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

(Mark One)

[X] Annual Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange
    Act Of 1934

For the fiscal year ended December 31, 1997 or

[ ] Transition Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange
    Act Of 1934

For the transition period from    to

Commission file number:  1-3879

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

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

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

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

Securities registered pursuant to Section 12(b) of the Act:

      Title of each class            Name of each exchange on which registered
             None                                     None

Securities registered pursuant to Section 12(g) of the Act:

                                 None

    Indicate  by check mark  whether  the  registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

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

    State the aggregate  market value of the voting stock held by  nonaffiliates
of the  registrant.  The  registrant's  voting  stock  is not  publicly  traded;
therefore the aggregate market value of  approximately 2% of outstanding  voting
stock held by nonaffiliates is not available.

    Indicate  the  number  of  shares  outstanding  of each of the  registrant's
classes of common stock, as of the latest practicable date. 10,092,215 shares of
common  stock having a par value of $0.10 per share were  outstanding  March 13,
1998.

<PAGE>

                                                 TABLE OF CONTENTS
                                                       1997
                                                     FORM 10-K

   Item                                                      Page

   Part I

1. Business                                                            1-3
2. Properties                                                          3
3. Legal Proceedings                                                   3
4. Submission of Matters to a Vote of Security Holders                 3

   Part II

5. Market for the Registrant's Common Stock and Related
   Stockholder Matters                                                 4-5
6. Selected Financial Data                                             6-7
7. Management's Discussion and Analysis of Financial
     Condition and Results of Operations                               7-13
8. Financial Statements and Supplementary Data
   Report of Independent Public Accountants                            14
   Financial Statements
     Consolidated Balance Sheets
       Assets                                                          15
       Liabilities and Stockholders' Equity                            16
     Consolidated Statements of Operations                             17
     Consolidated Statements of Permanent Stockholders' Equity         18
     Consolidated Statements of Cash Flows                             19
   Notes to Consolidated Financial Statements                          20-42
9. Changes in and Disagreements with Accountants on
     Accounting and Financial Disclosures                              42

   Part III

10.Directors and Executive Officers of the Registrant                  43-44
11.Executive Compensation                                              45-47
12.Security Ownership of Certain Beneficial Owners and Management      47-49
13.Certain Relationships and Related Transactions                      50

   Part IV

14.Exhibits, Financial Statement Schedules, and Reports on Form 8-K    51-59

<PAGE>
                                      PART I

ITEM 1. BUSINESS

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

General Information

    The Company  provides  diversified  management,  technical and  professional
services to primarily U.S. Government customers throughout the United States and
internationally.  Generally,  these  services  are  provided  under  both  prime
contracts  and  subcontracts,  which may be  fixed-price,  time-and-material  or
cost-type  contracts  depending on the work  requirements  and other  individual
circumstances.

    The Company  provides  services to various  branches  of the  Department  of
Defense ("DoD") and to the Department of Energy ("DoE"), NASA, the Department of
State,  the  Department  of Justice  and  various  other  U.S.,  state and local
government agencies, commercial clients and foreign governments.  These services
encompass  a wide  range of  management,  technical  and  professional  services
covering the following areas:

       Information  and  Engineering  Technology  ("I&ET")  designs,   develops,
       supports  and  integrates   software  and  hardware  systems  to  provide
       customers with  comprehensive  solutions for  information  management and
       engineering needs. I&ET also provides software and hardware  maintenance,
       computer  center  operations,  data  processing  and  analysis,  database
       administration,  telecommunications  support and operations,  maintenance
       and  operation of  integrated  electronic  systems,  and  integration  of
       electronic systems in local and wide area networks. Contracts include the
       design  and  development  of  a  personnel  records   management  system,
       including imaging, database and client server technology,  for the entire
       U.S. Navy, and the provision of basic computer,  software, and networking
       support to all of the DoE's operations.  In addition,  this business area
       provides services in support of nuclear  safeguards and security research
       and  development.  Revenues for 1997, 1996, and 1995 were $282.6 million,
       $271.5 million and $271.1 million, respectively.

       Aerospace  Technology's  ("AT") services include technical and evaluation
       services at test and  training  ranges;  engineering,  manufacturing  and
       installation  of  aircraft  system   upgrades;   corrosive   repairs  and
       structural modifications that extend airframe life for the aging fleet of
       military aircraft; ground based logistics support and staff augmentation;
       engineering and technical services for high-technology  space and missile
       systems programs; and aircraft maintenance,  modification,  logistics and
       fleet management.  These services are provided to the U.S.  Government as
       well as the United  Nations and other  foreign  organizations  at various
       locations throughout the world depending on the customer's  requirements.
       Revenues for 1997, 1996, and 1995 were $449.0 million, $383.3 million and
       $319.3 million, respectively.

       Enterprise Management ("EM") provides full service,  "turn-key" solutions
       for the management,  operation and maintenance of federal facilities.  EM
       manages  large-scale  facilities,  using computerized work management and
       scheduled  maintenance systems to perform roads and grounds  maintenance,
       civil engineering and custodial services,  landfill  recycling,  disposal
       operations,  and vehicle and heavy equipment maintenance.  Other services
       of this business area include testing and evaluation of military hardware
       systems at government  test ranges,  collection  and  processing of data,
       maintenance  of  targets,   ranges  and  laboratory  facilities,   health
       services,  operation of ships,  developmental  testing of complex weapons
       systems,  security systems work, and technology  transfer into commercial
       applications.  Revenues  for  1997, 1996, and 1995 were  $414.3  million,
       $366.7 million and $318.3 million, respectively.

<PAGE>

Industry Segments

    For business  segment  reporting,  Information and  Engineering  Technology,
Aerospace Technology and Enterprise Management each comprise reportable business
segments.

Backlog

    The Company's  backlog of business, which includes awards under both prime
contracts and  subcontracts  as well as the  estimated  value of option years on
government  contracts, was $3.6  billion at the  close of 1997, compared  to a
year-end  1996  backlog of $3.0  billion.  The  backlog  at  December  31,  1997
consisted  of $1.1 billion for both I&ET and EM and $1.4 billion for AT compared
to December 31, 1996  backlog of $0.9 billion for I&ET,  $0.6 billion for AT and
$1.5 billion for EM. Of the total backlog at December 31, 1997,  $2.6 billion is
expected to produce revenues after 1998: I&ET $0.9 billion,  AT $1.0 billion and
EM $0.7 billion.

    Contracts  with the U.S.  Government  are  generally  written for periods of
three to five years. Because of appropriation  limitations in the federal budget
process,  firm funding is usually made for only one year at a time, and, in some
cases,  for periods of less than one year, with the remainder of the years under
the contract expressed as a series of one-year options. The Company's experience
has been that the Government generally exercises these options. Amounts included
in backlog are based on the  contract's  total  awarded  value and the Company's
estimates  regarding the amount of the award that will ultimately  result in the
recognition of revenue.  These  estimates are based on the Company's  experience
with similar awards and similar customers.  Estimates are reviewed  periodically
and  appropriate  adjustments  are made to the  amounts  included in backlog and
unexercised  contract  options.  Historically,  these  adjustments have not been
significant.  In 1997, the Company had prime contract  revenue of  approximately
72% from the U.S. Government, 45% attributable to the Department of Defense.

Competition

    The markets which the Company  services are highly  competitive.  In each of
its business  areas,  the Company's  competition  is quite  fragmented,  with no
single competitor holding a significant market position. The Company experiences
vigorous competition from industrial firms, university laboratories,  non-profit
institutions and U.S. Government agencies. Many of the Company's competitors are
large,  diversified firms with  substantially  greater  financial  resources and
larger technical staffs than the Company has available. Government agencies also
compete  with and are  potential  competitors  of the Company  because  they can
utilize their internal resources to perform certain types of services that might
otherwise be performed by the Company.  A majority of the Company's  revenues is
derived from contracts with the U.S.  Government and its prime contractors,  and
such  contracts are awarded on the basis of  negotiations  or  competitive  bids
where price is a significant factor.

Foreign Operations

    The Company has a 5% minority investment in an unaffiliated company in Saudi
Arabia,  but is in the  process of selling  its  investment  to one of the
Saudi  stockholders.  Other  activities  of the  Company  presently  include the
providing  of  services  in  foreign  countries  under  contracts  with the U.S.
Government,  the United  Nations,  and other  foreign  customers.  None of these
foreign  operations is normally material to the Company's  financial position or
results  of  operations;  however,  in 1995  the  Company's  Mexican  operations
reported  a  loss  of  $4.4   million   related  to  contract   completion   and
discontinuation  of the operations (see Management's  Discussion and Analysis of
Revenue and Gross Margin).

    The risks  associated  with the  Company's  foreign  operations in regard to
foreign  currency  fluctuation and political and economic  conditions in foreign
countries have not been significant.

Incorporation

    The Company was incorporated in Delaware in 1946.

<PAGE>

Employees

    As of December 31, 1997,  the Company had  approximately  16,100  employees,
approximately  1,600  of  which  were  located  outside  of the  United  States.
Approximately  2,700 of the  Company's  U.S.  employees  are  covered by various
collective bargaining agreements with labor unions.

    At year-end,  the Company had approximately 300 vacant positions, a majority
of which were for Information  Technology ("IT") professionals.  The scarcity of
IT professionals  is a common  predicament  within the industry.  The Company is
actively  recruiting to fill these vacancies  utilizing  extensive  advertising,
participation in job fairs, sign-on bonuses and other recruitment incentives.

    During 1997, the Company  experienced  turnover in several senior management
positions.  The  President of I&ET  resigned at the end of the third quarter and
the Vice President of Business  Development was named the Acting President until
a replacement  can be found.  This change has not had a negative  impact on I&ET
operations or the Company's business development. Additionally, the Senior Vice
President and Chief  Financial  Officer and the Vice  President and Controller
retired during the first half of 1997. The transition to the new management team
was timely and well executed.

ITEM 2. PROPERTIES

    The  Company is  primarily a  service-oriented  company,  and, as such,  the
ownership or leasing of real property is an activity which is not material to an
understanding of the Company's operations. The Company owns two office buildings
and, in addition,  leases numerous commercial facilities used in connection with
the  various  services  rendered  to  its  customers,  including  its  corporate
headquarters,  a 149,000 square foot facility under a 12-year lease. None of the
properties is unique.  All of the Company's owned  facilities are located within
the United States. In the opinion of management,  the facilities employed by the
Company are adequate for the present needs of the business.

    The Company  has signed a lease with the  developer  of a  to-be-constructed
building in Reston,  Virginia  for the 12-year  lease of 154,000  square feet of
space  for  consolidation  of  several  offices  near  the  Company's  corporate
headquarters and anticipates occupancy in December 1999.

    Under the terms of a proposed settlement agreement related to a subsidiary's
involvement in ongoing asbestos litigation (see Item 7 "Management's  Discussion
and Analysis of Financial  Conditions and Results of Operations"  and Note 21(a)
to the  Consolidated  Financial  Statements  included  elsewhere  in this Annual
Report on Form 10-K) the Company  would  transfer  ownership of one of the owned
office  buildings  to the  subsidiary,  the  stock  of  which  would  in turn be
transferred to a trust for the benefit of asbestos claimants.

ITEM 3. LEGAL PROCEEDINGS

    This item is incorporated herein by reference to Note 21 to the Consolidated
Financial Statements included elsewhere in this Annual Report on Form 10-K.

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

    There were no matters  submitted  to a vote of security  holders  during the
fourth quarter of 1997.


<PAGE>

                                   PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

    DynCorp's  common stock is not  publicly  traded.  However,  the Company has
established an Internal Market to provide liquidity for its stockholders. Shares
available for trading in the Internal Market are registered under the Securities
Act of 1933. The Internal Market generally  permits  stockholders to sell shares
of common  stock on four  predetermined  days each  year,  subject  to  purchase
demand.

    Sales of common stock on the Internal Market are made at established  prices
for the common stock  determined  pursuant to the formula and valuation  process
described below (the "Formula  Price") to active  employees and directors of the
Company and to the trustees of the Savings and Retirement  Plan ("SARP") and the
Employee  Stock  Ownership Plan ("ESOP"),  as well as the  administrator  of the
Employee Stock Purchase Plan ("ESPP"),  who may purchase  shares of common stock
for their respective trusts and plans.

    If the aggregate  purchase orders exceed the number of shares  available for
sale,  the Company may, but is not  obligated to, sell  authorized  but unissued
shares  of  common  stock  on  the  Internal  Market.   Further,  the  following
prospective purchasers will have priority, in the order listed:

    - the administrator of the ESPP;
    - the trustees of the SARP;
    - eligible employees and directors, on a pro rata basis; and
    - the trustees of the ESOP.

    If the aggregate number of shares offered for sale on the Internal Market is
greater than the aggregate  number of shares  sought to be purchased,  offers by
stockholders  to sell 500 shares or less,  or up to the first 500 shares if more
than 500 shares are offered,  will be accepted  first.  If,  however,  there are
insufficient  purchase  orders to support the primary  allocation of 500 shares,
then the  purchase  orders will be allocated  equally  among all of the proposed
sellers up to the first 500 shares offered for sale by each seller.  Thereafter,
a similar  procedure  will be applied to the next 10,000 shares  offered by each
remaining  seller,  and offers to sell in excess of 10,500  shares  will then be
accepted on a pro-rata basis. All sellers on the Internal Market (other than the
Company and its retirement  plans) will pay a commission equal to two percent of
the  proceeds  from such  sales.  No  commission  is paid by  purchasers  on the
Internal  Market.  As an alternative to this procedure,  the Company may, but is
not required to, purchase excess shares offered for sale in the Internal Market.

    The  market  price  of the  common  stock  is  established  pursuant  to the
valuation  process  described  below,  which uses the formula set forth below to
determine  the Formula  Price at which the Common  Stock  trades in the Internal
Market.  The  Formula  Price is  reviewed  four times each  year,  generally  in
conjunction with Board of Directors  meetings,  which are usually  scheduled for
February, May, August and November.

    The  Formula  Price per share of common  stock is the product of seven times
the operating  cash flow ("CF"),  where  operating  cash flow is  represented by
earnings before  interest,  taxes,  depreciation and amortization of the Company
for the four fiscal  quarters  immediately  preceding  the date on which a price
revision is made,  multiplied by a market factor  ("Market  Factor"  denoted MF)
plus the non-operating  assets at disposition  value (net of disposition  costs)
("NOA"),  minus the sum of interest  bearing  debt  adjusted to market and other
outstanding  securities senior to common stock ("IBD"), the whole divided by the
number  of  shares  of  common  stock  outstanding  at the date on which a price
revision is made, on a fully diluted basis assuming  exercise of all outstanding
options  and  warrants  ("ESO").  The Market  Factor is a numeric  factor  which
reflects existing securities market conditions relevant to the valuation of such
stock.  The Formula Price of the common stock,  expressed as an equation,  is as
follows:

                                     [(CFx7)MF+NOA-IBD]
                  Formula Price =                ESO


<PAGE>

    The Board of  Directors  believes  that the  valuation  process  and Formula
result in a fair price for the common  stock  within a broad range of  financial
criteria.  Other than quarterly  review and possible  modification of the Market
Factor,  the Board of  Directors  will not change the Formula  unless (i) in the
good faith  exercise of its  fiduciary  duties and after  consultation  with its
professional  advisors,  the Board of Directors  determines  that the formula no
longer  results in a stock  price  which  reasonably  reflects  the value of the
Company on a per share  basis,  or (ii) a change in the Formula or the method of
valuing the common stock is required under applicable law.

    The  following  table sets forth the Formula  Price for the common stock and
the Market  Factor by quarter  since the adoption of the Formula by the Board of
Directors in August 1995.

       Quarter Ended              Formula Price ($)       Market Factor
       -------------              -----------------       -------------
       December 31, 1995             14.50                   2.14
       March 28, 1996                15.00                   1.36
       June 27, 1996                 16.75                   1.15
       September 26, 1996            19.00                   1.15
       December 31, 1996             20.00                   1.27
       March 27, 1997                20.00                   1.27
       June 26, 1997                 20.00                   1.27
       September 25, 1997            20.00                   1.23
       December 31, 1997             20.00                   1.23

    For the March 26,  1998  trade,  the Board of  Directors  approved a formula
price of $21.00  for the  common  stock and a market  factor of 1.29.  The price
determined by the ESOP's independent appraiser was also $21.00 for the March 26,
1998 trade.

    Prior to August 1995,  the market value of the common stock was  established
periodically  by the Board of  Directors  for  purposes of  repurchases  under a
former stockholders agreement.  Based on the Board's review of valuations set by
the ESOP Trust, the price per share by quarter was as follows:

       March 30, 1995                         $14.90
       June 29, 1995                          $14.90
       September 28, 1995                     $14.90

<PAGE>

    There were  approximately  581 record  holders  of DynCorp  common  stock at
December 31, 1997. In addition,  the DynCorp Employee Stock Ownership Plan Trust
owns stock on behalf of approximately 30,400 present and former employees of the
Company. Cash dividends have not been paid on the common stock since 1988.

    On March 30, 1995, the Company sold 1,208,059  shares of common stock to the
ESOP,  the Company's  retirement  plan.  The shares were sold for cash which the
ESOP  obtained from the Company in a combination  of Company  contributions  and
funds  borrowed by the ESOP from the  Company.  The portion of shares  purchased
with loan  proceeds  was pledged to the  Company  until the loan was repaid from
subsequent  Company  contributions.  The  sale is  believed  to be  exempt  from
registration pursuant to Section 4(2) of the Securities Act of 1933.

<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

    The following  table presents  summary  selected  historical  financial data
derived from the audited  Consolidated  Financial  Statements of the Company for
each of the five years.  During the periods presented,  the Company paid no cash
dividends  on its Common  Stock.  The  following  information  should be read in
conjunction with  "Management's  Discussion and Analysis of Financial  Condition
and Results of Operations" and the audited Consolidated Financial Statements and
related notes thereto, included elsewhere in this Annual Report on Form 10-K.
(Dollars in thousands, except per share data.)

<TABLE>
<CAPTION>
                                                                   Years Ended December 31,
                                                     1997(b)        1996(c)      1995(d)     1994(a)(f)   1993(a)(g)
<S>                                            <C>             <C>            <C>          <C>           <C>
Statement of Operations Data:
Revenues                                        $  1,145,937   $  1,021,453   $  908,725   $   818,683   $  777,216
Cost of services                                $  1,096,246   $    970,163   $  871,317   $   783,121   $  742,460
Corporate selling and administrative            $     17,785   $     18,241   $   18,705   $    16,887   $   17,547
Interest expense                                $     12,432   $     10,220   $   14,856   $    14,903   $   14,777
Earnings (loss) from continuing operations
  before extraordinary item and certain
  other expenses (h)                            $     15,579   $     12,774   $   12,974   $     1,966   $   (4,192)
Earnings (loss) from continuing operations
  before extraordinary item (e)                 $      7,422   $     11,949   $    5,274   $      (352)  $   (4,485)
Net earnings (loss)                             $      7,422   $     14,629   $    2,368   $   (12,831)  $  (13,414)
Common stockholders' share of earnings (loss)   $      7,422   $     12,345   $      453   $   (14,437)  $  (14,761)
EBITDA (i)                                      $     29,274   $     34,948   $   17,841   $    25,933   $   21,976
Earnings (loss) per share from continuing
  operations before extraordinary
  item for common stockholders
    Basic                                       $       0.83   $       1.14   $     0.40   $     (0.29)  $    (1.13)
    Diluted                                     $       0.70   $       0.82   $     0.29   $     (0.29)  $    (1.13)
Common stockholders' share of earnings (loss)
    Basic                                       $       0.83   $       1.46   $     0.05   $     (2.12)  $    (2.87)
    Diluted                                     $       0.70   $       1.05   $     0.04   $     (2.12)  $    (2.87)
Balance Sheet Data:
Total assets                                    $    382,584   $    368,752   $  375,490   $   396,000   $  360,103
Long-term debt excluding current maturities     $    152,239   $    103,555   $  104,112   $   230,444   $  215,939
Redeemable common stock                         $    154,840   $    139,322   $  135,894   $   130,828   $  100,630

<FN>

(a)  Restated for the discontinuance of the Commercial Aviation business.
(b)  1997 includes $7,800 of costs related to asbestos  litigation (see Notes 14
     and 21(a)),  $2,488  reversal of income tax valuation  allowance and $2,055
     reversal of accrued  interest  related to IRS  examinations  and  potential
     disallowance of deductions (see Note 15).
(c)  1996  includes  $3,299  accrual  for  supplemental  pension  and other fees
     payable to retiring  officers and a member of the Board of  Directors  (see
     Note 14),  $1,286  write-off of cost in excess of net assets acquired of an
     unconsolidated  subsidiary  (see  Note  14),  $1,250  credit  for a revised
     estimate of the ESOP Put Premium  (see Notes 7 and 14) and $4,067  reversal
     of income tax valuation allowance (see Note 15).
(d)  1995 includes $7,707  reversal of income tax valuation  allowance (see Note
     15),  $4,362  accrued  for losses  and  reserves  related to the  Company's
     Mexican operation, $2,400 accrual of legal fees related to the defense of a
     lawsuit  filed  by a  subcontractor  of  a  former  electrical  contracting
     subsidiary  (see Notes 14 and 21(b)) and $5,300 accrued for uninsured costs
     related to claims  against a former  subsidiary for alleged use of asbestos
     containing products (see Notes 14 and 21(a)).
(e)  The  extraordinary   loss  in  1995  of  $2,886  resulted  from  the  early
     extinguishment  of debt (see Note 5).
(f)  1994  includes  $3,250  write-off  of investment in unconsolidated subsidiary, $2,665 accrual of legal fees
     related to the defense of a lawsuit  filed by a  subcontractor  of a former
     electrical contracting subsidiary (see Note 21), $1,830 credit for reversal
     of legal costs associated with an acquired  business and $4,069 reversal of
     income tax reserves (see Note 15).
(g)  1993 includes $2,000 of legal and other expenses associated with an acquired business,
     $988 accelerated amortization of costs in excess of net assets of an acquired business, for assets that were
     subsequently determined to have been overvalued at the time of acquisition.
(h)  Certain other expenses includes costs and expenses associated with divested
     businesses of $8,157 in 1997, $825 in 1996,  $7,700 in 1995, $2,318 in 1994
     and $293 in 1993 (see Note 14).
(i)  EBITDA  (earnings  from  continuing   operations  before  extraordinary  item  and  before  interest,   taxes,
     depreciation and amortization),  while not a measure under generally accepted accounting  principles ("GAAP"),
     is a standard  measure of financial  performance in industry.  EBITDA should not be considered in isolation or
     as an  alternative  to net  earnings  (loss),  earnings (loss)  from  operations,  cash  flows  from  operating
     activities,  or any other measure of  performance  under GAAP.  EBITDA has been adjusted for the  amortization
     of deferred  debt  expense and debt  issuance  discount  which are
     included in "interest  expense" in the Consolidated  Statements of Operations and included in "amortization and
     depreciation"  in the  Consolidated  Statements of Cash Flows.  Amortization  of deferred debt expense was $706
     in 1997, $829 in 1996, $743 in 1995, $324 in 1994 and $328 in 1993.  Amortization  of debt issuance discount
     was $26 in 1997.

