<PAGE>   1
                                                                    EXHIBIT 13.1


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

GENERAL

BTG, Inc. ("BTG" or "the Company") is an information technology company
providing complete solutions to a broad range of complex systems and product
needs of the United States Government and its agencies and departments ("the
Government") and other commercial and state and local government customers. The
Company provides systems development, integration, engineering and network
design, implementation, and security expertise services ("the Systems
Business"). The Company also resells computer hardware, software and integrated
systems ("the Product Reselling Business").

The Company's revenues are derived from both contract activities and product
sales. Contract revenue is typically less seasonal than product sales but
fluctuates month-to-month based on contract delivery schedules. Contract
revenue is characterized by lower direct costs than product sales yet generally
requires a higher relative level of infrastructure support. Year-to-year
increases in contract revenue have generally resulted from increases in volume,
driven by additional work requirements under Government contracts, rather than
price increases, which are generally limited to escalation factors of 3% to 4%
on direct labor costs. Product sales are highly seasonal, with the Company's
second and third fiscal quarters typically accounting for the greatest
proportion of revenues each year. Product sales are characterized by higher
direct costs than contract revenue; however, indirect expenses associated with
product sales are generally lower in comparison. Year-to-year increases in
product sales have generally been driven by higher volumes as opposed to price
increases.

During fiscal 1996, the Company's operations were adversely affected by the
Government's budget impasse, which resulted in partial shutdowns of the
Government for several weeks during the Company's third and fourth fiscal
quarters. These shutdowns had a negative impact on fiscal 1996 third-quarter
operations.   In addition, the processing of payments under Government
contracts and purchases was delayed by the shutdowns. This required the Company
to carry higher receivable balances, which, in turn, resulted in higher
interest costs. The extent of any impact on the Company's results of
operations, financial position or liquidity resulting from possible future
shutdowns cannot be determined at this time.

In October 1995, the Company acquired all of the outstanding capital stock of
Concept Automation, Inc. of America ("CAI") for approximately $14.7 million.
CAI was primarily involved in the integration, sale and maintenance of
electronic data processing equipment and related support services, principally
to civilian agencies of the Government. The acquisition was accounted for using
the purchase method of accounting, and accordingly, the results of operations
of CAI have been included in the Company's consolidated statements of
operations since the date of acquisition. The excess of the purchase price over
the fair value of the net tangible and identifiable intangible assets acquired
has been recorded as goodwill and is being amortized on a straight-line basis
over 20 years, the expected period of benefit. Effective April 1, 1996, the
Company integrated CAI's operations with those of its Technology Systems and
Integration and Network Systems business units.

In August 1996, the Company formed a new subsidiary, Community Networks, Inc.
("CNI"), in which the Company maintains a majority interest at March 31, 1997.
CNI was created to be a total solutions provider to broadband network owners
entering the Internet access market. CNI's offerings will allow network
operators to sell enhanced Internet services to residential consumers and
businesses. CNI's initial market has been data-over-cable, high-speed Internet
access via cable television plants, focused on mid-sized and independent cable
operators; however, CNI plans to diversify to serve other broadband
telecommunications providers, including telephone companies, utilities, and
emerging wireless technology companies. During fiscal 1997, BTG contributed
approximately $2.7 million toward the start-up of CNI, principally for the
development and marketing of its products and services.  CNI began providing
its services to residential customers for the first time in April 1997. The
Company believes that CNI will continue to require similar investment over the
next fiscal year as it continues to establish itself in the high-speed Internet
access arena.





