<PAGE>   1
================================================================================

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

[X]            ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
                    FOR THE FISCAL YEAR ENDED MARCH 31, 1999

                                       OR

[ ]           TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
                    FOR THE TRANSITION PERIOD FROM      TO
                         COMMISSION FILE NUMBER 0-25094
                                    BTG, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S>                                                              <C>
                       VIRGINIA                                        54-1194161
             (STATE OR OTHER JURISDICTION                           (I.R.S. EMPLOYER
          OF INCORPORATION OR ORGANIZATION)                        IDENTIFICATION NO.)

      3877 FAIRFAX RIDGE ROAD, FAIRFAX, VIRGINIA                       22030-7448
       (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                        (ZIP CODE)
</TABLE>
       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (703) 383-8000.

           SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
                                (Not applicable)
           SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

                                  Common Stock

    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 (Section 229.405 of this chapter) 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. [ ]

    Based upon the closing price of the registrant's common stock as of June 14,
1999, the aggregate market value of the voting stock held by non-affiliates of
the registrant is $36,746,358*.

    The number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date is:

<TABLE>
<S>                                  <C>
       Class: Common Stock.          Outstanding at June 14, 1999: 8,842,225 shares.
</TABLE>

                      DOCUMENTS INCORPORATED BY REFERENCE:

PART III: Portions of the Definitive Proxy Statement for the Annual Meeting of
          Shareholders to Be Held on September 9, 1999.

----------

*  Solely for purposes of this calculation, all executive officers and directors
   of the registrant and all shareholders reporting beneficial ownership of more
   than 5% of the registrant's common stock are considered to be affiliates.

================================================================================


                                       1
<PAGE>   2

                                     PART I

ITEM 1.  BUSINESS

INTRODUCTION

      BTG, Inc. ("BTG" or the "Company") is an information systems and
technical services company providing complete solutions to a broad range of the
complex systems needs of the United States Government and its agencies and
departments (the "Government") and other commercial and state and local
government customers. Currently, the Company provides systems development,
integration, engineering and network design, implementation and security
expertise services (the "Systems Business"). Prior to fiscal 1999, the Company
operated a division which was responsible for reselling computer hardware and
software products (the "Product Reselling Business"), principally to the
Government. In February 1998, BTG entered into an asset purchase agreement with
Government Technology Services, Inc. ("GTSI") under which BTG completed the
sale to GTSI of certain assets, contracts and customer orders of the Product
Reselling Business (the "GTSI Transaction"). During fiscal 1999, the Company
experienced a significant decrease in revenues derived from product sales as a
result of the GTSI Transaction and management expects that revenues from
product sales will continue to decline in future periods as well. During fiscal
years 1999 and 1998, the Company's revenues were $316.4 million and $586.7
million, respectively, and it recorded net income from continuing operations of
$2.8 million in fiscal 1999 and a net loss from continuing operations in fiscal
1998 of $29.1 million. Through acquisitions, internal growth and successful
contract awards, the Company has increased its participation as a significant
provider of information technology systems solutions to the Government.

      The Company's headquarters and executive offices are located at 3877
Fairfax Ridge Road, Fairfax, Virginia 22030-7448, and its telephone number is
(703) 383-8000.

INDUSTRY BACKGROUND

      Since the mid-to-late 1980s, the Government, like many corporate
organizations, has increasingly adopted computer networking technology to
connect personal computers into resource-sharing work groups referred to as
local area networks ("LANs"). In recent years, there has been an increasing
demand in the information technology industry for open systems approaches
designed to create interoperability among commercial-off-the-shelf ("COTS")
computer software and hardware products manufactured by different suppliers. In
addition, concerns over excessive development costs and the rapid pace of
technological change have led both Government and commercial customers to
demand more flexible systems created by adapting readily-available COTS
software and hardware, rather than systems that have been built to customized
specifications.

      The Government information technology market is generally characterized
by highly-structured procurement rules and procedures, large contracts, a
relatively long sales cycle (often several years), significant barriers to
entry, and low collection risks. In addition, many contracts in the defense and
intelligence areas require high-level security clearances.

      Since the late 1980s, the Government has made use of fewer, but
larger-scale procurements to meet its information technology requirements,
requiring companies to have greater financial and technical resources in order
to participate in competitive bids. This has necessitated increased use of
teaming agreements among several firms in order to fulfill the requirements of
the larger procurements, which typically have been awarded as indefinite
delivery-indefinite quantity ("IDIQ") type contracts. Increasingly, such IDIQ
awards have been made to more than one team which has resulted in post-award
competition for contract orders. See "Government Contracts -- Negotiated
Procurement Contracts".

      The 1990s marked the emergence of rapidly developing Internet/intranet
technologies. Although information technologies such as ARPANET, secure data
transmissions, and data encryption, have long been in use in the military
intelligence arena, recent technological advancements in computer hardware and
software technology have now made such applications economically viable for use
by private companies. This has given rise to the need for specialized expertise
in the areas of local and wide area network design and installation, network
management and operation, and network security, all using new and complex
information technology hardware and software products.



                                       2
<PAGE>   3

COMPANY OPERATIONS

      Prior to fiscal 1999, the Company's business was organized into two
principal areas: the Systems Business and the Product Reselling Business. As a
result of the GTSI Transaction, the Product Reselling Business is no longer
part of the Company's operations and, as a result, the Company realized a
significant reduction in revenues generated from product sales during fiscal
1999, as compared to the prior year. Overall, revenues from contract services
accounted for approximately 70.5% and 29.7% of revenues in fiscal 1999 and
1998, respectively, while revenues from product sales accounted for
approximately 29.5% and 70.3% of total revenues during such periods. The major
focus of the Company in fiscal 1999 was the Systems Business and the Company
currently anticipates that the Systems Business will remain its primary focus
for the foreseeable future. In both fiscal 1999 and 1998, approximately 93% of
the Company's revenues were derived from contracts or subcontracts with the
Government.

The Systems Business

      The Systems Business is generally engaged in systems analysis and
engineering, solutions development, systems integration, and operations support
services. In its Systems Business, the Company designs, develops and integrates
command, control, communications and intelligence systems that provide open,
modular computer-based solutions for specific military applications, including
information warfare. The Company provides competitive and rapidly accessible
solutions to its Government defense-oriented clients using either COTS software
and hardware from multiple providers or custom-built systems.

      In addition, the Company has specific expertise in data assimilation and
correlation applications, that is, the technique of accepting, processing,
correlating, displaying and analyzing electronic data from land-, sea-, air-,
and space-based sensors, for rapid evaluation. The Company's systems give a
coherent picture of the available electronic information, as well as the means
to share such information. The Company has developed both tactical systems,
which allow users to act upon intelligence data immediately, and analytical
systems, which permit the use of data for evaluation and planning purposes.
These types of systems have been used for tracking troop movements and other
intelligence functions in a variety of military settings, including operations
in the Middle East, Somalia, Bosnia, and Korea.

      The Company also uses its expertise in the Systems Business to develop
custom networks and websites, and to provide development, maintenance, data
base software, and operations support services to several civilian Government
agencies.

The Product Reselling Business

      In its Product Reselling Business, the Company provided clients with
advanced technology products in the areas of enterprise networking, the UNIX
operating system environment, data storage, image processing and
high-performance client/servers. The Company's product sales were primarily
made directly to the Government and to systems integrators and prime
contractors selling to the Government market. As a result of the GTSI
Transaction, the Company anticipates further significant decreases in revenues
from product sales to the Government.

      A significant percentage of the Company's revenues (37.4% in fiscal 1999
and 54.6% in fiscal 1998) was derived from product sales to the Government
under a variety of agency-specific IDIQ contracts. Another significant
percentage (6.6% in fiscal 1999 and 14.2% in fiscal 1998) of the Company's
revenue was derived from sales to the Government under the General Services
Administration ("GSA") Schedule, either directly from the Company's GSA
Schedule contracts or from sales to other prime contractors with GSA Schedule
contracts. See "Government Contracts -- The GSA Schedules."

CUSTOMERS AND CUSTOMER SUPPORT

      The Company derives a substantial portion of its revenues from contracts
with various agencies of the Government, including all four armed forces, the
Defense Intelligence Agency ("DIA"), the GSA, the National Security Agency
("NSA"), and many of the civilian Government agencies such as the Environmental
Protection Agency, and the Departments of Education and Justice. In addition,
the Company has performed projects for, or supplied computer hardware, software
and integrated systems to, a number of commercial customers, as well as several
state and local governments. As of March 31, 1999, the Company was performing
on over 175 active Government contracts, with a total contract backlog in
excess of $589 million. See "Backlog".


                                       3
<PAGE>   4

      In both fiscal 1999 and 1998, the Company derived approximately 93% of
its revenues from Government contracts. The following table sets forth the
Company's estimates of the sources of its revenues in the last two fiscal
years:

<TABLE>
<CAPTION>
                                                                           FISCAL YEARS
                                                                          ENDED MARCH 31,
                                                                     -------------------------
                                                                        1999           1998
                                                                     ----------     ----------
                                                                        (% OF TOTAL REVENUES)
<S>                                                                     <C>           <C>
          DoD -- armed forces ................................           55.9%         42.3%
          DoD -- national security agencies ..................            0.7           2.1
          GSA (including BTG customers with GSA Schedule
           sales) ............................................            6.6          14.2
          Other civilian agencies ............................           29.4          34.0
          Commercial customers and state and local
           governments .......................................            7.4           7.3
          Other ..............................................            --            0.1
</TABLE>

      The Company offers its customers a full range of support services for the
systems it develops and strives to understand thoroughly the environment of the
end user of its systems. Members of the team work with customers throughout
each project to ensure that the Company's solutions are fully responsive to the
customer's requirements. The Company stresses on-time performance and provides
rapid support and backup, by telephone hotline and in person, for systems in
use throughout the world. A significant portion of the customer support
provided by the Company as a result of sales of the Product Reselling Business
is performed by third party contractors. The Company's revenues are highly
dependent on the Government's demand for the products and services offered by
the Company. Changes in the structure, composition and/or buying patterns of
the Government could affect the Company's future operations.

TEAMING RELATIONSHIPS

      The Company maintains teaming relationships with major Government
contractors, including Hughes Data Systems, Lockheed Martin Corporation,
UNISYS, Inc. and EDS Corporation, in order to bid on and participate in a
greater number of increasingly large and complex procurement projects. Teaming
relationships have enabled BTG to secure several government contracts during
the past several years.

SALES AND MARKETING

      Within its Systems Business, the Company's marketing activities are
largely conducted by senior management and its own professional staff of
engineers, analysts and other personnel. Sales and marketing activities within
the Product Reselling Business were performed by a devoted sales and marketing
department.

GOVERNMENT CONTRACTS

      Approximately 93% of the Company's revenues in both fiscal 1999 and 1998
were derived from business performed under the following two types of
Government contracts: (i) contracts obtained through a negotiated procurement
process and (ii) GSA Schedule contracts. The Company's activities within its
Systems Business are generally performed under contracts obtained through
negotiated procurements, while the Company's product reselling activities were
generally performed under both negotiated procurement contracts (IDIQ type) and
GSA Schedule contracts.

      Government contracts are generally subject to a number of inherent risks
including, for example, the Government's right to terminate contracts for
convenience, as well as for default; the uncertainty of Government funding; the
right of the Government not to exercise option years under contracts; the
adjustment of costs and revenues by Government auditors; the shutdown or
partial shutdown of selected Government agencies; and protests by unsuccessful
offerors. The extent of any impact on the Company's results of operations,
financial position, or liquidity resulting from these inherent risks cannot be
predicted at this time.


                                       4
<PAGE>   5

Negotiated Procurement Contracts

      Negotiated procurement contracts include cost-reimbursement contracts
(both cost-plus-fixed-fee and cost-plus-award-fee), time and materials
contracts, fixed-price contracts and IDIQ contracts. Fiscal 1999 and 1998
revenues derived under negotiated procurement contracts were as follows, by
contract type:

<TABLE>
<CAPTION>
                                                               FISCAL YEARS ENDED MARCH 31,
                                                      ---------------------------------------------
                                                              1999                    1998
                                                      ---------------------   ---------------------
                                                                 (DOLLARS IN THOUSANDS)
                                                       REVENUE     PERCENT     REVENUE     PERCENT
                                                      ---------   ---------   ---------   ---------
<S>                                                   <C>          <C>        <C>          <C>
          Cost-reimbursement......................    $   9,645      3.5%     $  41,228      8.9%
          Time and materials......................       21,242      7.7         29,177      6.3
          Fixed-price.............................        9,375      3.4          6,993      1.5
          IDIQ *..................................      234,904     85.4        385,081     83.3
                                                      ---------     ----      ---------     ----
                                                      $ 275,166     100.0%    $ 462,479     100.0%
                                                      =========     =====     =========     =====
          </TABLE>

----------

*     Approximately $116.6 million and $64.5 million of revenues in fiscal 1999
      and 1998, respectively, were generated under IDIQ-type, negotiated
      procurement contracts which were primarily service-oriented. Approximately
      $118.3 million and $320.6 million of revenues in fiscal 1999 and 1998,
      respectively, were generated under IDIQ-type, negotiated procurement
      contracts which were primarily product-oriented.

      Cost-plus-fixed-fee contracts provide for the reimbursement of incurred
costs during contract performance, to the extent that such costs are allowable
and allocable, and the payment of a fixed fee. The size of such fees as a
proportion of the contract value is limited by law. Cost-plus-award-fee
contracts typically provide for the reimbursement of costs with a base fee and
an additional fee that is based upon a periodic evaluation of the contractor's
performance against specified criteria. Under time and materials contracts, the
contractor agrees to provide, at a fixed hourly rate, certain categories of
labor that satisfy established education and experience qualifications. To the
extent a contractor's costs differ from the fixed hourly rate, the contractor
realizes all of the benefit or detriment resulting from decreases or increases
in the cost of performing the work. Under fixed-price contracts, the contractor
agrees to perform certain work for a fixed price and, accordingly, realizes all
the benefit or detriment resulting from decreases or increases in the cost of
performing the work.

      Under typical IDIQ contracts, the contractor agrees to provide specific
products and related services at specified unit prices. These contracts, which
are often awarded for large-scale Government purchases of computer hardware,
software and integrated systems, are typically awarded through a formal
competitive bid process. The periods of performance for IDIQ contracts
typically span a number of years. Under IDIQ contracts, the Government is under
no obligation to make purchases at levels approved under the contract. As part
of the Government mandate to streamline procurement procedures, agencies are
awarding IDIQ contracts to multiple parties. Each winner then has an
opportunity to provide the types of products and services described in the
contract. The agency typically buys from the most competitive contractor
without going through additional formal procurement procedures. IDIQ contracts
are often subject to modification as products included in original contract
specifications are replaced with new technology. Generally, the Company has had
a record of profitability on its time and materials, fixed-price, and IDIQ type
contracts.

The GSA Schedules

      Approximately 6.6% and 14.2% of the Company's revenues in fiscal 1999 and
1998, respectively, were derived from sales pursuant to the GSA Schedules held
by the Company during those periods. GSA Schedule contracts are negotiated with
the GSA, which is the central procurement agency of the executive branch of the
Government. Although Government agencies are not required to purchase products
under GSA Schedule contracts, these contracts provide Government agencies with
an efficient and cost-effective means for buying diverse professional IT
services, often with dramatically reduced paperwork. Government agencies may
purchase goods and services under these contracts with funds from their own
agency budgets at predetermined prices, terms and conditions.

      GSA Schedule contracts are awarded on the basis of a number of factors,
the most important of which are compliance with applicable regulations and the
prices of the products and services to be sold. Any number of competing
suppliers may be awarded a GSA Schedule contract for a given product or
professional IT services. Products and services may be added to a GSA Schedule
contract during its term with the consent of both the contractor and
Government.

                                       5
<PAGE>   6

      At the time of initial award, prices to the end users under the Company's
GSA Schedule contracts are set for the duration of the contract at a specified
level or at specified levels varying over time. In addition, under certain
circumstances, BTG is required under the terms of its GSA Schedule contract to
pass on any savings, resulting from supplier discounts, or other price
reductions, to the Government in the form of corresponding price reductions.
Furthermore, the GSA Schedule contract does not have pre-set delivery schedules
or minimum purchase levels. The uncertainties related to future contract
performance costs, quantities to be shipped and dates of delivery make it
difficult to predict the future sales and profits, if any, that may result from
such contracts.

      As a result of the GTSI Transaction, the Company anticipates a further
significant decrease in the revenues derived from future product sales under
its GSA Schedule contracts.

THE PROCUREMENT PROCESS

      The Company's contracts department prepares bids on procurements and
advises Company personnel on a wide variety of technical and practical issues
relating to the procurement process. It is involved in evaluating bid
opportunities, identifying key products or services needed to respond to
solicitations, negotiating favorable agreements with suppliers and
co-contractors, preparing written responses to the solicitation document,
meeting all mandatory technical requirements and, in general, successfully
processing the proposal effort from initial submission to post-award
implementation. This department also monitors compliance with relevant
procurement regulations and keeps abreast of changes in such regulations. The
Company believes its experience in the procurement process enables it
effectively to identify realistic procurement opportunities and to manage
resources cost-effectively in the pursuit of a variety of procurement
opportunities.

BACKLOG

      The Company's total contract backlog is only a portion of total contract
capacity (i.e. the maximum amount that the Government could purchase under its
contracts with the Company) and represents management's estimate of the
aggregate revenues that will be earned by the Company over the life of all of
its contracts, including option periods. Because many of BTG's contracts are
multi-year contracts and contracts with option years, total contract backlog
represents revenues expected to be realized over a number of years into the
future. The Company's estimated total contract backlog as of March 31, 1999 and
1998 was $589 million and $570 million, respectively. Because total contract
backlog is based on management's estimate as to the future potential of
existing contracts, there can be no assurance that all of such backlog will be
recognized as revenue.

