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UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, DC 20549


Form 10-K

|   |  |                                                                                             
|-- |  | --------------------------------------------------------------------------------------------
|þ  |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934    
|  
|   |  | For the Fiscal Year Ended December 31,
    2002                                             
|  
|or
|  
|o  |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



---

Commission File Number 001-31342



---

Veridian Corporation

(Exact name of registrant as specified in its
charter)


|                                                                   |  |                                     
|------------------------------------------------------------------ |  | ------------------------------------
|Delaware                                                           |  | 54-1387657                          
|(State or other jurisdiction of
    incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                                  
|1200 South Hayes Street, Suite 1100
    Arlington, Virginia        |  | 22202(Zip Code)                     
|(Address of principal executive
    offices)                       |  |                                     

Registrants telephone number, including
area code:

(703) 575-3100




---

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

|                                          |  |                                          
|----------------------------------------- |  | -----------------------------------------
|Title of each class                       |  | Name of each exchange on which registered
|                                          |  |                                          
|Common stock, par value $0.0001 per share |  | New York Stock Exchange                  

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

None


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

Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of
registrants 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. o

Indicate by check mark whether the registrant is
an accelerated filer (as defined in Rule 12b-2 of the
Act).     Yes o          No þ

The aggregate market value of the common stock on
June 28, 2002 (based on the closing prices in the daily
composite list for transactions on the New York Stock Exchange
during the last business day of the registrants most
recently completed second quarter) held by non-affiliates of the
registrant was approximately $384,709,975.

At March 10, 2003, the registrant had
outstanding 34,171,158 shares of common stock, par value
$0.0001 per share.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrants Proxy Statement
for the 2003 Annual Meeting of Stockholders, which will be filed
within 120 days of December 31, 2002, are incorporated
by reference into Part II and Part III.



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TABLE OF CONTENTS



|                                                  |                                                                                                         |  |  |  |  |  |  | 
|------------------------------------------------- | ------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                           
|                                                  | Item 1. Business                                                                                       
|                                                  | Item 2. Properties                                                                                     
|                                                  | Item 3. Legal Proceedings                                                                              
|                                                  | Item 4. Submission of Matters to a Vote of Security Holders                                            
|PART II                                          
|                                                  | Item 5. Market for Registrants Common Equity and Related Stockholder Matters                          
|                                                  | Item 6. Selected Financial Data.                                                                       
|                                                  | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operation           
|                                                  | Item 7A. Quantitative and Qualitative Disclosures About Market Risk                                    
|                                                  | Item 8. Financial Statements and Supplementary Data                                                    
|                                                  | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure           
|PART III                                         
|                                                  | Item 10. Directors and Executive Officers of the Registrant                                            
|                                                  | Item 11. Executive Compensation                                                                        
|                                                  | Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|                                                  | Item 13. Certain Relationships and Related Transactions                                                
|                                                  | Item 14. Controls and Procedures                                                                       
|PART IV                                          
|                                                  | Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K                               
|SIGNATURES                                       
|CERTIFICATION                                    
|CERTIFICATION                                    
|FINANCIAL STATEMENTS                             
|SECOND AMENDED AND RESTATED CERTIFICATE OF INCORP
|RESTATED BYLAWS OF VERIDIAN CORPORATION          
|FORM OF REVOLVING CREDIT NOTE                    
|FORM OF SWINGLINE NOTE                           
|FORM OF TERM NOTE PURSUANT TO CREDIT AGREEMENT   
|SALE AND ASSIGNMENT AGREEMENT                    
|AMENDMENT TO SALE AND ASSIGNMENT AGREEMENT       
|LIST OF SUBSIDIARIES OF VERIDIAN CORPORATION     
|INDEPENDENT AUDITORS REPORT AND CONSENT OF KPMG  
|CERTIFICATION OF DAVID H. LANGSTAFF              
|CERTIFICATION OF JAMES P. ALLEN                  