                                       16
<PAGE>   2
RESULTS OF OPERATIONS

The following table presents for the periods indicated (i) the percentage of
revenues represented by certain income and expense items and (ii) the
percentage period-to-period increase (decrease) in such items:
<TABLE>
<CAPTION>
                                                                                                          Period-to-Period   
                                                                     Percentage of Revenue              Increase (Decrease) of
                                                                  Fiscal Year Ended March 31,                   Dollars        
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                         1997             1996
                                                                                                     compared with    compared with
                                                              1997         1996           1995           1996            1995       
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                         <C>           <C>            <C>            <C>             <C>
Revenues:                                                                                                            
  Contract revenue                                           27.5%         31.4%          29.6%          63.9%           45.3%
  Product sales                                              72.5          68.6           70.4           98.0            33.4
    Total revenues                                          100.0         100.0          100.0           87.3            36.9
Direct costs:                                                                                                        
  Contract costs (as a % of contract revenue)                60.7          53.1           50.0           87.4            54.4
  Cost of product sales (as a % of product sales)            87.8          87.4           87.0           99.0            34.0
    Total direct costs (as a % of total revenues)            80.4          76.6           76.1           96.5            37.9
Indirect, general and administrative expenses                16.1          19.1           18.8           58.2            38.9
Amortization and other operating costs, net                   0.5           0.8            0.7           20.1            49.1
Operating income                                              3.0           3.5            4.4           60.8             8.5
Interest expense                                             (1.5)         (1.4)          (0.9)         100.6           123.6
Equity in earnings of affiliate                               0.4           0.4             --          138.3           100.0
Other income                                                  0.1            --             --          100.0              --
Income before income taxes                                    2.0           2.5            3.5           51.4            (5.5)
Provision for income taxes                                    0.9           1.1            1.5           60.3            (5.2)
Net income                                                    1.1           1.4            2.0           44.6            (5.7)
</TABLE>

FISCAL 1997 COMPARED WITH FISCAL 1996

Revenues for fiscal 1997 increased by $186.5 million, or 87.3%, from fiscal
1996. Of this increase, $42.8 million was attributable to contract revenue and
$143.7 million was attributable to product sales. The increase in contract
revenue was primarily due to an increase of $13.8 million under contracts
acquired in connection with the acquisition of CAI; an increase of $17.7
million of revenue recognized under the Company's Integration for Command,
Control, Communications, Computers and Intelligence ("IC4I") contract; an
increase of $3.2 million in contract sales of certain Internet browser products
and services; $2.1 million of revenue resulting from a new contract with the
Federal Aviation Administration; $1.7 million of revenue resulting from the
Company's National Institutes of Health ("NIH") ImageWorld contract, which was
awarded in August 1996; an increase of $1.3 million in services work related to
a contract with the Tennessee Valley Authority ("TVA"); and a net increase of
$3.0 million from a variety of other contracts. The increase in product sales
was primarily due to an increase of $50.4 million of revenue generated under a
variety of sales vehicles acquired in connection with the acquisition of CAI;
an increase of $95.3 million of revenue resulting from sales under the
Company's electronic computer store contract with the NIH; $11.0 million in
increased sales under General Services Administration ("GSA") Schedule
contracts, either directly from the Company's GSA Schedule contracts or from
sales to other prime contractors with GSA Schedule contracts; an increase of
$7.8 million in orders fulfilled under the Systems Acquisition Support Services
("SASS") contract for the defense intelligence community; and $9.8 million in
increased sales to the commercial market.  These increases were offset by
decreases of $28.7 million in sales from purchase contracts under the Basic
Ordering Agreement ("BOA") with the North Atlantic Treaty Organization
("NATO"), and a net decrease of $1.9 million in revenues under a variety of
other sales vehicles. In fiscal 1997, approximately 89% of the Company's
revenues were derived from contracts or subcontracts with and product sales to
the Government, compared with 90% for fiscal 1996.

Direct costs, expressed as a percentage of total revenues, increased from 76.6%
in fiscal 1996 to 80.4% in fiscal 1997, reflecting the increased proportion of
total revenues derived from product sales, which typically have higher direct
costs than do revenues generated from service contracts. Contract costs as a
percentage of contract revenue increased from 53.1% in fiscal 1996 to 60.7% in
fiscal 1997, primarily as a result of revenues generated from the IC4I contract
and from contracts acquired in connection with the acquisition of CAI, both of
which require higher levels of material purchases and/or subcontractor
involvement than does BTG's historical contract base, which has a more
labor-intensive, higher gross margin profile. Contract costs include labor
costs, subcontract costs, material costs and other costs directly related to
contract revenue. As a percentage of product revenues, cost of product sales in
fiscal 1997 was relatively unchanged from fiscal 1996.