</FN>
</TABLE>

<PAGE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

Overview

    The Company  provides  diversified  management,  technical and  professional
services to primarily U.S. Government customers throughout the United States and
internationally.  The  Company's  customers  include  various  branches  of  the
Department of Defense and to the  Department of Energy,  NASA, the Department of
State,  the  Department  of Justice  and  various  other  U.S.,  state and local
government agencies,  commercial clients and foreign governments.  The following
discussion should be read in conjunction with the audited Consolidated Financial
Statements.

Revenue and Gross Margin

    Consolidated revenues continued to increase annually, to $1,145.9 million in
1997, from $1,021.5 million in 1996 and $908.7 million in 1995;  however,  gross
margin  fluctuated  from year to year (4.3% in 1997,  5.0% in 1996,  and 4.1% in
1995).

    Aerospace  Technology  ("AT")  reported  the best  performance  of the three
business  areas in 1997.  Revenues  were  $449.0  million in 1997 as compared to
$383.3 million in 1996, a 17% increase. Gross margin increased from 3.5% in 1996
to 4.0% in 1997.  Increased  level of effort on State  Department  contracts  in
support  of  the  government's   drug   eradication   program  and  the  Haitian
peacekeeping  initiative,  which  were  awarded  late in  1996  but  were  fully
operational in 1997, contributed  significantly to the increase in both revenues
and gross margin.  Additionally,  numerous smaller contract awards further added
to AT's increased revenues and improved gross margin.  Other existing contracts,
one with the Air Force to provide  maintenance  and repair  work on DoD  weapons
systems and equipment at various locations worldwide,  and another with the Army
to maintain a fleet of rotary-wing  aircraft,  further  augmented AT's revenues;
however,   lower  indirect  expense  ceilings  and  increased   proposal  costs,
respectively,  resulted in lower profits on these  contracts in 1997 as compared
to 1996.

    The AT business  area  increased  backlog by 133% at December  31, 1997 over
that of 1996,  primarily  due to the  aforementioned  Air Force  contract won in
recompetition.  Management  believes the growth  experienced  in the AT business
area in 1997 will continue  into 1998.  However,  the nature of the  procurement
process  and  the  volume  of  the  Company's   business  which  is  subject  to
recompetition  annually can have a dramatic impact on revenues and gross margin.
Additionally,  the U.S.  Government  has the right to  terminate  contracts  for
convenience or may reduce the volume of services provided.

    AT revenues increased in 1996, up $64.0 million from $319.3 million in 1995,
but gross margin deteriorated slightly,  down from 3.6% in 1995 to 3.5% in 1996.
Increases in revenues and gross margin were  attributable  to increased level of
effort on certain  Department of State contracts as well as a newly formed joint
venture.  However,  several  contract  losses  diminished  gross margin in 1996,
offsetting any increases  attributable  to the increased  level of effort or new
business.

    Enterprise  Management  ("EM")  also  reported  increased  revenues,  $414.3
million in 1997 as compared to $366.7  million in 1996, up 13%;  however,  gross
margin  remained  flat at 5.2% for both 1997 and  1996.  A large  Department  of
Energy subcontract to provide facility and  infrastructure  support at the DoE's
Hanford,  Washington  site,  as well as other new business and contract wins all
contributed significantly to EM's revenues and gross margin. Unfortunately,  the
loss of a large  contract with the Army as well as residual  losses  recorded in
conjunction  with the closure of the Company's  Mexican  operations  (see below)
more than offset any increases in gross margin attributable to contract wins and
new business.

    Both EM's revenues and gross margin increased in 1996 over 1995. Revenue was
$366.7 million,  up 15% over $318.3 million in 1995 and gross margin was 5.2% in
1996, up from 3.4% in 1995.  Another large DoE contract  at the  Rocky  Flats
Environmental  Technology  Site  in  Colorado,  awarded  in 1995  but not  fully
operational  until 1996,  and the  contract at the Hanford  facility,  which was
phased in during August 1996 and fully operational by October 1996,  contributed
significantly  to the  increases in EM's  revenues and gross  margin.  Partially
offsetting  this was the loss of a large  contract with the Department of Health
and Human  Services.  Significantly  improving  EM's 1996  gross  margin was the
closure in 1995 of the Company's Mexican operations.  Approximately $4.4 million
was  charged to Cost of Services in 1995 for the  following:  estimated  loss at
completion,  plus  currency  devaluation  losses,  on a  contract  to  install a
security  system,  severance  costs  associated  with the reduction of the local
workforce and reserves for closing the operation.

    In keeping  with its plan to continue  growth in the EM business  area,  the
Company acquired the assets of FMAS Corporation  ("FMAS") in February 1998. FMAS
is a medical outcome  measurement and data extraction  services company which is
projected  to add  $17.0  million  to  EM's  revenues  in  1998  (see  Note  24,
"Subsequent Events", to the Consolidated Financial Statements). Additionally, EM
was awarded a large contract with the Department of Defense in the first quarter
of 1998 which is projected to generate an additional $17.0 million in revenue in
1998.  However,  the  nature of the  procurement  process  and the volume of the
Company's  business  which  is  subject  to  recompetition  annually  can have a
dramatic impact on revenues and gross margin. Additionally,  the U.S. Government
has the right to terminate contracts for convenience or may reduce the volume of
services provided.

    Information  and  Engineering  Technology's  ("I&ET")  revenues  were $282.6
million in 1997, a 4% increase  over 1996 revenues of $271.5  million,  however,
gross  margin  declined to 3.5% in 1997,  down from 6.8% in 1996.  Increases  in
revenue attributable to numerous Indefinite Delivery/Indefinite Quantity("IDIQ")
contract awards,  the acquisition of Data Management  Design,  Inc.  ("DMDI") in
June of 1996 and  other  new  business  ventures  were  partially  offset by the
phase-out of a large  contract with the U.S.  Postal  Service.  Gross margin was
adversely  impacted by a number of factors including  contract losses,  start-up
costs and  software development costs incurred in support of new  businesses,
poor  performance  attributable to the DMDI business as well as other
contracts  acquired late in 1996 and fee disputes.  Further eroding gross margin
was the write-off of software,  which the Company acquired late in 1996 in order
to  bid  a  contract which  was  not  subsequently  awarded  to  the  Company.
Additionally,   many  of  the  new  IDIQ  contracts  awarded  require  increased
administrative  oversight  and sales effort and yield lower profit  margins than
sole  source  direct  contract  awards  which have  historically  comprised  the
majority of the Company's business.

    I&ET's 1996 revenues were $271.5 million,  up marginally from $271.1 million
in 1995, however, gross margin improved  significantly,  up from 5.7% in 1995 to
6.8% in 1996. Increased revenues attributable to the acquisition of DMDI in June
of 1996 and a  contract  with the  General  Services  Administration  which  was
awarded and phased in during 1995 but which was fully  operational  in 1996 were
offset by the mid-year  phase-out of a large  contract with the Postal  Service.
Gross margin was similarly affected,  however, additional profits resulting from
greater absorption of overhead on existing contracts which were under performing
in 1995 further contributed to I&ET's improved gross margin.

    Management  believes  I&ET's  revenues will grow slightly in 1998.  However,
there are no  assurances  because the  contract  base is  comprised of many IDIQ
contracts which require continuous marketing.  Additionally, the U.S. Government
has the right to terminate contracts (including orders under IDIQ contracts) for
convenience.

Corporate Selling and Administrative

    Corporate selling and administrative  expenses continued to decrease both in
dollar   amount  and  as  a  percentage  of  revenue.   Corporate   selling  and
administrative  expenses were $17.8  million in 1997,  $18.2 million in 1996 and
$18.7  million in 1995,  or, as a  percentage  of revenue,  1.6%,  1.8% and 2.1%
respectively.  This trend is not expected to continue,  however,  as the Company
has embarked on a comprehensive  resystemization  effort (see "Year 2000") which
is  projected  to add  approximately  $3.0  million  to  corporate  selling  and
administrative expense in 1998.

Interest Expense and Interest Income

    Interest  expense was $12.4  million in 1997, up from $10.2 million in 1996.
The  increase  is due to greater  levels of  indebtedness  in 1997 at a slightly
higher  effective rate of interest.  The Company issued $100.0 million of 9 1/2%
Senior  Notes in March  1997 and $50.0  million  of 7.486%  Contract  Receivable
Collateralized  Notes in April  1997,  utilizing  the  proceeds  to  retire  the
maturing $100.0 million of 8.54% Contract Receivable Collateralized Notes and to
repurchase  certain of the Company's  common stock and warrants.  Offsetting the
increase  in  interest  expense  attributable  to the newly  issued debt was the
reversal of $2.1 million of interest related to the Internal  Revenue  Service's
examination and the potential disallowance of certain deductions.

    Interest expense in 1996 was $10.2 million, down from $14.9 million in 1995,
primarily  due to  the  redemption  of the  Company's  16%  Junior  Subordinated
Debentures in 1995.  Also  contributing  to the decrease was the  liquidation in
1995 of the  mortgage on the  corporate  headquarters  which was sold and leased
back.

    Interest  income was $2.0  million,  $1.8  million and $3.8 million in 1997,
1996 and 1995, respectively. The fluctuations are attributable to the balance of
cash and short-term  investments throughout any given year. In early 1997, after
issuance of the Senior Notes but before retiring the maturing debt or subsequent
stock purchases, the Company had significant cash balances. In 1995, the Company
had significant  cash after the sale of the Commercial  Aviation  business,  the
sale and lease-back of the Company's  corporate  headquarters and the collection
of the Cummings Point Industries, Inc. note receivable but before calling the 16
% Junior Subordinated  Debentures.  The twelve-month average balance of cash and
short-term  investments  was $25.0  million in 1997,  $20.0  million in 1996 and
$32.0 million in 1995, resulting in higher interest yields in 1997 and 1995 than
in 1996.

Other

    Other  Expense  increased to $10.3  million in 1997, up from $5.5 million in
1996. The most  significant  factor was a $7.8 million  increase in reserves for
asbestos  litigation  resulting  from a  subsidiary's  agreement in principle to
globally settle approximately 11,000 pending asbestos personal injury claims and
unknown future claims pursuant to Section 524(g) of the U.S. Bankruptcy Code and
a related contingent settlement agreement between the Company and the subsidiary
for the release of the Company from any subsidiary asbestos liability (see Notes
14 and 21(a) to the  Consolidated  Financial  Statements  and the  discussion of
"Liquidity and Capital  Resources"  which  follows).  Offsetting  this increase,
however,  is the  absence  in 1997 of any  additional  significant  nonrecurring
charges  such as costs  related to the  retirement  of several of the  Company's
officers  as well as the  write-off  of cost in excess of assets  acquired  of a
minority owned investment, both of which adversely impacted 1996.

    Other Expense  decreased in 1996 to $5.5 million from $10.2 million in 1995.
This reduction resulted from the fact that previously  established reserves were
charged for costs incurred in 1996 to enforce insurance  policies  beneficial to
the  subsidiary  against  which  asbestos  claims had been asserted and the 1996
defense costs  associated  with a lawsuit filed by a  subcontractor  of a former
subsidiary (see Note 21 (a) and (b) to the Consolidated  Financial  Statements).
In addition,  a credit  recognized for a revised  estimate of the Company's ESOP
Put liability also reduced Other Expense.  Offsetting  these  reductions  were
costs related to the retirement of several of the Company's  officers as well as
the write-off of cost in excess of assets associated with a minority  investment
(see Note 14 to the Consolidated Financial Statements).

Income Taxes

    The  provision  for  income  taxes in 1997  and  1996 is  based on  reported
earnings,  adjusted to reflect the impact of temporary  differences  between the
book value of assets and liabilities recognized for financial reporting purposes
and  such  amounts  recognized  for tax  purposes.  Also  included  in 1996 is a
provision for foreign taxes related to prior years' foreign operations.  The tax
benefit in 1995 reflects a tax provision based on an estimated  annual effective
tax rate, excluding expenses not deductible for tax. Additionally, $2.5 million,
$4.1 million and $7.7 million of tax  valuation  reserves were reversed in 1997,
1996 and 1995,  respectively.  These deferred taxes have been realized primarily
as an  offset  against  earnings,  and in  1995,  the  gain  on the  sale of the
Commercial Aviation business. Based on current projections, management estimates
tax payments, net of tax refunds, of $3.7 million in 1998.

    No valuation  allowance for deferred federal tax assets was deemed necessary
at  December  31,  1997.  The Company has  provided a  valuation  allowance  for
deferred  state tax  assets of $5.0  million  at  December  31,  1997 due to the
uncertainty  of  achieving  future  earnings  in either the time frame or in the
particular state jurisdiction needed to realize the tax benefit.

Working Capital and Cash Flows

    Working  capital at December  31,  1997,  was $84.2  million,  up from $75.8
million at December 31, 1996. The ratio of current assets to current liabilities
at December 31, 1997 was 1.54 compared to 1.51 at December 31, 1996.

    Cash  provided  from  operations  was $9.9 million in 1997  compared to $4.8
million in 1996. Although net earnings decreased,  $8.2 million of this decrease
was  attributable to the accrual of reserves for divested  businesses  which did
not use any cash in 1997. Further improving operating cash flows was the absence
in  1997  of any tax  payments  related  to the  gain  on the  1995  sale of the
Commercial Aviation business. Offsetting these items was an increase in accounts
receivable,  primarily due to delayed collections on certain subcontracts.  Cash
provided from  continuing  operations was $4.8 million in 1996 compared to $13.9
million in 1995.  Decreases in  operating  cash flows were due to the payment in
1996 of $14.0 million of federal and state taxes related to the gain on the 1995
sale of the Commercial Aviation business and an increase in accounts receivable,
partially offset by increased earnings.

    Investing activities used funds of $8.3 million in 1997, principally for the
purchase of property and  equipment  and also to fund the Company's 47% interest
in a minority owned  investee and to make a loan to the same investee.  In 1996,
cash of $1.7 million was provided, with additional proceeds from the sale of the
Commercial  Aviation  business,  as well as the  release  of cash on  deposit as
collateral for letters of credit  partially  offset by acquisitions  and capital
expenditures.  In 1995,  the proceeds from the sale of the  Commercial  Aviation
business,  the  sale  and  leaseback  of  the  corporate  headquarters  and  the
collection of the Cummings Point Industries, Inc. note receivable contributed to
the $139.8 million of funds provided from investing activities.

    In 1997,  financing  activities utilized funds of $3.0 million. The proceeds
from the issuance of the 9 1/2% Senior Notes and the 7.486% Contract  Receivable
Collateralized  Notes were used to retire the maturing 8.54% Contract Receivable
Collateralized  Notes,  to make a loan to the ESOP to fund the  purchase  of the
Class C Preferred  Stock,  to fund the  Company's  purchase of common  stock and
warrants from certain  investors and to pay transaction fees associated with the
placement  of the  Senior  Notes and  amendments  to the terms of the  Company's
revolving line of credit.  In 1996, $11.8 million of cash was used for financing
activities,  principally  the purchase of treasury  shares,  but also payment on
indebtedness  and fees associated  with securing a line of credit.  In 1995, the
$126.9 million use of funds from financing activities consisted primarily of the
utilization of the proceeds from the sale of the Commercial Aviation business to
redeem the 16% Junior  Subordinated  Debentures,  the pay-off of the mortgage on
the corporate headquarters, and the purchase of treasury shares. These uses were
partially offset by funds provided from the sale of stock to the ESOP.

Liquidity and Capital Resources

    The  Company's   primary  source  of  cash  and  cash  equivalents  is  from
operations.  The  Company's  principal  customer  is the U.S.  Government.  This
provides  for a  dependable  flow  of  cash  from  the  collection  of  accounts
receivable. Additionally, many of the contracts with the U.S. Government provide
for progress  billings based on costs incurred.  These progress  billings reduce
the amount of cash that would  otherwise be required  during the  performance of
these contracts.

    At the close of 1996, the Company's debt totaled $104.2  million.  The 8.54%
Contract  Receivable  Collateralized  Notes,  Series 1992-1,  constituted $100.0
million  of this  total and were  scheduled  to  mature in May 1997.  Due to the
maturity  of these  notes,  the  Company  embarked  on a  comprehensive  plan to
refinance the maturing debt and to recapitalize the Company.

    On January 23, 1997,  the Company  entered into an agreement  with Capricorn
Investors,  L.P.  ("Capricorn") in which Capricorn agreed to waive its rights to
nominate  directors of the Company and also waived  certain voting rights of the
Company's then outstanding Class C Preferred Stock. In return for these waivers,
the Company  paid a fee and  authorized  Capricorn to  distribute a  substantial
portion of the shares of common stock and  warrants  and all of the  outstanding
shares of Class C Preferred  Stock to its  investors.  On February 5, 1997,  the
Employee Stock  Ownership Trust purchased from certain of these investors all of
the Company's Class C Preferred Stock. The ESOP subsequently converted the Class
C Preferred  Stock into common shares and common share  warrants,  and exercised
the  related  warrants.  Concurrently  with the  ESOP's  purchase,  the  Company
acquired a sizable  number of its  outstanding  common  shares and common  stock
warrants from other Capricorn investors.  The purchase price of these securities
was $56.4  million  ($19.55 per common share or warrant),  of which half,  $28.2
million, was paid in cash ($9.3 million and $18.9 million , was paid by the ESOP
and the Company,  respectively) and short-term notes were issued for the balance
(notes  issued by the ESOP and the Company were $9.3 million and $18.9  million,
respectively).

    The Company  engaged in the  aforementioned  equity  repurchases in order to
eliminate the potential effect of certain  preferential  voting rights given the
Class C Preferred Stock in the Company's certificate of incorporation; to reduce
the  outstanding  and fully diluted equity of the Company;  to provide  treasury
shares for future issuance to employees under the Company's various compensation
and benefit  plans  without the need for issuance of new shares;  and to provide
additional  shares for the ESOP,  which can only acquire shares by purchase from
the  Company or other  stockholders.  The ESOP's  purpose  for  engaging  in the
aforementioned   transaction  was  to  acquire  shares  for  the  allocation  to
participants'  accounts in 1997 and 1998. In addition to converting a portion of
the  Company's  total   capitalization   from  equity   capitalization  to  debt
capitalization,  the  transactions  reduced the Company's  fully diluted equity,
thus improving the Company's earnings per share.

    On March 17, 1997, the Company closed on the issuance of $100.0 million of 9
1/2%  Senior  Subordinated  Notes  due  2007  (see  Note 5 to  the  Consolidated
Financial Statements).  On April 18, 1997, the Company's wholly-owned subsidiary
Dyn  Funding   Corporation  ("DFC")  entered  into  agreements  with  Prudential
Insurance  Company of America and  Columbine  Life  Insurance  Company,  Inc. to
purchase  from DFC up to $140.0  million of Contract  Receivable  Collateralized
Notes, Series 1997-1. A five year $50.0 million Class A Fixed Rate Note, bearing
interest  at 7.486% was issued at closing and a $90.0  million  Class B Variable
Rate Note,  which was also  issued,  had yet to be utilized at December 31, 1997
(see Notes 5 and 24 to the Consolidated Financial Statements). The proceeds from
these  transactions  were  used  to  retire  the  maturing  Contract  Receivable
Collateralized  Notes,  to pay the Company's short term notes and make a loan to
the ESOP to enable it to pay the short-term notes (plus accrued interest) issued
to certain Capricorn investors and to pay various transaction fees.

    At December 31, 1997, the Company's debt totaled $152.7 million  compared to
$104.2  million at December 31, 1996 and $105.4 million at December 31, 1995. In
addition to the aforementioned  financings,  debt servicing requirements and the
liquidation  of certain notes reduced the  Company's  debt by $1.0 million.  The
decrease in debt from December 31, 1995 to December 31, 1996,  reflects only the
Company's minimum debt servicing requirements.

    At December 31, 1997,  $60.5 million of accounts  receivable were restricted
as  collateral  for the 7.486 % Contract  Receivable  Collateralized  Notes (the
"Notes") and $1.5 million of cash was restricted as collateral for the Notes and
has been  included  in Other  Assets on the  accompanying  Consolidated  Balance
Sheet.

    The Company has a $15.0 million line of credit which it utilized  throughout
1997,  never exceeding $8.0 million in borrowings at any given point in time. At
December 31, 1997, there were no borrowings under this line of credit,  however,
the facility does provide  credit  support for letters of credit and at December
31, 1997, the amount available for borrowing was reduced by $10.0 million due to
the collateralization of outstanding letters of credit.

    The Company also has available up to $90.0 million of Floating Rate Contract
Receivable  Collateralized  Notes, Series 1997-1,  Class B (the "Class B Notes")
under the April 1997 indenture. At December 31, 1997, the Company had sufficient
unused  receivable  collateral to draw down  approximately  $60.0  million.  The
notes,  when drawn, bear interest at the LIBOR rate plus 70 basis points and two
business days are required to access the funds.  In February  1998,  the Company
drew down  $10.0  million  of the Class B Notes to fund the  acquisition  of the
assets  of  FMAS  Corporation  (see  Note  24  to  the  Consolidated   Financial
Statements).

    The Company  has  embarked on a  comprehensive  resystemization  effort (see
"Year 2000") and is projecting  expenditures in conjunction  with this effort of
$10.4  million  in 1998  and $1.0  million  in 1999.  The  resystemization  will
necessitate  replacing most of the Company's desktop  workstations over the next
three years, at a cost of approximately $4.0 million annually through 2000.

    The Board of Directors has issued an enabling  resolution which provides for
the repurchase of up to 500,000 shares of the Company's  common stock at a price
not to exceed $22.50 per share,  subject to all applicable  financial covenants.
Management  continuously  reviews  alternative  uses of  excess  cash  and  debt
capacity in terms of  acquisitions,  dividends,  repurchase  of shares and other
financial matters.

    The Company anticipates contributing  approximately $13.0 million in cash to
the ESOP in 1998. The amount of the Company's annual contribution to the ESOP is
determined  by, and within the  discretion of, the Board of Directors and may be
in the form of cash, common stock or other qualifying securities.  In accordance
with ERISA  requirements  and the ESOP documents,  in the event that an employee
participating in the ESOP is terminated, retires, dies or becomes disabled while
employed  by the  Company,  the  ESOP  Trust  or the  Company  is  obligated  to
repurchase  shares of common stock distributed to such former employee under the
ESOP ("ESOP  Participant  Puts"),  until such time as the common  stock  becomes
"Readily  Tradable Stock," as defined in the ESOP documents.  (See Note 7 to the
Consolidated Financial Statements.)