      Because the Government operates under annual appropriations, agencies of
the Government typically fund contracts on an incremental basis. Accordingly,
only a portion of the Company's total contract backlog is "funded". Funded
backlog consists of the aggregate dollar portion of contracts that is currently
appropriated by Government customers and allocated to contracts by the
purchasing Government agencies or otherwise allocated for payment by customers
upon completion of specified work. The Company estimates that as of March 31,
1999 and 1998, its funded contract backlog was $119.5 million and $74.8
million, respectively.

      Funded backlog generally varies depending on procurement and funding
cycles and other factors beyond the Company's control. Accordingly,
period-to-period comparisons are difficult and not necessarily indicative of
any future trends in revenues. Moreover, the unfunded backlog cannot be relied
upon as an indicator of future contract revenue because there is no assurance
that the unfunded portion will be funded. Finally, the Government's ability to
select multiple winners under IDIQ contracts, as well as its right to limit
orders to any particular awardee, mean that there is no assurance that unfunded
contract backlog will result in actual orders to the Company.

      The preceding information regarding contract backlog and future revenues
to be derived therefrom is forward-looking and is subject to certain risks and
uncertainties including, but not limited to, the inherent difficulty of
predicting future contract potential, a dependence on the continued funding of
Government programs and contract procurements, and the risk of contract
termination.

COMPETITION

      In seeking to provide a broad range of services and products that address
the complete information technology needs of its customers, the Company
participates, to varying degrees, in multiple segments of the information
technology market, including markets for systems engineering, development and
integration services. Within each segment, the Company competes against
different firms of varying sizes, with different specializations and skills.
Each of the market segments in which the Company operates is competitive. The
number and size of competitors vary among operating groups and within the
individual divisions of each group. Frequently, the number and identity of
competitors vary even from program to program within a given business area.
Many of the

                                       6
<PAGE>   7

Company's competitors are significantly larger and have greater financial
resources than the Company. Some of these competitors are part of large,
diversified companies that have access to the financial resources of their
parent companies.

      The Company believes that the principal competitive factors in the
Systems Business are technical understanding, management capability, past
contract performance, personnel qualifications and price. During its recent
history, the Company has been very successful in securing the exercise of
contract option years in its Systems Business, which the Company believes is
attributable to the strength of its past contract performance and its
competitive prices. Further, the Company's senior management team has an
extensive number of years of industry-specific technical and managerial
experience. As a result, the Company believes that it competes favorably on
each of the principal competitive factors within the Systems Business.

      Government contracts are periodically subjected to the competitive
bidding process, and the Company generally has been successful in retaining its
incumbent business. In addition, a significant number of the opportunities the
Company pursues are large dollar value procurements. In such cases, in order to
enhance its ability to compete, the Company will often team or joint venture
with one or more firms possessing complementary technical skills, which firms
may be competitors of the Company in other procurements.

CERTAIN REGULATORY MATTERS

      The nature of the Company's business subjects the Company to various
regulatory restrictions and limitations, including those set forth below.

      Security Clearances. Many of the Company's Government contracts require
the Company to maintain facility security clearances complying with DoD
requirements, including its Secured Compartmented Information Facilities
("SCIFs") for the performance of classified work under its contracts. The
Company believes that it is in compliance with these requirements. As of March
31, 1999, approximately 53% of the Company's employees possessed secret or top
secret security clearances, which are required for the performance of certain
of the Company's contracts. No Company contract has ever been terminated for
security reasons.

      Government Contract Audits and Investigations. Government contractors are
commonly subject to various audits and investigations by Government agencies.
Among the agencies that oversee or enforce contract performance are the Defense
Contract Audit Agency ("DCAA"), the Inspectors General of the various
departments, the Defense Criminal Investigative Service, the GAO and the
Department of Justice. These audits and investigations involve a review of a
contractor's performance on its contracts, as well as its pricing practices,
costs and compliance with applicable laws, regulations and standards. The DCAA
generally audits cost-reimbursable contracts to verify that costs have been
properly charged to the Government. Final audits by the DCAA have been
completed for the Company's fiscal years through 1996. The Company has not
experienced any material adverse effects as a result of these completed audits.
Management does not expect the completion of future audits on open years 1997
through 1999 to have a material adverse effect on the Company's consolidated
financial position.

      Export Regulations. United States law and regulations issued by various
agencies of the Government, including but not limited to the Department of
Commerce, the Department of the Treasury and the Department of State, restrict
and regulate the export of technology as well as goods and commodities provided
by United States businesses to controlled foreign subsidiaries and affiliates.
The Company is subject to certain of these regulations with respect to
technology developed by the Company which is sold to non-US customers.

EMPLOYEES

      As of March 31, 1999,the Company employed 1,320 employees, of whom 1,117
were technical/managerial staff, 198 were administrative staff and 5 were
engaged in sales and marketing. The Company believes that it is competitive in
hiring and retaining qualified personnel. The Company's ability to remain
competitive will be based in large measure upon its ability to recruit and
train qualified personnel. None of the Company's employees is represented by a
labor union. The Company considers its relations with its employees to be good
and has not experienced any significant labor problems.

                                       7
<PAGE>   8

EXECUTIVE OFFICERS

      Set forth below is certain information with respect to the executive
officers of BTG.

<TABLE>
<CAPTION>
         Name                   Age     Position
<S>                             <C>     <C>
         Dr. Edward H. Bersoff  56      Chairman of the Board, President and Chief Executive Officer
         Paul G. Leslie         47      Executive Vice President and Chief Operating Officer
         Todd A. Stottlemyer    35      Executive Vice President and Chief Financial and Administrative Officer
         Randall C. Fuerst      43      Senior Vice President for Operations
         Linda Hill             39      Senior Vice President and Chief Human Development Officer
         Alan W. Jackson        57      Senior Vice President for Business Development
         John Littley, III      52      Senior Vice President and Chief Information Officer
         Marilynn D. Bersoff    51      Corporate Secretary
         </TABLE>

        Edward H. Bersoff has served as BTG's President, Chief Executive
    Officer and Chairman of the Board of Directors since the Company's founding
    in 1982. From 1975 until 1982, he was employed by CTEC, Inc. ("CTEC"), a
    provider of systems integration services, serving first as Vice President,
    then Executive Vice President, and later as President. Previously, he was
    employed by Logicon, Inc., a provider of advanced technology systems and
    services to national security, civil and industrial clients, and the
    National Aeronautics and Space Administration, in Cambridge, Massachusetts.
    Dr. Bersoff has over 30 years of experience in intelligence system
    development, software, quality assurance, configuration management,
    corporate management and management of software product design,
    development, implementation and maintenance. Dr. Bersoff serves as a
    director of Phillips Publishing International, Inc., a publishing firm, and
    Transcrypt International, a telecommunications company. He is the husband
    of Marilynn D. Bersoff.

        Paul G. Leslie joined BTG in May of 1999 as Executive Vice President
    and Chief Operating Officer. Mr. Leslie was previously Vice President and
    Deputy General Manager of Federal Information Technology at TRW, Inc. which
    he joined in 1998 through the acquisition of BDM International, Inc.
    ("BDM"). At BDM, he was Senior Vice President and General Manager of
    Systems Development and Integration for four years. Prior to that, he
    served as Senior Program Manager of the Commercial Systems Group of
    Universal Systems, Inc. and as Technical Director of Systems Engineering
    Development for EDS, Inc.

        Todd A. Stottlemyer joined BTG in May of 1998 as Senior Vice President
    and Director of Corporate Development and is currently Executive Vice
    President and Chief Financial and Administrative Officer. Mr. Stottlemyer
    was previously Corporate Vice President for BDM, where for 12 years he was
    involved in corporate strategy and business planning, and most recently was
    responsible for shareholder relations, mergers and acquisitions, public
    affairs, media relations and government affairs. Mr. Stottlemyer currently
    serves on the board of directors of the Northern Virginia Technology
    Council and is Chairman of the Fairfax County Chamber of Commerce, as well
    as a Commissioner of the Fairfax County Economic Development Authority. Mr.
    Stottlemyer was appointed by the Governor of Virginia to be the
    Vice-Chairman of the Blue Ribbon Commission on Information Technology. At
    BTG, he is responsible for finance, investor relations, media relations and
    government affairs, as well as the Company's legal and purchasing
    departments.

        Randall C. Fuerst is currently Senior Vice President for Operations of
    BTG. Mr. Fuerst has been with BTG since 1982 and has served in a variety of
    positions with the Company including Senior Vice President and General
    Manager of Company operations. He has over 20 years of experience in
    complex systems development, integration and world-wide systems support.
    Previously, Mr. Fuerst worked at CTEC, Inc., where he was manager of
    fielded systems support.

        Linda Hill has served as a Vice President of BTG since 1995 and is
    currently Senior Vice President and Chief Human Development Officer.
    Previously, she was a Senior Vice President within the Company's operating
    unit, where she was responsible for new business opportunities. Ms. Hill
    has been with BTG since 1985 and has served in a variety of positions with
    the Company including Director of Advanced Programs and Deputy General
    Manager of the Company's Systems Engineering Group, where she oversaw
    strategic planning, development of new business opportunities, and
    organizational planning of the business unit. She has over 17 years of
    computer-based systems experience, including world-wide systems
    integration, systems development, and program management of large-scale
    projects for the defense intelligence community

                                       8
<PAGE>   9

        Alan W. Jackson has served as Senior Vice President for Business
    Development at BTG since January 1999. Previously, beginning in April 1997,
    Mr. Jackson had been the President and CEO of STAC, Inc., an employee-owned
    company specializing in high level analysis and technical services for the
    intelligence community. BTG acquired STAC in 1999. From 1995 to 1997, he
    was Vice President of the Systems Engineering Division of TASC, Inc. Prior
    to joining TASC he was a Vice President at Alandeo Limited and at the
    Melpar Division of E-Systems, Inc where, over an 18 year period he held
    increasingly more responsible positions in business development, software
    and hardware design and development, systems engineering, manufacturing and
    general management, serving both domestic and international customers.

        John Littley, III has served as Senior Vice President and Chief
    Information Officer of BTG, overseeing the network operations and
    applications support for the Company's automated systems, since January
    1999. From 1994 to 1998 he served as Vice President and then Senior Vice
    President of Corporate Development, in charge of developing new business
    opportunities. He served as Director of Corporate Development for the
    Company from September 1993 to April 1994. Between 1991 and 1993 he was
    Vice President of Corporate Development for SEA, Inc., a computer
    engineering firm. Mr. Littley originally joined the Company in 1982, and
    has served in a variety of other positions, including Director of Advanced
    Programs, Director of Engineering Services and Director of Systems
    Development.

        Marilynn D. Bersoff has served as Senior Vice President and Secretary
    of BTG from 1993 to 1999 and is currently Corporate Secretary. She also
    served as Secretary of BTG from 1982 to 1987 and as Secretary and Treasurer
    from 1987 to 1993. She was employed by CTEC from 1978 to 1982 and by a data
    transmission company prior to CTEC. As Corporate Secretary, Ms. Bersoff
    works with the Company's Board of Directors and is responsible for
    maintenance of the corporate records. Ms. Bersoff has over 22 years of
    experience in administration, management and technical support. She is the
    wife of Edward H. Bersoff.

ITEM 2.  PROPERTIES

    The Company leases all of the offices and facilities used in connection
with its operations, which comprise approximately 390,000 square feet at
various sites located in 11 states and the District of Columbia. The following
table sets forth information relating to the significant offices and facilities
currently leased by the Company:

<TABLE>
<CAPTION>
                                                        APPROXIMATE
                              LOCATION                SQUARE FOOTAGE                  EXPIRATION OF LEASE(S)
                      ------------------------       ----------------          ------------------------------------
<S>                                                      <C>                 <C>
                      Fairfax, Virginia                   210,000             June 2012
                      Largo, Maryland                      30,000             October 2000
                      Tinton Falls, New Jersey             27,000(1)          January 2007 and July 2008
                      Niceville, Florida                   18,000(2)          April 2000, July 2000, February 2001,
                                                                              February 2003
</TABLE>

----------

(1)   This property is held under two leases.

(2)   This property is held under four leases.

ITEM 3.  LEGAL PROCEEDINGS

      The Company is occasionally a defendant in litigation incidental to its
business. The Company believes that none of such litigation currently pending
against it, individually or in the aggregate, will have a material adverse
effect on the Company's financial condition or results of operations.

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

      No matters were submitted to a vote of BTG shareholders during the fourth
quarter of the fiscal year ended March 31, 1999.


                                       9
<PAGE>   10

                                     PART II

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

      The Company's common stock is publicly traded 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 1999 and 1998 are as follows:

<TABLE>
<CAPTION>
    ------------------------------------------------------------------------------
      QUARTER ENDED                                     HIGH              LOW
      -------------                                --------------    -------------
    ------------------------------------------------------------------------------
      FY 1998:
    ------------------------------------------------------------------------------

<S>                                                <C>               <C>
           June 30, 1997                           $      20.000     $      8.500
    ------------------------------------------------------------------------------
           September 30, 1997                             16.000            9.750
    ------------------------------------------------------------------------------
           December 31, 1997                              14.750            8.375
    ------------------------------------------------------------------------------
           March 31, 1998                                 11.000            7.938
    ------------------------------------------------------------------------------
      FY 1999:

    ------------------------------------------------------------------------------
           June 30, 1998                           $      10.375     $      8.000
    ------------------------------------------------------------------------------
           September 30, 1998                             9.500             6.000
    ------------------------------------------------------------------------------
           December 31, 1998                              7.000             4.438
    ------------------------------------------------------------------------------
           March 31, 1999                                 8.750             5.625
    ------------------------------------------------------------------------------
</TABLE>


      The Company has never paid cash dividends and is currently prohibited
from doing so under its line of credit facility. 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.

      The Company has authorized 20,000,000 shares of common stock and
1,000,000 shares of preferred stock. At March 31, 1999, 8,852,205 shares of
common stock were outstanding. No preferred shares have been issued. The
Company had approximately 305 shareholders of record on March 31, 1999.


                                       10
<PAGE>   11

ITEM 6.  SELECTED FINANCIAL DATA

      The selected consolidated financial data presented below under the
captions "Statement of Operations Data" and "Balance Sheet Data" for, and as of
the end of, each of the years in the five-year period ended March 31, 1999, are
derived from the consolidated financial statements of BTG, Inc. and
subsidiaries, which financial statements have been audited by KPMG LLP,
independent certified public accountants. The consolidated financial statements
as of March 31, 1999 and 1998, and for each of the years in the three-year
period ended March 31, 1999, and the report thereon, are included in Item 8.
"Financial Statements and Supplementary Data."

<TABLE>
<CAPTION>
                                                                                FISCAL YEARS ENDED MARCH 31,
                                                         -------------------------------------------------------------------------
                                                           1999             1998            1997            1996           1995
                                                         --------        ----------      ----------       ---------      ---------
                                                                       (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                      <C>             <C>             <C>             <C>            <C>
              STATEMENT OF OPERATIONS DATA:
              Revenues:
                   Contract revenue ..............       $184,794        $ 157,422       $ 106,131       $  67,014      $  46,130
                   Product sales .................        131,641          429,315         292,270         146,544        109,859
                                                         --------         --------        --------        --------       --------
                                                          316,435          586,737         398,401         213,558        155,989
              Direct costs:
                   Contract costs ................        123,510          105,035          63,500          35,577         23,046
                   Cost of product sales .........        127,821          399,508         256,678         128,070         95,585
                                                         --------         --------        --------        --------       --------
                                                          251,331          504,543         320,178         163,647        118,631
              Indirect, general and administrative
                expenses .........................         56,512           89,317          63,347          40,827         29,388
              Amortization expense ...............            695            1,682           1,523           1,595          1,070
              Restructuring charge ...............          1,796           38,474              --              --             --
                                                         --------         --------        --------        --------       --------
                                                          310,334          634,016         385,048         206,069        149,089
              Operating income (loss) ............          6,101          (47,279)         13,353           7,489          6,900
              Interest expense, net ..............         (3,949)          (8,448)         (6,107)         (3,045)        (1,362)
              Unusual charge .....................         (1,201)              --              --              --             --
              Equity in earnings of affiliate ....             24              589           1,887             792             --
              Gain on sale of investments, net ...          3,532           20,228              63              --             --
              Other ..............................           (179)          (2,466)             --              --             --
                                                         --------         --------        --------        --------       --------
              Income (loss) from continuing
                operations before income taxes and
                extraordinary items ..............          4,328          (37,376)          9,196           5,236          5,538
              Provision (benefit) for income taxes          1,567           (8,295)          4,150           2,282          2,406
                                                         --------         --------        --------        --------       --------
              Income (loss) from continuing
                operations .......................          2,761          (29,081)          5,046           2,954          3,132
              Loss from discontinued operations,
                net of income tax benefit ........           (765)          (4,264)           (775)             --             --
                                                         --------         --------        --------        --------       --------
              Net income (loss) before
                extraordinary items ..............          1,996          (33,345)          4,271           2,954          3,132
              Extraordinary loss from early
                extinguishment of debt, net of
                income tax benefit ...............            ---           (1,878)             --              --             --
                                                         --------         --------        --------        --------       --------
              Net income (loss) ..................       $  1,996         $(35,223)       $  4,271        $  2,954       $  3,132
                                                         ========         ========        ========        ========       ========
              Basic earnings (loss) per share ....       $   0.23         $  (4.12)       $   0.62        $   0.49       $   0.63
                                                         ========         ========        ========        ========       ========
              Diluted earnings (loss) per share ..       $   0.23         $  (4.12)       $   0.60        $   0.47       $   0.60
                                                         ========         ========        ========        ========       ========
              Weighted average shares used for
                basic EPS ........................          8,774            8,540           6,887           6,043          4,979
                                                         ========         ========        ========        ========       ========
              Weighted average shares used for
                diluted EPS ......................          8,827            8,540           7,141           6,233          5,196
                                                         ========         ========        ========        ========       ========
</TABLE>


<TABLE>
<CAPTION>
                                                                                      AS OF MARCH 31,
                                                         -------------------------------------------------------------------------
                                                           1999             1998            1997            1996           1995
                                                         --------        ----------      ----------       ---------      ---------
                                                                                         (IN THOUSANDS)
              BALANCE SHEET DATA:
<S>                                                       <C>             <C>            <C>             <C>             <C>
              Cash and equivalents                        $    --         $     --        $     --        $     47        $ 1,267
              Receivables, net ...                         53,281          135,050          99,017          69,146         44,677
              Inventory, net .....                            378            2,214          16,716           9,421          6,327
              Working capital ....                         26,895           43,812          83,551          47,949         13,125
              Total assets .......                         90,377          212,439         156,080         109,460         72,309
              Line of credit .....                         17,666           70,252          30,021          30,453         23,419
              Shareholders' equity                         36,011           33,060          66,245          27,745         23,039
</TABLE>

                                       11
<PAGE>   12

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

GENERAL

      BTG, Inc. ("BTG" or the "Company") is an information systems and
technical services company providing complete solutions to a broad range of the
complex systems needs of the United States Government and its agencies and
departments (the "Government") and other commercial and state and local
government customers. The Company is an industry leader in providing systems
analysis and engineering services, solutions development, systems integration,
and computer-based operations and support.