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##### Table of Contents



TABLE OF CONTENTS

|                                         |  |                                                                                                    |     |      |    | 
|---------------------------------------- |  | -------------------------------------------------------------------------------------------------- | --- | ---- | -- | 
|                                         |  |                                                                                                    |     | Page
|                                         |  |                                                                                                    |     |     
|PART I                                  
|Item 1.                                  |  | Business                                                                                           |     |      | 1  | 
|Item 2.                                  |  | Properties                                                                                         |     |      | 29 | 
|Item 3.                                  |  | Legal Proceedings                                                                                  |     |      | 30 | 
|Item 4.                                  |  | Submission of Matters to a Vote of Security
    Holders                                            |     |      | 30 | 
|PART II                                 
|Item 5.                                  |  | Market for Registrants Common Equity and
    Related Stockholder Matters                          |     |      | 31 | 
|Item 6.                                  |  | Selected Financial Data                                                                            |     |      | 32 | 
|Item 7.                                  |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operation           |     |      | 34 | 
|Item 7A.                                 |  | Quantitative and Qualitative Disclosures About
    Market Risk                                     |     |      | 43 | 
|Item 8.                                  |  | Financial Statements and Supplementary Data                                                        |     |      | 43 | 
|Item 9.                                  |  | Changes in and Disagreements With Accountants on
    Accounting and Financial Disclosure           |     |      | 44 | 
|PART III                                
|Item 10.                                 |  | Directors and Executive Officers of the Registrant                                                 |     |      | 44 | 
|Item 11.                                 |  | Executive Compensation                                                                             |     |      | 44 | 
|Item 12.                                 |  | Security Ownership of Certain Beneficial Owners
    and Management and Related Stockholder Matters |     |      | 44 | 
|Item 13.                                 |  | Certain Relationships and Related Transactions                                                     |     |      | 44 | 
|Item 14.                                 |  | Controls and Procedures                                                                            |     |      | 44 | 
|PART IV                                 
|Item 15.                                 |  | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K                                |     |      | 45 | 
|Certification of Chief Executive Officer |  |                                                                                                    | 52  |     
|Certification of Chief Financial Officer |  |                                                                                                    | 53  |     
|Financial Statements                     |  |                                                                                                    | F-1 |     



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PART I






|        |         
|------- | --------
|Item 1. | Business

Overview

Veridian Corporation, a Delaware corporation, was
incorporated in 1986 and serves as a holding company for its
subsidiaries. The oldest business conducted by Veridian traces
its heritage to 1948. We conduct our business through four
primary operating subsidiaries: Veridian Engineering, Inc.,
Veridian Systems Division, Inc., Veridian Information Solutions,
Inc. and Veridian IT Services, Inc. (formerly SIGNAL
Corporation). Veridian Systems Incorporated is a fifth, smaller
subsidiary. Each of our subsidiaries is wholly-owned and
controlled by us. We are a leading provider of information-based
systems, integrated solutions and services to the U.S.
government. We specialize in mission-critical national security
programs, primarily for the intelligence community, the
Department of Defense, law enforcement and other U.S. government
agencies. Our offerings include the design, development,
deployment, operation and protection of vital networks,
databases and other information and intelligence systems. We are
at the forefront of U.S. government-funded research, development
and application of advanced information and sophisticated sensor
technologies for emerging defense and intelligence initiatives.
During our 50 years of experience, we have developed
long-standing customer relationships, proprietary technologies
and intellectual property and have acquired extensive security
clearances and domain expertise in understanding our
governmental customers operations and missions.

Our customer and contract base is highly
diversified across a wide range of mission-critical
applications. We currently have more than 2,000 contracts, two
of which represented in excess of 5% of 2002 revenues each. One
such contract is with an intelligence agency and had revenues of
more than $50 million in 2002. The second contract is with
the U.S. Army and had revenues of $59 million in 2002. The
next largest contract represented less than 3% of our revenues
in 2002. For the year ended December 31, 2002,
approximately 47% of our revenues were represented by cost-plus
contracts, 40% by time-and-materials contracts and 13% by fixed
price contracts, resulting in substantial margin stability. Our
contracts typically have terms of several years with renewal
options. Our experience has been that most renewal options are
exercised and the scope and term of our contracts are often
expanded. Given our broad range of specialized capabilities and
contracts, we are not dependent on any one funding decision,
customer or technology for our business.