Indirect, general and administrative expenses include the costs of indirect
labor, fringe benefits, overhead, sales and administration, bid and proposal,
and research and development. Indirect, general and administrative expenses for
fiscal 1997 increased by $23.8 million, or 58.2%, from  fiscal 1996. This
increase resulted primarily from an increase in the overall volume of business
as compared with fiscal 1996; as well as from indirect expenses incurred by
CAI, of which only a portion were included in the





                                       17
<PAGE>   3
Company's consolidated fiscal 1996 results; and from the Company's investment
in CNI. In addition, the Company incurred certain costs during fiscal 1997 that
were directly related to certain extraordinary events occurring during its
fourth quarter, such as the Company's consolidation of its Washington, D.C.
area offices, the alignment of certain employee benefits between the plans of
acquired companies and BTG, and the write-off of a significant receivable
resulting from the bankruptcy of a commercial customer.  Expressed as a
percentage of total revenues, indirect, general and administrative expenses
decreased in fiscal 1997 to 16.1%, from 19.1% in fiscal 1996, principally
reflective of the increased proportion of total revenues derived from product
sales, which typically have lower indirect, general and administrative expenses
than do revenues generated from service contracts. In addition, certain
non-recurring costs recognized in fiscal 1996 resulting from compensation paid
to a number of employees that could not be charged as direct labor costs to
federal contracts affected by the Government shutdown contributed to the
decreased percentage of indirect, general, and administrative expenses compared
with total revenues.

Amortization and other operating costs, net, which include the amortization of
goodwill and other intangible assets as well as other operating expenses that
are non-reimbursable under Government contracts, increased by $321,000 in
fiscal 1997 as compared with the previous year. This increase was attributable
to increased amortization expense of approximately $389,000 associated with the
goodwill and other intangible assets arising from the acquisition of CAI in
October 1995, offset by a net reduction of $68,000 in other operating costs.

Interest expense for fiscal 1997 increased by $3.1 million, or 100.6%, from
fiscal 1996. This increase was due, in part, to interest paid on borrowings
related to the Company's acquisition of CAI, as well as to the significant
growth in revenues in fiscal 1997, which generated an increase in the level of
outstanding receivables and in the amount of inventory held by the Company,
thereby resulting in a higher level of interest expense related to the
financing of these operating assets. The Company maintains a revolving line of
credit facility (the "Credit Facility") to fund its working capital needs. (See
"Liquidity and Capital Resources--Credit Facility.") In addition, higher
interest costs were incurred during fiscal 1997 as a result of the issuance of
subordinated notes payable (the "Subordinated Notes") by the Company in
February 1996. These notes bear interest at a stated annual rate of 12.875% and
have an effective annual rate of 14.2%. (See "Liquidity and Capital
Resources--Subordinated Notes.") In December 1996, the Company sold 2,190,000
shares of its common stock in a public offering, at $16.25 per share, for total
proceeds of $33.1 million, net of issuance costs. The proceeds from this
offering were received at the latter part of the Company's third quarter and
were used to reduce borrowings outstanding under the Credit Facility.

Equity in the earnings of unconsolidated affiliates increased by $1.1 million,
or 138.3%, in fiscal 1997 as compared with fiscal 1996. This income is derived
from the Company's 49% interest in an unconsolidated joint venture. The joint
venture entity, which is with an unrelated company, was created for the purpose
of performing under a specific contract. BTG's interest was acquired by the
Company in connection with its acquisition of CAI. The significant increase in
this income during fiscal 1997 as compared with the prior year was a result of
both the higher volume of product sales recognized by the joint venture in
fiscal 1997 and the fact that product sales from the joint venture only
generated  income for the Company for the portion of fiscal 1996 coincident
with the acquisition of CAI.