      The Company's revenues have historically been 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. Product sales are characterized by higher direct costs
than contract revenue; however, indirect expenses associated with product sales
are generally lower in comparison. The Company's operating performance is
affected by both the number and type of contracts held, the timing of the
installation or delivery of the Company's services and products, and the
relative margins of the services performed or products sold. In general, the
Company recognizes its highest margins on its most specialized systems
engineering and software development projects and lower margins on sales of
commercial-off-the-shelf products.

      In recent years, the Company identified what it believed to be a dramatic
change in the federal product reselling market. The Government's product
purchasing strategy shifted its focus to contract vehicles such as General
Services Administration ("GSA") Schedules, which heavily weigh lowest price as
opposed to best value. As profit margins in the product reselling business
began to shrink during fiscal 1998, it became increasingly clear to the Company
that only the largest product resellers could generate the volume of sales
required to compensate for the decreasing product margins. Accordingly, on
February 12, 1998, BTG entered into an asset purchase agreement under which BTG
completed the sale to Government Technology Services, Inc. ("GTSI") of (i)
certain of the assets, principally inventory and property and equipment, and
(ii) certain of the existing contracts and outstanding customer orders of the
BTG operating division responsible for reselling computer hardware and software
products (the "GTSI Transaction"). As consideration for the sale, BTG initially
received $8.0 million and 15,375 shares of a new series of preferred stock of
GTSI, designated Series C 8% cumulative redeemable convertible preferred stock.
Ten percent of the purchase price was placed in escrow for a one-year period to
serve as security for the Company's indemnification for potential obligations
under the acquisition agreement. Pursuant to the acquisition agreement, the
preferred stock received by the Company converted into 3,000,000 shares of GTSI
common stock once approved by the GTSI shareholders on May 12, 1998. In July
1998, the Company sold 1.1 million shares of its GTSI holdings for $5.0
million, resulting in a loss of approximately $440,000.

      In February 1999, BTG and GTSI entered into a series of agreements in
order to settle a number of issues which arose after the GTSI Transaction.
Under the terms of the new agreements, BTG transferred to GTSI all of the cash
portion of the escrow and 200,000 shares of GTSI common stock. In addition, BTG
granted GTSI the option to purchase, at a per-share price of $5.25, the
remaining 1.3 million GTSI shares held by BTG. In addition, as part of the
February 1999 agreements, BTG agreed to novate to GTSI certain contracts
awarded to BTG's product reselling division in a prior year.

      Also in February 1999, BTG and GTSI entered into an agreement under which
GTSI issued a note payable to BTG as consideration for the purchase by GTSI of
400,000 shares of the GTSI common stock held by BTG. These shares were sold at
$5.00 per share. The note, which bears interest at 8.0%, is payable in three
annual installments beginning on January 31, 2000.


                                       12
<PAGE>   13

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>
                                                     PERCENTAGE OF REVENUE
                                                       FISCAL YEAR ENDED                      PERIOD-TO-PERIOD
                                                           MARCH 31,                  INCREASE  (DECREASE) OF DOLLARS
                                              --------------------------------        -------------------------------
                                                                                            1999           1998
                                                                                         COMPARED TO   COMPARED TO
                                                 1999      1998       1997                  1998           1997
                                              --------------------------------        -------------------------------
<S>                                            <C>        <C>       <C>                   <C>            <C>
Revenues:
   Contract revenue.....................         58.4%     26.8%      26.6%                 17.4%          48.3%
   Product sales........................         41.6      73.2       73.4                 (69.3)          46.9
      Total revenues....................        100.0     100.0      100.0                 (46.1)          47.3
Direct costs:
   Contract costs (as a % of
      Contract revenue).................         66.8      66.7       59.8                  17.6           65.4
   Cost of product sales (as a
      % of product sales)...............         97.1      93.1       87.8                 (68.0)          55.7
      Total direct costs (as a
         % of total revenues)...........         79.4      86.0       80.4                 (50.2)          57.6
Indirect, general and
   administrative expenses..............         17.9      15.2       15.9                 (36.7)          41.0
Amortization expense....................          0.2       0.3        0.4                 (58.7)          10.4
Restructuring charge....................          0.5       6.6       --                   (95.3)          (A)
Operating income (loss).................          2.0      (8.1)       3.3                 112.9         (454.1)
Interest expense, net...................        (1.2)      (1.4)      (1.5)                (53.3)          38.3
Unusual charge..........................         (0.4)     --         --                   (A)              --
Equity in earnings of affiliate ........           --       0.1        0.5                 (95.9)        (68.8)
Gain on sale of investments, net........          1.1       3.4       --                    (82.5)          (B)
Merger-related costs....................           --      (0.4)      --                     (A)            (A)
Other expenses..........................         (0.1)     --         --                     (A)            --
Income (loss) from continuing
   operations before income taxes
   and extraordinary items..............          1.4      (6.4)       2.3                  111.6        (506.4)
Provision (benefit) for income taxes              0.5      (1.4)       1.0                  118.9        (299.9)
Income (loss) from continuing
   operations...........................          0.9      (5.0)       1.3                  109.5        (676.3)
Loss from discontinued operations               (0.3)      (0.7)      (0.2)                 (82.1)        450.3
Net income (loss) before extraordinary
   items ...............................          0.6      (5.7)       1.1                 106.0         (880.7)
Extraordinary loss......................           --      (0.3)      --                     (A)            (A)
Net income (loss).......................          0.6      (6.0)       1.1                  105.7        (924.7)
</TABLE>


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

(A)   There was no expense for this item in a comparison year.

(B)   The percentage year-to-year increase is in excess of 1,000%.


                                       13
<PAGE>   14

Fiscal 1999 Compared With Fiscal 1998

      Revenues for fiscal 1999 decreased by $270.3 million, or 46.1%, from
fiscal 1998. This decrease consisted of a $27.4 million increase in contract
revenue offset by a $297.7 million decrease in product sales. The increase in
contract revenue was primarily due to an increase of $13.7 million of revenue
recognized under contracts acquired in connection with the acquisition of
Nations, Inc. in June 1997, $9.4 million of revenue generated by new contracts
of the Company's Delta Research division, and a net increase in work performed
at several civilian Government agencies. These increases were offset by a
reduction in activity under the Company's Integration for Command, Control,
Communications, Computers and Intelligence ("IC4I") contract of $11.8 million.
The decrease in product sales was primarily attributable to the GTSI
Transaction. Included in product sales during fiscal 1999 was $93.6 million of
revenue resulting from certain contracts awarded to BTG's product reselling
business unit in a prior year which were subcontracted to GTSI as part of the
GTSI Transaction (the "Royalty Contracts"). Pursuant to an agreement entered
into as part of the GTSI Transaction, GTSI assumed substantially all of the
future performance requirements of the Royalty Contracts under a subcontractor
agreement and BTG received a fee of 1% or 2% on total product sales made under
such contracts. In the last quarter of fiscal 1999, the Company entered into an
agreement with GTSI whereby it agreed to novate the Royalty Contracts to GTSI
and, accordingly, will receive no future revenue from such contracts. The
Company expects that revenues from product sales will be substantially lower in
future periods. In both fiscal 1999 and 1998, approximately 93% of the
Company's revenues were derived from contracts or subcontracts with, and
product sales to, the Government, on either a direct or indirect basis.

      Direct costs, expressed as a percentage of total revenues, decreased to
79.4% in fiscal 1999 from 86.0% in fiscal 1998, reflecting the decreased
proportion of total revenues derived from product sales, which typically have
higher direct costs than do revenues generated from service contracts. Contract
costs include labor costs, subcontractor costs, material costs and other costs
directly related to contract revenue. Contract costs as a percentage of
contract revenue were virtually the same for fiscal 1999 and 1998 at 66.8% and
66.7%, respectively. As a percentage of product revenues, cost of product sales
in fiscal 1999 was 97.1%, an increase over the 93.1% reported in fiscal 1998
primarily due to product sales recognized from the Royalty Contracts for which
gross margins of 1% to 2% were earned.

      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 1999 decreased by $32.8 million, or 36.7%, from fiscal
1998. This decrease was due primarily to the GTSI Transaction which resulted in
a reduction in the number of Company employees, space requirements, and other
related indirect costs, and to the Company's increased emphasis on cost
containment. Expressed as a percentage of total revenues, indirect, general and
administrative expenses increased in fiscal 1999 to 17.9%, from 15.2% in fiscal
1998, principally reflective of the decreased proportion of total revenues
derived from product sales, which typically have lower indirect, general and
administrative expenses than do revenues generated from service contracts.

      Amortization expense, which includes the amortization of goodwill and
other intangible assets, decreased by $987,000 in fiscal 1999 as compared with
the previous year. This decrease was, in large part, attributable to certain
intangible assets which were written-off in fiscal 1998 in connection with the
Company's restructuring of its operations and divestiture of its product
reselling division.

      Restructuring charges of $1.8 million were recognized during fiscal 1999
and represented an increase in the estimated accrued restructuring costs
recorded during fiscal 1998. Specifically, the fiscal 1999 charges related to
an adjustment to the estimated impairment of certain assets of the product
reselling division and additional facility costs. In fiscal 1998, the Company's
Board of Directors approved a restructuring plan designed to refocus the
Company on its core business and historical strengths in order to improve
operating results. The $38.5 million of restructuring charges recorded in
fiscal 1998 included $13.7 million associated with the write-down of goodwill
recorded in connection with past acquisitions of certain product reselling
companies, $9.9 million associated with the loss recorded on the sale and
disposal of certain of the assets related to the GTSI Transaction, $5.8 million
in estimated reserves for certain prepaid software licenses initially purchased
for resale by the product reselling division, and $3.5 million in estimated
reserves for future facility and equipment lease commitments of the product
reselling division.

      Interest expense for fiscal 1999 decreased by $4.5 million, or 53.3%,
from fiscal 1998. 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". The decrease in fiscal 1999 was due to a
significantly lower average balance outstanding under the Company's Credit
Facility and to the repayment in April 1998 of the Company's long-term debt
obligations. Cash used to reduce outstanding debt was primarily generated from
the collection of outstanding receivables and from proceeds made available from
sales of investments.

                                       14
<PAGE>   15

      Unusual charges of $1.2 million were recognized by the Company during
fiscal 1999 as a result of the agreements entered into by BTG and GTSI during
February 1999.

      Equity in the earnings of unconsolidated affiliates during fiscal 1998
resulted from the Company's interest in an unincorporated joint venture. The
joint venture entity, which was with an unrelated company, was formed for the
purpose of performing under a specific contract which ended on March 31, 1998.
In June 1998, the Company acquired a common stock interest in GTSI for which
the equity method of accounting was used. BTG's share of the earnings reported
by GTSI of $24,000 for the three months ended June 30, 1998 was recognized by
BTG during fiscal 1999. In July 1998, BTG sold a substantial portion of its
interest in GTSI and no longer reported its investment in GTSI under the equity
method.

      Gains recognized on sales of investments during fiscal 1999 was $3.5
million, down from the $20.2 million reported in fiscal 1998 and resulted
primarily from the Company's liquidation of its remaining shares in Cisco
Systems, Inc. ("Cisco"), which it acquired as a result of its ownership of the
WheelGroup Corporation. See "Liquidity and Capital Resources".

      Other non-operating costs decreased by approximately $2.3 million, or
92.7%, from the comparable period of the prior year. The decrease in fiscal
1999 was primarily due to approximately $2.5 million of merger-related costs
which were incurred in fiscal 1998 in connection with the termination of a
planned acquisition.

      Income tax expense, as a percentage of income from continuing operations
before income taxes, was 36.2% during fiscal 1999. In fiscal 1998, the Company
recognized an income tax benefit due to the pre-tax loss experienced by the
Company. As a percentage of the loss from continuing operations before income
taxes, this benefit was 22.2%. During fiscal 1999, the Company was able to
realize portions of the net operating losses generated by the product reselling
division for which a valuation allowance had been established in fiscal 1998.
As a result, the effective income tax rate for fiscal 1999 was lower than would
otherwise have been expected. The effective income tax rate for fiscal 1998 was
significantly and adversely affected by the write-down of goodwill recorded in
connection with the Company's divestiture of its product reselling business.
The costs associated with such write-downs are not deductible for income tax
return purposes.

      The Company recorded losses of $765,000 and $4.3 million, net of income
taxes, in fiscal 1999 and 1998, respectively, from the discontinuance of the
non-strategic operations of a retail computer store and a subsidiary operating
in the Internet access market, both of which were owned and operated by BTG.

Fiscal 1998 Compared With Fiscal 1997

      Revenues for fiscal 1998 increased by $188.3 million, or 47.3%, from
fiscal 1997. Of this increase, $51.3 million was attributable to contract
revenue and $137.0 million was attributable to product sales. The increase in
contract revenue was primarily due to $38.1 million of revenue recognized under
contracts acquired in connection with the acquisition of Nations and an
increase of $4.4 million in revenue recognized under the Company's IC4I
contract. The remaining increase in contract revenue during fiscal 1998
resulted from a variety of federal and commercial contracts involving both
systems engineering and integration work. The increase in product sales was
primarily driven by shipments made under two new Government contracts: the U.S.
Army PC-2 contract ("PC-2"), which was awarded to the Company in October 1996
and first generated revenue in June 1997, and a U.S. Department of State
contract ("State Department"), which was awarded to the Company in April 1997.
In addition, the Company experienced an increase in sales under GSA Schedule
contracts, either directly from the Company's GSA Schedule contracts or from
sales to other prime contractors with GSA Schedule contracts, and under the
Company's TDA-2 contract with the U.S. Department of Treasury. The overall
increase in product sales was offset, in part, by a reduction in orders
fulfilled under both the Systems Acquisition Support Services ("SASS") and
Tennessee Valley Authority ("TVA") contracts. In fiscal 1998, approximately 93%
of the Company's revenues were derived from contracts or subcontracts with and
product sales to the Government, as compared with 89% for fiscal 1997.

      Direct costs, expressed as a percentage of total revenues, increased from
80.4% in fiscal 1997 to 86.0% in fiscal 1998. Contract costs as a percentage of
contract revenue increased from 59.8% in fiscal 1997 to 66.7% in fiscal 1998,
primarily as a result of increased revenues generated from the IC4I contract;
from contracts acquired in connection with the acquisition of Nations; and from
an increase in revenues generated from systems integration and networking
contracts. The IC4I contract, the contracts acquired through the acquisition of
Nations, and the Company's systems integration and networking contracts require
higher levels of materials, subcontractor involvement and/or other direct costs
than does BTG's historical contract base, which has a more labor-intensive,
higher gross margin profile. Cost of product sales as a percentage of product
sales increased from 87.8% in fiscal 1997 to 93.0% in fiscal 1998. This
increase was due, in large part to both competitive market pressures in the
product reselling environment

                                       15
<PAGE>   16

and to the startup costs associated with several large IDIQ Government contracts
for which shipments began during fiscal 1998. During fiscal 1998, the Company
shipped a significant amount of products under the PC-2 and State Department
contracts, which both provided for extended warranty coverage. The estimated
costs of this extended warranty coverage have been included in cost of product
sales during fiscal 1998.

      Indirect, general and administrative expenses for fiscal 1998 increased
by $26.0 million, or 41.0%, from fiscal 1997. This increase resulted primarily
from an increase in the overall volume of business as compared to the prior
year. Expressed as a percentage of total revenues, indirect, general and
administrative expenses decreased in fiscal 1998 to 15.2%, from 15.9% in fiscal
1997.

      Amortization expense, which includes the amortization of goodwill and
other intangible assets, increased by $159,000, or 10.4% in fiscal 1998 as
compared with the previous year. This increase was primarily attributable to
the amortization of goodwill associated with the acquisition of Nations.

      Restructuring charges totaling $38.5 million were incurred during fiscal
1998 primarily as a result of the Company's divestiture of its product
reselling business. In fiscal 1998, the Company's Board of Directors approved a
restructuring plan designed to refocus the Company on its core business and
historical strengths in order to improve operating results. The total
restructuring charges recorded in fiscal 1998 included $13.7 million associated
with the write-down of goodwill associated with past acquisitions of certain
product reselling companies, $9.9 million associated with the loss recorded on
the sale and disposal of certain of the assets of the divested product
reselling division, $5.8 million in estimated reserves for certain prepaid
software licenses initially purchased for resale by the product reselling
division, and $3.5 million in estimated reserves for future facility and
equipment lease commitments of the product reselling division.