Our comprehensive solutions leverage our core
capabilities that include:



| |   |                                                          
| | - | ---------------------------------------------------------
| |  | network security and enterprise protection;              
|
| |  | intelligence, surveillance, and reconnaissance
    (ISR);
|
| |  | knowledge discovery and decision support;                
|
| |  | information systems development and integration;         
|
| |  | chemical, biological and nuclear detection;              
|
| |  | network and enterprise management; and                   
|
| |  | systems engineering services.                            

Given the critical and classified nature of many
of our services and our sophisticated technical capabilities, we
are called upon to support our customers in the intelligence
community and the Department of Defense as they respond to
crisis situations around the world. Our solutions enable our
customers to manage risk by identifying a wide variety of
conventional and nonconventional threats, including nuclear,
biological, chemical, cyber aggression and terrorism,
quantifying exposure to these threats and implementing prudent
physical and cyber countermeasures.

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Our customers include:



| |   |                                  
| | - | ---------------------------------
| |  | Department of Defense, including:



| |   |                                                                 
| | - | ----------------------------------------------------------------
| |  | U.S. military services (Army, Navy, Air Force,
    Marine Corps)
|
| |  | Defense Advanced Research Projects Agency                       
|
| |  | Defense Information Systems Agency                              



| |   |                                       
| | - | --------------------------------------
| |  | U.S. intelligence agencies, including:



| |   |                                    
| | - | -----------------------------------
| |  | National Reconnaissance Office     
|
| |  | National Imaging and Mapping Agency
|
| |  | National Security Agency           
|
| |  | Other intelligence agencies        



| |   |                                              
| | - | ---------------------------------------------
| |  | U.S. government civilian agencies, including:



| |   |                                                                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Department of Justice                                                                                                                                                            
|
| |  | Federal Bureau of Investigation                                                                                                                                                  
|
| |  | Department of Homeland Security (including the
    Immigration and Naturalization Service, Transportation Security
    Administration, U.S. Coast Guard and U.S. Customs Service)
|
| |  | Department of Transportation (including the
    Federal Aviation Administration)                                                                                                 
|
| |  | Federal Energy Regulatory Commission                                                                                                                                             
|
| |  | U.S. Senate                                                                                                                                                                      
|
| |  | Patent and Trademark Office                                                                                                                                                      
|
| |  | Other commercial, state and local governments and
    international customers                                                                                                    

Revenues, as a percentage of total revenues, by
customer group were as follows for the year ended
December 31, 2002:

|                                  |  |              |     |             |  |  |     |  
|--------------------------------- |  | ------------ | --- | ----------- |  |  | --- | -
|                                  |  | Pro Forma(1) |     | As Reported
|                                  |  |              |     |            
|Department of Defense             |  |              | 49  | %           |  |  | 48  | %
|U.S. intelligence agencies        |  |              | 31  |             |  |  | 37  |  
|U.S. government civilian agencies |  |              | 16  |             |  |  | 10  |  
|Other                             |  |              | 4   |             |  |  | 5   |  
|                                  |  |              |     |             |  |  |     |  
|                                  |  |              | 100 | %           |  |  | 100 | %
|                                  |  |              |     |             |  |  |     |  



---



|    |                                                                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Pro Forma to include the revenues of SIGNAL
    Corporation for the period prior to the date of acquisition
    (from January 1, 2002 to September 23, 2002).

Our Market Opportunity

We derive our revenues predominantly from
contracts with U.S. government agencies focused on national
security. As a result, funding for our programs is generally
linked to trends in U.S. government spending in the areas of
defense and intelligence. With an increased focus on national
security, we believe the following trends and developments will
drive the growth in our industry.



| |   |                                                                                                                                                                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Increase in Overall Defense Spending.In response to President George W.
    Bushs stated commitment to strengthen national defense,
    Congress appropriated $364.6 billion in fiscal year 2003
    for defense funding. This reflects an increase of more than 10%
    over the fiscal year 2002, the largest one-year