The Company's effective tax rate for fiscal 1997 was 46.1% compared with 43.6%
in fiscal 1996. This increase was principally due to the additional goodwill
and intangible asset amortization expense recorded in fiscal 1997, which is not
deductible for income tax purposes, and an  increase in certain other
non-deductible costs offset, in part, by a reduction in the deferred tax asset
valuation allowance.

Net income for fiscal 1997 increased by $1.3 million, or 44.6%, from fiscal
1996, due to the reasons discussed above.

FISCAL 1996 COMPARED WITH FISCAL 1995

Revenues for fiscal 1996 increased by $57.6 million, or 36.9%, from fiscal
1995. Of this increase, $20.9 million was attributable to contract revenue,
which increased by 45.3%, and $36.7 million was attributable to product sales,
which increased by 33.4%.  The increase in contract revenue was primarily due
to revenue of $7.7 million recognized by CAI, which was acquired in October
1995; an increase of $7.4 million in revenue recognized from a full year's
operations of Delta, which was acquired in November 1994; and $4.9 million in
sales of Internet-related services. The increase in product sales was primarily
due to sales of $17.6 million recognized by CAI; $20.0 million in sales to
prime contractors of the Government under a variety of contract vehicles; $9.7
million in increased sales from direct Department of Defense ("DOD") orders;
$4.8 million in orders fulfilled under the SASS contract; and $1.0 million in
increased sales to the commercial market. These increases were offset by
decreases of $10.7 million in sales from purchase contracts under the NATO BOA
and $6.3 million in decreased sales under the Company's GSA Schedule contracts,
the latter of which the Company believes was in large part attributable to the
Government's budget impasse during fiscal 1996. In fiscal 1996, approximately
90% of the Company's revenues were derived from contracts or subcontracts with
and product sales to the Government, as compared with 91% for fiscal 1995.

Direct costs, expressed as a percentage of total revenues, increased to 76.6%
in fiscal 1996 from 76.1% in fiscal 1995. Contract costs as a percentage of
contract revenue increased to 53.1% in fiscal 1996 from 50.0% in fiscal 1995,
primarily as a result of revenue generated from CAI's contracts, which
typically required higher levels of material purchases than BTG's historical
contract base, which has a more labor-intensive, higher gross margin profile.
Contract costs include labor costs, subcontract costs, material costs and other
costs directly related to contract revenue. Cost of product sales as a
percentage of product revenue increased slightly to 87.4% in fiscal 1996  from
87.0% in fiscal 1995. This increase was primarily attributable to the inclusion
of CAI's product sales, which generated lower gross margins for the year than
the company has typically experienced in its other product sales business.

Indirect, general and administrative expenses include fringe benefits,
overhead, selling and administrative, bid and proposal,





                                       18
<PAGE>   4
and research and development expenses. Indirect, general and administrative
expenses increased by $11.4 million, or 38.9%, in fiscal 1996 as compared with
fiscal 1995. Expressed as a percentage of total revenues, indirect, general and
administrative expenses increased slightly in fiscal 1996 to 19.1%, from 18.8%
in fiscal 1995. This increase was due primarily to indirect expenses of $5.3
million at CAI and a net increase in indirect expenses of $3.6 million at
Delta, which was acquired during the latter half of fiscal 1995. These
increases were offset by decreased bid and proposal costs of $1.1 million in
fiscal 1996 as compared with fiscal 1995. The remainder of the increase was
primarily attributable to an increase in the overall volume of business and to
higher indirect costs resulting from compensation paid to a number of employees
who could not be charged as direct labor costs to federal contracts affected by
the Government shutdown.

Amortization and other operating costs, which include the amortization of
goodwill and other intangible assets as well as other operating expenses that
are non-reimbursable under Government contracts, increased by $525,000, or
49.1%, in fiscal 1996 as compared with fiscal 1995. This increase was largely
attributable to $394,000 of additional amortization expense associated with
goodwill and other intangible assets arising from the business combinations
made by the Company in fiscal 1996 and the latter half of fiscal 1995. The
remaining increase was attributable to additional non-reimbursable operating
costs incurred principally as a result of the overall increase in the Company's
business and from unconsummated merger and acquisition transactions.