      Interest expense for fiscal 1998 increased by $2.3 million, or 38.3%,
from fiscal 1997. This increase was due principally to the significant growth
in revenue in fiscal 1998 as compared with the prior year, which resulted in
higher receivable and inventory balances, thereby resulting in a higher level
of interest expense related to the financing of these operating assets. In
addition, higher interest costs were incurred in fiscal 1998 due to interest
paid on borrowings related to the Company's acquisition of Nations in June
1997. As a percentage of total revenues, interest expense decreased in fiscal
1998 to 1.4% from 1.5% in fiscal 1997.

      Equity in the earnings of unconsolidated affiliates was $589,000 in
fiscal 1998, a decrease of $1.3 million from the prior year. This income
resulted from the Company's interest in an unincorporated joint venture entity
which was formed for the purpose of performing under a specific Government
contract. Decreased income from this source was attributable to the lower
demand for products under the associated contract which ended on April 30,
1998.

      The Company recorded a gain on the sale of investments in fiscal 1998 of
$20.2 million as the result of the sale of its ownership interests in Cisco,
which it acquired as a result of its ownership of the WheelGroup Corporation.
See "Liquidity and Capital Resources".

      Merger-related costs of $2.5 million were incurred by the Company during
fiscal 1998. These costs were primarily attributable to the termination of the
Company's planned acquisition of Micros-To-Mainframes, Inc. ("M-T-M"). On
August 29, 1997, the Company entered into an Agreement and Plan of Merger (the
"Agreement") with M-T-M under which BTG agreed to acquire all of the
outstanding common stock of M-T-M for cash and common stock consideration
valued at approximately $25.0 million. On February 13, 1998, the Agreement, as
subsequently amended, was terminated. Pursuant to the Agreement, BTG paid M-T-M
a $500,000 termination fee. In addition, the Company paid M-T-M $1.25 million
for additional out-of-pocket expenses and in exchange for a release from future
liability which may arise as a result of the termination of the Agreement.

      Income tax expense, as a percentage of income before income taxes, was
45.1% during fiscal 1997; however, due to the pre-tax loss experienced by the
Company during fiscal 1998, there was an income tax benefit which, as a
percentage of the loss before income taxes, was 22.3%. The effective income tax
rate for fiscal 1998 was significantly and adversely affected by the write-down
of goodwill recorded in connection with the Company's divestiture of its
Product Reselling Business. The costs associated with such write-downs are not
deductible for income tax return purposes.

      The Company recorded losses of $4.3 million and $775,000, net of income
taxes, in fiscal 1998 and 1997, respectively from the discontinuance of the
non-strategic operations of a retail computer store and a subsidiary operating
in the Internet access market, both of which were owned and operated by BTG.

                                       16
<PAGE>   17

      In fiscal 1998, the Company recorded an extraordinary loss of $1.9
million, net of income taxes, from the early extinguishment of outstanding
notes payable.

INFLATION

      Approximately 35.3% and 25.9% of the Company's contract revenue for
fiscal 1999 and fiscal 1998, 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 focus in fiscal 1999
on the collection of outstanding receivables from its divested product
reselling division, operating activities provided cash of approximately $41.8
million. This was primarily reflective of a decrease in receivables of
approximately $81.8 million offset by the reduction in accounts payable of
$56.9 million, primarily associated with the vendor obligations remaining from
the product reselling division. In addition, $10.6 million was provided from
the collection of income taxes receivable which resulted from fiscal 1998
operating losses used to claim previously paid taxes.

      Cash flow of $23.6 million was provided by investing activities in fiscal
1999, primarily from the $30.3 million of proceeds received from sales of
Company investments, offset by the approximate $5.7 million of cash used for
the purchase of STAC, Inc. in January 1999.

      In March 1998, pursuant to a merger agreement entered into by the
WheelGroup Corporation ("WGC") and Cisco, a publicly-traded technology company,
BTG's ownership interest in WGC was converted into approximately 326,000 common
shares of Cisco. The shares of Cisco initially received by BTG were
unregistered; however, in accordance with the merger agreement, were registered
shortly after the merger was consummated. In fiscal 1999, the Company sold all
of its Cisco shares for approximately $25.5 million and used the proceeds from
these sales to retire outstanding debt. Gains of approximately $4.2 million and
$20.2 million were recognized during fiscal 1999 and 1998, respectively, as a
result of these transactions.

      During fiscal 1999, the Company entered into an agreement with Oracle
Corporation under which Oracle is to provide BTG with an enterprise-wide
financial and project management software system, and related technical support
and implementation services. During fiscal 2000, the Company anticipates
spending approximately $3.4 million on costs associated with the implementation
of the system. The Company believes that the system will be fully implemented
by April 1, 2000.

      During fiscal 1999, approximately $65.5 million was used in financing
activities, primarily to reduce outstanding amounts under the Credit Facility
($53.2 million) and to retire outstanding long-term debt instruments ($19.1
million). In connection with the financing of the acquisition of STAC, the
Company issued $5.4 million of notes payable in January 1999. $3.7 million of
these notes were repaid during March 1999. During fiscal 1998, approximately
$37.8 million was provided from financing activities primarily as a result of
$38.3 million in net advances under the Credit Facility; $15.0 million in new
promissory term notes; and $1.2 million in proceeds from the issuance of common
stock under certain employee benefit plans. These financing sources were offset
by $16.4 million in payments under both outstanding debt and capital lease
arrangements. The $15.0 million in new promissory term notes were used to
retire outstanding subordinated notes payable. During fiscal 1997, $32.9
million was provided from financing activities primarily as a result of $33.1
million in net proceeds received from a follow-on public common stock offering.

      At March 31, 1999, working capital was approximately $26.9 million
compared with working capital of $43.8 million at March 31, 1998. This decrease
is attributable to several factors including the sale of investments ($22.3
million) the collection of receivables ($81.8 million) and the collection of
the income tax receivable ($10.6 million). Cash generated from these current
assets was used to reduce not only current liabilities such as accounts payable
($56.9 million) and outstanding debt ($15.0 million), but also the current and
noncurrent portions of the line of credit ($53.2 million). As a result of the
net application of the Company's working capital, BTG's current ratio improved
from 1.32 at March 31, 1998 to 1.78 at March 31, 1999 and the ratio of total
liabilities to total equity was reduced from 5.43 at March 31, 1998 to 1.51 at
March 31, 1999.

                                       17
<PAGE>   18

      Credit Facility. The Credit Facility is a secured revolving credit
facility consisting of two revolving promissory notes provided to the Company
and its subsidiaries by NationsBank, N.A. ("NationsBank") and Fleet Capital
Corporation in the principal amount of up to $50.0 million. On November 9,
1998, the Company amended the Credit Facility to provide for, among other
things, an extension of the maturity date of the facility to August 31, 2002.
Under the amended agreement, the principal amount outstanding under the Credit
Facility may not exceed the lesser of (i) $50.0 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 ($50.0 million unless otherwise reduced), the Company must
pay a commitment fee at the rate of three-eighths of one percent per annum on
the difference between the commitment amount and the daily outstanding
principal balance under the Credit Facility during such quarter. 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 2.25% to 3.25% depending on the Company's leverage ratio.

      The Credit Facility is secured by substantially all assets of the Company
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, 1999, the Company was in compliance with all of the covenants under the
Credit Facility.

      At March 31, 1999, the Company had available borrowings under its Credit
Facility of $17.6 million. The Company believes that funds available under its
Credit Facility will be sufficient to fund the cash requirements of the
Company's ongoing operations for the next 12 months.

YEAR 2000 COMPLIANCE

      The Year 2000 (or "Y2K") problem arises from the standard use of two
digit fields to hold the (four digit) year in a date. The scope of the Y2K
problem goes beyond simply "fixing" the calendar so that it rolls over
correctly on December 31, 1999. In many systems, the two-digit year field with
the characters "99" triggers special logic. This was a standard and accepted
practice for decades. The problem also includes leap year calculations,
specialized clock functions (i.e., Global Positioning System), and embedded
systems. Embedded systems can be looked at as computer chips or automated
devices involving software, microcode, firmware, and EPROM program code. These
automated devices typically perform their intended functions over long periods
of time without error, unless there is a physical defect in the code. Typical
systems that contain embedded software are fire suppression systems, security
systems, elevator control, lighting management systems, and telephone systems.
Virtually every item that uses electricity is a possible candidate for a Year
2000 problem.

      Systems that do not properly recognize date-related information could,
among other things, fail to operate, operate incorrectly, or fail to exchange
data properly with other systems. This could result in major system failures
and the disruption of business operations. Assessments of the global impact of
this problem vary, and it is therefore not possible to predict what the impact
on the Company may be. The Company has established a Year 2000 Committee to
conduct this analysis, to lead the Company's efforts to achieve Y2K compliance,
and to advise senior management on risks and solutions. The Committee has
initiated a number of assessments, gathered information, conducted tests, and
prepared plans to address the Year 2000 problem. The Company expects this
process to continue throughout calendar 1999 and into the first quarter of
calendar 2000. However, there can be no assurances that corrective action will
be completed before any Year 2000 problems occur, or that costs will not be
greater than anticipated.

      The Company has reviewed its internal operations, including the physical
plant, computer programs, and other systems on which its operations rely. Based
on this assessment, an action plan has been developed. It includes obtaining
supplier certifications, obtaining and installing vendor-provided software
upgrades, and replacing affected systems where necessary. Specifically, the
core financial system utilized by the Company was not Y2K compliant. During
December 1998, the system was upgraded to a Y2K compliant version. This upgrade
included vendor supplied applications, new versions of operating systems, and
new hardware. Full end-to-end system tests were conducted and discrepancies
corrected. It should be noted that the Company's fiscal 2000 began on April 1,
1999 and the upgraded accounting system has had no Y2K related problems. The
cost of this upgrade was included in the normal, annual maintenance expenses
for the system. Other corporate systems have been evaluated to determine
appropriate courses of action. Embedded systems (principally security systems)
have been examined and upgraded to Y2K compliant versions. The Company expects
to complete remediation of all critical internal systems by September 1999.

                                       18
<PAGE>   19

      In the ordinary course of its business, the Company spends a portion of
its information technology budget on maintenance and upgrades to its corporate
information technology infrastructure. During fiscal 1999, the Company incurred
an additional $126,000 for specific Year 2000 remediation, out of a total
information technology budget of $5.2 million. These costs have been expensed
as incurred. The estimate for Year 2000 remediation, in addition to ordinary
information technology expenses, for fiscal 2000 (beginning April 1999) is
$470,000, out of a total information technology budget of $6.2 million. A
portion of this amount will be used to acquire capital equipment which would
not otherwise have been purchased until a future period.

      The Company believes there is a risk that other parties with whom it
deals may be relying on systems that could experience Year 2000 problems. This
includes the Company's largest customer, the Government, whose Year 2000
remediation efforts are known to be underway. Based on information currently
available, the Company does not believe it will suffer a materially adverse
affect by the Year 2000 problems of the Government or its other customers. It
should be noted that should Y2K noncompliance by the Government or any other
customer disrupt the Company's receipt of payments, the Company would expect to
increase its short-term borrowings, which could materially increase the
Company's interest expenses. In addition, there is a risk that customers will
reduce funding on contracts awarded to the Company in order to fund Year 2000
remediation. To the extent the Company is not the provider of that remediation,
this would affect the Company's revenues.

      The Company has taken steps to assure itself that the financial
institutions, utilities, and service providers with whom it deals will not
experience Year 2000 problems that would materially and adversely affect the
Company. In addition, the Company has obtained commitments from suppliers of
products for resale that such products will be Y2K compliant. Although the
Company believes that essential operations and services will not be affected,
any failures or delays could disrupt the Company's business and cause it to
incur substantial expense.

      The Company has undertaken an assessment of the extent to which products
it has developed and resold are Y2K compliant. The Company is aware that the
distribution of non-Y2K compliant products could give rise to customer claims
against the Company. With respect to BTG-branded products, which it stopped
manufacturing in 1998, the Company will provide, when and where appropriate,
BIOS upgrades and software utilities, to bring such products to a level of Year
2000 compliance, when possible. The Company cannot estimate the outcome of such
claims or their effect on the Company, but believes that most such claims, if
any, would be without merit.

      There can be no assurances that the Company will not experience delay in,
or increased cost associated with, the implementation of its Year 2000
remediation plan, and the Company's inability to implement such plan could have
an adverse effect on future results of operations. In addition, there can be no
assurance that the Company will not experience serious unanticipated negative
consequences and/or material costs caused by undetected errors or defects in
the technology used in its internal systems, which are comprised of third party
software, third party hardware that contains embedded software, and the
Company's own branded-products. The most reasonably likely worst case scenarios
would include: (i) corruption of data contained in the Company's internal
information systems, (ii) hardware failure, (iii) the failure of infrastructure
services provided by government agencies and other third parties (e.g.,
providers of electricity, phone service, water transport, etc.), and (iv) the
inability of the Government or any other customer to make timely payments on
Company invoices. The Company is continuing to prepare its contingency
planning, which will include among other things, manual "work-arounds" for
software and hardware failures, as well as substitution of systems, if
necessary.

      The statements above describing the Company's plans and objectives for
handling Year 2000 issues and the expected impact of the Year 2000 issue on the
Company are forward-looking statements. Those statements involve risks and
uncertainties that could cause actual results to differ materially from the
results discussed above. Factors that might cause such a difference include,
but are not limited to, delays in executing the plan outlined above and
increased or unforeseen costs associated with the implementation of the plan
and any necessary changes to the Company's systems.

NEW ACCOUNTING PRONOUNCEMENT

      On March 4, 1998, the American Institute of Certified Public Accountants
issued Statement of Position No. 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1 provides
guidance on the capitalization of certain costs related to computer software
developed or obtained for internal use and is effective for financial
statements issued for fiscal years beginning after December 15, 1998. The
Company will adopt SOP 98-1 effective April 1, 1999, and believes that such
adoption will have an impact on its consolidated financial statements in the
future.

                                       19
<PAGE>   20

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      The Company does not believe that there are any disclosures required
under this item with respect to market risk sensitive instruments. The
Company's obligations under its line of credit and long-term debt bear interest
at rates which have been indexed to current market rates.



                                       20
<PAGE>   21

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                          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, 1999 and 1998, and the related consolidated
statements of operations, shareholders' equity, cash flows, and comprehensive
income for each of the years in the three-year period ended March 31, 1999.
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, 1999 and 1998, and the results of their operations
and their cash flows for each of the years in the three-year period ended March
31, 1999, in conformity with generally accepted accounting principles.

/s/ KPMG LLP


McLean, Virginia
May 24, 1999


                                       21
<PAGE>   22

BTG, Inc. and Subsidiaries
Consolidated Statements of Operations
Fiscal Years Ended March 31, 1999, 1998 and 1997
(in thousands, except per share data)

<TABLE>
<CAPTION>
                                                                              1999             1998             1997
                                                                           ---------        ---------        ---------
<S>                                                                        <C>              <C>              <C>
Revenues:
   Contract revenue                                                        $ 184,794        $ 157,422        $ 106,131
   Product sales                                                             131,641          429,315          292,270
                                                                           ---------        ---------        ---------
                                                                           $ 316,435        $ 586,737        $ 398,401

Direct costs:
   Contract costs                                                            123,510          105,035           63,500
   Cost of product sales                                                     127,821          399,508          256,678
                                                                           ---------        ---------        ---------
                                                                           $ 251,331        $ 504,543        $ 320,178

Indirect, general and administrative expenses                                 56,512           89,317           63,347
Amortization expense                                                             695            1,682            1,523
Restructuring charge                                                           1,796           38,474              --
                                                                           ---------        ---------        ---------
                                                                           $ 310,334        $ 634,016        $ 385,048
                                                                           ---------        ---------        ---------

Operating income (loss)                                                    $   6,101        $ (47,279)       $  13,353

Interest expense, net                                                         (3,949)          (8,448)          (6,107)
Unusual charge                                                                (1,201)             --               --
Equity in earnings of unconsolidated affiliates                                   24              589            1,887
Gain on sale of investments, net                                               3,532           20,228               63
Other                                                                           (179)          (2,466)             --
                                                                           ---------        ---------        ---------

Income (loss) from continuing operations before
   income taxes and extraordinary items                                    $   4,328        $ (37,376)       $   9,196
Provision (benefit) for income taxes                                           1,567           (8,295)           4,150
                                                                           ---------        ---------        ---------

Income (loss) from continuing operations                                   $   2,761        $ (29,081)       $   5,046

Loss from discontinued operations:
   Loss from operations, net of income tax benefit of $160,  $1,325,
         and $492 for fiscal 1999, 1998, and 1997, respectively                 (251)          (2,147)            (775)
   Loss on disposal, net of income tax benefit of $124 and $1,304
         for fiscal 1999 and 1998, respectively                                 (514)          (2,117)              --
                                                                           ---------        ---------        ---------
                                                                                (765)          (4,264)            (775)
                                                                           ---------        ---------        ---------

Net income (loss) before extraordinary items                                   1,996          (33,345)           4,271
Extraordinary loss from early extinguishment of
   debt, net of income tax benefit of $1,158                                     --            (1,878)             --
                                                                           ---------        ---------        ---------

Net income (loss)                                                          $   1,996        $ (35,223)       $   4,271
                                                                           =========        =========        =========


Basic earnings (loss) per share:
   Income (loss) from continuing operations                                $    0.32        $   (3.40)       $    0.73
   Loss from discontinued operations                                           (0.09)           (0.50)           (0.11)
   Loss from extraordinary item                                                   --            (0.22)             --
                                                                           ---------        ---------        ---------
   Net income (loss)                                                       $    0.23        $   (4.12)       $    0.62
                                                                           =========        =========        =========

Diluted earnings (loss) per share:
   Income (loss) from continuing operations                                $    0.32        $   (3.40)       $    0.71
   Loss from discontinued operations                                           (0.09)           (0.50)           (0.11)
   Loss from extraordinary item                                                    --           (0.22)             --
                                                                           ---------        ---------        ---------
   Net income (loss)                                                       $    0.23        $   (4.12)       $    0.60
                                                                           =========        =========        =========


Weighted average shares outstanding (used in the
   calculation of basic earnings per share)                                    8,774            8,540            6,887
                                                                           =========        =========        =========
Weighted average shares outstanding (used in the
   calculation of diluted earnings per share)                                  8,827            8,540            7,141
                                                                           =========        =========        =========
</TABLE>

See accompanying notes to consolidated financial statements.