    To the  extent  the ESOP  Participant  Puts,  debt  service,  administrative
expenses and interest exceed the Company's 1998  contribution,  the Company will
fund the ESOP  Participant  Puts by former  employees  to prevent  the ESOP from
incurring  additional  debt.  The Company  projects these payments to be $1.0 to
$2.0 million in 1998.

    During  the  first  quarter  1998,   the  Company's   Delaware   subsidiary,
Fuller-Austin  Insulation  Company  ("Fuller-Austin"),  reached an  agreement in
principle  with the proposed but  unconfirmed  representative  of certain future
asbestos claimants, and counsel representing more than 75% of the present 10,740
claimants who have asserted asbestos bodily injury claims against Fuller-Austin,
regarding  a  global  settlement  of all  such  claims  (see  Note  21(a) to the
Consolidated  Financial Statements for the history of the Fuller-Austin asbestos
claims). Under the terms of the proposed settlement,  Fuller-Austin,  the future
claimants'  representative  and at least 75% of the presently existing claimants
would consent to the filing of a  Fuller-Austin  Chapter 11 bankruptcy  petition
under Section  524(g) of the U.S.  Bankruptcy  Code  ("Code").  Section  524(g),
adopted by the Congress as an amendment to the Code in 1994, deals  specifically
with reorganizations of debtors that are the subject of asbestos claims.

    If filed in and  confirmed by the  cognizant  bankruptcy  and U.S.  district
courts, the Fuller-Austin plan of reorganization ("the Plan") will result in the
stock of Fuller-Austin being transferred  irrevocably to a post-bankruptcy trust
for the sole benefit of asbestos  claimants,  present and future. In furtherance
of the proposed global settlement,  representatives of Fuller-Austin, its parent
and  sole  stockholder  DynCorp,   the  present  asbestos  claimants,   and  the
representative of the future unknown claimants have reached a separate agreement
in principle  ("Release  Agreement"),  contingent on approval of the Plan by the
bankruptcy  court,  under which the Company  would be released  from any and all
present  and  future   liability  for   Fuller-Austin   asbestos   liability  in
consideration  of the transfer of certain Company  property and insurance rights
to the  Fuller-Austin  bankruptcy  trust (the  "Trust"),  and the payment to the
trust of certain cash consideration.  The total amount of all such consideration
and  related  costs is  approximately  $14.0  million,  a  portion  of which was
recorded in prior  years and the  balance,  $7.8  million,  was  reserved by the
Company in 1997 in anticipation of the settlement under the Release Agreement.

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

Year 2000

    The "Year  2000" issue  ("Y2K")  concerns  the  inability  of some  computer
software  and hardware to  accommodate  "00" in the two digit data field used to
identify the year.  During 1997 the Company completed a thorough analysis of its
core  financial  and other  systems  and  began a  preliminary  analysis  of the
Company's   equipment   infrastructure   to  identify   issues  related  to  Y2K
functionality.

    The Company's  analysis of the core systems included all financial,  payroll
and human resources software products.  The Company has identified  solutions to
Y2K  functionality  issues where problems were  identified  and has  established
deadlines for initiating action to correct any deficiencies. Certain potentially
non-compliant  systems are scheduled to be replaced commencing in 1998 through a
resystemization effort that will replace existing software systems with new, Y2K
fully functional systems (see below).

    A preliminary analysis of the Company's network and equipment infrastructure
has  revealed no major issues  related to Y2K  compliance,  however,  a complete
inventory  and analysis is underway,  and a plan has been  developed to complete
the assessment in 1998. An employee  awareness  program will be launched in 1998
to educate and inform users of potential  problems  (particularly with so-called
"home  grown"  systems),  actions  required  to  assess  each  component  of the
infrastructure  and to correct,  upgrade or replace such components as necessary
to achieve full Y2K functionality.

    During 1997, the Company began to assess the Company's  general  information
technology  ("IT")  needs,  identify  new IT systems  criteria  and  establish a
timetable for  implementing a replacement IT system.  The Company has selected a
new software vendor and implementation is expected to begin in the first half of
1998 and  span  approximately  15  months.  The  successful  completion  of this
resystemization  effort will obviate the need to correct  deficiencies  with the
current  financial  and  human  resources  systems;  however,  the  Company  has
developed a plan for initiating  corrective  action on the current system in the
unlikely event the resystemization cannot be completed on time.

    The  Company   has   projected   expenditures   in   conjunction   with  the
resystemization of $10.4 million in 1998 and $1.0 million in 1999. Additionally,
the Company anticipates replacing most of its desktop workstations over the next
three years,  and estimates  this cost at  approximately  $4.0 million  annually
through 2000. The annual  expenditures for the new desktop work stations are not
significantly  above the levels  which can be expected  in the normal  course of
business. The depreciation and amortization expenses for the resystemization and
new desktop workstations are allowable costs under government contracts.

Environmental Matters

    Neither  the  Company  nor  any of its  subsidiaries  has  been  named  as a
Potentially  Responsible  Party  (as  defined  in  the  Comprehensive  Response,
Compensation  and Liability Act) at any site. The Company has incurred costs for
the  installation and operation of a soil and water  remediation  system and for
the clean up of environmental  conditions at certain other sites (see Note 21(b)
to the  Consolidated  Financial  Statements).  The Company's  liability,  in the
aggregate,  with  respect to these  matters is not deemed to be  material to the
Company's results of operations or financial condition.

Derivative Financial Instruments

    The Company's  policy is to use derivative  financial  instruments to manage
its exposures to fluctuations in interest rates and foreign  exchange rates. The
Company does not hold or issue financial  instruments for trading  purposes.  At
December 31, 1997,  the amounts of such  financial  instruments,  as well as the
amounts of gains and losses recorded during the year, were not material.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

    Information  with  respect  to  this  item  is  contained  in the  Company's
Consolidated Financial Statements and Financial Statement Schedules included
elsewhere in this Annual Report on Form 10-K.


<PAGE>

                       Report of Independent Public Accountants

To DynCorp:

We have  audited  the  accompanying  consolidated  balance  sheets of DynCorp (a
Delaware corporation) and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated  statements of operations,  permanent  stockholders' equity
and cash flows for each of the three  years in the  period  ended  December  31,
1997.  These  consolidated  financial  statements and the schedules  referred to
below are the responsibility of the Company's management.  Our responsibility is
to express an opinion on these consolidated  financial  statements and schedules
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 DynCorp and subsidiaries as of
December 31, 1997 and 1996,  and the results of their  operations and their cash
flows for each of the three years in the period  ended  December  31,  1997,  in
conformity with generally accepted accounting principles.

Our  audits  were  made for the  purpose  of  forming  an  opinion  on the basic
financial statements taken as a whole.  Schedules I and II, listed in Item 14 of
the Form 10-K,  are presented for purposes of complying  with the Securities and
Exchange  Commission's  rules and are not a required part of the basic financial
statements.  These  schedules  have been  subjected to the  auditing  procedures
applied in our audits of the basic financial statements and, in our opinion, are
fairly  stated in all  material  respects  in  relation  to the basic  financial
statements taken as a whole.

Washington, D.C.,                                          Arthur Andersen LLP
March 13, 1998

<PAGE>

DynCorp and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands)

                                                                 December 31,
                                                             1997          1996
Assets
Current Assets:
   Cash and cash equivalents (Notes 1 and 5)              $ 24,602     $ 25,877
   Accounts receivable and contracts in process, net
     (Notes 3, 4 and 5)                                    202,758      187,679
   Inventories of purchased products and supplies,
     at lower of cost (first-in, first-out) or market        1,090        1,030
   Prepaid income taxes (Notes 3 and 15)                     5,289        2,804
   Other current assets                                      5,844        7,205
                                                        ----------   ----------
      Total Current Assets                                 239,583      224,595

Property and Equipment, at cost (Notes 1 and 20):
   Land                                                      1,621        1,621
   Buildings and leasehold improvements                     11,659        9,324
   Machinery and equipment                                  28,752       24,876
                                                        ----------   ----------
                                                            42,032       35,821
   Accumulated depreciation and amortization               (22,412)     (16,737)
                                                        ----------   ----------
      Net property and equipment                            19,620       19,084
                                                        ----------   ----------

Intangible Assets, net of accumulated amortization
   (Notes 1 and 14)                                         46,750       48,927

Other Assets (Notes 5 and 21)                               76,631       76,146
                                                        ----------   ----------
Total Assets                                              $382,584     $368,752
                                                        ==========   ==========

See accompanying notes.

<PAGE>

DynCorp and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands, except per share amounts)
                                                                 December 31,
Liabilities and Stockholders' Equity                          1997         1996
Current Liabilities:
   Notes payable and current portion of long-term
    debt (Notes 3 and 5)                                  $    450     $    628
   Accounts payable (Note 3)                                46,109       42,716
   Deferred revenue and customer advances                    2,947        6,002
   Accrued income taxes (Notes 3 and 15)                       206          354
   Accrued expenses (Note 6)                               105,627       99,145

      Total Current Liabilities                            155,339      148,845

Long-term Debt (Notes 3 and 5)                             152,239      103,555

Deferred Income Taxes (Note 15)                              7,935        4,079

Other Liabilities and Deferred Credits (Notes 3 and 21)     69,845       75,434

Contingencies and Litigation (Note 21)                           -            -

Temporary Equity:
 Redeemable Common Stock at Redemption Value (Note 7)
  ESOP Shares, 6,887,119 and 6,165,957 shares issued
    and outstanding in 1997 and 1996, respectively,
    subject to restrictions                                151,823      136,343
  Other, 125,714 shares issued and outstanding in 1997
    and 1996                                                 3,017        2,979

Permanent Stockholders' Equity:
 Preferred Stock, Class C 18% cumulative, convertible,
  $24.25 liquidation value (liquidation value including
  unrecorded dividends of $14,147 in 1996), 123,711
  shares authorized, issued and outstanding (Note 8)             -        3,000
 Common Stock, par value ten cents per share, authorized
  20,000,000 shares; issued 4,784,770 shares in 1997
  and 3,315,673 shares in 1996 (Note 9)                        478          332
 Common Stock Warrants (Note 10)                             1,259       11,139
 Paid-in Surplus                                           125,412      148,234
 Reclassification to temporary equity for redemption
  value                                                   (154,138)    (138,694)
 Deficit                                                   (93,837)    (101,259)
 Common Stock Held in Treasury, at cost; 1,677,511
  shares and 170,716 warrants in 1997 and 1,514,482
  shares and 170,716 warrants in 1996                      (28,703)     (25,235)
 Unearned ESOP Shares (Note 12)                             (8,085)           -
                                                        ----------   ----------
Total Liabilities and Stockholders' Equity                $382,584     $368,752
                                                        ==========   ==========

See accompanying notes.

<PAGE>

<TABLE>
<CAPTION>

DynCorp and  Subsidiaries
Consolidated  Statements of Operations
For the Years Ended December 31
(Dollars in thousands, except per share data)

                                                                                1997          1996         1995
<S>                                                                      <C>            <C>          <C>
Revenues (Note 1):
   Information and Engineering Technology                                $   282,634    $  271,538   $  271,133
   Aerospace Technology                                                      448,963       383,252      319,335
   Enterprise Management                                                     414,340       366,663      318,257
                                                                          ----------    ----------    ---------
                          Total revenues                                   1,145,937     1,021,453      908,725
                                                                          ----------    ----------    ---------
Costs and expenses:
   Cost of services                                                        1,096,246       970,163      871,317
   Corporate selling and administrative                                       17,785        18,241       18,705
   Interest expense                                                           12,432        10,220       14,856
   Interest income                                                            (2,018)       (1,752)      (3,804)
   Other expense (Note 14)                                                    10,349         5,474       10,212
                                                                          ----------    ----------    ---------
                          Total costs and expenses                         1,134,794     1,002,346      911,286
                                                                          ----------    ----------    ---------
Earnings (loss) from continuing operations before income taxes,
   minority  interest and extraordinary item                                  11,143        19,107       (2,561)
   Provision (benefit) for income taxes (Note 15)                              2,282         5,893       (9,090)
                                                                          ----------    ----------    ---------
Earnings from continuing operations before minority interest
 and extraordinary item                                                        8,861        13,214        6,529
   Minority interest (Note 1)                                                  1,439         1,265        1,255
                                                                          ----------    ----------    ---------
Earnings from continuing operations before extraordinary item                  7,422        11,949        5,274
   Loss from discontinued operations, net of income taxes (Note 2)                 -             -       (1,416)
   Gain on sale of discontinued operations, net of income taxes (Note 2)           -         2,680        1,396
                                                                          ----------    ----------    ---------
Earnings before extraordinary item                                             7,422        14,629        5,254
   Extraordinary loss from early extinguishment of debt,
      net of income taxes (Note 5)                                                 -             -       (2,886)
                                                                          ----------    ----------    ---------
Net earnings                                                              $    7,422    $   14,629    $   2,368
                                                                          ==========    ==========    =========
   Preferred Stock Class C dividends not declared or recorded (Note 8)             -        (2,284)      (1,915)
                                                                          ----------    ----------    ---------
Common stockholders' share of earnings                                    $    7,422    $   12,345    $     453
                                                                          ==========    ==========    =========

Earnings Per Common Share (Note 17)
   Basic Earnings Per Share:
     Continuing operations before extraordinary item                      $     0.83    $     1.14    $    0.40
     Discontinued operations                                                       -          0.32         0.00
     Extraordinary item                                                            -             -        (0.35)
                                                                          ----------    ----------    ---------
                          Common stockholders' share of earnings          $     0.83    $     1.46    $    0.05
                                                                          ==========    ==========    =========

   Diluted Earnings Per Share:
     Continuing operations before extraordinary item                      $     0.70    $     0.82    $    0.29
     Discontinued operations                                                       -          0.23         0.00
     Extraordinary item                                                            -             -        (0.25)
                                                                          ----------    ----------    ---------
                          Common stockholders' share of earnings          $     0.70    $     1.05    $    0.04
                                                                         ==========     ==========    =========

See accompanying notes.

</TABLE>

<PAGE>

<TABLE>

DynCorp and Subsidiaries
Consolidated Statements of Permanent Stockholders' Equity
For the Years Ended December 31
(Dollars in thousands)

<CAPTION>
                                                                                                           Reclassification
                                                                                                             to Temporary
                                                                                                              Equity for
                                                                                                              Redemption
                                                                                         Common                  Value
                                                                Preferred      Common     Stock     Paid-in  greater than
                                                                    Stock       Stock  Warrants     Surplus    Par Value    Deficit
<S>                                                                <C>         <C>       <C>       <C>       <C>          <C>
Balance, December 31, 1994                                         $3,000      $   81    $11,486   $130,277  $ (130,118)  $(118,256)
  Stock issued under Restricted Stock Plan (Note 10)                               26                  (242)
  Treasury stock purchased (Notes 7 and 9)
  Warrants exercised or canceled (Note 10)                                          7       (181)       175
  Contribution of stock to Employee Stock Ownership Plan (Note 12)                           121                 17,879
  Payment received on Employee Stock Ownership Plan note (Note 12)
  Accrued interest on note receivable (Note 11)
  Collection of note receivable (Note 11)
  Net earnings                                                                                                                2,368
  Reclassification to Redeemable Common Stock (Note 7)                            (76)                           (4,992)
                                                                   ------      ------     ------    -------    --------    --------
Balance, December 31, 1995                                          3,000         159     11,305    148,089    (135,110)   (115,888)
  Stock issued under Restricted Stock Plan (Note 10)                               11                  (124)
  Treasury stock purchased (Notes 7 and 9)
  Warrants and stock options exercised (Notes 10 and 19)                            7       (166)       185
  Reclassification from Temporary Equity (Note 7)                                 166                            32,972
  Shares purchased by Employee Stock Ownership Plan
    on Internal Market (Note 7)                                                   (13)                           (1,874)
  Payment received on Employee Stock Ownership Plan note (Note 12)
  Other                                                                                                  84
  Net earnings                                                                                                               14,629
  Reclassification to Redeemable Common Stock (Note 7)                              2                           (34,682)
                                                                   ------      ------     ------    -------    --------    --------
Balance, December 31, 1996                                          3,000         332     11,139    148,234    (138,694)   (101,259)
  Stock issued under Restricted Stock Plan (Note 10)                               13                  (802)
  Treasury stock issued
  Treasury stock purchased (Notes 7 and 9)
  Warrants and stock options exercised (Notes 10 and 19)                          111     (2,683)     2,981
  Class C Preferred Stock converted and warrants exercised                     (3,000)        95     (2,007)      5,119
  Common stock purchased and warrants exercised                                           (5,190)   (30,120)
  Loans to Employee Stock Ownership Plan (Note 12)
  Payment received on Employee Stock Ownership Plan note (Note 12)
  Net Earnings                                                                                                                7,422
  Reclassification to Redeemable Common Stock (Note 7)                            (73)                          (15,444)
                                                                   ------      ------     ------   --------   ---------    --------
Balance, December 31, 1997                                     $        -      $  478     $1,259   $125,412   $(154,138)   $(93,837)
                                                                   ======      ======     ======   ========   =========    ========

</TABLE>

<TABLE>
<CAPTION>
                                                                                   Employee
                                                                                    Stock      Cummings
                                                                                  Ownership      Point
                                                                                  Plan Loan   Industries
                                                                     Treasury   and Unearned      Note
                                                                        Stock    ESOP Shares   Receivable
<S>                                                                  <C>        <C>            <C>
Balance, December 31, 1994                                            $(8,817)  $       -      $ (8,943)
  Stock issued under Restricted Stock Plan (Note 10)
  Treasury stock purchased (Notes 7 and 9)                            (12,267)
  Warrants exercised or canceled (Note 10)
  Contribution of stock to Employee Stock Ownership Plan (Note 12)                (13,750)
  Payment received on Employee Stock Ownership Plan note (Note 12)                 13,247
  Accrued interest on note receivable (Note 11)                                                    (951)
  Collection of note receivable (Note 11)                                                         9,894
  Net earnings
  Reclassification to Redeemable Common Stock (Note 7)
                                                                     --------      -------      -------
Balance, December 31, 1995                                            (21,084)       (503)            -
  Stock issued under Restricted Stock Plan (Note 10)                       75
  Treasury stock purchased (Notes 7 and 9)                             (4,226)
  Warrants and stock options exercised (Notes 10 and 19)
  Reclassification from Temporary Equity (Note 7)
  Shares purchased by Employee Stock Ownership Plan
    on Internal Market (Note 7)
  Payment received on Employee Stock Ownership Plan note (Note 12)                    503
  Other
  Net earnings
  Reclassification to Redeemable Common Stock (Note 7)
                                                                     --------      -------      -------
Balance, December 31, 1996                                            (25,235)          -             -
  Stock issued under Restricted Stock Plan (Note 10)
  Treasury stock issued                                                   233
  Treasury stock purchased (Notes 7 and 9)                               (907)
  Warrants and stock options exercised (Notes 10 and 19)
  Class C Preferred Stock converted and warrants exercised
  Common stock purchased and warrants exercised                        (2,794)
  Loans to Employee Stock Ownership Plan (Note 12)                                (13,274)
  Payment received on Employee Stock Ownership Plan note (Note 12)                  5,189
  Net Earnings
  Reclassification to Redeemable Common Stock (Note 7)
                                                                     --------    --------   -----------
Balance, December 31, 1997                                           $(28,703)  $  (8,085)   $        -
                                                                     ========    ========   ===========
See accompanying notes.

</TABLE>

<PAGE>

<TABLE>


DynCorp and Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended December 31
(Dollars in thousands)

<CAPTION>
                                                                                   1997           1996          1995
<S>                                                                            <C>            <C>         <C>
Cash Flows from Operating Activities:
  Net earnings                                                                 $  7,422       $ 14,629     $   2,368
  Adjustments to reconcile net earnings
   to net cash provided by operating activities:
     Depreciation and amortization (Note 1)                                       9,888          9,467        11,348
     Loss, before tax, on purchase of Junior Subordinated Debentures (Note 5)         -              -         4,786
     Payment of income taxes on gain on sale of the
        Commercial Aviation business                                                  -        (13,990)            -
      (Earnings) loss from discontinued operations (Note 2)                           -         (2,680)           20
     Deferred income taxes (Note 15)                                              4,165          1,478         4,959
     Proceeds from insurance settlement for asbestos claims                       1,488              -             -
     Change in reserves for divested businesses (Note 14)                         8,157            825         7,700
     Other                                                                         (882)          (848)       (1,031)
     Change in assets and liabilities, net of acquisitions and dispositions:
       Increase in accounts receivable and contracts
         in process                                                             (15,311)        (6,864)       (6,975)
       (Increase) decrease in inventories                                           (60)           353          (340)
       Increase in other current assets                                          (1,245)        (1,867)       (1,222)
       (Decrease) increase in current liabilities except notes payable
         and current portion of long-term debt                                   (3,685)         4,345        (7,756)
                                                                               --------       --------      --------
  Cash provided by continuing operations                                          9,937          4,848        13,857
  Cash used by operating activities of discontinued operations                        -              -        (3,375)
                                                                               --------       --------      --------
            Cash provided by operating activities                                 9,937          4,848        10,482
                                                                               --------       --------      --------
Cash Flows from Investing Activities:
  Sale of property and equipment                                                    318          1,093        16,294
  Proceeds received from notes receivable                                             4              3         8,950
  Purchase of property and equipment                                             (5,110)        (5,310)       (4,789)
  Deferred income taxes from "safe harbor" leases (Note 15)                        (309)          (316)         (554)
  Increase in investment in unconsolidated subsidiaries                          (2,038)          (169)          (93)
  Increase in notes receivable to equity investee                                  (867)             -             -
  Assets and liabilities of acquired businesses
     (excluding cash acquired) (Note 1)                                               -         (2,801)       (1,092)
  Proceeds from sale of discontinued operations (Note 2)                              -          3,050       135,700
  Decrease (increase) in cash on deposit for letters of credit (Note 5)               -          6,244        (3,307)
  Investing activities of discontinued operations                                     -              -       (11,439)
  Other                                                                            (255)          (113)          176
                                                                               --------       --------      --------
            Cash (used) provided by investing activities                         (8,257)         1,681       139,846
                                                                               --------       --------      --------
Cash Flows from Financing Activities:
  Treasury stock purchased (Note 7)                                                (923)        (9,712)      (12,267)
  Payment on indebtedness                                                        (1,708)        (1,264)      (25,172)
  Retirement of Contract Receivable Collateralized Notes 1992-1                 (98,500)             -             -
  Proceeds from Contract Receivable Collateralized Notes 1997-1                  50,000              -             -
  Proceeds from issuance of Senior Notes                                         99,484              -             -
  Common stock and warrants purchased from investors                            (37,819)             -             -
  Redemption of Junior Subordinated Debentures (Note 5)                               -              -      (105,971)
  Stock released to Employee Stock Ownership Plan (Note 12)                       5,189            503        17,497
  Loans to Employee Stock Ownership Plan (Note 12)                              (13,274)             -             -
  Deferred financing expenses (Note 5)                                           (5,080)        (1,310)         (864)
  Financing activities of discontinued operations                                     -              -          (228)
  Other                                                                            (324)           (20)           90
                                                                               --------       --------      --------
            Cash used by financing activities                                    (2,955)       (11,803)     (126,915)
                                                                               --------       --------      --------
Net (Decrease) Increase in Cash and Cash Equivalents                             (1,275)        (5,274)       23,413
Cash and Cash Equivalents at Beginning of the Year                               25,877         31,151         7,738
                                                                               --------       --------      --------
Cash and Cash Equivalents at End of the Year                                    $24,602       $ 25,877     $  31,151
                                                                               ========       ========      ========
See accompanying notes.