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | increase since the 1980s. The Presidents
    defense budget proposed for fiscal year 2004 is
    $379.9 billion, reflecting a further increase of 4% over
    fiscal year 2003. This fiscal year 2004 budget does not include
    additional funds that the Bush Administration intends to seek to
    fight terrorism and for any conflict with Iraq. The Department
    of Defenses six-year spending plan, sent to Congress in
    February 2003, projects a 32% budget increase from fiscal years
    2003 through 2009.
|
| |  | Emphasis on Protecting and Enhancing
    Information Systems and ISR Capabilities.The Department of Defense is placing a
    greater emphasis on information superiority and information
    infrastructure protection, defined as the ability to collect,
    process, assimilate and protect information while denying an
    adversarys capabilities to do the same.                                                                                                                                                      



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In response to new strategic and tactical global
    threats, the Department of Defense has focused its resources on
    enhancing military efficiency, readiness and technological
    sophistication of existing and future platforms by implementing
    advanced information-based systems. This ongoing transformation
    of military capabilities centers on developing information and
    command and control capabilities needed to significantly enhance
    coordinated armed forces operations. With the support of secure
    command, control, communications, computers, intelligence,
    surveillance and reconnaissance, or C4ISR, systems, the
    Department of Defense expects to have the ability to respond
    rapidly to any conflict.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Increase in Intelligence Spending.While the intelligence community
    budgets are classified, the increase in appropriations for the
    national foreign intelligence program for fiscal year 2003
    represents the largest one-year increase in more than two
    decades. We believe that an emphasis on national security will
    continue to lead to significant additional funding for the
    intelligence community to enhance information assurance and
    protection, network security and ISR capabilities.                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | Homeland Security Spending.The threats of terrorist activities
    have emphasized the importance of homeland security. The Bush
    Administration and Congress responded initially with
    $40 billion of emergency supplemental appropriation. Since
    that time, the Bush Administration and Congress have joined
    together to create the Department of Homeland Security. The
    Presidents budget proposal for that department for fiscal
    year 2004 is $36.2 billion, representing a 7.4% increase
    over fiscal year 2003 and a 64% increase over fiscal year 2002.
    The consolidation of a large number of agencies into the
    Department of Homeland Security is the largest federal
    reorganization in more than 50 years. In addition, even
    outside that department, particularly within the federal law
    enforcement community, substantially expanded homeland security
    initiatives are getting underway.
|
| |  | Increase in Overall U.S. Government
    Information Technology (IT) Spending.The U.S. government has consistently
    increased spending on IT since 1980 and is the largest purchaser
    of these services and products. This trend is expected to
    continue over the next five years. The total federal IT budget
    for fiscal year 2003 is expected to be $54.2 billion, 8.6%
    higher than it was in 2002. The Presidents budget proposal
    for IT (both defense and civil) for fiscal year 2004 is
    $59.3 billion, representing a 9.4% increase over the
    current year. By 2008, according to the Government Electronics
    and Information Technology Association, the IT budget is
    expected to be $67 billion.                                                                                                                                                                                                            

Our Business Strengths and Competitive
Advantages

We believe that we are well positioned to
capitalize on these market opportunities and to address the
mission-critical information requirements of our customers as a
result of our:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Strong Set of Core Capabilities.Our distinctive capabilities position
    us to capitalize on the increasing demand for vital defense
    information services. We integrate our technical areas of
    expertise into comprehensive solutions that support our
    customers growing needs in mission-critical initiatives,
    such as securing information networks, processing intelligence
    on adversaries, sharing knowledge among agencies, responding to
    disasters and defending against weapons of mass destruction.
|
| |  | Highly Skilled Employee Base with High-Level
    Security Clearances.We work with
    customers in highly classified environments and at front-line
    deployments due in large part to the advanced degrees and
    security clearances of our employee base. Approximately 20% of
    our more than 7,100 employees                                                                                                                                                                                                               

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| |  |                                                                                                                                                                                                                                                                                                                                                                    
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | have advanced degrees, with 76% holding U.S.
    government security clearances, including more than 55% of those
    cleared employees holding higher-level security clearances. This
    large body of employees with higher-level security clearances
    provides us with a distinctive competitive advantage in pursuing
    new business in classified areas.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our employees with security clearances have
    completed a difficult and lengthy approval process, which
    requires a candidate to be sponsored by the U.S. government for
    a particular purpose and entails extensive background
    investigations that typically take six months to a year.
    Higher-level clearances may take additional time for background
    investigations and may require successful completion of
    polygraph testing. We also maintain numerous facility clearances
    as required to support classified programs.