                                       22
<PAGE>   23

BTG, Inc. and Subsidiaries
Consolidated Balance Sheets
March 31, 1999 and 1998
(in thousands, except share data)

<TABLE>
<CAPTION>
                                                                           1999                  1998
                                                                       -------------         --------
                           ASSETS
<S>                                                                         <C>               <C>
Current assets:
   Investments, at fair value                                               $      --         $  22,286
   Receivables, net                                                             53,281          135,050
   Inventory, net                                                                  378            2,214
   Prepaid expenses                                                              2,786            3,338
   Income tax receivable                                                            43           10,348
   Deferred income taxes                                                         3,360            3,820
   Other                                                                         1,443            5,308
                                                                             ---------        ---------
       Total current assets                                                  $  61,291        $ 182,364
                                                                             ---------        ---------

Property and equipment:
   Furniture and equipment                                                      11,301            8,754
   Leasehold improvements                                                        2,393            2,332
                                                                             ---------        ---------
                                                                             $  13,694        $  11,086
   Accumulated depreciation and amortization                                    (8,492)          (6,578)
                                                                             ---------        ---------
                                                                             $   5,202        $   4,508

Other assets:
   Goodwill, net of accumulated amortization of $912 and
     $499 at March 31, 1999 and 1998, respectively                           $  15,211        $   8,860
   Other intangible assets, net of accumulated amortization of $1,177
     and $2,051 at March 31, 1999 and 1998, respectively                            48              874
   Restricted investments                                                        6,429           14,813
   Deferred income taxes                                                           462              228
   Other                                                                         1,734              792
                                                                             ---------        ---------
                                                                             $  90,377        $ 212,439
                                                                             =========        =========


             LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
   Current maturities of long-term debt                                      $   1,700        $  15,000
   Current maturities of line of credit                                            --            31,417
   Accounts payable                                                             18,203           74,573
   Accrued expenses                                                             11,050           13,483
   Income taxes currently payable                                                  309              --
   Other                                                                         3,134            4,079
                                                                             ---------        ---------
       Total current liabilities                                             $  34,396        $ 138,552
                                                                             ---------        ---------

Line of credit, excluding current maturities                                    17,666           38,835
Other                                                                            2,304            1,992
                                                                             ---------        ---------
       Total liabilities                                                     $  54,366        $ 179,379
                                                                             ---------        ---------

Commitments and contingencies

Shareholders' equity:
   Preferred stock, no par value, 1,000,000 shares authorized;
     no shares issued or outstanding                                        $      --        $      --
   Common stock, no par value, 20,000,000 shares authorized;
     8,852,205 and 8,634,451 shares outstanding at March 31, 1999
     and 1998, respectively, net of reacquired shares held in treasury          54,860           53,384
   Accumulated deficit                                                         (18,534)         (20,530)
   Treasury stock, at cost, 53,000 and 50,057 shares at March 31, 1999
     and 1998, respectively                                                       (315)            (527)
   Accumulated other comprehensive income                                          --               733
                                                                             ---------        ---------
       Total shareholders' equity                                            $  36,011        $  33,060
                                                                             ---------        ---------
                                                                             $  90,377        $ 212,439
                                                                             =========        =========
</TABLE>

See accompanying notes to consolidated financial statements.

                                       23
<PAGE>   24

BTG, Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity
Fiscal Years Ended March 31, 1999, 1998 and 1997
(in thousands, except share data)

<TABLE>
<CAPTION>
                                                           Retained                       Accumulated
                                                           Earnings                          Other           Total
                                              Common     (Accumulated      Treasury       Comprehensive  Shareholders'
                                              Stock        Deficit)          Stock           Income          Equity
                                            --------       --------        ---------        --------        --------

<S>                                         <C>            <C>             <C>           <C>               <C>
Balance, March 31, 1996                     $ 17,915       $ 10,422        $    (527)    $      (65)       $ 27,745

     Net income                                  --           4,271              --             --            4,271
     Sale of 2,190,000 common
        shares related to a follow-
        on public offering, net of
        related issuance costs                33,061            --              --              --           33,061
     Sale of 125,742 common shares
        under employee stock
        option and stock purchase
        plans                                  1,067            --              --              --            1,067
     Tax benefits applicable to
        stock option plans                        36            --              --              --               36
     After-tax change in unrealized
        investment gains                         --             --              --               65              65
                                            --------       --------        --------        --------        --------

Balance, March 31, 1997                     $ 52,079       $ 14,693        $   (527)     $      --         $ 66,245

     Net loss                                    --         (35,223)             --             --          (35,223)
     Sale of 190,607 common shares
        under employee stock
        option and stock purchase
        plans                                  1,290            --              --              --            1,290
     Tax benefits applicable to
        stock option plans                        15            --              --              --               15
     After-tax change in unrealized
        investment gains                          --            --              --              733             733
                                            --------       --------        --------        --------        --------


Balance, March 31, 1998                     $ 53,384      $ (20,530)       $   (527)     $      733        $ 33,060

     Net income                                  --           1,996             --              --            1,996
     Sale of 131,844 common shares
        under employee stock
        option and stock purchase
        plans                                    753            --              --              --              753
     Sale of 138,910 common shares
        in a private placement to
        certain directors                        723            --              527             --            1,250
     After-tax change in unrealized
        investment gains, net of
        reclassification adjustment              --             --              --             (733)           (733)
     Purchase of 53,000 common shares            --             --             (315)            --             (315)
                                            --------       --------        --------        --------        --------

Balance, March 31, 1999                     $ 54,860       $(18,534)       $   (315)     $      --         $ 36,011
                                            ========       =========       ========      ==========        ========
</TABLE>

See accompanying notes to consolidated financial statements.


                                       24
<PAGE>   25

BTG, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Fiscal Years Ended March 31, 1999, 1998 and 1997
(in thousands)

<TABLE>
<CAPTION>
                                                                                        1999            1998             1997
                                                                                    -------------   -------------    ------------

<S>                                                                                  <C>             <C>              <C>
Cash flows from operating activities:
   Net income (loss)                                                                  $  1,996        $(35,223)       $  4,271
   Adjustments to reconcile net income (loss) to net cash
     provided by (used in) operating activities:
       Loss on discontinued operations                                                     765           4,264             775
       Depreciation and amortization                                                     2,249           4,383           3,698
       Deferred income taxes                                                               167          (3,572)            888
       Reserves for accounts receivable and inventory                                      366           3,082             785
       Equity in earnings of affiliate                                                     (24)             --              --
       Loss on sales of property and equipment                                              --             375              61
       Gain on sale of investments                                                      (3,532)        (20,228)            (63)
       Restructuring charge                                                              1,796          35,492              --
       Unusual charge                                                                    1,706              --              --
       Extraordinary loss on extinguishment of debt                                         --           1,182              --
       Changes in assets and liabilities, net of the effects from
         purchases of subsidiaries:
           (Increase) decrease in restricted cash                                           --              --              47
           (Increase) decrease in receivables                                           81,821         (30,021)        (30,500)
           (Increase) decrease in inventory                                              1,439         (20,409)         (7,319)
           (Increase) decrease in income tax receivable                                 10,572          (6,542)           (339)
           (Increase) decrease in prepaids and other                                     3,278            (536)         (5,068)
           (Increase) decrease in other assets                                             400           1,028            (353)
           Increase (decrease) in accounts payable                                     (56,853)         40,519           6,782
           Increase (decrease) in accrued expenses                                      (4,102)         (1,243)          2,617
           Increase (decrease) in other liabilities                                       (408)           (657)         (1,736)
           Increase (decrease) in income taxes currently payable                           309              --          (1,310)
                                                                                      --------        --------        --------

         Net cash provided by (used in) the operating activities of
           continuing operations                                                        41,945         (28,106)        (26,764)
         Net cash used in discontinued operations                                         (124)         (3,974)           (793)
                                                                                      --------        --------        --------
                Net cash provided by (used in) operating activities                   $ 41,821        $(32,080)       $(27,557)
                                                                                      --------        --------        --------


Cash flows from investing activities:
   Purchases of subsidiaries, net of cash acquired                                      (5,705)        (10,153)             --
   Purchases of investments                                                                 --              --            (593)
   Proceeds from sales of investments                                                   30,288              --             425
   Purchases of notes receivable                                                            --              --            (375)
   Purchases of property and equipment                                                    (939)         (1,918)         (2,780)
   Proceeds from sale of business                                                           --           7,200              --
   Product development costs                                                                --            (807)         (2,003)
                                                                                      --------        --------        --------
                Net cash provided by (used in) investing activities                   $ 23,644        $ (5,678)       $ (5,326)
                                                                                      --------        --------        --------


Cash flows from financing activities:

   Net advances (repayments) under line of credit                                      (53,155)         38,289            (432)
   Principal payments on long-term debt                                                (19,076)        (15,645)           (140)
   Proceeds from the issuance of long-term debt                                          5,400          15,000              --
   Principal payments on capital lease obligations                                        (116)           (759)           (220)
   Payment of debt issue costs                                                              (3)           (306)           (215)
   Proceeds from the issuance of common stock                                            1,800           1,179          33,890
   Purchase of treasury stock                                                             (315)             --              --
                                                                                      --------        --------        --------
                Net cash provided by (used in) financing activities                   $(65,465)       $ 37,758        $ 32,883
                                                                                      --------        --------        --------

Increase (decrease) in unrestricted cash and equivalents                                    --              --              --

Unrestricted cash and equivalents, beginning of year                                        --              --              --
                                                                                      --------        --------        --------

Unrestricted cash and equivalents, end of year                                        $     --        $     --        $     --
                                                                                      ========        ========        ========
</TABLE>

See accompanying notes to consolidated financial statements.

                                       25
<PAGE>   26

BTG, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
Fiscal Years Ended March 31, 1999, 1998 and 1997
(in thousands)

<TABLE>
<CAPTION>
                                                                    1999             1998            1997
                                                               -------------     ------------    -------------

<S>                                                              <C>             <C>              <C>
Net income (loss)                                                 $  1,996        $(35,223)       $  4,271
                                                                  --------        --------        --------

Other comprehensive income, net of tax:
   Unrealized gains on investments:
       Unrealized holding gains arising during the period            1,839             733              --
       Less: reclassification adjustment for gains included
         in net income                                              (2,572)             --              --
                                                                  --------        --------        --------
Comprehensive income (loss)                                       $  1,263        $(34,490)       $  4,271
                                                                  ========        ========        ========
</TABLE>

See accompanying notes to consolidated financial statements.


                                       26
<PAGE>   27

BTG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Fiscal Years Ended March 31, 1999, 1998 and 1997

1.    NATURE OF OPERATIONS

      BTG, Inc. ("BTG" or the "Company") is an information systems and technical
services company providing expertise to a broad range of the complex systems
needs of its customers. The Company is an industry leader in providing systems
analysis and engineering services, solutions development, systems integration,
and computer-based operations and support.

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

   Principles of Consolidation

      The accompanying consolidated financial statements include the accounts of
all majority-owned subsidiaries of the Company. All significant intercompany
balances and transactions have been eliminated in consolidation. Investments in
unconsolidated affiliates owned more than 20 percent, but not in excess of 50
percent, are recorded on the equity method.

   Revenue Recognition

      The Company provides systems development, integration and engineering
services, primarily to the United States Government and its agencies and
departments (the "Government"), on a contractual basis. Revenue on cost-plus-fee
contracts is recognized to the extent of costs incurred plus a proportionate
amount of fees earned. Revenue on time-and-materials contracts is recognized to
the extent of billable rates times hours delivered plus other direct costs.
Revenue on fixed-price contracts is recognized using the
percentage-of-completion method based on costs incurred in relation to total
estimated costs. Anticipated contract losses are recognized as soon as they
become known and estimable.

      Revenue that is contractually billable prior to performance or delivery is
deferred until the work has been performed and/or the product has been
delivered.

      The Company also provides off-the-shelf hardware and software to the
Government under a variety of contract vehicles and to commercial companies as a
third-party distributor. Related revenue is recognized when products are shipped
or when customers have accepted the products or services, depending on
contractual terms. Estimated future costs of providing customer support under
warranty obligations for products sold by the Company are recorded at the time
of revenue recognition.

   Cash and Equivalents

      All highly liquid debt instruments with original maturities of three
months or less are classified as cash equivalents.

   Investments

      Investments in marketable debt and equity securities are accounted for
under the provisions of Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities ("Statement
115"). At March 31, 1998, the Company's short-term investments consisted solely
of marketable equity securities which were classified as "available for sale" in
accordance with the provisions of Statement 115. Accordingly, such investments
are carried at fair value in the accompanying consolidated financial statements.
Fair value was determined based on quoted market prices. Net unrealized gains
from these investments were carried as a separate component of shareholders'
equity, net of the related tax effects. At March 31, 1999, the Company held no
investments in marketable debt or equity securities.

   Inventory

      Inventory, net of an allowance for obsolescence, consists principally of
purchased products held for resale and is valued at the lower of cost,
determined on the average cost basis, or market value.

                                       27
<PAGE>   28

   Property and Equipment

      Property and equipment are recorded at cost and are depreciated over their
estimated useful lives, three to seven years, using accelerated and
straight-line methods. Leasehold improvements are amortized over the terms of
the related leases using the straight-line method. Assets recorded under capital
leases are amortized using the straight-line method over either the lease term
or the estimated useful lives of the leased assets depending on the criteria
used for lease capitalization.

   Goodwill and Intangible Assets

      Goodwill, the excess of cost over the fair value of net tangible and
identifiable intangible assets of acquired companies, is amortized over the
expected periods of benefit, 20 to 30 years, on a straight-line basis.
Intangible assets are amortized on a straight-line basis over the expected
periods of benefit, three to 13 years.

      The Company assesses the recoverability of its goodwill and intangible
assets by determining whether the balances can be recovered through the
estimated, undiscounted future operating cash flows of the acquired operations.
The amount of impairment, if any, is measured based on projected discounted
future operating cash flows. The assessment of the recoverability of goodwill
and intangible assets will be impacted if estimated future operating cash flows
are not achieved.

   Income Taxes

      Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.

   Research and Development Expenses

      The Company expenses research and development costs as they are incurred.
Research and development expenses for the fiscal years ended March 31, 1999,
1998 and 1997 were not significant.

   Fair Value of Financial Instruments

      The carrying value of the Company's receivables, payables, and revolving
line of credit instruments approximates fair value since all such instruments
are either short-term in nature or bear interest rates which are indexed to
current market rates. Fair value for the Company's notes receivable and
long-term debt is determined based on current rates offered for instruments with
similar remaining maturities. At March 31, 1999, the carrying value of the
Company's notes receivable and long-term debt approximated fair value.

   Earnings Per Share

      Basic earnings per share is computed by dividing net income for the year
by the weighted average number of shares of common stock outstanding during the
year. Diluted earnings per share is computed by dividing net income for the year
by the weighted average number of shares of common stock and potential dilutive
securities outstanding during the year. Potential dilutive securities include
all issued and outstanding options and warrants.

   Use of Estimates

      The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingencies as of the dates of the financial statements, and the
reported amounts of revenues and expenses during the reporting periods. The
Company uses the most current and best available information in preparing its
estimates. Significant estimates were used in the accompanying consolidated
financial statements to account for the deferred tax asset valuation allowance,
product warranty liability, and certain other reserves recorded in connection
with the restructuring charge recognized in both fiscal 1999 and 1998. Actual
results may differ from those estimates.

                                       28
<PAGE>   29

Comprehensive Income

      In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 130, Reporting Comprehensive Income
("Statement 130"). Statement 130 established standards for reporting and
presenting comprehensive income and its components in consolidated financial
statements. The Company's only element of comprehensive income during fiscal
1999, 1998 and 1997 related to unrealized gains on investments held at March 31,
1998. These gains were realized during fiscal 1999. The Company adopted
Statement 130 effective April 1, 1998.

Segment Reporting

      In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, Disclosures about Segments of an Enterprise and Related Information
("Statement 131"). The Company adopted Statement 131 during its fiscal 1999.
Statement 131 establishes new procedures and requirements for the (i)
determination of business segments, (ii) presentation and disclosure of segment
information, and (iii) disclosure of selected segment information within interim
consolidated financial statements. Business segments, as defined in Statement
131, are components of an enterprise for which separate financial information is
available and is evaluated regularly by the Company in deciding how to allocate
resources and in assessing performance. The financial information is required to
be reported on the basis that it is used internally for evaluating the segment
performance.

   Reclassification

      Certain amounts in the prior years' financial statements have been
reclassified to conform to the fiscal 1999 presentation.

3.    RECEIVABLES

      The components of receivables are as follows (in thousands):

<TABLE>
<CAPTION>
                                                                  MARCH 31,
                                                         -------------------------
                                                            1999             1998
                                                         ---------         -------

<S>                                                    <C>              <C>
     Amounts billed and billable                        $  52,800        $ 129,328
     Retainages billable upon contract completion           2,358            2,040
     Other unbilled amounts                                   561            4,244
     Other receivables                                        200            2,621
     Allowance for doubtful accounts                       (2,638)          (3,183)
                                                        ---------        ---------
       Total                                            $  53,281        $ 135,050
                                                        =========        =========
</TABLE>

      The Company anticipates collecting substantially all receivables, except
retainages, within one year.