</TABLE>

<PAGE>


DynCorp and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1997
 (Dollars in thousands, except per share amounts or where otherwise noted)

(1)   Summary of Significant Accounting Policies

Organization  -- The Company  provides  diversified  management,  technical  and
professional  services to primarily U.S. Government  customers throughout United
States and internationally.

Principles  of  Consolidation  --  All  majority-owned  subsidiaries  have  been
included in the financial statements and all significant  intercompany  accounts
and  transactions  have been  eliminated.  Outside  investors'  interest  in the
majority-owned subsidiaries is reflected as minority interest.  Investments less
than 50% owned are accounted for using the equity method of accounting.

Accounting  Estimates -- The  preparation of financial  statements in conformity
with generally accepted accounting principles (GAAP) 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 may differ from these estimates.

Contract  Accounting  --  Contracts in process are stated at the lower of actual
cost incurred plus accrued profits or net estimated realizable value of incurred
costs,  reduced by  progress  billings.  The Company  records  income from major
fixed-price contracts, extending over more than one accounting period, using the
percentage-of-completion method. During performance of such contracts, estimated
final contract prices and costs are periodically reviewed and revisions are made
as required. The effects of these revisions are included in the periods in which
the revisions are made. On cost-plus-fee contracts, revenue is recognized to the
extent of costs  incurred  plus a  proportionate  amount of fee  earned,  and on
time-and-material  contracts,  revenue is  recognized  to the extent of billable
rates times hours delivered plus material and other reimbursable costs incurred.
Losses on contracts are recognized when they become known. Disputes arise in the
normal  course of the  Company's  business  on  projects  where the  Company  is
contesting  with  customers  for  collection  of funds because of events such as
delays, changes in contract specifications and questions of cost allowability or
collectibility. Such disputes, whether claims or unapproved change orders in the
process  of  negotiation,  are  recorded  at the lesser of their  estimated  net
realizable  value or actual costs incurred and only when realization is probable
and can be reliably  estimated.  Claims against the Company are recognized where
loss is considered probable and reasonably determinable in amount.

Accounts  Receivable -- It is the Company's  policy to provide  reserves for the
collectibility of accounts  receivable when it is determined that it is probable
that the  Company  will not  collect  all  amounts due and the amount of reserve
requirement can be reasonably estimated.

Property and Equipment -- The Company  computes  depreciation  and  amortization
using the  straight-line  method.  The estimated  useful lives used in computing
depreciation  and  amortization  are:  buildings,  15-33  years;  machinery  and
equipment, 3-20 years; and leasehold improvements, the lesser of the useful life
or the term of the lease.  Depreciation and amortization  expense was $4,881 for
1997, $4,310 for 1996 and $5,100 for 1995.

Cost of property  and  equipment  sold or retired  and the  related  accumulated
depreciation  or  amortization  is  removed  from  the  accounts  in the year of
disposal,  and any gains or losses are reflected in the consolidated  statements
of operations.  Expenditures  for maintenance and repairs are charged to expense
as incurred, and major additions and improvements are capitalized.

Intangible Assets -- At December 31, 1997,  intangible assets consist of $45,140
of unamortized  goodwill and $1,610 of value assigned to contracts.  Goodwill is
being amortized on a straight-line basis over periods up to forty years ($43,330
forty  years,  $147  thirty  years,  $1,502  fifteen  years and $161 ten years).
Amortization  expense was  $1,560,  $2,814 (see Note 14 (d)) and $2,081 in 1997,
1996 and 1995, respectively.  Amounts allocated to contracts are being amortized
over the lives of the  contracts  for periods up to ten years.  Amortization  of
amounts  allocated  to  contracts  was  $617 in 1997  and 1996 and $624 in 1995.
Cumulative  amortization  of  $18,159  and  $31,129  has been  recorded  through
December 31, 1997, of goodwill and value assigned to contracts, respectively.

<PAGE>

Environmental   Liabilities  --  The  Company  accrues  environmental  costs  in
accordance with Statement of Position ("SOP") 96-1,  "Environmental  Remediation
Liabilities",  when it is probable  that a liability  has been  incurred and the
amount  can  be  reasonably  estimated.   Recorded  liabilities  have  not  been
discounted.

Postretirement  Health  Care  Benefits -- The  Company  provides no  significant
postretirement  health care or life insurance  benefits to its retired employees
other than allowing them to continue as participants in the Company's plans with
the retiree  paying the full cost of the  premium.  The Company has  determined,
based  on an  actuarial  study,  that it has no  liability  under  Statement  of
Financial  Accounting  Standard  ("SFAS") No. 106,  "Employers'  Accounting  for
Postretirement Benefits Other Than Pensions".

Postemployment   Benefits  --  SFAS  No.   112,   "Employers'   Accounting   for
Postemployment Benefits", requires employers to accrue for the estimated cost of
benefits  provided  by  an  employer  to  former  or  inactive  employees  after
employment,   but  before   retirement.   The  Company  does   provide   limited
post-employment  benefits  such  as  severance  pay and  outplacement  services,
however,  the Company  cannot  reasonably  estimate its  liability  and thus the
accrual of any such post-employment benefits is accounted for in accordance with
SFAS No. 5, "Accounting for Contingencies".

Long-Lived Assets -- SFAS No. 121,  "Accounting for the Impairment of Long-Lived
Assets and for  Long-Lived  Assets to Be Disposed Of," requires that  long-lived
assets and  certain  intangibles  be  reviewed  for  impairment  when  events or
circumstances  indicate the carrying  amount of an asset may not be recoverable.
The  Company's  practice is consistent  with the  guidelines as set forth in the
statement.

Stock Options -- SFAS No. 123,  "Accounting  for Stock-Based  Compensation,"  is
effective  for fiscal years  beginning  after  December 15, 1995.  The statement
encourages,  but does not  require,  adoption of the fair value based  method of
accounting for employee stock options and other stock  compensation  plans.  The
Company  accounts  for its  stock  option  plan in  accordance  with  Accounting
Principles  Board  ("APB")  Opinion No. 25,  "Accounting  for Stock Issued to
Employees"  and has made the required  proforma  disclosure  of net earnings and
earnings per share as if the fair value based method for  accounting  defined in
SFAS 123 had been applied (see Note 19).

Earnings per Common Share -- The Company has adopted SFAS No. 128, "Earnings per
Share," and has restated all prior periods presented to conform to the new
standard.

Segment Reporting -- SFAS No. 131,  "Disclosures about Segments of an Enterprise
and Related  Information",  was issued in June 1997, and is effective for fiscal
years beginning after December 15, 1997, with early application encouraged.  The
Company has chosen to adopt this statement in 1997 and the required  disclosures
are contained  either in Part I, Item 1, "Business"  included  elsewhere in this
Annual  Report  on  Form  10-K,  or in  Note  22,  "Business  Segments"  to  the
consolidated financial statements.

Derivative  Financial  Instruments -- The Company's  policy is to use derivative
financial  instruments to manage its exposures to fluctuations in interest rates
and  foreign  exchange  rates.  The  Company  does not  hold or issue  financial
instruments  for trading  purposes.  At December 31,  1997,  the amounts of such
financial  instruments,  as well as the  amounts  of gains and  losses  recorded
during the year, were not material.

New Accounting Pronouncements -- SFAS No. 130, "Reporting Comprehensive Income",
was issued in June 1997, and becomes  effective for fiscal years beginning after
December 15, 1997.  The  statement  establishes  standards for the reporting and
display  of   comprehensive   income  and  its  components  in  a  full  set  of
general-purpose  financial  statements.  At present, the Company does not report
any transactions  which would be deemed to be included in comprehensive  income,
therefore,  SFAS No. 130, will not  materially  impact the  Company's  financial
statements.

Consolidated  Statements  of Cash  Flows -- For  purposes  of these  statements,
short-term  investments  which  consist of  government  treasury  bills and time
deposits with a maturity of ninety days or less are considered cash equivalents.
Cash  and  cash  equivalents  at the  balance  sheet  date  are  net  of  checks
outstanding.  Cash and  short-term  investments  at December  31, 1997 and 1996,
excludes $1.5 million and $3.0 million,  respectively,  of restricted cash which
is classified as Other Assets.

Depreciation   and   amortization   is  comprised  of  property  and  equipment,
amortization  of intangible  assets and other items such as the  amortization of
deferred  debt  expense,  covenants  not to compete and deferred  organizational
cost.  Amortization  in 1997 included a charge of $1.0 million for the write-off
of software  which the Company  acquired late in 1996 in order to bid a contract
which was subsequently awarded to another company.

Classification  -- Consistent  with industry  practice,  assets and  liabilities
relating to long-term  contracts and programs are classified as current although
a portion of these amounts is not expected to be realized within one year.

Noncash investing and financing activities consist of the following:

                                              1997        1996        1995
                                              ----        ----        ----
Acquisitions of businesses:
   Assets acquired                        $      -     $ 4,998     $ 2,772
   Liabilities assumed                           -      (1,498)     (1,680)
   Cash acquired                                 -        (699)          -
                                         ---------     -------    --------
   Net cash                              $       -     $ 2,801     $ 1,092
                                         ---------     -------     -------
Capitalized equipment leases and
 notes secured by property and equipment $     626     $     -     $     -

(2)   Discontinued Operations

    During  1995,  the  Company  sold  all of its  subsidiaries  engaged  in the
commercial  aircraft  maintenance  and ground  handling  activities,  i.e.,  the
Commercial  Aviation  business.  At December  31,  1995,  certain  contingencies
existed  regarding  the final sales  prices of both the  maintenance  and ground
handling  businesses.  Additionally,  the Company  retained  certain  contingent
liabilities which included general  warranties and  representations  and certain
specific issues regarding environmental, insurance and tax matters. During 1996,
the Company  recorded a net gain of $2,680  related to the resolution of some of
these  outstanding  issues  as  well as the  adjustment  of  estimated  reserves
recorded at disposition.

The components of discontinued operations on the statements of operations are as
follows:

                                                     Years Ended December 31,
                                                       1996            1995
   Revenues                                        $     -         $130,709
   Cost of services                                      -          123,698
   Interest expense and other (a)                        -            7,236
   Pre-tax gain on sale of discontinued operations  (3,448)         (29,998)
   Income tax provision                                768           29,793
                                                   -------         --------
   Gain (loss) from discontinued operations        $ 2,680        $     (20)
                                                   =======        =========

 (a) The Company has charged interest  expense to discontinued  operations of
     $7,950 in 1995. The interest  expense charged is the sum of the interest
     on the debt of the discontinued operations assumed by the buyers plus an
     allocation  of  other  consolidated   interest  that  was  not  directly
     attributable to the continuing operations of the Company.

    The sale of the subsidiaries  resulted in a partial  termination of the ESOP
and termination of all active participants of the subsidiaries.  These employees
were entitled to put their ESOP shares  (approximately  493,000  shares)  sooner
than had been  previously  anticipated.  These shares have been  included in the
estimated annual  repurchase  commitment  reported in Note 7, Redeemable  Common
Stock.

(3)   Fair Value of Financial Instruments

    The following  methods and  assumptions  were used to estimate the fair
value of each class of financial  instruments  for which it is practicable to
estimate the value:

    Accounts Receivable,  Prepaid Income Taxes,  Accounts Payable and Accrued
Income Taxes - The carrying amount approximates the fair value due to the short
maturity of these instruments.

    Long-term debt and other  liabilities and deferred  credits - The fair value
of the Company's 7.486% Contract Receivable  Collateralized Notes and the Senior
Notes, based on the current rate as if the issue date were December 31, 1997, is
$153.4 million as compared to a book value of $149.5 million.  The fair value of
the 8.54%  Contract  Receivable  Collateralized  notes at December 31, 1996, was
equal to the book value, $100.0 million, due to the short maturity of the notes.
For the  remaining  long-term  debt  (see  Note 5) and  other  liabilities  and
deferred credits, the carrying amount approximates the fair value.

(4)   Accounts Receivable and Contracts in Process

    The  components  of accounts  receivable  and  contracts  in process were as
follows at December 31:

                                                           1997         1996
                                                       --------    ---------
U.S. Government:
  Billed and billable                                  $119,538     $108,301
  Recoverable costs and accrued profit on progress
    completed but not billed                             25,462       26,473
  Retainage due upon completion of contracts              2,034        2,343
                                                     ----------   ----------
                                                        147,034      137,117
                                                       --------     --------
Other Customers (primarily subcontracts  from
 U.S. Government prime contractors and other state,
 local and quasi-government agencies):
  Billed and billable (less allowance for doubtful
    accounts of $476 in 1997 and $229 in 1996)           37,104       42,689
  Recoverable costs and accrued profit on progress
    completed but not billed                             18,620        7,873
                                                     ----------   ----------
                                                         55,724       50,562
                                                     ----------   ----------
                                                       $202,758     $187,679
                                                       ========     ========

    Billed and billable  include  amounts earned and  contractually  billable at
year-end but which were not billed  because  customer  invoices had not yet been
prepared  at  year-end.  Recoverable  costs and  accrued  profit  not  billed is
composed  primarily  of  amounts  recognized  as  revenues,  but  which  are not
contractually  billable  at the balance  sheet  dates.  It is expected  that all
amounts at  December  31,  1997,  will be  collected  within one year except for
approximately $6,580.

(5)   Long-term Debt

    At December 31, 1997 and 1996, long-term debt consisted of:

<TABLE>
<CAPTION>
                                                                     1997         1996
<S>                                                             <C>        <C>
9 1/2% Senior Notes                                               $99,510    $       -
7.486% Contract Receivable Collateralized Notes, Series 1997-1     50,000            -
8.540% Contract Receivable Collateralized Notes, Series 1992-1          -      100,000
Mortgages payable                                                   3,100        3,461
Notes payable, 8.5% demand note in 1997, due in installments
  through 2002, 11.43% weighted average interest rate in 1996          79          722
                                                                 --------     --------
                                                                  152,689      104,183
Less current portion                                                  450          628
                                                                 --------     --------
                                                                 $152,239     $103,555
                                                                 ========     ========
</TABLE>

Debt maturities as of December 31, 1997, were as follows:


                       1998                         $    450
                       1999                              153
                       2000                              166
                       2001                              180
                       2002                           50,212
                       Thereafter                    101,528
                                                   ---------
                                                    $152,689
                                                   =========

    On March 17, 1997, the Company closed on the issuance of $100.0 million of
9 1/2% Senior Subordinated Notes ("Senior Notes") with a scheduled  maturity in
2007. Interest is payable semi-annually,  in arrears, on March 1 and September 1
of each  year.  The Senior  Notes are  redeemable,  in whole or in part,  at the
option of the  Company,  on or after March 1, 2002 at a  redemption  price which
ranges from 104.75% in 2000 to 100.00% in 2005 and thereafter.  In addition,  at
any time  prior to  March 1,  2000,  the  Company  may  redeem  up to 35% of the
aggregate  principal  amount  of the  Senior  Notes  (at a  redemption  price of
109.50%) with proceeds  generated from a public offering of equity,  provided at
least  65%  of  the  original  aggregate  amount  of the  Senior  Notes  remains
outstanding.  The Senior Notes are general unsecured  obligations of the Company
and will be  subordinated  in right of payment to all existing and future senior
debt of the Company.

    On April 18,  1997,  the  Company's  wholly  owned  subsidiary  Dyn  Funding
Corporation  ("DFC"),  completed  a private  placement  of $50 million of 7.486%
Fixed Rate Contract Receivable Collateralized Notes, Series 1997-1, Class A (the
"Class A Notes").  The Class A Notes are  collateralized by the right to receive
proceeds from certain U.S. Government  contracts and certain eligible commercial
accounts receivable of the Company and its subsidiaries.  Credit support for the
Class A Notes is provided  by  overcollateralization  in the form of  additional
receivables.  The  Company  retains an  interest  in the  excess  balance of the
receivables  through its ownership of the common stock of DFC. Interest payments
are made monthly with principal  payments scheduled to begin March 31, 2002 (the
"Amortization Date"). The period between April 18, 1997 and February 28, 2002 is
referred to as the "Non-Amortization Period".

    On an ongoing basis,  cash receipts from the  collection of the  receivables
are used to make interest  payments on the Class A Notes, pay a servicing fee to
the Company,  and purchase additional  receivables from the Company.  During the
Non-Amortization  period,  cash in excess of the  amount  required  to  purchase
additional  receivables  and meet payments on the Class A Notes is to be paid to
the  Company  subject to certain  collateral  coverage  tests.  The  receivables
pledged as  security  for the Class A Notes are valued at a discount  from their
stated value for purposes of determining proper credit support.  DFC is required
to maintain  receivables,  at their discounted  values,  plus cash on deposit at
least equal to the outstanding balance of the Class A Notes.

    The Class A Notes may be redeemed in whole,  but not in part,  at the option
of DFC at a price equal to the principal,  plus accrued interest, plus a premium
(as defined).  The indenture also provides for special redemption of the Class A
Notes in the event the  collateral  value ratio is less than 1.00 and  mandatory
redemption  in the event  the  collateral  value  ratio is less than 0.95 on two
consecutive  determination dates and the Company has not substituted receivables
or  deposited  cash to bring  the  collateral  value  ratio  to 1.00.  Mandatory
redemption is also required in the event three special  redemptions are required
within any twelve month period or the aggregate  stated value of all  ineligible
receivables  which have been  ineligible  for more than 30 days exceed 7% of the
aggregate collateral balance and the collateral value ratio is less than 1.00.

    Also issued at closing were $90 million of Floating Rate Contract Receivable
Collateralized  Notes, Series 1997-1, Class B (the "Class B Notes"). The Class B
Notes,  when drawn,  will be subject to the same terms as the Class A Notes.  At
December 31, 1997, the Class B Notes had yet to be utilized. (See Note 24).

    The proceeds from the issuance of the Senior Notes,  net of a discount,  and
from the  issuance of the Class A Notes were used to retire the  maturing  8.54%
Contract Receivable  Collateralized  Notes, Series 1992-1, to fund the Company's
purchase of common stock and  warrants,  to make a loan to the ESOP to enable it
to repay notes issued for the purchase of the Company's Class C Preferred Stock
and to pay various transaction fees (see Note 12).

    At December 31,  1997,  $60,478 of accounts  receivable  are  restricted  as
collateral for the Class A Notes. Additionally,  $1.5 million of cash (3% of the
balance  of the  Class A Notes) is  restricted  and has been  included  in Other
Assets in the  balance  sheet.  Similarly  $3 million,  or 3% of the  previously
outstanding 8.54%  Collateralized  Notes, had been classified as restricted cash
and included in Other Assets on the balance sheet on December 31, 1996.

    Upon the  closing of the  Senior  Notes and the Class A Notes,  the  Company
reduced its revolving credit facility with Citicorp North America, Inc. from $50
million to $15 million.  The  facility  provides  funds for working  capital and
capital expenditure requirements and also provides for letters of credit for the
Company and its subsidiaries.  The agreement contains customary  restrictions on
the  ability  of the  Company  to  undertake  certain  activities,  such  as the
incurrance of additional  debt, the payment of dividends on or the repurchase of
the Company's common stock, the merger of the Company into another Company,  the
sale of substantially all the Company's assets, and the acquisition of the stock
or  substantially  all  the  assets  of  another  company.  The  agreement  also
stipulates that the Company must maintain certain  financial  ratios,  including
specified ratios of earnings to fixed charges and debt to earnings.  The Company
utilized this credit facility  throughout  1997, never exceeding $8.0 million in
borrowings  at any given period in time.  At December  31,  1997,  there were no
borrowings under this line of credit,  however, the amount available was reduced
by $10 million due to outstanding letters of credit.

    During 1995, the Company  repurchased or called all of the  outstanding  16%
Junior  Subordinated  Debentures.  The Company recorded an extraordinary loss of
$2,886,  net of an income tax  benefit  of $1,900  consisting  primarily  of the
write-off of unamortized  discount or deferred  financing costs and also various
transaction fees.

    The  Company   acquired  the  Alexandria,   VA  headquarters  of  Technology
Applications,  Inc.  ("TAI") on  November  12,  1993,  in  conjunction  with the
acquisition  of TAI. A mortgage of $3,344  bearing  interest at 8% per annum was
assumed.  Payments  are made  monthly  and the  mortgage  matures in April 2003.
Additionally, a $1,150 promissory note was issued. The note bears interest at 7%
per annum. Payments under the note shall be made quarterly through October 1998.

    The Company obtained title to its corporate office building on July 31, 1992
by assuming a mortgage of $19,456.  On  February  7,1995,  the Company  sold the
building to RREEF America REIT Corp. C and entered into a twelve year lease with
RREEF as the  landlord.  The facility was sold for $13,780 and the proceeds were
applied to the  mortgage.  A net gain of $3,430 was realized on the  transaction
and is being amortized over the life of the lease.

    Deferred  debt  issuance  costs are  being  amortized  using  the  effective
interest  rate method over the term of the related  debt.  At December 31, 1997,
unamortized  deferred debt issuance costs were $5,645 and amortization for 1997,
1996 and 1995 was $706, $829 and $743, respectively.

    Cash paid for interest was $13,076 for 1997, $9,485 for 1996 and $14,150 for
1995.