| |   |                                                                                                                                                                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Proprietary Technology and Intellectual
    Property.We possess significant trade
    secrets and know-how relating to technologies, processes and
    methods. Our innovations in sensor, image processing and
    information security technologies have resulted in a number of
    patents in these technology areas.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Because of our comprehensive technical expertise
    and experience, we are successful in winning additional
    contracts for U.S. government-funded research and development.
    Our continued success in research and development has helped us
    create a diversified portfolio of sophisticated sensor and
    advanced information technologies and obtain additional research
    and development funding. This accumulation of U.S.
    government-funded research and development has resulted in
    significant intellectual property and technology expertise that
    we are able to leverage into larger, more comprehensive systems
    contracts for our U.S. government customers. Our combination of
    technologies and domain expertise also positions us as a
    preferred provider with major aerospace and defense companies
    pursuing large-scale programs involving major platforms.



| |   |                                                                                                                                                                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Strong Customer Relationships and Heritage of
    Trust.We have more than 50 years
    of experience supporting priority national programs and
    protecting critical national security infrastructures. We have a
    reputation for integrity and responsibility and are committed to
    providing outstanding customer service.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our executives and technical staff have developed
    long-standing, key customer relationships across the
    intelligence community, the Department of Defense and civil
    agencies supporting national security initiatives. As a result,
    we are often called upon as a trusted partner in critical,
    time-sensitive situations. For example, after the terrorist
    attacks on September 11, 2001, we were asked by some of our
    customers to operate key positions and support front-line
    systems on a 24x7 basis.



| |   |                                                                                                                                                                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Disciplined Growth-Oriented Management Team.Our team has a successful track record
    in identifying key growth opportunities, developing integrated
    solutions that address market demand and acquiring and
    integrating strategic assets and capabilities that build and
    sustain our competitive advantage.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Anticipating the increased focus of the
    intelligence community and the Department of Defense on the
    concept of information superiority as a key component of
    warfare, we initiated an investment and acquisition strategy in
    1997 to develop, assemble and integrate sophisticated,
    information-based capabilities. Since 1997, we have acquired and
    successfully integrated several companies. We have substantial
    experience in market analysis, opportunity identification and
    qualification, and in identifying, acquiring and integrating
    companies and capabilities. Successful integration of acquired
    capabilities, along with bundling of offerings to address
    emerging requirements, has positioned us well to compete in
    growth markets supporting national security.

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Our Business Strategy

We intend to increase our revenues, profitability
and stockholder value by strengthening our position as a leading
provider of information-based systems, integrated solutions and
services for mission-critical national security programs. Our
key strategies for achieving this objective are as follows:



| |   |                                                                                                                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Expand our position in rapidly growing U.S.
    government segments and accelerate the application of our
    technology.We believe our core
    capabilities address many emerging needs in our industry. We
    intend to target rapidly growing segments in our industry,
    including:



| |   |                                                                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Defending critical information systems and
    infrastructures in the face of cyber attack and conducting
    effective information operations;                                                               
|
| |  | Advancing ISR systems to deny enemies sanctuary
    and to support military commanders in the field;                                                                                                          
|
| |  | Developing next-generation technologies and
    capabilities to defend against terrorism and defeating chemical,
    biological and nuclear weapons of mass destruction; and                                  
|
| |  | Developing a Global Information Grid
    of sensors and networks designed to provide U.S. forces with a
    superior capability to collect, process and disseminate
    information in a secure environment.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Leverage our strong set of complementary
    capabilities to win larger and more complex contracts.We have an extensive history of
    providing information-based solutions for mission-critical
    systems supporting intelligence and defense-related U.S.
    government agencies. We expect our experience, differentiating
    technologies, enhanced systems design and development skills and
    personnel resources to position us to compete effectively to win
    larger and more comprehensive U.S. government contracts. For
    example, we recently defeated a large incumbent contractor to
    win a $154 million contract to provide a broad range of
    services regarding information technology and network
    infrastructure related to the U.S. Navys development of
    weapons systems.                                                                                                                                                                                                             
|
| |  | Maintain technical leadership by retaining and
    attracting highly-skilled employees and enhancing our research
    and development efforts.We intend to
    continue to retain and recruit highly-skilled and
    security-cleared technical professionals, including engineers,
    scientists, analysts, technicians and support specialists who
    are attracted by the challenging nature and national
    significance of our work. These talented individuals ensure we
    have the knowledge base to continue to build our expertise in
    the design, development, deployment, operation and protection of
    mission-critical information solutions for our customers. We
    will also continue to focus our research and development efforts
    to maintain our proprietary leading-edge technical position in
    high-value areas such as network security, knowledge discovery
    and decision support and ISR, both through U.S.
    government-funded contracts and internal research and
    development.
|
| |  | Pursue selected strategic acquisitions.We intend to enhance and to expand our
    core capabilities and to broaden our customer base by
    selectively pursuing strategic acquisitions. We have substantial
    experience in identifying, acquiring and integrating
    information-based systems companies that possess differentiating
    technologies, long-standing customer relationships and strong
    competitive positions in growth markets. We will continue to be
    highly selective in our acquisition program, pursuing only those
    companies that strengthen our core capabilities, expand our
    presence in new mission-critical segments and provide
    opportunities in high-growth information-based markets.                                                                                                                                                                                                                                                                                        

Our Core Capabilities

The following are offerings for each of our core
capabilities.

Network
Security and Enterprise Protection

Intrusion Prevention, Detection and Response.We provide solutions that protect
networks on a 24x7 basis through a system of firewalls and
security applications that monitor systems, detect intrusions and

5



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unauthorized activity, notify users of suspicious
activity, identify and track intruders and provide repairs to
restore security in the system.


Threat and Risk Assessment.We provide services to test network
and enterprise security status, specifically for vulnerability
to potential threats, and provide consultation services
regarding the required security upgrades and implementations.

Information Operations.We develop and deploy a broad range of
information tools to combat cyber aggression and other threats,
including high-level planning, intelligence analysis, forensic
analysis, attack signature identification and technical
implementation.

Computer Forensics and Emergency Response.We provide tools and techniques to
determine the impact to digital systems of intrusions or
unauthorized activity, as well as provide services for the rapid
recovery of digital media to sustain business operations.

Multi-Level Secure Communications.We provide technologies and systems
that permit simultaneous access to data and applications
involving different levels of security classification and
authorization on a single protected system.

Security Policy and Administration.We develop and implement policies to
ensure the availability, safety and integrity of enterprise
applications to include applications for both cyber and physical
security.

Intelligence,
Surveillance and Reconnaissance (ISR)

Remote Sensing Technology and Systems.We research, develop and deploy
leading-edge sensors which collect information about a target or
a geographic region from remote aircraft and spacecraft to
provide valuable, timely information to intelligence analysts or
battlefield planners.

Sensor Processing and Exploitation.We develop tools to extract useful
information from remotely-sensed images or other data products,
including techniques to enhance images and computer methods to
automate target detection and identification.

Data Collection Management.We develop and deploy tools and
systems for the optimal scheduling of complex constellations of
satellite-based data collection sensors in space.

Modeling and Simulation.We develop models to predict sensor
and total ISR system performance and their effectiveness in
realistic operational scenarios.

Knowledge
Discovery and Decision Support

Data Mining and Event Correlation.We develop, deploy and operate systems
that allow customers to gather and analyze large volumes of data
and detect unseen patterns or abnormalities through the
application of sophisticated techniques such as customized data
algorithms, neural networks and multiple regression models.

Data Warehousing.We
develop and deploy systems that combine separate databases and
files into a single logical entity, primarily for databases and
files that may not have been designed to work together,
improving the effectiveness of a customers
mission-critical operations.

Multi-Source Data Fusion.We provide capabilities to combine
data from distinctly different sources, such as radar and
optical sensors, into a common model for intelligence analysis
and decision making.

Chemical,
Biological and Nuclear Detection

Detection Technology Research.We develop sensor technologies that
detect chemical and biological agents and nuclear contaminants,
materials and weapons.

Monitoring Systems.We design, develop and deploy nuclear
detection systems to support counterproliferation requirements
and national security needs.