4.    ACCRUED EXPENSES

      Accrued expenses consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                                         MARCH 31,
                                                              --------------------------------
                                                                 1999                  1998
                                                              ---------             ----------

<S>                                                           <C>                   <C>
     Accrued salaries and related taxes                       $   4,934             $   4,334
     Accrued employee leave                                       3,679                 3,254
     Accrued product warranty costs                                 888                 3,406
     Other                                                        1,549                 2,489
                                                              ---------             ---------
                                                              $  11,050             $  13,483
                                                              =========             =========
</TABLE>


                                       29
<PAGE>   30


5.    OTHER CURRENT LIABILITIES

      Other current liabilities consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                                         MARCH 31,
                                                              --------------------------------
                                                                 1999                  1998
                                                              ---------             ----------

<S>                                                           <C>                   <C>
     Accrued purchase price from business combination         $   1,000             $     --
     Accrued commitments of divested reselling division             734                 1,942
     Other                                                        1,400                 2,137
                                                              ---------             ---------
                                                              $   3,134             $   4,079
                                                              =========             =========
</TABLE>

6.    INCOME TAXES

      The total income tax expense (benefit) for the years ended March 31, 1999,
1998 and 1997 was allocated as follows (in thousands):

<TABLE>
<CAPTION>
                                                               FISCAL YEARS ENDED
                                                                     MARCH 31,
                                                 ----------------------------------------------
                                                   1999                1998              1997
                                                 ---------           --------         ---------

<S>                                              <C>                 <C>              <C>
     Income (loss) from continuing operations    $   1,567           $ (8,295)        $   4,150
     Discontinued operations                          (284)            (2,629)             (492)
     Extraordinary item                                --              (1,158)              --
                                                 ---------           --------         ---------
                                                 $   1,283           $(12,082)        $   3,658
                                                 =========           ========         =========
</TABLE>


      The provision (benefit) for income taxes attributable to income (loss)
from continuing operations include the following (in thousands):

<TABLE>
<CAPTION>
                                                              FISCAL YEARS ENDED
                                                                  MARCH 31,
                                                ----------------------------------------------
                                                  1999                1998               1997
                                                -------             -------            -------
Current:
<S>                                             <C>                 <C>                <C>
  Federal                                       $   828             $(5,182)           $ 2,714
  State                                             381                (661)               535
                                                -------             -------            -------
                                                  1,209              (5,843)             3,249
                                                -------             -------            -------
Deferred:
  Federal                                           299              (2,048)               752
  State                                              59                (404)               149
                                                -------             -------            -------
                                                    358              (2,452)               901
                                                -------             -------            -------
                                                $ 1,567             $(8,295)           $ 4,150
                                                =======             =======            =======
</TABLE>

      Income tax expense (benefit) differs from the amount of income taxes
determined by applying the U.S. Federal income tax statutory rates to income
(loss) from continuing operations before income taxes and extraordinary items as
follows:

<TABLE>
<CAPTION>
                                                              FISCAL YEARS ENDED
                                                                  MARCH 31,
                                                ----------------------------------------------
                                                  1999                1998               1997
                                                -------             -------            -------

<S>                                              <C>                <C>                 <C>
Statutory Federal income tax rate                35.0%              (35.0%)             35.0%
State income tax, net of Federal
  income tax benefit                              5.3                (1.9)               5.0
Phase-in tax rate differential                   (1.0)                1.0               (1.0)
Non-deductible amortization expense               4.3                11.9                5.2
Change in the valuation allowance                (9.6)                1.3               (1.2)
Other permanent differences                       2.2                 0.5                2.1
                                                -------             -------            -------
  Effective tax rate                             36.2%              (22.2%)             45.1%
                                                =======             =======            =======

</TABLE>

                                       30
<PAGE>   31

      The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at March 31,
1999 and 1998 are presented below (in thousands):

<TABLE>
<CAPTION>
                                                                               MARCH 31,
                                                                       ----------------------
                                                                           1999         1998
                                                                       ----------   ---------
<S>                                                                    <C>          <C>
     Deferred tax assets:
       Financial reporting reserves                                    $   3,113    $   5,594
       Net operating loss carryforwards                                      440        5,885
       Employee benefits, accrued for financial reporting purposes         1,077        1,165
       Deferred revenue                                                     --            369
       Capital loss carryforwards                                           --            173
       Other                                                                 302          383
                                                                       ---------    ---------
     Total deferred tax assets                                             4,932       13,569
     Less: valuation allowance                                              (133)        (550)
                                                                       ---------    ---------
           Net deferred tax assets                                         4,799       13,019
                                                                       ---------    ---------

     Deferred tax liabilities:

       Gain on sale of investments                                          --         (7,717)
       Revenues not contractually billable                                  (901)      (1,183)
       Other                                                                 (76)         (71)
                                                                       ---------    ---------
     Total deferred tax liabilities                                         (977)      (8,971)
                                                                       ---------    ---------
           Net deferred tax asset                                      $   3,822    $   4,048
                                                                       =========    =========
</TABLE>

      There was no valuation allowance for deferred tax assets as of April 1,
1997. In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will be realized. The ultimate realization of the deferred
tax assets is dependent upon the generation of future taxable income during the
periods in which the temporary differences become deductible. Management
considers taxes paid during the previous three years, scheduled reversal of
deferred tax liabilities, historical and projected future taxable income, and
tax planning strategies which can be implemented by the Company in making this
assessment. Based upon these factors, the Company has established a valuation
allowance against that portion of the deferred tax assets for which management
believes that ultimate realization cannot presently be assessed as "more likely
than not". Operating losses incurred in fiscal 1998 were primarily the result of
divested and discontinued operations for which no future losses are anticipated.
Management believes that, based principally on the past earnings history of its
ongoing operations and the scheduled reversal of significant deferred tax
liabilities, the majority of its deferred tax assets at March 31, 1999 are more
likely than not realizable.

7.    LINE OF CREDIT

      In November 1995, the Company entered into a revolving line of credit
facility (the "Credit Facility") with a syndicate of financial institutions
which provided for borrowings up to $60.0 million based on specified percentages
of eligible accounts receivable (the "borrowing base"). In October 1996, and
again in October 1997, the Credit Facility was amended to increase the ceiling
for available borrowings to $85.0 million and $110.0 million, respectively. In
February 1998, in connection with the divestiture of the Company's product
reselling business, the Credit Facility was further amended to reduce the
ceiling for available borrowings to $95.0 million through March 31, 1998, $85.0
million from April 1, 1998 through June 30, 1998, $75.0 million from July 1,
1998 through September 30, 1998, and $60.0 million from October 1, 1998 through
August 31, 1999. On November 9, 1998, the Company again amended its Credit
Facility to provide for, among other things, an extension of the maturity date
of the facility to August 31, 2002 and a further reduction, to a $50.0 million
ceiling, in available borrowings under the facility. At March 31, 1999, the
balance outstanding under the Credit Facility was approximately $17.7 million
and approximately $17.6 million was available for additional borrowing. At March
31, 1998, outstanding borrowings under the Credit Facility were in excess of the
amounts available under the prescribed borrowing base by approximately $15.1
million and the Company obtained approval from the lending financial
institutions for overadvance funding to cover such excess borrowings. Interest
on outstanding borrowings under the amended agreement is provided at a rate
equal to, at the Company's option, either the lender's prime rate or LIBOR plus
a percentage ranging from 2.25% to 3.25%, depending on the Company's leverage
ratio. During the period the Company was utilizing overadvance funding, all
outstanding borrowings accrued interest at the lender's prime rate.

                                       31
<PAGE>   32

      The Credit Facility is secured by substantially all assets of the Company.
The Company is required to comply with various financial covenants under the
Credit Facility and is restricted from, among other things, paying dividends,
changing its capital structure, or making acquisitions without the approval of
the lenders. At March 31, 1999, the Company was in compliance with all financial
covenants under the Credit Facility. At March 31, 1998, the Company obtained
waivers from the lending financial institutions for non-compliance with certain
of the financial covenants. At March 31, 1999, the entire balance outstanding
under the Credit Facility has been classified as a noncurrent liability in the
accompanying consolidated balance sheet, as the Company anticipates that its
borrowing base over the next fiscal year will provide for a minimum availability
equal to or in excess of the amount outstanding on such date.

      In addition to a revolving loan, the Credit Facility includes a facility
under which the Company can, subject to the approval of the lender and the
payment of certain fees, obtain letters of credit of up to a maximum of $5.0
million. At March 31, 1999 and 1998, there were no letters of credit outstanding
under the facility. Costs incurred to obtain the Credit Facility have been
capitalized and are being amortized over the term of the agreement.

      An analysis of activity under the Credit Facility is as follows (in
thousands):

<TABLE>
<CAPTION>
                                                                   MARCH 31,
                                                           ------------------------
                                                              1999           1998
                                                           ---------      ---------
<S>                                                        <C>            <C>
Maximum line of credit available
  during the period                                        $ 57,045       $110,000

Balance outstanding at the end of the period               $ 17,666       $ 70,252

Total borrowing base at the end of the period              $ 35,291       $ 55,170

Interest rate at the end of the period:
  At the lender's prime rate option                          7.75 %         8.50 %
  At the LIBOR option                                        7.47 %         7.69 %

Monthly average amount outstanding during the period       $ 36,226       $ 67,524

Monthly weighted average interest rate
  outstanding during the period                              9.56 %         7.96 %
</TABLE>


8.    LONG-TERM DEBT

      The Company's long-term debt consists of the following (in thousands):

<TABLE>
<CAPTION>
                                                                  MARCH 31,
                                                            ---------------------
                                                             1999          1998
                                                            -------      --------
<S>                                                         <C>          <C>
Term promissory notes, principal due in four
  equal quarterly installments beginning on June 30,
  1999, with interest due quarterly at the lender's
  prime rate (7.75% at 3/31/99)                             $ 1,700      $     --

Term promissory notes, paid during fiscal 1999                   --        15,000
                                                            -------       -------

                                                              1,700        15,000

Less current maturities                                       1,700        15,000
                                                            -------       -------
                                                            $   --        $   --
                                                            =======       =======
</TABLE>


      On January 26, 1999, the Company issued two term promissory notes totaling
$3.4 million to the financial institutions that lend to the Company under the
Credit Facility. The proceeds from the term promissory notes were used to
finance the acquisition of STAC, Inc. In March 1999, the Company repaid $1.7
million of the notes.

                                       32
<PAGE>   33

      On February 24, 1998, the Company issued two term promissory notes, each
in the amount of $7.5 million, to the financial institutions that lend to the
Company under the Credit Facility. In April 1998, the Company repaid the term
promissory notes with proceeds from the sale of investments. The funds initially
received from the issuance of the term promissory notes were used for the early
retirement of other outstanding notes payable. Total costs incurred by the
Company in connection with such early retirement amounted to approximately $1.9
million, net of the related tax benefits, and are presented as an extraordinary
item in the accompanying consolidated statements of operations.

9. SHAREHOLDERS' EQUITY AND STOCK OPTIONS

   Preferred Stock

      The Company's Amended Articles of Incorporation authorize the Company to
issue up to 1,000,000 shares of preferred stock, 982,500 of which have no par
value and 17,500 of which have a par value of $0.01. No preferred shares have
been issued as of March 31, 1999.

   Common Stock

      The Company has one class of voting common stock with 20,000,000 shares
authorized for issuance. In November 1996, the Company sold 2,190,000 shares of
common stock, pursuant to a follow-on public offering, at $16.25 per share, for
total proceeds of $33.1 million, net of issuance costs of approximately $2.5
million.

   Treasury Stock

      In September 1998, the Company's Board of Directors approved the adoption
of a share repurchase plan. Under the terms of the share repurchase plan, the
Company is authorized to purchase, from time to time, up to 500,000 shares of
its common stock through both open market and negotiated purchases. During
fiscal 1999, the Company purchased 53,000 shares of common stock under the plan
for approximately $315,000.

   Directors Stock Option Plan

      The Company has a Directors Stock Option Plan (the "Directors Option
Plan") which provides for the granting of a maximum of 100,000 nonqualified
stock options to non-employee members of the Board of Directors. The option
price per share is equal to the fair market value of a company share on the date
of grant. The term of each option is ten years and an option first becomes
exercisable six months after the date of grant. Under the terms of the Directors
Option Plan, each non-employee member of the Board of Directors will be granted
1,000 options on each anniversary date of the Director's service commencement
date.

      Additional information with respect to options under the Directors Option
Plan is as follows:

<TABLE>
<CAPTION>
                                                                             WEIGHTED-AVERAGE
                                                      NUMBER                  EXERCISE PRICE
                                                    OF SHARES                   PER SHARE
                                                   ------------                 ---------

<S>                                                    <C>                        <C>
Shares under option, March 31, 1996                    10,000                     $11.25
     Options granted                                    6,000                      13.69
                                                   ------------                 --------
Shares under option, March 31, 1997                    16,000                     $12.16
     Options granted                                    7,000                      12.45
                                                   ------------                 --------
Shares under option, March 31, 1998                    23,000                      12.25
     Options granted                                    6,000                       7.25
     Options forfeited                                 (1,000)                     13.13
                                                   ------------                 --------
Shares under option, March 31, 1999                    28,000                     $11.15
                                                   ============                 ========

Options exercisable, March 31, 1998                    23,000                     $12.25
                                                   ============                 ========
Options exercisable, March 31, 1999                    27,000                     $11.28
                                                   ============                 ========
</TABLE>


                                       33
<PAGE>   34

   Employee Stock Option Plans

      In fiscal year 1995, the Company adopted an employee option plan (the
"Plan"). Under the terms of the Plan, 250,000 shares of common stock were
reserved for issuance to employees. The Plan provides for grants of both
qualified and non-qualified options. In August 1996 and again in August 1997,
the Company's shareholders approved an amendment to the Plan which increased the
total number of shares of common stock reserved for issuance to 750,000 and
1,250,000 on such respective dates.

      Additional information with respect to all options under the Company's
employee stock option plans is as follows:

<TABLE>
<CAPTION>
                                                                             WEIGHTED-AVERAGE
                                                      NUMBER                  EXERCISE PRICE
                                                     OF SHARES                  PER SHARE
                                                   ------------                 ---------

<S>                                                   <C>                          <C>
Shares under option, March 31, 1996                   258,401                      $4.47
     Options granted                                   87,500                       9.51
     Options exercised                                (57,227)                      3.28
     Options forfeited                                (15,453)                      4.19
                                                   ------------                 --------
Shares under option, March 31, 1997                   273,221                      $6.35
     Options granted                                  189,000                      14.88
     Options exercised                                (96,741)                      3.44
     Options forfeited                                (37,603)                     12.73
                                                   ------------                 --------
Shares under option, March 31, 1998                   327,877                     $11.39
     Options granted                                  815,750                       7.53
     Options exercised                                (26,737)                      4.30
     Options forfeited                               (141,139)                     11.14
                                                   ------------                 --------
Shares under option, March 31, 1999                   975,751                      $8.39
                                                   ============                 ========

Options exercisable, March 31, 1998                    64,351                      $5.98
                                                   ============                 ========
Options exercisable, March 31, 1999                    79,579                      $8.78
                                                   ============                 ========
</TABLE>


   Stock Purchase Plans

      In August 1995, the Company's shareholders adopted (i) the Annual Leave
Stock Plan (the "Annual Leave Plan") and (ii) the Employee Stock Purchase Plan
(the "ESPP"). Under the Annual Leave Plan, eligible employees are permitted to
exchange certain unused amounts of accrued annual leave for shares of common
stock at the fair market value of the stock on the date of exchange. During
fiscal 1999, 13,264 shares of common stock, valued at approximately $75,000,
were issued under the Annual Leave Plan. During fiscal 1998, 11,944 shares of
common stock, valued at approximately $111,000 were issued under the Annual
Leave Plan. During fiscal 1997, 11,355 shares of common stock, valued at
approximately $202,000 were issued under the Annual Leave Plan.

      Under the ESPP, eligible employees of the Company who elect to participate
are permitted to purchase common stock of the Company, through payroll
deductions, at a 15 percent discount to the lower of the fair market value of
such stock at the beginning or ending date of the quarterly election period.
Under its original terms, the total number of shares of common stock that were
issuable under the ESPP was 150,000, limited to 12,500 per fiscal quarter. In
August 1996, the Company's shareholders approved an amendment to the ESPP which
(i) increased the total number of shares of common stock issuable under the ESPP
to 400,000; (ii) eliminated the quarterly purchase limitation; and (iii) added a
provision to allow for annual lump sum contributions. A total of 72,882, 75,854
and 55,080 common stock shares were issued under the ESPP during fiscal 1999,
1998 and 1997, respectively.

      On October 15, 1996, the Company adopted, subject to the approval of the
Company's shareholders, the Non-Employee Director Stock Purchase Plan (the
"Directors Purchase Plan"). Under the terms of the Directors Purchase Plan,
non-employee members of the Board of Directors may elect to have their fees
invested in BTG common stock at a price equal to the lower of 100% of the fair
market value of a Company share on the beginning or ending date of the election
period. The election period is the 12-month period beginning on October 1 of
each year. The maximum number of shares that may be issued under the Directors
Purchase Plan is 100,000. The Company's shareholders approved the Directors
Purchase Plan in August 1997. During fiscal 1999, 18,961 shares of

                                       34
<PAGE>   35

common stock, valued at approximately $128,000, were issued under the Directors
Purchase Plan. During fiscal 1998, 6,068 shares of common stock, valued at
approximately $85,000, were issued under the Directors Purchase Plan. No shares
of common stock were issued under the Directors Purchase Plan during fiscal
1997.