Interest expense increased by $1.7 million, or 123.6%, in fiscal 1996 as
compared with fiscal 1995. This increase was due in large part to interest paid
on borrowings related to the Company's acquisition of ACTech, Delta, and CAI in
fiscal 1995 and 1996. In addition, the growth in revenues in fiscal 1996
generated an increase in receivable balances, thereby resulting in a higher
level of interest expense related to receivable financing. Further, the
Government shutdowns during the third and fourth quarters of fiscal 1996
delayed the processing of payments under Government contracts and purchases.
This required the Company to carry its outstanding receivable accounts for
longer periods of time than would otherwise have been the case, which, in turn,
resulted in higher interest costs to the Company. In November 1995, the Company
entered into the Credit Facility, a revolving line of credit that is primarily
used to fund ongoing operations of the Company. Interest paid under the Credit
Facility is based on current market rates adjusted monthly. The average
interest rate incurred under the Credit Facility during fiscal 1996 was 8.1%,
as compared with 7.9% in fiscal 1995. The increase in the average interest rate
paid reflects the higher rate payable under the formula set forth in the Credit
Facility as compared with the Company's former credit facility, partially
offset by a decline in prevailing market rates during fiscal 1996.

The Company's effective tax rate for fiscal 1996 was 43.6% compared with 43.4%
in fiscal year 1995. The increase was due to the additional goodwill and
intangible asset amortization expense, which typically is not deductible for
income tax purposes, offset in part by a reduction in the deferred tax asset
valuation allowance.

Net income for fiscal 1996 decreased by $178,000, or 5.7%, from fiscal 1995,
due to the reasons discussed above.

INFLATION

Approximately 31.6% and 56.8% of the Company's contract revenue for fiscal 1997
and 1996, respectively, were under cost-reimbursement-type contracts, under
which inflationary increases are borne by the customer. Although the Company
performs on several multi-year, fixed-price and time-and-materials contracts,
under which it bears the risk of inflationary pressures on its costs, to date
it has not been materially adversely affected by inflation. In addition, the
Company's product sales generally have not been affected by inflation.

LIQUIDITY AND CAPITAL RESOURCES

Principally as a result of the Company's significant growth in fiscal 1997,
operating activities used cash of approximately $27.6 million in fiscal 1997,
primarily reflecting increases in accounts receivable, inventory, and prepaid
expenses of approximately $30.6 million, $7.3 million, and $5.3 million,
respectively. These increases were offset by increases in accounts payable and
accrued expenses of approximately $6.8 million and $2.6 million, respectively.
In addition, decreases in other liabilities and income taxes currently payable
of approximately $1.6 million and $1.3 million, respectively, contributed to
the use of cash by the Company's operating activities in fiscal 1997. Net cash
of $5.2 million and $13.3 million was used by operating activities during
fiscal 1996 and 1995, respectively. The cash used in operations during fiscal
1996 was largely the result of increases in accounts receivable  resulting from
higher business volumes.

Cash flow related to investing activities during fiscal 1997 resulted in a net
use of cash of approximately $5.3 million and primarily consisted of
investments in capital expenditures and product development. The Company
invested approximately $2.0 million in the development of various software
products during fiscal 1997, principally for products to be used by the
Company's newly formed subsidiary, CNI, in the delivery of its products and
services. In addition, the Company invested cash of approximately $2.8 million
in capital expenditures during fiscal 1997, primarily relating to the
acquisition of office and computer-related equipment for use in the performance
of contracts and increased efficiency in the Company's administration and to
leasehold improvements associated with the Company's physical relocation of its
principal facilities. The Company expects to invest less cash in capital
expenditures in fiscal 1998. In addition, the Company invested $200,000 during
fiscal 1997 in WheelGroup Corporation ("WGC"), which is principally involved in
network security products and services, and purchased a $300,000 convertible
note from WGC.

In fiscal 1996 and 1995, approximately $15.2 million and $4.2 million,
respectively, were used by investing activities. The cash used in investing
activities during these fiscal years was principally due to the acquisitions of
CAI, ACTech and Delta.