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Incident Response Systems.We design and develop systems that
merge collection, analysis, assessment, and decision aids into a
comprehensive system to support authorities in responding to
natural and man-made disasters.

Network and
Enterprise Management

Network Design, Implementation and Operation.We provide end-to-end network services
including network design services, Local Area Network design,
Wide Area Network design, total network support, network and
telecommunications engineering, network operations, technology
upgrades, security and system maintenance support.

Training and Simulation Systems.We design, create and integrate large,
network-based computer models that simulate the complex
environment of military operations, providing a realistic
training environment for senior battlefield commanders and their
staffs.

Development and Management of Network and
Enterprise Operations Centers.We
develop operations centers to improve network and enterprise
efficiency by instrumenting and measuring network performance
and by providing quantitative data to enable decision-making in
support of the enterprise mission and its infrastructure. We
manage these centers on a 24x7 basis for our customers.

Information Systems Integration.We integrate new hardware and software
platforms with existing computer networks, upgrade communication
protocols and interfaces, ensure systems compatibility and
migrate applications to new operating systems and platforms all
to improve network system reliability, availability and security.

Software Engineering and Life Cycle
Management.Our software engineers
develop business, scientific and system applications over a wide
spectrum of operating systems and hardware platforms, with an
emphasis on distributed client/server database applications.

Office Automation and Groupware
Applications.We define and create
custom applications for our customers to facilitate their unique
business processes using modern software development and
database tools. We use state-of-the-art tools and web-enabling
technology to help our customers do business on the Internet.

Help Desk
Operations.We operate a number of
help desks for our customers, using an insourcing
partnership-based approach reinforced with service level
agreements to ensure we maintain high levels of customer
satisfaction at a low cost.

Systems
Engineering Services

Spacecraft and Aircraft Research, Development,
Testing and Evaluation.We provide
expert systems engineering analysis, tools, techniques and
models to support the research, development, test and evaluation
of the U.S. governments spacecraft, aircraft, and missile
programs.

Systems Life Cycle Support.We provide expert engineering support
for all phases of design, development and operations of major
national intelligence systems.

Systems Support for U.S. Navy Surface Fleet.We provide engineering, design and
installation services to upgrade U.S. Navy ships with modern
command, control, communications and computer systems.

Modeling and Simulation for Systems
Acquisition Support.We develop models
and simulations and perform engineering and operational analyses
to support the Department of Defenses weapons systems
acquisition processes from early concept development to full
system production.

Intelligent Transportation Systems.We develop vehicle-based technologies
to make vehicles safer and to add smart technologies
to vehicles in order to provide more effective and efficient
emergency responses.

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Backlog

Many of our contracts, primarily with the U.S.
government, extend over multiple years. In many cases our
contracts include unexercised options. The amount included in
funded backlog is for orders for which funding is
appropriated and allocated to the contract by the purchasing
agency. Because the U.S. government operates under annual
appropriations, our customers typically fund contracts on an
incremental basis, generally for periods of one year or less.
Accordingly, a significant amount of our backlog is
unfunded. We include in unfunded backlog an estimate
of future funding that we expect to receive on signed contracts.

Our backlog consists of the following approximate
amounts at the dates specified:

|                 |  |                    |           |      |  |   |           | 
|---------------- |  | ------------------ | --------- | ---- |  | - | --------- | 
|                 |  |                   
|                 |  | As of December 31,
|                 |  |                   
|                 |  | 2002               |           | 2001
|                 |  |                    |           |     
|                 |  |                   
|                 |  | (In thousands)    
|Funded backlog   |  | $                  | 464,000   |      |  | $ | 206,000   | 
|Unfunded backlog |  |                    | 2,090,000 |      |  |   | 1,140,000 | 
|                 |  |                    |           |      |  |   |           | 
|Total backlog    |  | $                  | 2,554,000 |      |  | $ | 1,346,000 | 
|                 |  |                    |           |      |  |   |           | 

We believe that year-to-year comparisons of
backlog are difficult and not necessarily indicative of future
revenues from backlog. The actual timing of revenues on projects
included in backlog could change because many factors affect the
scheduling of projects. In addition, cancellation or adjustments
to contracts may occur. Backlog is typically subject to large
variations from quarter to quarter as existing contracts are
renewed or new contracts are awarded. Also, a significant amount
of our contract work is performed on contracts with a duration
of one year or less. In many cases these contracts or task
orders represent recurring short-term extensions of work that
has been performed for many years with a customer. We estimate
that approximately $1.7 billion of our backlog at
December 31, 2002 will not be filled in 2003.