   Profit Sharing Plan

      The Company established a qualified 401(k) profit sharing plan in 1987
under which eligible employees may elect to defer a portion of their salary. At
the discretion of the Board of Directors, the Company may contribute to the
plan. The current contribution, as approved by the Board, is a matching
contribution of an amount up to five percent of eligible employees' deferrals.
Employees participating in the plan vest in the employer contribution over four
years at 10%, 30%, 60%, and 100% cumulative per year, respectively.

      Company contributions to the 401(k) plan were approximately $1.6 million,
$2.0 million, and $1.6 million in fiscal 1999, 1998 and 1997, respectively.

   Disclosures Pursuant to Statement of Financial Accounting Standards No. 123

      The Company applies Accounting Principles Board Opinion 25 and its related
interpretations in accounting for its equity participation programs.
Accordingly, no compensation cost has been recognized for its incentive stock
option plans and its stock purchase plans. Had compensation cost for the
Company's stock-based compensation plans been determined based on the fair value
at the grant dates for awards under those plans consistent with the method of
accounting under Statement of Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation, the Company's net income and earnings per share
would have been reduced to the pro forma amounts indicated as follows (in
thousands, except per share data):

<TABLE>
<CAPTION>
                                                                                  MARCH 31,
                                                                  ----------------------------------------
                                                                     1999           1998           1997
                                                                  ---------       --------       ---------

<S>                                     <C>                       <C>             <C>            <C>
     Net income (loss)                  As reported               $   1,996       $(35,223)      $   4,271
                                        Pro forma                 $   1,739       $(35,463)      $   4,181

     Diluted earnings (loss)
       per share                        As reported               $    0.23       $  (4.12)      $    0.60
                                        Pro forma                 $    0.20       $  (4.15)      $    0.59
</TABLE>

      The fair value of each option is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for option grants during the years ended March 31, 1999, 1998
and 1997, respectively:

<TABLE>
<CAPTION>
                                                                             FISCAL YEARS ENDED
                                                                                  MARCH 31,
                                                                  ----------------------------------------
                                                                      1999           1998          1997
                                                                  ---------       --------       ---------

<S>                                                                <C>            <C>             <C>
     Dividend yield                                                   0.0%           0.0%            0.0%
     Expected volatility                                             60.0%          50.0%           46.0%
     Risk-free interest rate                                          5.1%           6.0%            6.0%
     Forfeiture rate                                                  6.0%           6.0%            6.0%
     Expected life                                                 3-8 years      3-7 years       3-7 years
</TABLE>



                                       35
<PAGE>   36

The following table summarizes information about fixed stock options outstanding
at March 31, 1999:

<TABLE>
<CAPTION>
                                  OPTIONS OUTSTANDING                             OPTIONS EXERCISABLE
                  ---------------------------------------------------        ----------------------------
                    NUMBER         WEIGHTED-AVERAGE                            NUMBER
   RANGE OF      OUTSTANDING          REMAINING       WEIGHTED-AVERAGE       EXERCISABLE  WEIGHTED-AVERAGE
EXERCISE PRICES   AT 3/31/99       CONTRACTUAL LIFE    EXERCISE PRICE        AT 3/31/99    EXERCISE PRICE
---------------   ----------       ----------------    --------------        ----------    --------------

<S>                <C>               <C>                  <C>                    <C>         <C>
$6.12 - $6.90        480,000            9.70 years         $6.47                   --              --
$7.75 - $10.32       436,251            8.56               $9.09                 79,579          $8.78
$18.25 - $20.08       59,500            8.01              $18.71                   --              --
---------------   ----------       ---------------   ----------------        ----------    --------------
$6.12 - $20.08       975,751            9.09 years         $8.39                 79,579          $8.78
                  ==========       ===============   ================        ==========    ==============
</TABLE>

      The per share weighted-average fair value of stock options granted during
fiscal 1999, 1998 and 1997 was $3.99, $7.22 and $4.49, respectively.

10.   EARNINGS PER SHARE

      The following table illustrates the calculation of basic and diluted
earnings per share results for fiscal 1999, 1998 and 1997 (in thousands, except
per share data):

<TABLE>
<CAPTION>
                                                                             FISCAL YEARS ENDED
                                                                                 MARCH 31,
                                                                  ----------------------------------------
                                                                    1999           1998            1997
                                                                 ---------       --------        --------

<S>                                                                <C>          <C>               <C>
Income (loss) from continuing operations                           $2,761       $  (29,081)       $5,046
                                                                   ======       ==========        ======

Weighted average common stock shares
     outstanding during the period (used in the
     calculation of basic per share results)                        8,774            8,540         6,887
Dilutive effect of common stock options and
     common stock purchase warrants                                    53             --             254
                                                                   ------       ----------        ------

Weighted average common stock and potentially
     dilutive securities outstanding during the period (used
     in the calculation of diluted per share results)               8,827            8,540         7,141
                                                                   ======       ==========        ======


Basic earnings (loss) per share                                    $ 0.32       $    (3.40)       $ 0.73
                                                                   ======       ==========        ======
Diluted earnings (loss) per share                                  $ 0.32       $    (3.40)       $ 0.71
                                                                   ======       ==========        ======
</TABLE>

      Outstanding common stock options and common stock purchase warrants were
not included in the calculation of diluted per share results for fiscal 1998,
since the effect of which would result in antidilutive per-share results given
the Company's reported net loss during that period.

11.   RESTRUCTURING CHARGE

      In fiscal 1998, the Company's Board of Directors approved a restructuring
plan designed to refocus the Company on its core business and historical
strengths in order to improve operating results. Pursuant to this plan, the
Company consummated, in February 1998, the divestiture of substantially all of
the BTG operating division (the "Division") responsible for the reselling of
computer hardware and software products. In addition, the Company recorded a
restructuring charge of approximately $38.5 million associated with such
divestiture.

                                       36
<PAGE>   37

      The major components of the initial restructuring charge were as follows
(in thousands):

<TABLE>
<CAPTION>
                                                                   FISCAL YEAR ENDED
                                                                     MARCH 31, 1998
                                                                   -----------------

<S>                                                                      <C>
Impairment of goodwill                                                   $13,694
Loss on sale and disposal of Division assets                               9,943
Estimated impairment of retained Division assets                           9,282
Reserve for future facility and operating lease commitments                3,504
Accrued employee compensation and severance costs                          1,622
Other accrued reserves and costs                                             429
                                                                         -------
                                                                         $38,474
                                                                         =======
</TABLE>

      At March 31, 1998, the Company had outstanding accruals and reserves of
approximately $14.6 million for restructuring costs established during fiscal
1998. During fiscal 1999, approximately $7.5 million of these accruals and
reserves were utilized against the estimated impairment of retained Division
assets, the reserve established for facility and operating lease commitments,
accrued employee severance costs, and certain other accrued reserves. An
additional charge of $1.8 million, related to an adjustment to the estimated
impairment of retained Division assets and additional facility costs, was
recorded during fiscal 1999. At March 31, 1999, the Company had remaining
restructuring accruals and reserves outstanding of approximately $8.9 million.

12.   DISCONTINUED OPERATIONS

      During the year ended March 31, 1999, the Company's Board of Directors
approved a management plan to dispose of a retail computer store operated by the
Company. In connection with this discontinued operation, the Company recorded
losses of approximately $717,000, net of the related income tax benefit, during
fiscal 1999.

      During the year ended March 31, 1997, the Company formed a new subsidiary,
Community Networks, Inc. ("CNI"), for the purpose of providing local communities
with high-speed Internet access, specialized intranets, and electronic commerce
capability on a subscriber fee-based model. The subscriber base did not grow as
rapidly as was initially anticipated and the Company discontinued the operations
of CNI during fiscal 1998. As a result, losses of approximately $4.2 million,
net of the related income tax benefit, were recognized during fiscal 1998.

      Net losses from the Company's discontinued operations have been segregated
from continuing operations and reported as a separate line item on the
consolidated statements of operations. Prior year reported results have been
reclassified in order to provide for consistent presentation.

      Operating results from the Company's discontinued operations are as
follows (in thousands):

<TABLE>
<CAPTION>
                                                        FISCAL YEARS ENDED
                                                            MARCH 31,
                                              --------------------------------------
                                                1999          1998           1997
                                             ---------      --------       --------

<S>                                          <C>            <C>            <C>
Operating revenues                           $ 2,033        $ 3,260        $ 1,633
Loss before income taxes                        (411)        (3,472)        (1,267)
Loss from discontinued operations, net
  of income taxes                               (251)        (2,147)          (775)
</TABLE>


13.   INVESTMENTS

WheelGroup Corporation

      In May 1996, the Company entered into an agreement with WheelGroup
Corporation ("WheelGroup") under which it (i) purchased 214,042 shares of the
outstanding common stock of WheelGroup for $200,000; (ii) purchased a
convertible note receivable

                                       37
<PAGE>   38

from WheelGroup for $300,000; and (iii) committed to the purchase of certain
distribution rights and consulting services from WheelGroup for approximately $1
million, payable in various installments over fiscal years 1997 and 1998. As the
result of a significant investment in WheelGroup by a venture capital fund, BTG
was given the option, in March 1997, to purchase an additional 28,146 shares of
WheelGroup for $9.87 per share. As a result, $277,799 of amounts previously paid
to WheelGroup under the distribution rights and consulting services agreement
were used to purchase the additional 28,146 shares.

      In March 1998, pursuant to a merger agreement entered into by WheelGroup
and Cisco Systems, Inc. ("Cisco"), a publicly-traded technology company, the
Company's ownership interests in WheelGroup were converted into approximately
326,000 common shares of Cisco. The shares of Cisco initially received by BTG
were unregistered; however, in accordance with the merger agreement, were
registered shortly after the merger was consummated. In connection with the sale
of its WheelGroup interests, the Company recorded a gain in fiscal 1998 of
approximately $20.2 million calculated using the fair market value of Cisco
common stock on the date of closing of the merger. At March 31, 1998, the
Company had classified its Cisco investment as "available for sale" in
accordance with the provisions of Statement 115. Accordingly, such investment
was carried at fair value, determined on quoted market prices, in the
accompanying consolidated financial statements. The net unrealized gain from
this investment was carried as a separate component of shareholders' equity, net
of the related tax effects. In fiscal 1999, the Company sold all of its Cisco
shares for approximately $25.5 million and used the proceeds from these sales to
retire outstanding debt. Gains of approximately $4.2 million were recognized
during fiscal 1999 as a result of these sales.

   Government Technology Services, Inc.

      On February 12, 1998, BTG and Government Technology Services, Inc.
("GTSI") entered into an Asset Purchase Agreement (the "APA") under which BTG
completed the sale to GTSI of (i) certain of the assets, principally inventory
and property and equipment, and (ii) certain of the existing contracts and
outstanding customer orders of the BTG operating division responsible for
reselling computer hardware and software products. In addition, GTSI hired a
significant number of the individuals previously employed by BTG in this
division. As consideration for the sale, BTG initially received $8.0 million and
15,375 shares of a new series of preferred stock of GTSI, designated Series C 8%
cumulative redeemable convertible preferred stock. Ten percent of the purchase
price was placed in escrow for a one-year period to serve as security for the
Company's indemnification for potential obligations under the acquisition
agreement. Pursuant to the acquisition agreement, the preferred stock received
by the Company converted into 3,000,000 shares of GTSI common stock once
approved by the GTSI shareholders on May 12, 1998. In July 1998, the Company
sold 1.1 million shares of its GTSI holdings for $5.0 million, resulting in a
loss of approximately $440,000.

      In February 1999, BTG and GTSI entered into a series of agreements in
order to settle a number of issues which arose subsequent to the APA. Under the
terms of the new agreements, BTG transferred to GTSI all of the cash portion of
the escrow and 200,000 shares of the GTSI common stock being held in the escrow.
In addition, BTG granted GTSI the option to purchase, at a per-share price of
$5.25, the remaining GTSI shares held by BTG. This option has a term of five
years; however, BTG has the right to sell its shares to an unrelated third party
with the consent of GTSI. Upon a sale of these shares during the option term to
any party other than GTSI, the agreement obligates BTG to pay GTSI a per-share
amount of $0.50. In addition, as part of the February 1999 agreements, BTG
agreed to novate to GTSI certain contracts awarded to BTG's product reselling
division in a prior year. During fiscal 1999, approximately $93.6 million of
product sales revenue was recognized by BTG from these contracts under which
GTSI was used as the subcontractor. An unusual charge of approximately $1.2
million was recognized by the Company during fiscal 1999 as a result of these
agreements.

      Also in February 1999, BTG and GTSI entered into an agreement under which
GTSI issued a note payable to BTG as consideration for the purchase by GTSI of
400,000 shares of the GTSI common stock held by BTG. These shares were sold at
$5.00 per share. The note, which bears interest at 8.0%, is payable in three
annual installments beginning on January 31, 2000. During fiscal 1999, the
Company recognized interest income of approximately $21,000 from this note.

      The 1.3 million and 3.0 million shares of GTSI common stock held by BTG at
March 31, 1999 and 1998, respectively, have been classified as restricted
investments in the accompanying consolidated balance sheets. BTG's investment in
GTSI at March 31, 1999 represents less than 20% of GTSI's outstanding shares and
BTG does not have the ability to exercise significant influence over the
operating or financial policies of GTSI. Accordingly, the Company carries this
investment at cost.



                                       38
<PAGE>   39

14.   BUSINESS COMBINATIONS

      On January 26, 1999, BTG completed the acquisition of STAC, Inc. ("STAC")
an analysis and software development company headquartered in Fairfax, Virginia.
The Company purchased all of the common stock of STAC for approximately $6.4
million, $1.5 million of which was contingent on certain stock market indices
which were subsequently satisfied. The Company has accounted for this
acquisition using the purchase method of accounting and accordingly, the results
of operations of STAC have been included in the Company's consolidated statement
of operations since the date of the acquisition. The purchase price was
allocated to net tangible and identifiable intangible assets and liabilities
based on preliminary estimates of fair value as of the date of acquisition. The
excess of purchase price over the estimated fair value of net tangible and
identifiable intangible assets and liabilities acquired of approximately $6.8
million was allocated to goodwill and is being amortized on a straight-line
basis over the expected period of benefit, 20 years. The final allocation of the
purchase price will be determined during the subsequent fiscal year when
preliminary studies and other estimates are finalized. In addition, the Company
entered into retention agreements with certain former employees of STAC which
provide for an aggregate payment of up to $700,000 over a three-year period if
the employees remain with BTG. This acquisition does not have a material effect
on pro forma operations.

      In June 1997, the Company acquired, for $10.0 million in cash, all of the
outstanding capital stock of Nations, Inc. ("Nations"), a systems engineering
and software development company headquartered in Tinton Falls, New Jersey. The
acquisition has been accounted for using the purchase method of accounting and,
accordingly, the results of operations of Nations have been included in the
Company's consolidated statement of operations since the date of acquisition,
June 12, 1997. The excess of the purchase price over the fair value of the net
tangible and identifiable intangible assets acquired of approximately $6.9
million has been recorded as goodwill and is being amortized on a straight-line
basis over the expected period of benefit, 30 years. In connection with the
acquisition, the Company also entered into both non-compete and employment
agreements with several members of Nations' senior management.

      The following unaudited pro forma financial information presents the
combined results of operations of the Company and Nations as if the acquisition
had occurred as of the beginning of the fiscal years ended March 31, 1998 and
1997. The pro forma financial information does not necessarily reflect the
results of operations that would have occurred had the Company and Nations
constituted a single entity during such periods.

<TABLE>
<CAPTION>
                                                                           FISCAL YEARS ENDED
                                                                               MARCH 31,
                                                                      -------------------------
                                                                         1998           1997
                                                                      ----------     ----------
                                                                             (UNAUDITED)
                                                                (IN THOUSANDS, EXCEPT PER SHARE DATA)

<S>                                                                   <C>            <C>
     Revenues                                                         $  597,299     $  445,325
     Net income (loss) before extraordinary items                     $  (33,157)    $    5,160
     Net income (loss)                                                $  (35,035)    $    5,160
     Earnings (loss) per common share                                 $    (4.10)    $     0.72
</TABLE>


      On August 29, 1997, the Company entered into an Agreement and Plan of
Merger (the "Agreement") with Micros-To-Mainframes, Inc. ("M-T-M") under which
BTG agreed to acquire all of the outstanding common stock of M-T-M for cash and
common stock consideration valued at approximately $25.0 million. On February
13, 1998, the Agreement, as subsequently amended, was terminated. Pursuant to
the Agreement, BTG paid M-T-M a $500,000 termination fee. In addition, the
Company paid M-T-M $1.25 million for additional out-of-pocket expenses and in
exchange for a release from future liability which may arise as a result of the
termination of the Agreement. Total costs incurred in connection with this
merger and acquisition transaction during fiscal 1998 were approximately $2.4
million and are included in other non-operating expenses in the accompanying
consolidated statements of operations.

15.   COMMITMENTS AND CONTINGENCIES

   Audit Review

      Substantially all payments to the Company under cost-reimbursable
Government contracts are provisional payments which are subject to adjustment
upon audit by the Defense Contract Audit Agency or other regulatory agency.
Audits through fiscal 1996 have

                                       39
<PAGE>   40

been completed and final rates have been established. Audits for 1997 and
subsequent years are not expected to result in a material adverse effect on the
Company's consolidated financial position.

Litigation and Claims

      The Company is a party to various legal actions and claims resulting from
the normal course of business. Although the total amount of liability, if any,
with respect to these matters cannot be ascertained, management of the Company
believes that any resulting liability should not have a material effect on the
Company's consolidated financial position or future results of operations.

   Leases

      The Company leases office space and equipment under certain operating
lease agreements expiring at various dates through June 2012. Most leases
include provisions for periodic rent escalations based on changes in various
economic indices. Rent expense in fiscal 1999, 1998 and 1997 was $6.3 million,
$8.9 million, and $5.9 million, respectively.