(6)   Accrued Expenses

    At December 31, 1997 and 1996, accrued expenses consisted of the following:

                                                       1997           1996
                                                       ----           ----
    Salaries and wages                            $  42,804       $ 44,044
    Insurance                                        19,878         14,768
    Interest                                          3,103          4,447
    Payroll and miscellaneous taxes                  10,650          8,508
    Accrued contingent liabilities and operating
      reserves (see Note 21)                         24,017         19,969
    Other                                             5,175          7,409
                                                  ---------      ---------
                                                   $105,627        $99,145
                                                  =========      =========

(7)   Redeemable Common Stock

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

<TABLE>
<CAPTION>

                         Balance at                                Balance at
                         Redeemable    December 31,                Redeemable     December 31,
               Shares      Value           1997       Shares         Value           1996
<S>          <C>            <C>       <C>           <C>              <C>         <C>
ESOP Shares  3,520,037      $24.00    $ 84,480,888  3,520,037        $23.70     $ 83,424,877
             3,367,082      $20.00      67,341,640  2,645,920        $20.00       52,918,400
             ---------                 -----------  ---------                    -----------
             6,887,119                $151,822,528  6,165,957                   $136,343,277
             =========                 ===========  =========                    ===========

Other Shares   125,714      $24.00    $  3,017,136    125,714        $23.70     $  2,979,422
             =========                ============  =========                    ===========

</TABLE>

ESOP Shares

    In accordance  with ERISA  regulations and the Employee Stock Ownership Plan
(the "Plan")  documents,  the ESOP Trust or the Company is obligated to purchase
vested  common  stock  shares from ESOP  participants  (see Note 12) at the fair
value (as  determined  by an  independent  appraiser)  as long as the  Company's
common stock is not publicly traded.  The shares initially bought by the ESOP in
1988 were bought at a "control  price,"  reflecting the higher price that buyers
typically pay when they buy an entire  company (as the ESOP and other  investors
did in the 1988 LBO). A special  provision in the ESOP's 1988 agreement  permits
participants  to receive a "control  price" when they sell these  shares back to
the Company  under the ESOP's "put option"  provisions.  This  "control  price,"
determined by the appraiser as of December 31, 1997,  was $24.00 per share.  The
additional  shares received by the ESOP in 1994 through 1997 were at a "minority
interest price,"  reflecting the lower price that buyers typically pay when they
are buying only a small piece of a company.  Participants  do not have the right
to sell  these  shares at the  "control  price".  The  minority  interest  price
determined by the  independent  appraiser as of December 31, 1997 was $20.00 per
share.  Participants  receive  their  vested  shares upon  retirement,  becoming
disabled,  or death, over a period of one to five years and for other reasons of
termination  over a period  of one to ten  years,  all as set  forth in the Plan
documents.  In the event  the fair  value of a share is less  than  $27.00,  the
Company was committed to pay,  through  December 31, 1996, up to an aggregate of
$16  million,  the  difference  (Premium)  between the fair value and $27.00 per
share.  The Company  estimated a total  Premium of $8.5 million and recorded the
Premium as Other  Expense in the  Consolidated  Statements of Operations in 1989
through 1994 (see Note 14). As of December  31,  1996,  the Company had expended
$6,976 of the  Premium.  In 1996,  the Company  reversed  $1,250,  revising  its
estimated  ESOP  Premium.  The  remaining  liability  represents  the  Company's
obligation  to  honor  the  Premium  commitment  to ESOP  participants  who were
grandfathered  due to minor  administrative  changes  in the plan in 1995.  From
October 1990 through May 1996,  the Company had  purchased  633,453  shares from
participants. In June 1996, the ESOP Trust began purchasing participants' shares
at fair value,  utilizing the cash  available  from the Company's  contributions
(see Note 12), while the Company continues to pay the premium,  if any. Based on
the fair  values of $24.00  and  $20.00  per share at  December  31,  1997,  the
estimated  aggregate  annual  commitment  to  repurchase  shares  from  the ESOP
participants upon death,  disability,  retirement and termination is as follows:
$7,178 in 1998, $6,606 in 1999, $7,970 in 2000, $10,764 in 2001, $13,743 in 2002
and $105,562  thereafter.  Under the Subscription  Agreement with the ESOP dated
September  9, 1988,  the Company is  permitted  to defer put  options if,  under
Delaware  law, the capital of the Company  would be impaired as a result of such
repurchase.  At December  31, 1997 and 1996,  6,887,119  and  6,165,957  shares,
respectively, were outstanding and included in Redeemable Common Stock.

Management Investors Shares

    Redeemable common stock held by management  investors  includes those shares
acquired by management  investors  pursuant to the merger in 1988, shares earned
through the  Restricted  Stock Plan (see Note 10) and shares issued  through the
Management  Employees Stock Purchase Plan (the "Stock Purchase Plan"). The Stock
Purchase  Plan  allowed   employees  in   management,   supervisory   or  senior
administrative  positions to purchase shares of the Company's common stock along
with warrants at current fair value.  The Board of Directors was responsible for
establishing the fair value for purposes of the  Stockholders  Agreement and the
Stock Purchase Plan. The Stock Purchase Plan was discontinued in 1994.  Treasury
stock,  which the Company acquired from terminated  employees who had previously
purchased  shares from the  Company,  was issued to employees  purchasing  stock
under the Stock Purchase Plan. Under the DynCorp Stockholders  Agreement adopted
in March 1994 and which expires in March 1999, the Company was  committed,  upon
an employee's termination of employment, to purchase common stock shares held by
employees pursuant to the merger, through the Stock Purchase Plan or through the
Restricted Stock Plan. In May 1995, the Board of Directors,  with the consent of
the Class C Preferred  stockholder,  approved the  establishment  of an Internal
Market as a  replacement  for the  resale  procedures  included  in the  DynCorp
Stockholders  Agreement.  In May 1996, the  Securities  and Exchange  Commission
approved the  registration  of shares for trading on the Internal  Market,  thus
releasing  the Company from its  obligation  to  repurchase  any  management  or
restricted  stock  shares.   Therefore,  the  management  investor  shares  were
reclassified from Temporary Equity (at the redemption value) to Permanent Equity
(at par value) in 1996.

Other Shares

    In  conjunction  with the  acquisition of Technology  Applications,  Inc. in
November 1993, the Company issued put options on 125,714 shares of common stock.
The holder  may,  at any time  commencing  on  December  31,  1998 and ending on
December 31,  2000,  sell these shares to the Company at a price per share equal
to the greater of $17.50;  or, if the stock is publicly traded, the market value
at a specified date; or, if the Company's stock is not publicly traded, the ESOP
control  price at the time of exercise.  At December 31, 1997 and 1996,  125,714
shares of common stock were outstanding and included in Redeemable Common Stock.


<PAGE>
<TABLE>

    Following  are the changes in  Redeemable  Common  Stock for the three years
ended December 31, 1997:

<CAPTION>
                                                    Redeemable Common Stock
                                                                    Management
                                             Other          ESOP     Investors         Total
<S>                                      <C>           <C>           <C>           <C>
Balance, December 31, 1994               $   2,288     $  86,338     $  42,202     $ 130,828
  Treasury stock purchased                                (2,904)       (9,336)      (12,240)
  Warrants exercised (Note 10)                                             179           179
  Contribution of stock to ESOP (Note 12)                 18,000                      18,000
  Adjustment of shares to fair value           (13)         (953)           93          (873)
                                         ---------     ---------     ---------     ---------
Balance, December 31, 1995                   2,275       100,481        33,138       135,894
  Reclassification to permanent equity                                 (33,138)      (33,138)
  Treasury stock purchased                                  (290)                       (290)
  Shares purchased on Internal Market                      1,887                       1,887
  Adjustment of shares to fair value           704        34,265                      34,969
                                         ---------     ---------     ---------     ---------
Balance, December 31, 1996                   2,979       136,343             -       139,322
  Shares purchased on Internal Market                        205                         205
  Shares purchased by ESOP not
     collateralized by notes                              13,371                      13,371
Adjustment of shares to fair value              38         1,904                       1,942
                                         ---------     ---------     ---------     ---------
Balance, December 31, 1997                  $3,017      $151,823     $       -     $ 154,840
                                         =========     =========     =========     =========

</TABLE>

(8)   Preferred Stock, Class C

    Dividends on the Class C Preferred  Stock  accrued at an annual rate of 18%,
compounded quarterly.  At December 31, 1996, cumulative dividends of $11,147 had
not been recorded or paid. In February 1997, the ESOP purchased all of the Class
C Preferred Stock which was immediately converted into Common Stock.

(9)   Common Stock

    At December 31, 1997,  Common Stock  includes those shares issued to outside
investors, management investor shares (i.e. shares issued through the Restricted
Stock Plan and  Management  Employees  Stock  Purchase Plan) and any ESOP shares
which have been purchased by the Company and are being held as treasury stock.

(10)   Common Stock Warrants and Restricted Stock

    The Company  initially  issued  warrants on September 9, 1988 to the Class C
Preferred  stockholder and to certain common  stockholders to purchase a maximum
of 5,891,987  shares of common stock of the Company.  The warrants issued to the
Class C Preferred  stockholder and to certain common  stockholders were recorded
at their fair value of $2.43 per  warrant and  warrants  issued to a lender were
recorded at $3.28 per warrant.  Each warrant is  exercisable to obtain one share
of common stock.  The  stockholder  may exercise the warrant and pay in cash the
exercise  price of $0.25 for one  share of common  stock or may sell back to the
Company a sufficient  number of the  exercised  shares to equal the value of the
warrants to be exercised.  During 1997,  3,736,113  warrants  were  exercised or
cancelled and 347,367  warrants were  outstanding  at December 31, 1997.  Rights
under the  warrants  lapse no later  than  September  9, 1998.  Included  in the
warrants exercised in 1997 are those associated with the Class C Preferred Stock
which was purchased by the ESOP in February 1997 and was  immediately  converted
into Common Stock.

    The Company had a Restricted  Stock Plan (the "Plan") under which management
and key employees could be awarded shares of common stock based on the Company's
performance. The Company initially reserved 1,023,037 shares of common stock for
issuance under the Plan.  Under the Plan,  Restricted Stock Units ("Units") were
granted to participants who were selected by the  Compensation  Committee of the
Board of Directors.  Each Unit entitled the participant  upon achievement of the
performance  goals (all as defined) to receive one share of the Company's common
stock.  Units  could not be  converted  into  shares of common  stock  until the
participant's interest in the Units had vested. Vesting occurred upon completion
of the specified periods as set forth in the Plan.

<PAGE>

(11)   Cummings Point Industries, Inc. Note Receivable

    The Company loaned $5.5 million (the "Note") to Cummings  Point  Industries,
Inc., of which Capricorn  Investors,  L.P.  ("Capricorn") owns more than 10%. By
separate agreement and as security to the Company,  Capricorn agreed to purchase
the  Note  from  the  Company  upon  three  months'  notice  for the  amount  of
outstanding principal plus accrued interest. As additional security, Capricorn's
purchase  obligation  was  collateralized  by certain  common stock and warrants
issued by the Company and owned by  Capricorn.  The Note,  which had  previously
been  reflected  as a  reduction  in  stockholders'  equity  was paid in full in
August, 1995.

(12)   Employee Stock Ownership Plan

    In September 1988, the Company  established an Employee Stock Ownership Plan
(the "Plan"). The Company borrowed $100 million and loaned the proceeds,  on the
same terms as the Company's borrowings, to the Plan to purchase 4,123,711 shares
of common stock of the Company ("the ESOP loan").  In accordance with subsequent
amendments to the plan, the ESOP acquired 2,797,812 additional shares, from 1993
through  1996  either  through  contributions  of  stock  from the  Company,  or
contributions of cash from the Company with which the ESOP then purchased shares
either from the  Company,  on the  Internal  Market or directly  from retired or
terminated participants.

    At the beginning of 1997, the ESOP had considerable cash on hand.  Utilizing
this cash and loans from the Company,  the ESOP  purchased  all of the Company's
Class C Preferred Stock. The ESOP  subsequently  converted the Class C Preferred
Stock and  exercised  the related  warrants,  at which time the  Company  issued
949,642  shares of common stock to the ESOP.  The purchase price for the Class C
Preferred  Stock was $18,566  ($19.55 per share,  after exercise of warrants) of
which half was paid in cash ($8,277 on hand and $1,006  loaned from the Company)
and notes were issued for the balance.  The notes, plus $89 of accrued interest,
were paid in full by April 2, 1997,  with the  proceeds of another loan from the
Company.  The unpaid balance on these notes from the ESOP, $5,189,  representing
260,272 shares, is reflected as a reduction of stockholders'  equity at December
31, 1997.

    Utilizing the Company's 1997  contribution as well as subsequent  loans, the
ESOP made the required  principal  and interest  payments on the  aforementioned
notes, paid administrative  fees,  purchased 230,320 shares of stock either from
retired or  terminated  participants  or on the  Internal  Market and  purchased
150,434  shares of stock from retired  officers of the Company in a  transaction
that allowed the ESOP to acquire shares at a below market price. At December 31,
1997, the unpaid balance on these subsequent loans, $2,896, representing 128,958
shares, is also reflected as a reduction in stockholders' equity.

    The Plan covers a majority of the employees of the Company.  Participants in
the Plan  become  fully  vested  after four years of service.  Of the  8,251,919
shares  acquired by the ESOP,  7,862,689 have been either issued or allocated to
participants  as of December 31, 1997. The Company  recognizes ESOP expense each
year based on the cash  contribution  for the year. In 1997, 1996 and 1995, cash
contributions to the ESOP were $11,200, $13,670 and $17,497, respectively. These
amounts   were  charged  to  Cost  of  Services   and   Corporate   Selling  and
Administrative Expenses.

(13)   Savings Plan

    The Company has a Savings and Retirement  Plan which qualifies under section
401(k) of the  Internal  Revenue  Code.  The plan allows  eligible  employees to
contribute  from 1% to 15% of their  income  on a  pretax  basis.  In 1996,  the
Company began matching 100% of the first 1% of employee contributions and 25% of
the next 4% of employee  contributions,  provided the employee  contribution was
invested in the Company's  Stock Fund.  Matching  contributions  are invested in
additional  shares of the  Company's  common  stock.  The Company  has  expensed
approximately $1,224 and $711 in 1997 and 1996,  respectively,  related to these
matching contributions.

<PAGE>

(14)   Other Expenses

<TABLE>
<CAPTION>
                                                      Years Ended December 31,
                                                     1997           1996           1995
<S>                                              <C>            <C>             <C>
Amortization of costs in excess
  of net assets acquired (see Note 1)            $  1,560       $  1,528         $2,081
Provision for non-recovery of receivables             629            120              -
ESOP Repurchase Premium (see Note 7)                    -         (1,250)             -
Write-off of investment in
  unconsolidated subsidiary (d)                                    1,286              -
Legal and other expense accruals
  associated with business discontinued in 1995       177              -              -
Costs associated with businesses discontinued
  in 1988 and prior years
     o Asbestos liability issues (a and b)          7,800(a)           -          5,300(b)
     o Subcontractor suit (c)                           -            750          2,400
     o Environmental costs (see Note 21(b))           180             75              -
Termination costs (e)                                   -          3,299              -
Miscellaneous                                           3           (334)           431
                                                 --------       --------       --------
     Total Other                                 $ 10,349       $  5,474       $ 10,212
                                                 ========       ========       ========

<FN>

(a)      In connection with the proposed  global  settlement that would transfer
         Fuller-Austin    Insulation,    Company    ("Fuller-Austin")    to    a
         post-Fuller-Austin  bankruptcy  reorganization plan trust (the "Trust")
         for the  benefit of present  and future  asbestos  claimants  (see Note
         21(a)),  the Company has  reserved an  additional  $7.8 million for the
         transfer of certain property and insurance rights to the Trust, and the
         payment to the Trust of certain cash consideration.
(b)      Reserves for potential  uninsured costs to defend and settle future asbestos
         claims against  Fuller-Austin  (see Note 21(a)).  (c) Reserves for the estimated
(c)      Reserves for the estimated costs (primarily legal defense) to resolve a lawsuit filed by a subcontractor of
         a former  subsidiary (see Note 21(b)).
(d)      In 1994, the Company paid $3 million for a 25% interest in Composite  Technology,  Inc. ("CTI").
         The volume of CTI's business has declined and in 1996 the
         Company  determined the goodwill  associated  with this  investment had
         been impaired and, accordingly, the unamortized balance at December 31,
         1996, was written off.
(e)      During 1996,  several  senior  executives  and a member of the Board of
         Directors announced their intentions to either retire or step down from
         their positions with the Company.  In conjunction with this action, the
         Company  accrued  $3.3  million,   representing  commitments  to  these
         individuals  for  supplemental   pension  benefits,   consulting  fees,
         payments  due under a covenant  not to  compete,  remuneration  for the
         waiver of certain preferred stock and Board of Directors voting rights,
         as well as accrued life insurance premiums payable.

</FN>
</TABLE>

(15)   Income Taxes

    As prescribed by SFAS No. 109,  "Accounting  for Income  Taxes," the Company
utilizes the asset and liability  method of accounting  for income taxes.  Under
this method,  deferred  income taxes are recognized for the tax  consequences of
temporary  differences  by applying  enacted  statutory tax rates  applicable to
future years to differences between the financial statement carrying amounts and
the tax bases of  existing  assets and  liabilities.  Valuation  allowances  are
provided if required.

    Earnings (loss) from continuing operations before income taxes and minority
interest (but including extraordinary item - see Note 5) were derived from the
following:

                                   Years Ended December 31,
                              1997          1996         1995
                           ---------     --------       ------
 Domestic operations        $ 11,422     $ 19,102     $ (3,111)
 Foreign operations             (279)           5       (4,236)
                           ---------     --------     ---------
                            $ 11,143     $ 19,107     $ (7,347)
                           =========     ========      ========

<PAGE>

    The provision (benefit) for income taxes consisted of the following:

                                     Years Ended December 31,
                            1997             1996             1995
                            ----             ----             ----
Current:
  Federal               $ (1,926)         $ 4,286         $(10,322)
  Foreign                     43              (81)          (2,234)
  State                        -              210           (1,493)
                        --------       ----------        ---------
                          (1,883)           4,415          (14,049)
                        --------        ---------         --------
Deferred:
  Federal                  6,653            3,939            9,749
  Foreign                      -            1,100            1,000
  State                      499             (436)           2,900
                        --------       ----------        ---------
                           7,152            4,603           13,649
                        --------        ---------         --------
Valuation Allowance:
  Federal                 (2,488)          (4,067)          (7,707)
  State                     (499)             942             (983)
                        --------         --------        ---------
                          (2,987)          (3,125)          (8,690)
                        --------          -------         ---------
       Total             $ 2,282          $ 5,893          $(9,090)
                        ========          =======          =======

<PAGE>

    The components of and changes in deferred taxes are as follows:

<TABLE>
<CAPTION>
                                                         Deferred                Deferred               Deferred
                                              Dec. 31,   Expense      Dec. 31,   Expense     Dec. 31,   Expense
                                                 1997   (Benefit)        1996   (Benefit)       1995   (Benefit)
<S>                                          <C>         <C>         <C>         <C>        <C>          <C>
Deferred tax liabilities:
  Employee benefits                          $ (2,220)   $     33    $ (2,187)   $  1,027   $ (1,160)    $ 1,535
  Contracts revenue recognition               (15,385)      3,954     (11,431)      1,645     (9,786)        885
  Intangible amortization                        (549)       (212)       (761)        (37)      (798)       (275)
  Depreciation and other amortization            (199)        265          66        (413)      (347)        806
  Other, net                                     (234)        309          75        (102)       (27)        (26)
                                              -------     -------     -------     -------    -------      ------
    Total deferred tax liabilities            (18,587)      4,349     (14,238)      2,120    (12,118)      2,925
                                              -------     -------     -------     -------    -------      ------
Deferred tax assets:
  Deferred compensation                         1,733         507       2,240         191      2,431       1,621
  Operating reserves and other accruals        13,954       1,797      15,751       3,234     18,985       1,290
  Increase due to federal rate change             335           -         335           -        335           -
  Deferred taxes of discontinued operations,
    retained by the Company                         -           -           -           -          -       4,018
  Benefit of state tax on temporary
    differences and state net operating
    loss carryforwards                          5,034         499       5,533        (942)     4,591         983
  Benefit of foreign, targeted jobs, R&E
    and AMT tax credit carryforwards                -           -           -           -          -       2,812
                                              -------     -------     -------     -------    -------      ------
    Total deferred tax assets                  21,056       2,803      23,859       2,483     26,342      10,724
                                              -------     -------     -------     -------    -------      ------
  Total temporary differences
    before valuation allowances                 2,469       7,152       9,621       4,603     14,224      13,649
  Valuation allowances:
    Federal                                         -      (2,488)     (2,488)     (4,067)    (6,555)     (7,707)
    State                                      (5,034)       (499)     (5,533)        942     (4,591)       (983)
                                              -------     -------     -------     -------    -------      ------
    Total temporary differences
      affecting tax provision                  (2,565)      4,165       1,600       1,478      3,078       4,959
                                              -------     -------     -------     -------    -------      ------
  "Safe harbor" leases                         (5,370)       (309)     (5,679)       (316)    (5,995)       (554)
                                              -------     -------     -------     -------    -------      ------
Net deferred tax (liability) asset            $(7,935)    $ 3,856     $(4,079)    $ 1,162    $(2,917)    $ 4,405
                                              =======     =======     =======     =======    =======      ======

</TABLE>

    The federal and state valuation allowances represent reserves for income tax
benefits  which  were not  recognized  in  prior  years  due to the  uncertainty
regarding future earnings.

    The tax provision  (benefit)  differs from the amounts  obtained by applying
the statutory U.S.  Federal income tax rate to the pre-tax  earnings (loss) from
continuing operations. The differences can be reconciled as follows:

                                                        Years Ended December 31,
                                                       1997      1996      1995
Expected Federal income tax provision (benefit)      $3,900    $6,688   $  (896)
Valuation allowance                                  (2,488)   (4,067)   (7,707)
State and local income taxes, net of
  Federal income tax benefit                              -       465       275
Nondeductible amortization of intangibles
  and other costs                                       726     1,165      (263)
Foreign income tax                                       43     1,016         -
Foreign, targeted job, R&E, AMT and fuel tax credits    (31)      (16)     (257)
Other, net                                              132       642      (242)
                                                    -------   -------   --------
       Tax provision (benefit)                       $2,282    $5,893   $(9,090)
                                                    =======   =======   ========

<PAGE>

    The Company has state net operating loss  carryforwards  available to offset
future  taxable  income.  Following  are the  net  operating  losses  by year of
expiration:

                        Year of                        State Net
                      Expiration                    Operating Losses

                          1997                         $     587
                          1998                               689
                          1999                             1,474
                          2000                             2,471
                          2001                               942
                  Through 2011                            48,453
                                                        --------
                                                         $54,616
                                                        ========

    The  Company's  U.S.  Federal  income tax returns have been cleared  through
1993.

    Cash paid for income taxes was $2,676 for 1997,  $20,680 for 1996 ($14.0
million of which related to the gain on the sale of the Commercial Aviation
business) and $3,140 for 1995.