During fiscal 1997, approximately $32.9 million was provided from financing
activities, primarily as a result of $33.1 million in net proceeds resulting
from the Company's follow-on stock offering in December 1996, offset by
approximately $1.0 million in payments under both outstanding debt and capital
lease





                                       19
<PAGE>   5
arrangements and debt issue costs.  In addition, the Company received proceeds
of approximately $800,000 from sales of stock under employee stock option and
stock purchase plans during fiscal 1997. The net proceeds received from the
follow-on stock offering were used to reduce borrowings outstanding under the
Company's Credit Facility, under which were available borrowings of $30.2
million at March 31, 1997. During fiscal 1996, $19.1 million was provided from
financing activities, primarily as the result of $15.0 million in proceeds
received from the issuance of the Subordinated Notes and increased borrowings
of $7.0 million under the Company's Credit Facility. In fiscal 1996, these
funds were used to finance the cash portion of the Company's acquisition of CAI
and to fund the Company's significant business growth. In fiscal 1995, $18.6
million was provided from financing activities, reflecting $8.7 million in net
proceeds from the Company's initial public offering and increased borrowings of
$11.4 million under the Company's working capital line of credit.

At March 31, 1997, working capital was approximately $83.6 million, a $35.6
million increase over the working capital level at March 31, 1996. This
increase was primarily attributable to the higher levels of accounts receivable
and inventory at March 31, 1997 as compared with the prior year, resulting from
the Company's significant growth in fiscal 1997.

The Company believes that funds available under its revolving line of credit
facility will be sufficient to fund the Company's receivable financing and
capital expenditure requirements for the next 12 months. The Company is
currently negotiating with its lenders to increase the availability of funds
under its inventory financing facility in anticipation of increased volumes in
its Product Reselling Business during fiscal 1998.

CREDIT FACILITY. The Credit Facility is a secured revolving credit facility
consisting of three revolving promissory notes provided to the Company and its
subsidiaries by NationsBank, N.A. ("NationsBank"), Fleet Capital Corporation,
and Signet Bank, N.A. in the principal amount of up to $85.0 million. (See,
however, "Subordinated Notes" regarding limitations on the  Company's
borrowings under the Credit Facility.) The principal amount outstanding under
the Credit Facility may not exceed the lesser of (i) $85.0 million or (ii) a
defined borrowing base, which is a variable amount calculated by aggregating a
specified set of the Company's accounts receivable and unbilled costs. If for
any quarter during the term of the Credit Facility, the average daily
outstanding principal balance under the Credit Facility is less than 50% of the
commitment amount ($85 million unless otherwise reduced), the Company must pay
a commitment fee at the rate of three-eighths of 1% per annum on the difference
between the commitment amount and the daily outstanding principal balance under
the Credit Facility during such quarter. The Credit Facility expires on August
31, 1998. Interest on revolving loan advances made under the Credit Facility
is, at the option of the Company, either (i) the NationsBank prime rate or (ii)
LIBOR plus a percentage ranging from 1.25% to 2.00% depending on the Company's
leverage ratio. At March 31, 1997, the balance outstanding under the Credit
Facility was approximately $30.0 million and approximately $30.2 million was
available for additional borrowing. The Credit Facility is secured by
substantially all assets of the Company with the exception of inventory and
includes certain financial and other covenants restricting, among other things,
changes in capital structure, mergers, acquisitions, sales of assets, changes
of operations, purchases and redemptions of stock, additional indebtedness,
payment of dividends and other payments to shareholders, investments, capital
expenditures, a net loss by the Company for any fiscal quarter and certain
other matters without the approval of the lenders. At March 31, 1997, the
Company was not in compliance with some of the covenants under the Credit
Facility, and has obtained a waiver of such non-compliance from the lenders.