      Future minimum lease payments on non-cancelable operating leases,
including sublease commitments, were as follows on March 31, 1999 (in
thousands):

<TABLE>
<CAPTION>
            FISCAL YEARS ENDING                           GROSS         SUBLEASE          NET
                 MARCH 31,                             COMMITMENTS     COMMITMENTS    COMMITMENTS
                 ---------                             -----------     -----------    -----------

<S>                                                       <C>            <C>            <C>
                   2000                                   $  7,777       $   1,485      $   6,292
                   2001                                      6,881           1,075          5,806
                   2002                                      5,354             484          4,870
                   2003                                      4,035             --           4,035
                   2004                                      3,781             --           3,781
                   Thereafter                               30,475             --          30,475
                                                          --------       ---------      ---------
                                                          $ 58,303       $   3,044      $  55,259
                                                          ========       =========      =========
</TABLE>


16.   SUPPLEMENTAL CASH FLOW DISCLOSURES

      Supplemental cash flow disclosures, not presented elsewhere in the
consolidated footnotes, are as follows:

<TABLE>
<CAPTION>
                                                                      FISCAL YEARS ENDED
                                                                          MARCH 31,
                                                        ----------------------------------------------
                                                          1999               1998              1997
                                                       ---------           ---------         --------
<S>                                                    <C>                 <C>               <C>
     Cash paid during the year for (in thousands):
       Interest                                        $   4,248           $   7,605         $  5,075
       Income taxes                                    $     693           $   1,449         $  5,806
</TABLE>

      During fiscal 1999, the Company obtained approximately $814,000 of
internal-use software through the conversion of amounts paid to a major software
company in a prior year. The original payments were made as advanced royalties
against future sales by BTG of certain products of the software company.

      In connection with the Company's business combinations in fiscal 1999 and
1998, liabilities were assumed as follows (in thousands):

<TABLE>
<CAPTION>
                                                                        1999             1998
                                                                     --------         ---------

<S>                                                                  <C>              <C>
     Fair value of tangible and intangible assets acquired           $  9,775         $  15,612
     Cash paid and notes payable issued                                (6,351)          (11,743)
                                                                     --------         ---------
     Liabilities assumed                                             $  3,424         $   3,869
                                                                     ========         =========
</TABLE>


                                       40
<PAGE>   41

17.   SEGMENT REPORTING

      Under Statement 131, BTG has two reportable segments: the Systems Business
and the Product Reselling Business. The Company provides systems development,
integration, engineering and network design, and security expertise services
under the Systems Business. Under the Product Reselling Business, the Company
resells computer hardware and software. The accounting policies of these
segments are the same as those described in the summary of significant
accounting policies. In February 1998, pursuant to a restructuring plan approved
by BTG's Board of Directors, the Company began to phase out its operating
activities in the Product Reselling Business. Accordingly, the Company does not
anticipate significant operating activity in the Product Reselling Business
segment in future periods.

      Selected financial data for the Company's operating segments is summarized
as follows (in thousands):

<TABLE>
<CAPTION>
                                                            FISCAL YEARS ENDED
                                                                 MARCH 31,
                                                  1999             1998             1997
                                               ----------       ----------       ----------
<S>                                            <C>              <C>              <C>
Revenues:
   Systems Business                            $ 222,868        $ 175,937        $ 108,335
   Product Reselling Business                     93,567          410,800          290,066
                                               ---------        ---------        ---------
                                               $ 316,435        $ 586,737        $ 398,401
                                               ---------        ---------        ---------
Depreciation and amortization expense:
   Systems Business                            $   2,249        $   2,265        $   1,682
   Product Reselling Business                         --            2,118            2,016
                                               ---------        ---------        ---------
                                               $   2,249        $   4,383        $   3,698
                                               ---------        ---------        ---------
Restructuring charge:
   Systems Business                            $      --       $       --         $     --
   Product Reselling Business                      1,796           38,474               --
                                               ---------        ---------        ---------
                                               $   1,796        $  38,474         $     --
                                               ---------        ---------        ---------
Interest expense, net:
   Systems Business                            $   3,949        $   2,727        $   1,670
   Product Reselling Business                         --            5,721            4,437
                                               ---------        ---------        ---------
                                               $   3,949        $   8,448        $   6,107
                                               ---------        ---------        ---------
Income (loss) from continuing operations
 before taxes and extraordinary items:
   Systems Business                            $   3,392        $  (2,038)       $   3,512
   Product Reselling Business                       (800)         (52,619)           4,728
                                               ---------        ---------        ---------
                                               $   2,592        $ (54,657)       $   8,240
                                               ---------        ---------        ---------
<CAPTION>
                                                                 MARCH 31,
                                               --------------------------------------------
                                                   1999            1998              1997
                                               ----------       ----------        ---------
<S>                                            <C>              <C>               <C>
     Total assets:
       Systems Business                        $   88,632       $  114,610        $  67,597
       Product Reselling Business                   1,745           97,829           88,483
                                               ----------       ----------        ---------
                                               $   90,377       $  212,439        $ 156,080
                                               ----------       ----------        ---------
</TABLE>


                                       41
<PAGE>   42

      A reconciliation of segment data to consolidated Company data is as
follows (in thousands):

<TABLE>
<CAPTION>
                                                                FISCAL YEARS ENDED MARCH 31,
                                                      ------------------------------------------------
                                                          1999               1998              1997
                                                      ----------          ----------        ----------
<S>                                                   <C>                 <C>               <C>
     Income (loss) from continuing operations
      before taxes and extraordinary items:
        Segment data                                  $    2,592          $  (54,657)       $   8,240
        Gain on sale of investments, net                   3,532              20,228               63
        Unusual charges                                   (1,201)                --               --
        Equity in the earnings of affiliates                  24                 589            1,887
        Merger-related costs                                 --               (2,466)             --
        Other unallocated corporate costs                   (619)             (1,070)            (994)
                                                      ----------          ----------        ---------
                                                      $    4,328          $  (37,376)       $   9,196
                                                      ==========          ==========        =========
</TABLE>


      Approximately 93%, 93%, and 89% in fiscal 1999, 1998, and 1997,
respectively, of the Company's revenues resulted from contracts or subcontracts
with, and product sales to, the Government. The Company operates principally in
the United States.

18.   QUARTERLY FINANCIAL DATA (UNAUDITED)

      Unaudited summarized financial data by quarter for fiscal 1999 and 1998
are as follows (in thousands, except per share data). Quarterly revenues and
operating income (loss) exclude the revenues and operating losses of businesses
classified as discontinued operations:

      Fiscal 1999:

<TABLE>
<CAPTION>
                                                                 QUARTER ENDED
                                    ----------------------------------------------------------------------
                                       JUNE 30            SEPT 30             DEC 31            MARCH 31
                                    -------------     -------------       -------------      -------------

<S>                                  <C>               <C>                 <C>                <C>
Revenues                             $   84,080        $   87,683          $   84,030         $   60,642

Operating income                     $      859        $    1,458          $    1,126         $    2,658
Net income (loss)                    $       82        $       93          $     (268)        $    2,089

Basic earnings (loss) per share      $     0.01        $     0.01          $    (0.03)        $     0.24
Diluted earnings (loss) per share    $     0.01        $     0.01          $    (0.03)        $     0.24

Weighted average shares
   outstanding for basic EPS              8,679             8,803               8,796              8,816
Weighted average shares
   outstanding for diluted EPS            8,743             8,819               8,796              8,844
</TABLE>


Fiscal 1998:

<TABLE>
<CAPTION>
                                                                 QUARTER ENDED
                                    -----------------------------------------------------------------------
                                       JUNE 30            SEPT 30             DEC 31            MARCH 31
                                    -------------     -------------       -------------      --------------

<S>                                  <C>               <C>                 <C>                <C>
Revenues                             $  119,129        $  188,659          $  185,829         $   93,120
Operating income (loss)              $    2,882        $    (226)          $    2,165         $  (52,100)
Net income (loss)                    $      235        $  (2,335)          $    (798)         $  (32,325)

Basic earnings (loss) per share      $     0.03        $   (0.27)          $   (0.09)         $    (3.76)
Diluted earnings (loss) per share    $     0.03        $   (0.27)          $   (0.09)         $    (3.76)

Weighted average shares
     outstanding for basic EPS            8,476             8,525               8,563              8,597
Weighted average shares
     outstanding for diluted EPS          8,758             8,525               8,563              8,597
</TABLE>

                                       42
<PAGE>   43


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

      None.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

      Reference is made to the information to be set forth under the captions
"Election of Directors" appearing in the Company's definitive proxy statement
with respect to its annual meeting of shareholders to be held September 9, 1999
(the "Proxy Statement"), which information is incorporated herein by reference.
Information required by this item with respect to executive officers is provided
in Item 1 of this report. See "Item 1. Business -- Executive Officers."

ITEM 11. EXECUTIVE COMPENSATION

      Reference is made to the information to be set forth under the caption
"Executive Compensation" appearing in the Company's Proxy Statement, which
information is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

      Reference is made to the information to be set forth under the caption
"Beneficial Ownership of Common Stock" appearing in the Company's Proxy
Statement, which information is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      Reference is made to the information to be set forth under the caption
"Certain Relationships and Related Transactions" appearing in the Company's
Proxy Statement, which information is incorporated herein by reference.

                                     PART IV

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

   (a)Documents filed as part of this Report:

      1.    Financial Statement Schedules. The following additional financial
            data should be read in conjunction with the Consolidated Financial
            Statements included in Item 8. Schedules other than those listed
            below have been omitted because they are inapplicable or are not
            required.

         <TABLE>
         <CAPTION>
<S>                                                                                   <C>
            Valuation and Qualifying Accounts                                            Schedule VIII
            Statement regarding computation of per share earnings                        Exhibit 11
            Independent Auditors' Report on Consolidated Financial Statement Schedule    Exhibit 99.1
         </TABLE>

      2.    The following exhibits are either filed with this Report or are
            incorporated herein by reference:

            3.1   Amended and Restated Articles of Incorporation of the Company,
                  and the Amendment thereto (incorporated by reference to the
                  Company's Form 10-Q for the quarter ended September 30, 1997).

            3.2   Amended and Restated Bylaws of the Company (incorporated by
                  reference to the Company's registration statement on Form S-1
                  (File No. 33-85854)).

            4.1   Specimen certificate of share of Common Stock (incorporated by
                  reference to the Company's registration statement on Form S-8
                  (File No. 33-97302)).

                                       43
<PAGE>   44

            10.1  Amended and Restated Business Loan and Security Agreement,
                  dated October 31, 1997, among BTG, Inc. and its subsidiaries
                  and NationsBank, N.A. (incorporated by reference to the
                  Company's registration statement on Form S-4 (File No.
                  333-40917)).

            10.2  First Modification to Amended and Restated Business Loan and
                  Security Agreement, dated February 24, 1998, by and among BTG,
                  Inc. and its Subsidiaries and NationsBank, N.A. (incorporated
                  by reference to the Company's Form 10-K for the year ended
                  March 31, 1998).

            10.3  Second Modification to Amended and Restated Business Loan and
                  Security Agreement, dated June 24, 1998, by and among BTG,
                  Inc. and its subsidiaries and NationsBank, N.A. (incorporated
                  by reference to the Company's Form10-K for the year ended
                  March 31, 1998).

            10.4  Third Modification to Amended and Restated Business Loan and
                  Security Agreement, dated November 9, 1998, by and among BTG,
                  Inc. and its subsidiaries, NationsBank, N.A. and Fleet Capital
                  Corporation (incorporated by reference to the Company's Form
                  10-Q for the quarter ended September 30, 1998).

            10.5  Fourth Modification to Amended and Restated Business Loan and
                  Security Agreement, dated January 26, 1999, by and among BTG,
                  Inc. and its subsidiaries, NationsBank, N.A. and Fleet Capital
                  Corporation (incorporated by reference to the Company's Form
                  10-Q for the quarter ended December 31, 1998).

            10.6  1995 Employee Stock Option Plan (incorporated by reference to
                  the Company's Registration statement on Form S-8 (File No.
                  333-10473)).*

            10.7  Employee Stock Purchase Plan (incorporated by reference to the
                  Company's Registration statement on Form S-8 (File No.
                  333-10473)).*

            10.8  Annual Leave Stock Plan (incorporated by reference to the
                  Company's registration statement on Form S-8 (File No.
                  33-97302)).*

            10.9  Directors Stock Option Plan (incorporated by reference to the
                  Company's Form 10-K for the year ended March 31, 1996).*

            10.10 Non-Employee Director Stock Purchase Plan (incorporated by
                  reference to the Company's registration statement on Form S-1
                  (File No. 333-14767)).*

            10.11 Employment Agreement between the Company and Edward H. Bersoff
                  (incorporated by reference to the Company's registration
                  statement on Form S-1 (File No. 33-85854)).*

            10.12 Asset Purchase Agreement, dated February 12, 1998, among BTG,
                  Inc., BTG Technology Systems, Inc., Concept Automation, Inc.
                  of America and Government Technology Services, Inc.
                  (incorporated by reference to the Company's Form 10-Q for the
                  quarter ended December 31, 1997).

            10.13 Standstill Agreement, dated February 12, 1998, among BTG, Inc.
                  and Government Technology Services, Inc. (incorporated by
                  reference to the Company's Form 10-Q for the quarter ended
                  December 31, 1997).

            10.14 Certificate of Designations, Preferences and Rights of Series
                  C 8% Cumulative Redeemable Convertible Preferred Stock
                  (incorporated by reference to the Company's Form 10-Q for the
                  quarter ended December 31, 1997).

            11    Statement regarding computation of per share earnings.

            21    Subsidiaries of the Registrant.

            23    Consent of Independent Auditors.

            27    Financial Data Schedule.

            99    Independent Auditors' Report of KPMG LLP.

----------
* Management contract or compensatory plan or arrangement.

      (b)   Reports on Form 8-K:

            September 25, 1998          BTG reported that on September 16, 1998,
                                        the Company's Board of Directors adopted
                                        a shareholder rights plan and declared a
                                        dividend distribution of one preferred
                                        share purchase right on each outstanding
                                        share of BTG common stock.


      (c)   Exhibits to this Form 10-K are filed herewith, unless incorporated
            by reference.

      (d)   Schedules to this Form 10-K are filed herewith.


                                       44
<PAGE>   45

                                   SIGNATURES

      Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized as of the 28th day of
June, 1999.

                                     BTG, INC.

                     -----------------------------------------
                                     Registrant


                           By:  /s/ EDWARD H. BERSOFF
                               --------------------------------
                                    Edward H. Bersoff
                               President and Chief Executive Officer

      Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated as of June 28, 1999.

<TABLE>
<CAPTION>
               SIGNATURE                                                   TITLE
         -----------------------                                          -------
<S>                                                        <C>
         /s/ EDWARD H. BERSOFF                             Chairman of the Board and Chief Executive
-------------------------------------------                Officer (Principal Executive Officer)
         Edward H. Bersoff

         /s/ TODD A. STOTTLEMYER                           Chief Financial and Administrative Officer
-------------------------------------------                (Principal Accounting Officer)
         Todd A. Stottlemyer

         /s/ RUTH M. DAVIS                                 Director
-------------------------------------------
         Ruth M. Davis

        /s/  ALAN G. MERTEN                                Director
-------------------------------------------
         Alan G. Merten

                                                           Director
-------------------------------------------
         Raymond T. Tate

         /s/ RONALD L. TURNER                              Director
-------------------------------------------
         Ronald L. Turner

         /s/ DONALD M. WALLACH                             Director
-------------------------------------------
         Donald M. Wallach

         /s/ EARLE C. WILLIAMS                             Director
-------------------------------------------
         Earle C. Williams
</TABLE>



                                       45
<PAGE>   46

SCHEDULE VIII

                           BTG, INC. AND SUBSIDIARIES

                        VALUATION AND QUALIFYING ACCOUNTS
              FOR FISCAL YEARS ENDED MARCH 31, 1999, 1998 AND 1997
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                            BALANCE                                    OTHER       BALANCE
                                                              AT                                      CHANGES         AT
                                                           BEGINNING    ADDITIONS                    ADDITIONS      END OF
                                                            OF YEAR      AT COST     RETIREMENTS   (DEDUCTIONS)      YEAR
                                                            -------      -------     -----------   ------------      ----

<S>                                                         <C>         <C>            <C>            <C>          <C>
              FISCAL YEAR ENDED
                 MARCH 31, 1999
                   Allowances for doubtful accounts
                      receivable...............              $3,183      $   286        $  831         $   --       $2,638
                   Allowances for inventory
                      obsolescence.............               1,675           80         1,055             --          700
                   Allowances for income tax
                      valuations...............                 550            0           417             --          133
                                                             ------      -------        ------         ------       ------
                                                             $5,408      $   366        $2,303         $   --       $3,471
                                                             ======      =======        ======         ======       ======
              FISCAL YEAR ENDED
                 MARCH 31, 1998
                   Allowances for doubtful accounts
                      receivable...............              $1,002      $ 3,043        $  862         $   --       $3,183
                   Allowances for inventory
                      obsolescence.............                 950        2,090         1,365             --        1,675
                   Allowances for income tax
                     valuations................                  --          550            --             --          550
                                                             ------      -------        ------         ------       ------
                                                             $1,952      $ 5,683        $2,227         $   --       $5,408
                                                             ======      =======        ======         ======       ======
              FISCAL YEAR ENDED
                 MARCH 31, 1997
                   Allowances for doubtful accounts
                      receivable...............              $  221      $ 1,510        $  729         $   --       $1,002
                   Allowances for inventory
                      obsolescence.............                 925           82            57             --          950
                   Allowances for income tax
                      valuations...............                 105           --           105             --           --
                                                             ------      -------        ------         ------       ------
                                                             $1,251      $ 1,592        $  891         $   --       $1,952
                                                             ======      =======        ======         ======       ======
</TABLE>



                                       46