AMBIA Equity  Incentive Plan. The 34,665 shares of the
Company's Common Stock underlying the outstanding  Replacement Options are not
included in the 1,511,000  shares  presently  authorized  under the 1995 Stock
Option Plan.

In April 1995,  the Company's  shareholders  approved the adoption of the 1995
Stock Option Plan (the "1995 Plan"), which (i) consolidated the Company's 1991
Incentive Stock Option Plan and 1992 Non-Qualified  Stock Option Plan and (ii)


                                     -36-

<PAGE>

provided  for the  automatic  grant of stock  options  to the  members  of the
Compensation  Committee  of the  Company's  Board  of  Directors.  A total  of
1,511,000  shares of common  stock have been  authorized  for  issuance  under
options granted and to be granted under the 1995 Plan at exercise prices which
will not be less than 100% of the fair market value of the  underlying  shares
on the  date of  grant of the  option.  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  either  the  1991  Incentive  Stock  Option  Plan or the  1992
Non-Qualified  Stock  Option  Plan.  Options  granted  under the 1995 Plan are
exercisable  until the  earlier  of five  years  from the date of grant or one
month after  termination  of  employment.  On December  31,  1997,  options to
purchase 637,787 shares of common stock were exercisable.

During 1987, the Board of Directors adopted a Stock Warrant Purchase Plan. The
stock subject to this plan is authorized but unissued  shares of common stock.
On January 1, 1997,  the Stock Warrant  Purchase Plan expired.  As of December
31,  1997,  outstanding  warrants  for the right to purchase  4,666  shares of
common stock were outstanding.

As of December  31, 1997,  the Company had  reserved a total of  approximately
1,247,000  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>
                                                                                   Weighted Average
                                               Number of       Option Price          Option Price
                                                 Shares          Per Share            Per Share
                                             ----------------------------------------------------------
<S>                                               <C>            <C>                   <C>
   Outstanding at December 31, 1995                 485,529       $1.085-$5.619         $2.989
      Granted                                       359,653       $2.571-$7.875         $4.504
      Exercised                                   (176,852)       $1.085-$4.655         $3.499
      Expired/Canceled                             (13,196)       $1.090-$5.125         $4.834
                                             ----------------------------------------------------------
   Outstanding at December 31, 1996                 655,134       $1.085-$7.875         $3.342
      Granted                                       548,817       $7.063-$11.188        $9.116
      Exercised                                    (72,977)       $1.085-$10.313        $3.322
      Expired/Canceled                             (40,949)       $1.690-$11.188        $5.299
                                             ----------------------------------------------------------
   Outstanding at December 31, 1997               1,090,025       $1.085-$11.000        $5.956
   EXERCISABLE, DECEMBER 31, 1996                   396,103       $1.085-$7.875         $2.654
   EXERCISABLE, DECEMBER 31, 1997                   637,787       $1.085-$11.000        $4.620
</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.


                                     -37-

<PAGE>

<TABLE>
<CAPTION>
                                                                                   1997            1996
                                                                                   ----            ----
                                                                                  (AMOUNTS IN THOUSANDS)
<S>                                                                               <C>             <C>
    Net (loss) income available to common shareholders as reported......          $(3,465)        $  503
    Pro forma compensation expense......................................                0            134
                                                                                  --------        -------
    Pro forma net (loss) income.........................................          $(3,465)        $  369
</TABLE>

Per share:
            Net (loss) income available to common shareholders:

<TABLE>
<CAPTION>
                                                               1997           1996
                                                               ----           ----
<S>                                                          <C>             <C>
           Basic, as reported                                $(1.39)         $ .23
           Basic, pro forma                                  $(1.39)         $ .19
           Diluted, as reported                              $(1.39)         $ .22
           Diluted, pro forma                                $(1.39)         $ .16
</TABLE>

The weighted  average fair value of options granted in 1997 and 1996 was $5.37
and $4.31,  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 1997 and 1996:  no  dividend  yield,  expected
volatility  of 63.0 percent and  expected  life of five years.  The  risk-free
interest   rate  for  1997  and  1996  was  6.00  percent  and  6.21  percent,
respectively.

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.

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 property  and  equipment.  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 payments of capital lease  obligations as of December 31, 1997, are
as follows:

<TABLE>
<S>                                                                        <C>
           1998..............................................              $ 27,400
           1999..............................................                 6,200
           2000..............................................                    --
                                                                           ---------
                    Total minimum payments...................                33,600
           Less - Amounts representing interest..............                (1,100)
                                                                           ---------
           Present value of minimum lease payments...........                32,500
           Less - Current portion............................               (26,400)
                                                                           ---------
           Long-term portion.................................              $  6,100
                                                                           =========
</TABLE>


                                     -38-

<PAGE>

OPERATING LEASES

In 1993,  the  Company  entered  into a lease for its  corporate  headquarters
facility in Fairfax,  Virginia. This lease originally expired on July 31, 1998
("Base  Lease") but was  renewed in November  1997 and now expires on July 31,
2003.  Under  the  terms of the Base  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 Base Lease.

During  1996,  the  Company  incurred  approximately  $53,000 of rent  expense
related to space and  equipment  for an  off-site  training  facility  under a
month-to-month  lease. The Company incurred $84,000 of rent expense related to
the  off-site  training  facility  in  1997.  The  month-to-month   lease  was
terminated as of November 30, 1997.

On July 22, 1997, the Company assumed  responsibility  for leased office space
in  Mountain  View,  California  as a  result  of  its  acquisition  of  AMBIA
Corporation.  This lease expires on May 31, 1998 and the Company is discussing
the  possibility of extending the lease with the landlord.  Payments under the
lease that were the responsibility of the Company were  approximately  $37,000
in 1997.

Future minimum rental payments under these leases are as follows:

<TABLE>
<CAPTION>
                       Year               Amount
                       ----              --------
<S>                                      <C>
                       1998              $622,000
                       1999              $741,000
                       2000              $763,000
                       2001              $676,000
                       2002              $618,000
                       2003              $378,000
</TABLE>

Effective September 1997, the Company entered into a one-year agreement with a
third party to procure outside mainframe-related data processing services. The
minimum  commitment under this agreement  amounts to $50,000 until termination
in August 1998.

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 $41,000 in 1997 and $32,000 in 1996. 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 1997 or 1996.

CONTINGENCIES

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,  1991,  and in the  opinion of
management,  adjustments  resulting from the completion of such audits are not


                                     -39-

<PAGE>

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  $210,000 and
$195,000  in 1997 and 1996,  respectively,  for  services  rendered by certain
Directors  of the  Company.  Amounts  payable for these  services to companies
employing  these  Directors  were $17,500 and $12,500 at December 31, 1997 and
1996,  respectively.  Amounts  receivable from a company  employing a director
were $13,000 at December 31, 1996 and $0 at December 31, 1997.

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 9.5
percent at December 31, 1997) adjusted quarterly.

SUBSEQUENT FINANCING

On February  20,  1998,  the Company  consummated  a stock  offering  that was
declared  effective on February 17, 1998. The gross proceeds were  $8,000,000,
which consisted of 1,600,000 shares priced at $5.00 per share. The expenses of
the stock offering  (including the underwriters'  fee, legal fees,  accounting
fees, blue sky fees,  registration  costs,  printing and engraving  costs, and
other miscellaneous  fees) were estimated to be $1,350,000.  The resultant net
proceeds were estimated to be $6,650,000.


                                     -40-