(16)   Pension Plans

    Union  employees  who  are not  participants  in the  ESOP  are  covered  by
multiemployer  pension  plans  under  which  the  Company  pays  fixed  amounts,
generally  per hours  worked,  according to the  provisions of the various labor
contracts.  In 1997,  1996 and 1995,  the Company  expensed  $3,451,  $2,837 and
$2,514,  respectively,  for these plans.  Under the Employee  Retirement  Income
Security Act of 1974 as amended by the Multiemployer Pension Plan Amendments Act
of 1980,  an  employer  is  liable  upon  withdrawal  from or  termination  of a
multiemployer  plan for its  proportionate  share of the plan's  unfunded vested
benefits liability.  Based on information  provided by the administrators of the
majority of these multiemployer plans, the Company does not believe there is any
significant amount of unfunded vested liability under these plans.

(17)   Earnings Per Common Share

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

    Basic EPS is computed by dividing  earnings,  after  deducting the effect of
unpaid  dividends on the Class C Preferred Stock, by the weighted average number
of common shares  outstanding and  contingently  issuable  shares.  The weighted
average number of common shares  outstanding  includes issued shares less shares
held in treasury and any unallocated  ESOP shares.  Shares earned and vested but
unissued under the Restricted  Stock Plan are considered  contingently  issuable
and have been included in the calculation of basic EPS.  Diluted EPS is computed
similarly  except the  denominator is increased to include the weighted  average
number of stock  warrants and options  outstanding,  assuming the treasury stock
method.

<PAGE>

   The reconciliation of basic EPS to diluted EPS is as follows:

<TABLE>
<CAPTION>

                                                           1997                   1996                  1995
                                                    Earnings Per Share     Earnings  Per Share   Earnings  Per Share
<S>                                                <C>        <C>         <C>         <C>      <C>          <C>
 Basic Earnings Per Share
 Income from continuing operations
     before extraordinary item                       $ 7,422                $11,949              $ 5,274
 Class C Preferred dividends                               -                 (2,284)              (1,915)
                                                   ---------              ---------            ---------
     Common stockholders' share of earnings          $ 7,422   $0.83        $ 9,665   $1.14      $ 3,359    $0.40
 Discontinued operations                                   -       -          2,680    0.32          (20)   (0.00)
 Extraordinary item                                        -       -              -       -       (2,886)   (0.35)
                                                   ---------  ------      ---------   -----    ---------   ------
     Income for basic earnings per share             $ 7,422   $0.83        $12,345   $1.46      $   453    $0.05
                                                   =========  ======      =========   =====    =========   ======
 Weighted average shares outstanding               8,985,420              8,461,681            8,434,715
                                                   =========              =========            =========

 Diluted Earnings Per Share
 Common stockholders' share of earnings              $ 7,422   $0.70        $ 9,665   $0.82      $ 3,359    $0.29
 Discontinued operations                                   -       -          2,680    0.23          (20)   (0.00)
 Extraordinary item                                        -       -              -       -       (2,886)   (0.25)
                                                   ---------  ------      ---------   -----    ---------   ------
     Income for diluted earnings per share           $ 7,422   $0.70       $ 12,345   $1.05      $   453   $ 0.04
                                                   =========  ======      =========   =====    =========   ======
 Weighted average shares outstanding               8,985,420              8,461,681            8,434,715
     Effect of dilutive securities:
        Warrants                                   1,523,529              3,239,894            3,310,536
        Stock Options                                128,722                 34,696                    -
                                                  ----------             ----------           ----------
 Shares for diluted earnings per share            10,637,671             11,736,271           11,745,251
                                                  ==========             ==========           ==========

</TABLE>

(18)   Incentive Compensation Plans

   The Company has several formal incentive compensation plans which provide for
incentive payments to officers and key employees. Incentive payments under these
plans are based  upon  operational  performance,  individual  performance,  or a
combination thereof, as defined in the plans.  Incentive compensation expense of
$6,510 for 1997,  $6,367 for 1996,  and $6,692 for 1995 has been changed to Cost
of Services and Corporate Selling and Administrative Expenses.

(19)   Stock Option Plan

   The Company adopted an incentive stock option plan in December 1995,  whereby
options may be granted to officers and other key employees to purchase a maximum
of 1,250,000  common  shares at an option price not less than the most  recently
determined fair market value as of the grant date. Options issued under the plan
may be exercised only when vested and vest proportionately over a period of five
years.  Options which are not exercised  within seven years from the date of the
grant shall expire. Changes in stock options outstanding were as follows:

                                              Exercise Price
                                               or Range of     Weighted Average
                                     Shares   Exercise Prices   Exercise Price

Outstanding at December 31, 1994            -        N/A             N/A
Granted                               318,000      $14.90          $14.90
                                      -------
Outstanding at December 31, 1995      318,000      $14.90          $14.90
Granted                               488,000   $14.50-19.00       $17.57
Canceled or terminated                (15,500)     $14.90          $14.90
Exercised                                (600)     $14.90          $14.90
                                    ---------
Outstanding at December 31, 1996      789,900   $14.50-19.00       $16.55
Granted                               145,000   $19.00-20.00       $19.48
Canceled or terminated                (47,900)  $14.90-19.00       $16.61
Exercised                              (9,000)     $14.90          $14.90
                                    ---------
Outstanding at December 31, 1997      878,000   $14.50-20.00       $17.05
                                    =========
Exercisable at year-end               199,600
                                    =========

    The  Company has opted to account  for its stock  option plan in  accordance
with APB Opinion 25,  "Accounting  for Stock Issued to Employees".  Accordingly,
under  the  intrinsic   value  based  method  of  accounting  for  options,   no
compensation cost has been recognized. SFAS No. 123, "Accounting for Stock Based
Compensation",  encourages,  but does not  require,  adoption  of the fair value
based method of accounting for employee  stock  options.  The fair value of each
option  grant is equal to the  Formula  Price at the date of grant  (see Item 5,
"Market for the  Registrant's  Common  Stock and Related  Stockholder  Matters,"
included  elsewhere in this Annual  Report on Form 10-K).  The minimum  value is
determined  assuming  a five year  expected  life of the  options,  a  risk-free
interest rate of 5 1/2% and a volatility factor of zero. Had the Company adopted
SFAS No.  123,  common  stockholders'  share of net  earnings  would  have  been
approximately  $5,851 and $12,065 for the year ended December 31, 1997 and 1996,
respectively  and diluted  earnings  per share would have been $0.55 in 1997 and
$1.03 in 1996.  Comparable  data has not been presented for December 31, 1995 as
none of the options had vested and, therefore,  no additional  compensation cost
would be assumed.

(20)   Leases

    Future  minimum lease payments  required under  operating  leases that have
remaining noncancellable lease terms in excess of one year at December 31, 1997
are summarized below:

                          Years Ending December 31,
                 1998                                $   8,659
                 1999                                    8,339
                 2000                                    3,552
                 2001                                    2,400
                 2002                                    2,071
                 Thereafter                              8,445
                                                        ------
                 Total minimum lease payments        $  33,466
                                                        ======

    Net rent  expense  for leases of $21,577  for 1997,  $21,797  for 1996,
and $24,734 for 1995 has been charged to Cost of Services and Corporate Selling
and Administrative Expense.

(21)   Contingencies and Litigation

    The Company and its  subsidiaries  and  affiliates  are  involved in various
claims and lawsuits, including contract disputes and claims based on allegations
of negligence and other tortuous conduct. The Company is also potentially liable
for certain  personal  injury,  tax,  environmental  and contract dispute issues
related to the prior  operations of divested  businesses.  In addition,  certain
subsidiary  companies are potentially liable for environmental,  personal injury
and contract and dispute claims. In most cases, the Company and its subsidiaries
have denied, or believe they have a basis to deny, liability,  and in some cases
have  offsetting  claims  against the  plaintiffs,  third  parties or  insurance
carriers.  The total amount of damages  currently  claimed by the  plaintiffs in
these  cases  is  estimated  to  be  approximately $101.0  million   (including
compensatory  punitive  damages and  penalties).  The Company  believes that the
amount that will actually be recovered in these cases will be substantially less
than the amount  claimed.  After taking into account  available  insurance,  the
Company  believes  it is  adequately  reserved  with  respect  to the  potential
liability for such claims.  The estimates set forth above do not reflect  claims
that may have  been  incurred  but have not yet  been  filed.  The  Company  has
recorded  such  damages  and  penalties  that  are  considered  to  be  probable
recoveries against the Company or its subsidiaries.

(a)   Asbestos Claims

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

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

<PAGE>

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

    As of  February  13,  1998,  17,083  plaintiffs  have filed  claims  against
Fuller-Austin  and various other  defendants.  Of these claims,  2,218 have been
dismissed and 4,125 have been  resolved  without an admission of liability at an
average cost of $3,439 per claim, excluding legal defense costs.

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

                                                   Years
                         1994
                         & Prior     1995     1996     1997    1998     Total
                         ----------------------------------------------------
Claims Filed              4,056     4,523    4,122    3,784     598    17,083
Claims Dismissed           (113)      (51)  (1,116)    (931)     (7)   (2,218)
Claims Resolved          (1,617)     (182)  (1,825)    (460)    (41)   (4,125)
                                                                      -------
Claims Outstanding,
  as of February 13,1998                                               10,740
                                                                      =======

    In connection with these claims,  Fuller-Austin's primary insurance carriers
have  incurred  approximately  $25.8 million  (including  $11.6 million of legal
defense  costs) to defend and settle the claims and, in  addition,  jury verdict
judgments have been entered  against  Fuller-Austin  in the aggregate  amount of
$4.5 million  (partially  reduced by appeal during 1997 by $2.0  million)  which
have not been paid and which are under appeal by Fuller-Austin.

    Fuller-Austin  has  experienced  a decline in the number of claims  taken to
trial.  During the 15-month  period ending January 31, 1998, no cases were tried
by plaintiffs  although  approximately  855 cases were set for trial during this
period.   Plaintiffs  have  instead  elected  to  enter  into  settlements  with
Fuller-Austin for amounts ranging from $250 to $14,500 for an average during the
period of $2,632 per claim. In addition, in connection with these settlements, a
significant number of claims filed against  Fuller-Austin were dismissed with no
payment by  Fuller-Austin or its insurers.  Fuller-Austin  and its carriers will
continue to  evaluate  settlement  proposals,  but will be prepared to try cases
that cannot be settled in a manner consistent with recent settlement trends.

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

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

    Fuller-Austin's  defense counsel has analyzed the 10,740 claims  outstanding
as of February 13, 1998. Based on this analysis and consultation  with its other
professional  advisors,  Fuller-Austin  has estimated its cost,  including legal
defense  costs,  to be $11.5  million for claims filed and still  unsettled  and
$38.7 million as its minimum estimate of future costs of claims and settlements,
including  legal  defense  costs.  No upper limit of exposure  can  presently be
reasonably  estimated.  The Company cautions that these estimates are subject to
significant   uncertainties,   including   the  future  effect  of  tort  reform
legislation  enacted in Texas and other states,  the success of  Fuller-Austin's
litigation strategy,  the size of jury verdicts,  success of appeals in process,
the number and  financial  resources  of future  plaintiffs,  and the actions of
other defendants. Therefore, actual claim experience may vary significantly from
such estimates,  especially if certain Texas appeals are decided  unfavorably to
Fuller-Austin  and/or the level of claims  filed in other states  increases.  At
December 31, 1997 and 1996,  Fuller-Austin  recorded an estimated  liability for
future  indemnity  payments and defense  costs  related to  currently  unsettled
claims and minimum  estimated  future claims of $50.2 million and $55.0 million,
respectively (recorded as long-term liability).

Insurance Coverage

    Defense  has  been  tendered  to and  accepted  by  Fuller-Austin's  primary
insurance  carriers,  and by certain of the Company's primary insurance carriers
that  issued  policies  under  which  Fuller-Austin  is named  as an  additional
insured;  however,  only one such primary carrier has partially accepted defense
without a reservation of rights.  The Company believes that Fuller-Austin has at
least $4.4 million in  unexhausted  primary  coverage  (net of  deductibles  and
self-insured  retentions,  but including  disputed coverage) under its liability
insurance policies to cover the unsettled claims, verdicts and future unasserted
claims and defense costs. The primary carriers also have unlimited liability for
defense costs (presently running at an average annual rate of approximately $1.3
million) until  such  time as the  primary  limits  under  these  policies  are
exhausted.  When the primary limits are exhausted,  liability for both indemnity
and legal defense will be tendered to the excess coverage carriers, all of which
have been  notified of the  pendency  of the  asbestos  claims.  The Company and
Fuller-Austin  have  approximately  $390.0  million  of  additional  excess  and
umbrella insurance that is generally  responsive to asbestos claims after taking
into consideration certain pending carrier settlements that are discussed below.
This amount excludes approximately $92.0 million of coverage issued by insolvent
carriers.  After the $4.4 million of unexhausted  primary coverage,  the Company
has first tier excess coverage of $35.0 million  excluding a $35.0 million first
tier excess  segment of  insolvent  coverage  for policy years 1979 through 1984
(the "Insolvent  Segment").  All of the Company's and Fuller-Austin's  liability
insurance  policies  cover  indemnity  payments  and defense  fees and  expenses
subject to applicable policy terms and conditions.

Coverage Litigation

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

    Although  there can be no assurances  as to the outcome of this  litigation,
management  believes  that it is probable  that  Fuller-Austin  will  prevail in
obtaining judicial rulings confirming the availability of a substantial  portion
of the coverage. Based on a review of the independent ratings of these carriers,
the  Company  and  Fuller-Austin  believe  that a  substantial  portion  of this
coverage  will  continue  to be  available  to meet  the  claims.  Fuller-Austin
recorded in Other  Assets $50.2  million and $55.0  million at December 31, 1997
and 1996, respectively,  representing the amount that it expects to recover from
its  insurance  carriers for the payment of currently  unsettled  and  estimated
future claims.

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

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

Possible Global Settlement/Bankruptcy Filing

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

    In  furtherance  of  the  proposed  global  settlement,  representatives  of
Fuller-Austin,  its  parent  and sole  stockholder,  the  Company,  the  present
asbestos claimants,  and the representative of the future unknown claimants have
reached a separate agreement in principle ("Release  Agreement"),  contingent on
approval of the Plan by the Bankruptcy  Court,  under which the Company would be
released  from  any and all  present  and  future  liability  for  Fuller-Austin
asbestos  liability in consideration of the transfer of certain Company property
and insurance rights to the  Fuller-Austin  bankruptcy trust, and the payment to
the trust of certain  cash  consideration.  The total  amount  reserved for this
purpose is approximately $14.0 million, a portion of which was recorded in prior
years and the balance,  $7.8 million,  was reserved by the Company in the fourth
quarter of 1997 in anticipation of the settlement under the Release Agreement.

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

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

(b)   General Litigation

    The Company has  retained  certain  liability  in  connection  with its 1989
divestiture of its major electrical  contracting  business,  Dynalectric Company
("Dynalectric").  The Company and Dynalectric were sued in 1988 in Bergen County
Superior   Court,   New  Jersey,   by  a  former   Dynalectric   joint   venture
partner/subcontractor  (subcontractor).  The  subcontractor has alleged that its
subcontract to furnish certain  software and services in connection with a major
municipal traffic signalization project was improperly terminated by Dynalectric
and that Dynalectric  fraudulently diverted funds due, misappropriated its trade
secrets and proprietary information,  fraudulently induced it to enter the joint
venture,  and conspired with other defendants to commit acts in violation of the
New Jersey Racketeering  Influenced and Corrupt  Organization Act. The aggregate
dollar   amount  of  these  claims  has  not  been   formally   recited  in  the
subcontractor's  complaint.  Dynalectric  has also filed  certain  counterclaims
against the former subcontractor.  The Company and Dynalectric believe that they
have valid  defenses,  and/or that any  liability  would be offset by recoveries
under  the  counterclaims.  The  Company  and  Dynalectric  were  found  to have
committed certain discovery abuses,  but no monetary amount of sanctions has yet
been assessed. The Company and Dynalectric expect to file an appeal with respect
to this finding.  After nine years of seeking  arbitration  of this matter,  the
Company and Dynalectric have finally  prevailed.  Arbitration will take place in
Washington,  D.C.  later in 1998. The Company  believes that it has  established
adequate  ($1.3  million at December  31, 1997)  reserves  for the  contemplated
defense  costs  and  for  the  cost  of  obtaining  enforcement  of  arbitration
provisions contained in the contract.

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

    As  to  environmental   issues,   neither  the  Company,   nor  any  of  its
subsidiaries,  is named a  Potentially  Responsible  Party  (as  defined  in the
Comprehensive  Environmental Response,  Compensation and Liability Act (CERCLA))
at any  site.  The  Company,  however,  did  undertake,  as  part  of  the  1988
divestiture of a petrochemical  engineering subsidiary, an obligation to install
and  operate  a soil and  water  remediation  system  at a  subsidiary  research
facility  site in New Jersey and also is required to pay the costs of  continued
operation of the remediation system. In addition,  the Company,  pursuant to the
sale of the  Commercial  Aviation  Business,  is  responsible  for the  costs of
clean-up of environmental conditions at certain designated sites. Such costs may
include the removal and subsequent  replacement of contaminated soil,  concrete,
tanks, etc., that existed prior to the sale of the Commercial  Aviation Business
(see Note 2).

    The Company is a party to other civil and  contractual  lawsuits  which have
arisen in the normal course of business for which potential liability, including
costs of defense,constitute the remainder of the $101.0 million discussed above.
The estimated probable liability for these issues is approximately $10.0 million
and is substantially covered by insurance.  All of the insured claims are within
policy limits and have been tendered to and accepted by the applicable carriers.
The Company has  recorded  an  offsetting  asset  (Other  Assets) and  liability
(long-term  liability) of $10.0 million at December 31, 1997 and 1996, for these
items.

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

    The major  portion  of the  Company's  business  involves  contracting  with
departments and agencies of, and prime contractors to, the U.S. Government,  and
such contracts are subject to possible  termination  for the  convenience of the
government  and to audit and possible  adjustment to give effect to  unallowable
costs under cost-type  contracts or to other regulatory  requirements  affecting
both cost-type and fixed-price  contracts.  Payments received by the Company for
allowable  direct and indirect  costs are subject to  adjustment  and  repayment
after audit by  government  auditors if the  payments  exceed  allowable  costs.
Audits have been completed on the Company's incurred contract costs through 1986
and are continuing for subsequent periods. The Company has included an allowance
for excess  billings and contract  losses in its  financial  statements  that it
believes is adequate based on its interpretation of contracting  regulations and
past experience. There can be no assurance, however, that this allowance will be
adequate.  The Company is aware of various costs  questioned by the  government,
but  cannot  determine  the  outcome  of the audit  findings  at this  time.  In
addition,  the  Company is  occasionally  the subject of  investigations  by the
Department  of Justice and other  investigative  organizations,  resulting  from
employee and other allegations  regarding  business  practices.  In management's
opinion,  there are no  outstanding  issues of this nature at December  31, 1997
that will have a material adverse effect on the Company's consolidated financial
position, results of operations or liquidity.

(22)   Business Segments

    The Company  has three  reportable  segments,  Information  and  Engineering
Technology  (I&ET),  Aerospace  Technology (AT) and Enterprise  Management (EM).
These three  reportable  segments are  strategic  business  areas which  provide
distinctly different services to a variety of customers. I&ET designs, develops,
supports  and  integrates   software  and  systems  to  provide  customers  with
comprehensive  solutions for information  management and  engineering  needs. AT
provides  services ranging from aviation  maintenance to multifaceted  aerospace
sciences,  technology  and  avionics  engineering.  EM  offers  a full  range of
technical  services  from  facilities   management  to  security  systems,  ship
operations,  the  development  of work  management and  maintenance  systems and
engineering  and  logistics  services.  See also  Item I,  "Business,"  included
elsewhere in this Annual Report on Form 10-K for a  description  of the business
segments.

    The accounting  policies of the segments are the same as those  described in
Note 1, "Summary of  Significant  Accounting  Policies".  The Company  evaluates
performance  based primarily on operating  profit,  but also evaluates return on
net  assets  and days'  sales  outstanding.  Operating  profit is the  excess of
revenues over operating expenses and certain nonoperating expenses.

    The  Company  derived  97% of its  revenues  in 1997 and 1996 and 95% of its
revenues in 1995 from contracts and subcontracts with the U.S. Government. Prime
contracts  comprised  72%, 79% and 84% of revenue of which prime  contracts with
the  Department of Defense  ("DoD")  represented  45%, 50% and 51% of revenue in
1997,  1996 and  1995,  respectively.  In 1997,  the  Company's  second  largest
customer  was the  Department  of Energy,  comprising  22% of revenue.  No other
customer accounted for more than 10% of revenues in any year.

<PAGE>

    Revenue,  operating profit,  identifiable  assets,  capital expenditures and
depreciation and amortization by segment are presented below:

<TABLE>
<CAPTION>

                                                                  Years Ended December 31,
                                                                 1997        1996        1995
<S>                                                        <C>         <C>         <C>
Revenue
   I&ET                                                    $  282,634  $  271,538  $  271,133
   AT                                                         448,963     383,252     319,335
   EM                                                         414,340     366,663     318,257
                                                           ----------  ----------   ---------
                                                           $1,145,937  $1,021,453    $908,725
                                                           ==========  ==========   =========
Operating Profit
   I&ET                                                    $   11,095  $   20,237  $   18,139
   AT                                                          16,804      13,451      11,425
   EM                                                          20,690      17,485       9,866
                                                           ----------  ----------  ----------
                                                               48,589      51,173      39,430
                                                           ----------  ----------  ----------
   Corporate selling and administrative                        17,785      18,241      18,705
   Interest (net expense)                                      10,414       8,468      11,052
   Goodwill amortization                                        1,560       2,814       2,081
   Costs associated with divested businesses                    8,157         825       7,700
   Minority interest included in operating profit              (1,439)     (1,265)     (1,255)
   Termination costs (Note 14)                                      -       3,299           -
   Acquisition costs                                            2,203       1,241       2,075
   ESOP put premium                                                 -      (1,250)          -
   Other miscellaneous                                         (1,234)       (307)      1,633
                                                           ----------  ----------  ----------
   Earnings (loss) from continuing operations
      before income taxes, minority interest and
      and extraordinary item                               $   11,143  $   19,107  $   (2,561)
                                                           ==========  ==========  ==========

                                                                     As of December 31,
                                                                 1997        1996        1995
Identifiable Assets
   I&ET                                                    $  118,016  $  105,363  $   99,032
   AT                                                          75,239      76,681      60,275
   EM                                                          70,026      64,637      82,333
   Other (a)                                                   51,575      55,093      60,106
   Corporate                                                   67,728      66,978      73,744
                                                           ----------  ----------  ----------
                                                           $  382,584  $  368,752  $  375,490
                                                           ==========  ==========  ==========

   (a)  Includes  assets  related to  probable  insurance  indemnification recoveries pertaining
        to a former subsidiary (see Note 21(a)).