SUBORDINATED NOTES. On February 16, 1996, the Company entered into a Note and
Warrant Purchase Agreement ("the Nomura Agreement") with Nomura Holding
America, Inc. ("Nomura") under which the Company issued $15.0 million of
Subordinated Notes. The Subordinated Notes, which bear interest at 12.875% per
annum, are due in February 2001. In connection with the issuance of the
Subordinated Notes, the Company also issued common stock purchase warrants
("Warrants") to the holder of the Subordinated Notes, entitling such holder to
purchase up to 317,478 shares of Common Stock at $9.50 per share and to certain
registration rights with respect to such shares. The Warrants are exercisable
at any time through February 16, 2003. Both the number of shares obtainable
from exercise of the Warrants and the exercise price per share are subject to
adjustment based on certain anti-dilution provisions included in the Nomura
Agreement. The Nomura Agreement also contains certain covenants that, among
other matters, restrict or limit the ability of the Company to pay dividends,
incur indebtedness, make capital expenditures and acquire other companies. The
Company is also required to maintain certain financial ratios regarding
interest coverage, leverage, and net worth, among other things. At March 31,
1997, the Company was not in compliance with some of the covenants under the
Nomura Agreement, and has obtained a waiver of such non-compliance from Nomura.

On October 1, 1996, the Company obtained the consent of the Subordinated Notes
holder to increase its borrowings under the Credit Facility to $85.0 million
(the Nomura Agreement originally restricted the Company from borrowing amounts
over $60.0 million from the Credit Facility) through March 31, 1997, and $65.0
million thereafter.

INVENTORY FINANCING FACILITY. On October 31, 1996, the Company entered into an
agreement with Deutsche Financial Services Corporation ("DFS") under which it
can borrow up to $15.0 million to finance inventory purchases. Borrowings under
this inventory financing facility are secured by all of the Company's
inventory. The interest rate and other finance charges on each advance under
this facility are set by mutual agreement of the parties based on the
particular item of inventory being financed, the availability of vendor
discounts, prevailing economic conditions, DFS' floor planning volume with the
Company and its vendors, and certain other economic factors. The lenders of
both the Credit Facility and the Subordinated Notes have approved this
inventory financing facility, subject to the condition that the maximum amount
of outstanding debt





                                       20
<PAGE>   6
under this facility and the Credit Facility not exceed $90.0 million in the
aggregate. Outstanding advances to the Company under the inventory financing
facility at March 31, 1997 totaled $3.1 million. In addition, the Company is
subject to certain restrictive covenants under this facility. At March 31,
1997, the Company obtained a waiver from the lending financial institution for
non-compliance with one of the financial covenants.

MARKET INFORMATION

The Company's common stock trades on the Nasdaq National Market under the
symbol "BTGI." The stock has been publicly traded since December 1994. The high
and low sale prices per share of common stock for each quarter of fiscal 1997
and 1996 are as follows:

<TABLE>
<CAPTION>
                                                         
----------------------------------------------------------
Quarter Ended                       High              Low 
----------------------------------------------------------
FY 1997
<S>                               <C>             <C>
June 30, 1996                     $15.250         $  9.250
September 30, 1996                 15.750           11.500
December 31, 1996                  27.250           14.000
March 31, 1997                     27.875           17.500

FY 1996
June 30, 1995                      10.000            7.750
September 30, 1995                 11.750            8.375
December 31, 1995                  15.000            8.875
March 31, 1996                     11.875            8.750
</TABLE>

The Company has never paid cash dividends and is currently prohibited from
doing so under its debt agreements. It is the present policy of the Company to
retain earnings to finance the growth and development of its business, and
therefore, the Company does not anticipate paying cash dividends on its common
stock in the foreseeable future.

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Shareholders of BTG, Inc.:

We have audited the accompanying consolidated balance sheets of BTG, Inc. and
subsidiaries as of March 31, 1997 and 1996, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
years in the three-year period ended March 31, 1997.  These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of BTG, Inc. and
subsidiaries as of March 31, 1997 and 1996, and the results of their operations
and their cash flows for each of the years in the three-year period ended March
31, 1997, in conformity with generally accepted accounting principles.


/s/ KPMG PEAT MARWICK LLP

KPMG Peat Marwick LLP


McLean, Virginia
May 20, 1997





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