                                                                   Years Ended December 31,
                                                                 1997       1996         1995
    Capital Expenditures
       I&ET                                                $    1,976  $   3,606   $    2,700
       AT                                                         885        823          640
       EM                                                         740        384          936
       Corporate                                                1,509        497          513
                                                           ----------  ----------  ----------
                                                           $    5,110  $   5,310   $    4,789
                                                           ==========  ==========  ==========
    Depreciation and Amortization
       I&ET                                                $    5,651  $   3,775   $    5,223
       AT                                                       1,349      2,337        1,412
       EM                                                       1,432      1,525        2,296
       Corporate                                                1,456      1,830        2,417
                                                           ----------  ----------  ----------
                                                           $    9,888  $   9,467   $   11,348
                                                           ==========  ==========  ==========

The  equity in net  income  of  investees  accounted  for by the  equity  method
included  in  operating  profit and the amount of  investment  in equity  method
investees included in identifiable assets for each segment is presented below:

                                                                   Years Ended December 31,
                                                                 1997       1996         1995
    Equity Investees Earnings
       I&ET                                                $        -  $       -   $        -
       AT                                                          92         17           14
       EM                                                       1,038        659          141
                                                           ----------  ----------  ----------
                                                           $    1,130  $     676   $      155
                                                           ==========  ==========  ==========

                                                                         As of December 31,
                                                                 1997       1996         1995
    Investment in Equity Investees
       I&ET                                                $        -  $       -   $        -
       AT                                                       1,568      1,566        1,486
       EM                                                       2,266        230          142
                                                           ----------  ----------  ----------
                                                           $    3,834  $   1,796   $    1,628
                                                           ==========  ==========  ==========

</TABLE>

(23)   Quarterly Financial Data (Unaudited)

      A summary of quarterly financial data for 1997 and 1996 is as follows:

<TABLE>
<CAPTION>

                                                  1997 Quarters                                    1996 Quarters
                                       First     Second   Third(a)  Fourth(b)         First     Second      Third  Fourth(c)
<S>                                 <C>        <C>        <C>        <C>           <C>        <C>        <C>        <C>
Revenues                            $271,137   $288,695   $283,832   $302,273      $241,726   $249,630   $246,968   $283,129
Gross profit                          11,343     12,321     13,981     12,045        10,729     13,682     13,151     13,728
Earnings (loss) from continuing
  operations before income
  taxes, minority interest and
  extraordinary item                   4,005      3,680      6,097     (2,639)        3,737      6,892      5,965      2,513
Minority interest                        408        203        387        441           296        326        367        275
Discontinued operations                    -          -          -          -             -        865          -      1,815
Net earnings (loss)                    2,311      2,035      4,087     (1,011)        2,241      4,418      3,241      4,729
Earnings (loss) per common share:
  Basic earnings per share:
    Continuing operations           $   0.27     $ 0.23   $   0.46   $ ( 0.11)     $   0.20   $   0.36   $   0.32   $   0.28
    Discontinued operations                -          -          -          -             -       0.10          -       0.21
  Common stockholders' share
      of earnings (loss)            $   0.27     $ 0.23   $   0.46   $ ( 0.11)     $   0.20   $   0.46   $   0.32   $   0.49
  Diluted earnings (loss) per share
    Continuing operations           $   0.21     $ 0.20   $   0.39   $ ( 0.11)     $   0.14   $   0.26   $   0.23   $   0.19
    Discontinued operations                -          -          -          -             -       0.07          -       0.16
  Common stockholders' share
      of earnings (loss)            $   0.21     $ 0.20   $   0.39   $ ( 0.11)     $   0.14   $   0.33   $   0.23   $   0.35

<FN>

Quarterly financial data may not equal annual totals due to rounding. Quarterly earnings per share data may not equal annual total.

(a) 1997 Third Quarter includes:
   - $2,488 reversal of income tax valuation allowance (see Note 15)

(b) 1997 Fourth Quarter includes:
   - $7,800 of costs related to asbestos  litigation  (see Notes 14 and 21(a))
   - $2,055 reversal of accrued interest related to IRS examinations and potential disallowance of deductions (see Note 15)

(c) 1996 Fourth Quarter includes:
   - $3,299 accrual for supplemental  pension and other fees payable to retiring
     officers and a member of the Board of Directors (see Note 14)
   - $1,286 write-off of cost in excess of net assets acquired of an unconsolidated affiliate (see Note 14)
   - $1,250 reversal of overaccrued ESOP Premium (see Note 7)
   - $4,067 reversal of income tax valuation allowance (see Note 15)

</FN>
</TABLE>

(24)   Subsequent Event

    On February 2, 1998,  the Company  acquired  the assets of FMAS  Corporation
("FMAS"),  a medical outcome  measurement and data abstraction  services company
headquartered  in  Rockville,  MD.  FMAS is a leading  provider  of  proprietary
outcome performance  measurement systems to all DoD treatment facilities as well
as a number of other facilities under contract with the DoD.

    The Company financed the acquisition of FMAS by drawing $10.0 million of the
$90 million of the Class B Notes  available  under the April 1997 indenture (see
Note 5). The Class B Notes were issued at 6.325% through March 1, 1998, adjusted
to 6.372% through March 29, 1998, and will be adjusted  monthly until  redeemed.
After drawing down the $10.0 million of Class B Notes the Company had sufficient
unused  receivable   collateral  to  support  an  additional  $50.0  million  of
borrowings.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
           ACCOUNTING AND FINANCIAL DISCLOSURES

    None

<PAGE>

                                PART III

Item 10.  Directors and Executive Officers of the Registrant

The directors and executive officers of the Company are:

Name                   Age  Position
Dan R. Bannister        67   Director and Chairman of the Board
T. Eugene Blanchard     67   Director
Russell E. Dougherty    77   Director
Paul G. Kaminski        55   Director
Paul V. Lombardi        56   Director, President and Chief Executive Officer*
Dudley C. Mecum II      63   Director
David L. Reichardt      55   Director, Senior Vice President and General
                                       Counsel *
Herbert S.Winokur, Jr.  54   Director and Chairman of the Executive Committee
Robert B. Alleger, Jr.  52   Vice President, Aerospace Technology *
John J. Fitzgerald      44   Vice President and Controller *
Patrick C. FitzPatrick  58   Senior Vice President and Chief Financial
                                       Officer *
Paul T. Graham          31   Vice President and Treasurer
H. Montgomery Hougen    62   Vice President and Secretary and Deputy General
                                       Counsel
Roxane P. Kerr          49   Senior Vice President, Human Resources *
Marshall S. Mandell     55   Vice President, Business Development *
Carl H. McNair, Jr.     64   Vice President, Enterprise Management *
Ruth Morrel             43   Vice President, Law and Compliance
Henry H. Philcox        58   Vice President, Chief Information Officer
Richard E. Stephenson   62   Vice President, Technology and Government Relations
Robert G. Wilson        56   Vice President and General Auditor

*    Officers  designated by an asterisk are deemed to be "officers" for
     purposes of Rule 16a-1(f), as promulgated in Release No. 34-28869.

                               DIRECTORS

Dan R. Bannister                                            Director since 1985

Mr. Bannister, age 67, is Chairman of the Board.  He served as President of the
Company from 1984 until 1997 and as Chief Executive Officer from 1985 until
1997.  In  February, 1997, he was elected Chairman of the Board; he is an active
employee of the Company. He is a director of ITC Training Corporation.  His
term as a director expires in 1998.

T. Eugene Blanchard                                         Director since 1988

Mr. Blanchard, age 67, served as Senior Vice President and Chief Financial
Officer from 1979 to February,  1997, when he retired as an employee of the
Company.  He is the Chairman of the Company's Employee Stock Ownership Plan
Committee.  He is a director of Landmark Systems Corporation.  His term as a
director expires in 2000.

Russell E.  Dougherty                                     Director  since  1989

General Dougherty, age 77, is an attorney with the law firm of McGuire, Woods,
Battle & Boothe. He is a retired General, United States Air Force, who served
as Commander-in-Chief, Strategic Air Command and Chief of Staff, Allied Comand
Europe.  From 1980 to 1986, he served as Executive Director of the Air Force
Association and Publisher of Air Force Magazine.  He was formerly a member of
the Defense Science Board; trustee of the Institute for Defense Analysis; and
trustee of The Aerospace  Corp. His term as a director expires in 1999.

Paul G. Kaminski                                      Director since July, 1997

Mr. Kaminski, age 55, also served as a director of the Company from 1988 until
1994.  He is President and Chief Executive Officer of Technovation,  Inc.
(consulting and investment banking). He served in the United States Department
of Defense as Under Secretary of Defense for Acquisition and Technology from
1994 to 1997.  He was Chairman and Chief Executive Officer of Technology
Strategies & Alliances  (strategic  partnership consulting) from 1993 to 1994.
His term as a director expires in 1998.

Paul V. Lombardi                                          Director  since  1994

Mr.  Lombardi, age 56, has served as President and Chief Executive Officer since
February,  1997. He served as Chief Operating Officer from 1995 to February,
1997; as Executive Vice President from 1994 to February, 1997; as Vice President
1992 to 1994; as President of Federal Sector 1994 to 1995, and as President of
Government Services Group 1992 to 1994.  He was Senior Vice President and Group
General Manager, Planning Research Corporation from 1990 to 1992. His term as a
director expires in 2000.

Dudley C. Mecum II                                          Director since 1988

Mr. Mecum, age 63, is a Managing Director of Capricorn  Holdings LLC (an
investment  company).  He was a partner, G. L. Ohrstrom & Co., an investment
firm, from 1989 to 1997. He served as Group Vice President and Director,
Combustion  Engineering, Inc. from 1985 to 1988, and previously as Vice
Chairman,  Peat, Marwick & Mitchell.  He is a director of The Travelers Group,
Travelers Property and Casualty Inc., Lyondell Petrochemical Company, Vicorp
Restaurants Inc., Fingerhut Companies, Inc., Metris Companies Inc., and Suburban
Propane Partners LLP. His term as a director expires in 2000.

David L. Reichardt                                         Director  since 1988

Mr. Reichardt, age 55, has served as Senior Vice President and General Counsel
of the Company since 1986. He served as President of Dynalectric  Company,
a former subsidiary of the Company, from 1984 to 1986 and as Vice President and
General Counsel of DynCorp from 1977 to 1984. His term as a director expires in
1998.

Herbert S. Winokur, Jr.                                     Director since 1988

Mr. Winokur, age 54, served as Chairman of the Board from 1988 to February,
1997.  He is President, Winokur Holdings, Inc. (an investment company), which is
the Managing Partner of Capricorn Investors,  L.P. and Capricorn Investors II,
L.P.  He was formerly Senior Executive Vice President, Member, Office of the
President, and Director, Penn Central Corporation.  He is a director of ENRON
Corporation;  NAC Re Corp.; Mrs. Fields Holdings, Inc.; and the WMF Group Ltd.
His term as a director expires in 1999.

                          OTHER EXECUTIVE OFFICERS

In addition to the  above-named  directors who are also officers of the Company,
the Company's executive officers are:

Robert B. Alleger, Jr., age 52, Vice President, Aerospace Technology, has served
in that capacity and as President of the Aerospace Technology Strategic Business
Unit  ("SBU")  since 1996.  He was Vice  President,  Systems  Support  Services,
Lockheed Martin Services,  Inc. from 1992 to February,  1996 and Vice President,
Business Development, GE Government Services, General Electric Company from 1989
to 1992.

John J. Fitzgerald, age 44, Vice President and Controller, has served in that
capacity since July, 1997. He was Vice President and Controller, PRC, Inc. from
1992 to 1997.

Patrick C.  FitzPatrick,  age 58,  Senior  Vice  President  and Chief  Financial
Officer,  has served as Senior Vice President and Chief  Financial
Officer since February,  1997.  He also served as Treasurer from March to
November,  1997. He was Chief Financial Officer, American Mobile Satellite
Corporation from 1996 to February,  1997;  Senior Vice President and Chief
Financial Officer of PRC Inc. from 1992 to 1996;  and President and Chief
Operating  Officer of Oxford Real Estate Management Services from 1990 to 1992.

Paul T.  Graham,  age 31,  Vice  President  and  Treasurer,  has  served in that
capacity since  November,  1997. He was Finance Manager of the Company from 1992
to 1994,  Assistant  Treasurer  from 1994 to 1997,  and Director of Finance from
1995 to 1997.

H.  Montgomery  Hougen,  age 62, Vice President and Secretary and Deputy General
Counsel,  has served as a Vice President  since 1994 and as Corporate  Secretary
and Deputy General Counsel since 1984.

Roxane P. Kerr, age 49, Senior Vice President,  Human  Resources,  has served in
that  capacity  since March,  1998.  She was Vice  President,  Human  Resources,
LucasVerity Plc from 1993 to 1998 and a private human resources  consultant from
1992 to 1993.

Marshall S. Mandell, age 55, Vice President, Business Development, has served in
that  capacity  since  1994.  He has also  served  as  Acting  President  of the
Information and Engineering  Technology SBU since September,  1997. He served as
Vice President,  Business Development,  Applied Science Group from 1992 to 1994.
He was Senior Vice  President,  Eastern  Computers,  Inc.  from 1991 to 1992 and
President, Systems Engineering Group, Ogden/Evaluation Research Corporation from
1984 to 1991.

Carl H. McNair, Jr. age 64, Vice President, Enterprise Management, has served in
that capacity and as President of the  Enterprise  Management SBU since 1994. He
served as  President,  Support  Services  Division  from  1990 to 1994.  He is a
director of Air Methods Corporation.

Ruth Morrel,  age 43, Vice  President,  Law and  Compliance,  has served in that
capacity since 1994. She served as Group General Counsel from 1984 to 1994.

Henry H. Philcox,  age 58, Vice  President and Chief  Information  Officer,  has
served in that capacity since August,  1995. He was Chief Information Officer of
the Internal Revenue Service from 1990 to June, 1995.

Richard  E.  Stephenson,  age 62,  Vice  President,  Technology  and  Government
Relations,  has served in that capacity  since 1994. He served as Vice President
Strategic Planning, Government Services Group from 1991 to 1994.

Robert G. Wilson, age 56, Vice President and General Auditor, has served in that
capacity since 1985.

                               STOCKHOLDERS AGREEMENT

         Under the terms of the New  Stockholders  Agreement (the  "Stockholders
Agreement") which was adopted by substantially  all management  stockholders and
expires on March 10, 1999, the management stockholders and outside investors who
control approximately 32% of the voting stock on a fully diluted basis agreed to
the  following  procedure  for election of directors.  Capricorn  Investors,  LP
("Capricorn"),  an entity under the control of Mr. Winokur,  on behalf of itself
and the other  outside  investors,  was  entitled to nominate  four of the total
number of directors; Company management was entitled to nominate four directors;
and the two groups would agree on a ninth director,  for whom all of the parties
have agreed to vote. All of the current  directors and the nominees listed above
were initially selected by this process.  Effective January 23, 1997,  Capricorn
waived  its  right to  nominate  directors,  but not its  obligation  to vote in
accordance with the Shareholders Agreement.

              SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

         The Company  believes  that all  required  persons  filed all  required
reports under Section 16 of the Securities Exchange Act in a timely manner.


Item 11.  Executive Compensation

         The  following  table  sets  forth  information  regarding  annual  and
long-term  compensation for the chief executive  officer and the other four most
highly compensated executive officers of the Company. The table does not include
information for any fiscal year during which a named  executive  officer did not
hold such a position with the Company.

                         SUMMARY COMPENSATION TABLE

                                                          Long Term
                                                        Compensation
                                 Annual compensation       Awards

                                               Other    Securities
                                               annual   underlying    All other
Name and principal            Salary   Bonus   compen- options/SARs compensation
 position                Year   ($)     ($)(1)  sation      (#)          ($) (2)
     (a)                 (b)    (c)      (d)    ($)(c)      (f)            (i)

Paul V. Lombardi         1997  332,789  160,000  177        --          45,395
President & Chief        1996  279,614  148,000   --      90,000        50,974
Executive Officer        1995  257,071  105,900   --      40,000        47,749

Dan R. Bannister         1997  275,481     --    174       --           55,698
Chairman of the Board    1996  326,105  235,000   --     100,000        66,132
(formerly President &    1995  325,853  165,000   --      65,000        67,060
Chief Executive Officer)

David L. Reichardt       1997  245,082   90,000  244       --           41,515
Senior Vice President &  1996  219,464   99,000   --      75,000        41,780
General Counsel          1995  206,008   88,300   --      25,000        40,497

Patrick C. FitzPatrick   1997  241,933   90,000   --     100,000        33,493
Senior Vice President &  1996    --        --     --       --            --
Chief Financial Officer  1995    --        --     --       --            --

Marshall S. Mandell      1997  204,248   73,300  364       --           24,129
Vice President, Business 1996  179,246   80,000           30,000         9,182
Development              1995  157,705   65,000           12,500         7,066


     (1) Column (d) reflects  bonuses earned and expensed  during year,  whether
         paid during or after such year.  Since 1996,  20% of executive  bonuses
         have been paid in shares of Common Stock, valued at then-current market
         value.
     (2) Column  (i)  includes  individual's  pro rata  share  of the  Company's
         contribution  to the Company's  Employee Stock  Ownership Plan ("ESOP")
         and Savings and Retirement Plan ("SARP") and the  Company-paid  portion
         of group term and  supplemental  executive  retirement  plan  insurance
         premiums. These amounts are:


             ESOP contributions  SARP contributions     Insurance Premiums
                   ($)                  ($)                  ($) (1)
Name           1997(2) 1996  1995   1997  1996  1995     1997    1996     1995

Mr.Lombardi           5,075 4,632  2,850   900    --   42,545  44,999   43,117
Mr.Bannister          5,075 4,632  3,800 1,250    --   51,898  59,807   62,428
Mr.Reichardt          5,075 4,632  1,269   913    --   40,246  35,792   35,865
Mr.FitzPatrick           --    --  1,267    --    --   32,227      --       --
Mr.Mandell            5,075 4,632  2,361 1,306     --  21,768   2,801    2,434

     (1) Includes supplemental executive retirement plan insurance and term life
         insurance  premium,  the  premium for which is  computed  according  to
         Internal Revenue Service tables.
     (2) Individual allocation of 1997 ESOP contribution has not been calculated
         as of this date.

                       OPTION/SAR GRANTS IN LAST FISCAL YEAR

                                                           Potential realizable
                                                              value at assumed
                                                           annual rates of stock
                                                             price appreciation
                                      Individual Grants        for option term

               Number of  Percent of total
               securities  options/ SARs
               underlying  granted to    Exercise or
              options/SARs employees in  base price  Expiration
  Name        granted (#)   fiscal year  ($/Share)     date      5% ($)  10% ($)
  (a)             (b)         (c)          (d)         (e)        (f)     (g)

Mr. Lombardi       0           n/a         n/a         n/a        n/a      n/a
Mr. Bannister      0           n/a         n/a         n/a        n/a      n/a
Mr. Reichardt      0           n/a         n/a         n/a        n/a      n/a
Mr. FitzPatrick  50,000       }69%        19.00       2/3/04    386,745  901,281
                 50,000                   20.00     11/24/04    407,100  848,717
Mr. Mandell        0           n/a         n/a         n/a        n/a      n/a


               AGGREGATED OPTIONS/SAR EXERCISES IN LAST FISCAL YEAR
                         AND FY-END OPTION/SAR VALUES

                                Number of securities
                               underlying unexercised   Value of unexercised
                               options/SARs at fiscal in-the-money options/ SARs
                                    year-end (#)        at fiscal year-end ($)
              Shares
           acquired on   Value        Exercisable/             Exercisable/
   Name     exercise(#) realized     Unexercisable            Unexercisable
   (a)          (b)      ($) (c)         (d)                      (e)


Mr. Lombardi     --       --       34,000   96,000          126,600   302,400
Mr. Bannister    --       --       46,000  119,000          182,600   398,900
Mr. Reichardt    --       --       25,000   75,000           88,500   226,500
Mr. FitzPatrick  --       --            0  100,000                0    50,000
Mr. Mandell      --       --       11,000   31,500           40,500    98,250

                          COMPENSATION OF DIRECTORS

         Non-employee directors of the Company receive an annual retainer fee of
$16,500 as  directors  and $2,750 for each  committee  on which they serve.  The
Company also pays non-employee  directors a meeting fee of $1,000 for attendance
at each Board meeting and $500 for attendance at committee  meetings.  Directors
are reimbursed for expenses  incurred in connection  with attendance at meetings
and other Company functions.

                 DIRECTORS AND OFFICERS LIABILITY INSURANCE

         The Company has purchased and paid the premium for insurance in respect
of claims  against its directors and officers and in respect of losses for which
the Company may be required or permitted by law to indemnify  such directors and
officers. The directors insured are the directors named herein and all directors
of the  Company's  subsidiaries.  The  officers  insured  are all  officers  and
assistant  officers of the Company and its subsidiaries.  There is no allocation
or segregation  of the premium as regards  specific  subsidiaries  or individual
directors and officers.

                       CHANGE-IN-CONTROL AGREEMENTS

         The Company has entered into change-in-control  agreements with Messrs.
Lombardi,   Reichardt,  and  FitzPatrick  (the  "Severance  Agreements").   Each
Severance  Agreement  provides  that  certain  benefits,  including  a  lump-sum
payment,  will be triggered if the executive is terminated following a change in
control of the Company,  unless termination occurs under those circumstances set
forth in the  Severance  Agreements.  A change  in  control  would  occur if the
Company were to be substantially acquired by a new owner or if a majority of the
Board of Directors were replaced.  The Severance  Agreements currently expire on
December 31, 1998 but are subject to annual automatic  renewal unless terminated
by the Board of  Directors.  The amount of such lump sum  payment  would be 2.99
times  the  sum of the  executive's  annual  salary  and the  average  incentive
compensation  for the three  prior  years.  Other  benefits  include  payment of
incentive compensation not yet paid for the prior year and a pro rata portion of
incentive  compensation  awards for the current year.  Each Severance  Agreement
also  provides a  reduction  if the  payments  exceeds the amount the Company is
entitled to deduct on its federal  income tax return.  The Severance  Agreements
also provide that the Company will  reimburse the  individual for legal fees and
expenses incurred by the executive as a result of termination.

           COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

         None of the members of the Compensation Committee are current or former
employees of or have a business or other  relationship with the Company,  except
for Mr. Winokur.  (See Item 13. "Certain  Relationships and Related Information"
for a  discussion  of a series of  transactions  involving  Mr.  Winokur and the
Company.) No executive  officer of the Company  serves on the board of directors
or compensation committee of any entity (other than subsidiaries of the Company)
whose  directors  or  executive  officers  served on the Board of  Directors  or
Compensation Committee of the Company.

Item 12.  Security Ownership of Certain Beneficial Owners and Management

         As of March 10,  1998,  the Company had  [10,078,200]  shares of Common
Stock  outstanding,  which constituted all the outstanding  voting securities of
the Company.  If all shares  issuable  upon  exercise of  outstanding  warrants,
shares  issuable  upon exercise of all vested and unvested  options,  and shares
issuable as a result of expiration of deferrals under a former  Restricted Stock
Plan were to be issued, the outstanding voting securities  following such events
(the "fully  diluted  shares")  would consist of  [11,612,202]  shares of Common
Stock.  The following  tables show  beneficial  ownership of outstanding  voting
shares as a percentage of currently  outstanding stock and beneficial  ownership
of issued and issuable shares as a percentage of common stock on a fully diluted
basis assuming all such exercises and issuances.

               SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

         The  following  table  presents  information  as  of  March  10,  1998,
concerning the only beneficial owners of five percent or more of the outstanding
shares of the Company's common stock.

Name and address of                          Amount & nature of      Percent of
beneficial owner                                ownership              shares

DynCorp Employee Stock Ownership Plan Trust    7,282,581               72.3%
c/o DynCorp                                    Direct (1)
2000 Edmund Halley Dr.
Reston, VA  20191-3436

Capricorn Investors, L.P. (2)                  1,231,952               12.2%
30 East Elm Street                             Direct
Greenwich, CT  06830

   (1)  The Trust holds  these  shares for the  accounts of  approximately
        30,400  participants.  The Trustees  vote the shares in accordance
        with instructions received from participants.
   (2)  H. S. Winokur, Jr., a director of the Company, is the President of
        Winokur Holdings, Inc., which is the managing partner of Capricorn
        Holdings, G.P., which in turn is the general partner of Capricorn.

                      SECURITY OWNERSHIP OF MANAGEMENT

         The  following  table  presents  information  as  of  March  10,  1998,
concerning the beneficial  ownership of the Company's  common stock by directors
and named executive officers and all directors and officers as a group.
Shares include those held on behalf of the individuals in the ESOP and SARP.

                            Amount & nature of ownership

 Name and title of    Outstanding Obtainable within                  Percent of
 beneficial owner       shares       60 days (1)      Total          shares (2)

 D. R. Bannister         258,605      131,711        90,316  Direct       }3.8%
 Chairman of the Board     9,098                      9,098  Indirect

 T. E. Blanchard          91,281      31,200        122,481  Direct       }1.3%
 Director                                            13,702  Indirect

 R.E. Dougherty           4,000            0          4,000  Direct        } *
 Director

 P. C. FitzPatrick          184       10,000         10,184  Direct        } *
 Senior Vice President    3,098                       3,098  Indirect
 & Chief Financial Officer

 P. G. Kaminski               0            0             0                   *
 Director

 P. V. Lombardi          17,133       52,000         69,133  Direct         }*
 President, Chief         2,218                       2,218  Indirect
 Executive Officer &
 Director

 M. S. Mandell            3,772       17,000         20,772  Direct         }*
 Vice President,          2,193                       2,193  Indirect
 Business Development

 D. C. Mecum II               0            0              0                  *
 Director

 D. L. Reichardt         37,137       40,000         77,137  Direct         }*
 Senior Vice President    6,759                       6,759  Indirect
 & Director

 H. S. Winokur, Jr.   1,231,952            0      1,231,952  Indirect     10.9%
 Director (3)

 All directors and      482,747      325,511        808,257  Direct      }17.3%
 officers as a        1,298,573                   1,298,894  Indirect
 group

     (1) Column  reflect  shares  issuable  upon  exercise of vested  option and
         expiration of deferral periods under former Restricted Stock Plan.
     (2) Percentages  include  aggregate direct and indirect shares. An asterisk
         indicates  that  beneficial  ownership  is less than one percent of the
         class.
     (3) Includes  securities  owned  by  Capricorn.  See  preceding  table  for
         relationship of Mr. Winokur to Capricorn.

Item 13.  Certain Relationships and Related Information

         Mr. Winokur is the President of Winokur  Holdings,  Inc.,  which is the
managing  partner of  Capricorn  Holdings,  G.P.,  which in turn is the  general
partner of Capricorn. On January 23, 1997, the Company entered into an agreement
with  Capricorn.  Under the  agreement  Capricorn  waived its rights to nominate
directors of the Company  under the  Stockholders  Agreement  and certain  class
voting  rights of the Company's  then-outstanding  Class C Preferred  stock.  As
consideration, the Company paid Capricorn $1,175,000, and the Company authorized
Capricorn to distribute a substantial  portion of the shares of common stock and
warrants and all of the formerly  outstanding shares of Class C Preferred stock,
to  its  several   individual   investors  (the   "Investors").   Following  the
distribution,  the Company and the ESOP  entered  into a series of  transactions
with the individual  Investors,  and,  during  February  through April 1997, the
Company  and the ESOP  purchased  the  distributed  securities,  which  were the
equivalent of 2,884,178  shares of common stock in the aggregate,  at a price of
$19.55 per share. Except for the entities under the control of Mr. Winokur, none
of the Investors were affiliates of the Company.

         On  February  5, 1997,  the  Company  also  entered  into a  consulting
agreement with Capricorn Management,  G.P., an entity controlled by Mr. Winokur.
Under that  agreement,  the Company paid an aggregate  amount of $1,050,000  for
consulting  services during the period from 1995 through 1997 and for a covenant
against  competition;  the payment was  assigned to  Capricorn.  Capricorn  also
received a right of first offer  under  certain  circumstances  in the event the
Company seeks additional growth capital.

         General  Dougherty is an attorney  with the law firm of McGuire  Woods,
Battle & Boothe,  which firm is  retained  by the  Company  from time to time to
provide various legal services.

                                     PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) The following documents are filed as part of this Form 10-K:

1.  All financial statements.

2.  Financial statement Schedules.

 Schedule I - Condensed Financial Information of Registrant
    DynCorp (Parent Company)
        Balance Sheets
           Assets
           Liabilities and Stockholders' Equity
        Statements of Operations
        Statements of Cash Flows
        Notes to Condensed Financial Statements

 Schedule II - Valuation and  Qualifying  Accounts for the Years Ended  December
   31, 1997, 1996 and 1995.

 All other  financial  schedules not listed have been omitted since the required
 information is included in the Consolidated Financial Statements or the notes
 thereto, or is not applicable or required.

3.  Exhibits

Exhibit Description
3.1     Certificate of Incorporation, as currently in effect, consisting of
             Amended and Restated Certification of Incorporation (incorporated
             by reference to Registrant's Form 10-K/A for 1995, File No. 1-3879)
3.2     Registrant's By-laws as amended to date (incorporated by reference to
             Registrant's Form 10-K/A for 1995, File No. 1-3879)
4.1     Indenture and supplement, dated April 18, 1997 between Dyn Funding
             Corporation (a wholly owned subsidiary of the Registrant) and
             Bankers Trust Company relating to Contract Receivable
             Collateralized Notes (incorporated by reference to Registrant's
             Form S-2, File No. 33-59279)
4.2     Registration Rights Agreement, dated as of March 17, 1997, among the
             Registrant, and BT Securities Corporation and Citicorp Securities,
             Inc (incorporated by reference to Registrant's Form S-4 for
             1997, File No. 333-25355)
4.3     Indenture, dated March 17, 1997, between the Registrant and United
             States Trust Company of New York relating to the 9 1/2% Senior
             Subordinated Notes due 2007 (incorporated by reference to
             Registrant's Form S-4 for 1997, File No. 333-25355)
4.4     Specimen Common Stock Certificate (incorporated by reference to
             Registrant's Form 10-K for 1988, File No. 1-3879)
4.5     Statement Respecting Warrants and Lapse of Certain Restrictions
             (incorporated by reference to Registrant's Form 10-K for 1988,
             File No. 1-3879)
4.6     Amendment (effective March 26, 1991) to Statement Respecting
             Warrants and Lapse of Certain Restrictions  (incorporated by
             reference  to  Registrant's  Form  10-K for  1990,  File No.
             1-3879)
4.7     Article Fourth of the Amended and Restated Certificate of Incorporation
             (incorporated by reference to Registrant's Form 10-K for 1992,
             File No. 1-3879)
4.8     Second Amended and Restated Credit Agreement by and among Citicorp
             North America, Inc., certain Lenders, and the Registrant dated
             May 15, 1997 (incorporated by reference to Registrant's Form
             S-4 for 1997, File No. 333-25355)
4.9     Stockholders Agreement (incorporated by reference to Registrant's
             Form S-1 for 1995, File No. 33-59279)
10.1    Deferred Compensation Plan (incorporated by reference to Registrant's
             Form 10-K for 1987, File No. 1-3879)
10.2    Management Incentive Plan (filed herewith)
10.3    DynCorp Executive Incentive Plan (filed herewith)
10.4    Management Severance Agreements (incorporated by reference to Exhibits
             (c)(4) through (c)(12) to Schedule 14D-9 filed by Registrant
             January 25, 1988)
10.5    Employment Agreement of Paul V. Lombardi, Vice President, Government
             Services Group and currently President & Chief Executive Officer
             (incorporated by reference to Registrant's Form 10-K for 1993,
             File No. 1-3879)
10.6    Employment Agreement of Patrick C. FitzPatrick,  Senior Vice
             President  and  Chief  Financial  Officer  (incorporated  by
             reference  to  Registrant's  Form  10-K for  1996,  File No.
             1-3879)
10.7    Restricted Stock Plan (incorporated by reference to Registrant's
             Form 10-K/A for 1995, File No. 1-3879)
10.8    1995 Stock Option Plan, as amended (filed herewith)
21      Subsidiaries of the Registrant (filed herewith)
23      Consent of Independent Public Accountants (filed herewith)

(b)  Reports on Form 8-K

    None filed during the fourth quarter
        ended December 31, 1997

<PAGE>
                                   SIGNATURES

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

                                             DYNCORP

March 31, 1998                          By:   P. V. Lombardi
                                              P. V. Lombardi
                                              President and Chief
                                              Executive Officer


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



P. V. Lombardi    President and Director                 March 31, 1998
P. V. Lombardi    (Chief Executive Officer)

P. C. FitzPatrick Senior Vice President -                March 31, 1998
P. C. FitzPatrick Chief Financial Officer

D. L. Reichardt   Senior Vice President -                March 31, 1998
D. L. Reichardt   General Counsel and Director

J. J. Fitzgerald  Vice President and Controller          March 31, 1998
J. J. Fitzgerald  (Chief Accounting Officer)

D. R. Bannister   Director                               March 31, 1998
D. R. Bannister

T. E. Blanchard   Director                               March 31, 1998
T. E. Blanchard

H. S. Winokur, Jr.Director                               March 31, 1998
H. S. Winokur, Jr.

D. C. Mecum II    Director                               March 31, 1998
D. C. Mecum II

R. E. Dougherty   Director                               March 31, 1998
R. E. Dougherty

P. G. Kaminski    Director                               March 31, 1998
P. G. Kaminski

<PAGE>

DynCorp (Parent Company)
Schedule I - Condensed Financial Information of Registrant
Balance Sheets
(Dollars in thousands)
                                                                  December 31,
                                                                1997       1996
Assets

Current Assets:
Cash and cash equivalents                                   $ 18,591   $ 22,761
Accounts receivable and contracts in process,
  net of allowance for doubtful accounts (Note 3)             40,694     23,802
Inventories of purchased products and supplies                   548        911
Other current assets                                          10,005      8,263
                                                             -------    -------
    Total current assets                                      69,838     55,737

Investment in and advances to subsidiaries and affiliates     80,869     35,124

Property and Equipment, net of accumulated depreciation
   and amortization                                            7,780      6,217

Intangible Assets, net of accumulated amortization            30,775     31,831

Other Assets                                                   8,982      3,775
                                                             -------    -------
       Total Assets                                         $198,244   $132,684
                                                            ========   ========

The "Notes to Consolidated Financial Statements" of DynCorp and Subsidiaries
are an integral part of these statements.

See accompanying "Notes to Condensed Financial Statements".

<PAGE>

DynCorp (Parent Company)
Schedule I - Condensed Financial Information of Registrant
Balance Sheets
(Dollars in thousands)
                                                                 December 31,
                                                               1997        1996
                                                             ------       -----
Liabilities and Stockholders' Equity
Current Liabilities:
    Notes payable and current portion of long-term
      debt (Note 2)                                         $      -   $    267
    Accounts payable                                          17,078     15,203
    Advances on contracts in process                             661        508
    Accrued liabilities                                       71,304     72,758
                                                            --------   --------
        Total current liabilities                             89,043     88,736

Long-Term Debt (Note 2)                                       99,510        455

Other Liabilities and Deferred Credits                        12,465      6,654

Contingencies and Litigation                                       -          -

Temporary Equity:
    Redeemable Common Stock, at Redemption Value -
        ESOP                                                 151,823    136,343
        Other                                                  3,017      2,979

Permanent Stockholders' Equity:
    Preferred Stock, Class C                                       -      3,000
    Common Stock                                                 478        332
    Common Stock Warrants                                      1,259     11,139
    Paid-in Surplus                                          125,412    148,234
    Adjustment for redemption value greater than par value  (154,138)  (138,694)
    Deficit                                                  (93,837)  (101,259)
    Common Stock Held in Treasury                            (28,703)   (25,235)
    Unearned ESOP Shares                                      (8,085)         -
                                                            --------   --------
        Total Liabilities and Stockholders' Equity          $198,244   $132,684
                                                            ========   ========


The "Notes to Consolidated Financial Statements" of DynCorp and Subsidiaries are
an integral part of these statements.

See accompanying "Notes to Condensed Financial Statements."

<PAGE>

DynCorp (Parent Company)
Schedule I - Condensed Financial Information of Registrant
Statements of Operations
(Dollars in thousands)

<TABLE>
<CAPTION>
                                                                           For the Years Ended December 31,
                                                                          1997            1996             1995
<S>                                                                    <C>             <C>             <C>
Revenues                                                               $594,379        $588,978        $584,021
                                                                       --------        --------        --------
Costs and Expenses:
    Cost of services                                                    570,324         565,582         570,808
    Corporate selling and administrative                                  9,808          11,323          12,552
    Interest expense                                                      6,382           1,089           5,375
    Interest income                                                      (2,375)         (1,162)         (2,759)
    Other expense (Note 3)                                               27,773          18,373          22,583
                                                                       --------        --------        --------
                                                                        611,912         595,205         608,559

Loss from continuing operations before
  income taxes, equity in net income of
  subsidiaries and extraordinary item                                   (17,533)         (6,227)        (24,538)
    Benefit for income taxes                                             (7,709)         (3,994)        (25,340)
                                                                       --------        --------        --------
(Loss) earnings from continuing operations before
  equity in net income of subsidiaries and
  extraordinary item                                                     (9,824)         (2,233)            802
    Equity in net income of subsidiaries                                 17,246          14,182           4,472
                                                                       --------        --------        --------
Earnings from continuing operations before
  extraordinary item                                                      7,422          11,949           5,274
  Earnings (loss) from discontinued operations, net of
    income taxes                                                              -           2,680             (20)
                                                                       --------        --------        --------
Earnings before extraordinary item                                        7,422          14,629           5,254
    Extraordinary loss from early extinguishment
      of debt                                                                 -               -          (2,886)
                                                                       --------        --------        --------
Net earnings                                                             $7,422         $14,629        $  2,368
                                                                       ========        ========        ========
    Preferred Class C dividends not declared or recorded                      -          (2,284)         (1,915)
                                                                       --------        --------        --------
Common stockholders' share of earnings                                   $7,422         $12,345        $    453
                                                                       ========        ========        ========

<FN>

The "Notes to Consolidated Financial Statements" of DynCorp and Subsidiaries are
an integral part of these statements.

See accompanying "Notes to Condensed Financial Statements."

</FN>
</TABLE>

<PAGE>
<TABLE>

DynCorp (Parent Company)
Schedule I - Condensed Financial Information of Registrant
Statements of Cash Flows
(Dollars in thousands)
                                                                                      For the Years Ended December 31,
                                                                                   1997            1996            1995
<S>                                                                            <C>              <C>           <C>
Cash Flows from Operating Activities:
    Net earnings                                                               $  7,422         $14,629        $  2,368
    Adjustments to reconcile net earnings from operations
     to net cash (used) provided by operating activities:
       Depreciation and amortization                                              3,530           3,600           5,437
       Loss, before tax, on purchase of Junior Subordinated Debentures                -               -           4,786
       Payment of income taxes on gain on sale of
         discontinued operations                                                      -         (13,990)              -
       (Earnings) loss from discontinued operations                                   -          (2,680)             20
       Deferred income taxes                                                      1,785             787           2,707
       Change in reserves of businesses divested in 1988                          8,157             825           7,700
       Other                                                                       (323)           (327)         (2,021)
       Change in assets and liabilities, net of acquisitions and dispositions:
          (Increase) decrease in accounts receivable and
            contracts in process                                                (16,892)          4,367           4,311
          Decrease (increase) in inventories                                        363             255            (445)
          Increase in other current assets                                       (1,808)         (1,523)         (1,886)
          Decrease in current liabilities except notes
            payable and current portion of long-term debt                        (7,909)         (9,652)         (5,994)
                                                                               --------        --------        --------
    Cash (used) provided by continuing operations                                (5,675)         (3,709)         16,983
    Cash used by discontinued operations                                              -               -          (1,416)
                                                                               --------        --------        --------
        Cash (used) provided by operating activities                             (5,675)         (3,709)         15,567
                                                                               --------        --------        --------
Cash Flows from Investing Activities:
    Sale of property and equipment                                                  249             859              27
    Purchase of property and equipment, net of capitalized leases                (3,464)         (1,452)         (1,926)
    Proceeds received from notes receivable                                           -               -           8,943
    Assets and liabilities of acquired businesses                                     -          (1,707)              -
    Proceeds from sale of discontinued operations                                     -           3,050         135,700
    Investing activities of discontinued operations                                   -               -         (41,669)
    Increase in investments in affiliates                                          (867)              -               -
    Decrease (increase) in cash on deposit for letters of credit                      -           6,244          (3,307)
    Other                                                                          (276)           (232)           (229)
                                                                               --------        --------        --------
         Cash (used) provided from investing activities                          (4,358)          6,762          97,539
                                                                               --------        --------        --------
Cash Flows from Financing Activities:
    Treasury stock purchased                                                       (923)         (9,712)        (12,267)
    Payment on indebtedness                                                        (722)           (842)         (6,659)
    Proceeds from issuance of Senior Notes                                       99,484               -               -
    Common stock and warrants purchased from investors                          (37,819)              -               -
    Redemption of Junior Subordinated Debentures                                      -               -        (105,971)
    Stock released to Employee Stock Ownership Plan                               5,189             503          17,497
    Loans to Employee Stock Ownership Plan                                      (13,274)              -               -
    Deferred financing expenses                                                  (4,120)         (1,310)           (864)
    Other financing transactions                                                   (209)            (20)              -
    Change in intercompany balances, net                                        (41,743)            737          19,152
                                                                               --------        --------        --------
         Cash provided (used) from financing activities                           5,863         (10,644)        (89,112)
                                                                               --------        --------        --------
    Net (Decrease) Increase in Cash and Short-term Investments                   (4,170)         (7,591)         23,994
    Cash and Short-term Investments at Beginning of the Year                     22,761          30,352           6,358
                                                                               --------        --------        --------
    Cash and Short-term Investments at End of the Year                          $18,591         $22,761         $30,352
                                                                               ========        ========        ========

The "Notes to Consolidated Financial Statements" of DynCorp and Subsidiaries are
an integral  part of these  statements.  See  accompanying  "Notes to  Condensed
Financial Statements."

</TABLE>

<PAGE>



DynCorp (Parent Company)
Schedule I - Notes to Condensed Financial  Statements December 31, 1997 (Dollars
in thousands except where otherwise noted)


1.  Basis of Presentation

    Pursuant  to the  rules  and  regulations  of the  Securities  and  Exchange
Commission,  the Condensed Financial Statements of the Registrant do not include
all of the  information  and notes normally  included with financial  statements
prepared in accordance with generally  accepted  accounting  principles.  It is,
therefore,  suggested  that  these  Condensed  Financial  Statements  be read in
conjunction  with the  Consolidated  Financial  Statements  and  Notes  included
elsewhere in this Annual Report on Form 10-K.

2.  Long-term Debt

    At December 31, 1997 and 1996, long-term debt consisted of:

                                                    1997     1996
                                                   -----    -----
9 1/2% Senior Notes, due 2007                    $99,510  $     -
Notes payable, due in installments through 2002,
  11.43% weighted average interest rate                -      722
                                                 -------  -------
Less current portion                                   -      267
                                                 -------  -------
                                                 $99,510  $   455
                                                 =======  =======

3.  Accounts Receivable

    The Company's wholly-owned subsidiary,  Dyn Funding Corporation ("DFC"), was
established  in January,  1992 to facilitate  the issuance of $100.0  million of
8.54% Contract Receivable Collateralized Notes and to purchase eligible accounts
receivable from the Company and its subsidiaries. In April 1997, DFC completed a
private  placement  of $50.0  million of 7.486% Fixed Rate  Contract  Receivable
Collateralized Notes (the "Notes").  Utilizing the proceeds from the issuance of
the  Notes and a portion  of the  proceeds  from the 9 1/2%  Senior  Notes,  the
Company retired the maturing 8.54% Contract Receivable  Collateralized Notes. On
an ongoing basis, the cash received by DFC from collection of the receivables is
used to make interest  payments on the Notes, pay a servicing fee to the Company
and purchase additional receivables from the Company (see Note 5 to Consolidated
Financial Statements included elsewhere in this Annual Report on Form 10-K).

    The Company  receives 97% of the face value of the accounts  receivable sold
to DFC.  The 3%  discount  from the face  value of the  accounts  receivable  is
recorded as an expense by the Company at the time of sale. In 1997 and 1996, the
Company  recorded as expense  $16.7 million and $17.2 million which is reflected
in "Other  expense"  in the  accompanying  "Statements  of  Operations"  (in the
"Consolidated Statements of Operations" of DynCorp and Subsidiaries this expense
is offset by the gain recognized by DFC).


<PAGE>

<TABLE>

DynCorp and Subsidiaries
Schedule II - Valuation and Qualifying Accounts
For the Years Ended December 31, 1997, 1996 and 1995
(Dollars in thousands)

<CAPTION>
                                           Balance at  Charged to     Write-off of              Balance
                                            Beginning   Costs and    Uncollectible            at End of
              Description                   of Period    Expenses       Accounts     Other       Period
<S>                                            <C>        <C>          <C>      <C>            <C>
Year Ended December 31, 1997
  Allowance for doubtful accounts             $   229      $  629       $(382)   $       -      $   476

Year Ended December 31, 1996
  Allowance for doubtful accounts             $     9      $  120       $   -    $     100 (1)  $   229

Year Ended December 31, 1995
  Allowance for doubtful accounts             $     9      $    -       $   -    $       -      $     9



(1) Balance recorded at acquisition of Data Management Design, Inc.

</TABLE>