Sales and Marketing

Much of our business development and sales and
marketing activities are executed by line management. In
addition, we have approximately 30 individuals skilled in those
professional disciplines and possessing relevant technical
expertise who are focused solely on business development and
marketing. Our sales and marketing efforts focus on
well-coordinated single sales objective pursuits and key account
management led by seasoned business development professionals
and staffed by teams of business development, senior management
and program management personnel. We market and sell our
services by leveraging long-term customer relationships,
responding to competitive solicitations, capitalizing on our
IDIQ contracts, attending marketing events and engaging in
branding activities.

To supplement or complement our domain expertise,
we have teaming relationships to work together on contracts with
various industry partners. While we are often the prime
contractor on our contracts, we are a subcontractor when teaming
furthers our goals of expanding our customer base or pursuing
high-growth markets.

Research and Development

We maintain a staff of engineers, other
scientific professionals and support personnel engaged in the
development of new applications of technology and improvement of
existing products. These programs costs are expensed as
incurred. Veridian-funded research and development expenditures
were $5.8 million in 2000, $6.2 million in 2001 and
$5.9 million in 2002. The majority of our research and
development activities during 2002 were customer-funded, and as
such were paid for through contract revenues with an associated
expense in operating expenses.

Recent Corporate History

On September 24, 2002, we acquired SIGNAL
Corporation (subsequently renamed Veridian IT Services, Inc.), a
leading provider of information technology and engineering
services, for $227 million in cash

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and notes. The SIGNAL acquisition broadened our
exposure to the Department of Defense and homeland security
markets, expanded and strengthened our information-based systems
and solutions, and was immediately accretive to earnings.
SIGNALs capabilities included information security,
systems integration, software/database development, knowledge
management systems, modeling simulation, network/help desk
support and systems engineering services. During SIGNALs
15 years of experience, the company established strong
relationships with numerous governmental agencies as well as
commercial industry leaders. SIGNALs customers include:




| |   |                                                                                                                                                                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Department of Defense (approximately 55% of
    SIGNALs 2002 revenues), including all of the U.S. military
    services; and                                                                                                                                                                      
|
| |  | Civil agencies (approximately 43% of
    SIGNALs 2002 revenues), including the Department of
    Transportation, the Department of Justice, the Coast Guard, the
    Federal Energy Regulatory Commission, the Federal Aviation
    Administration, the U.S. Customs Service, and the U.S. Senate.

Financing for the acquisition consisted of
available cash, $25 million of seven-year subordinated
notes bearing interest initially at 9.50% and increasing
thereafter and borrowings under our credit facility. We expanded
our credit facility from $200 million to $360 million,
including a six-year $270 million term loan and a five-year
$90 million revolving line of credit.

In June 2002, we sold substantially all of the
net assets and operations of our wholly-owned subsidiary,
Veritect, Inc. (subsequently renamed Veridian Commercial
Operations, Inc.), to RedSiren Technologies, Inc. for
$0.5 million in cash. We have recognized a cumulative loss
of $8.7 million, net of income tax benefits.

Government Contracting and Regulatory
Processes

The government contracting process differs in
many ways from commercial contracting, and involves a high
degree of U.S. government regulation and oversight.

Contracting
Processes

The Competition in Contracting Act of 1984
requires agencies to attain full and open
competition in selecting companies to perform their
contracts. If a U.S. government agency has a requirement for
services valued above $25,000, it announces its requirements on
an electronic bulletin board. Interested contractors submit
information indicating their desire to perform the required
services. The agency then solicits competitive proposals or bids
from qualified contractors by providing them with a formal
request for a proposal, or RFP, or similar solicitation. The RFP
is an extensive document describing the desired services and
terms and conditions that will form the final agency contract.
The RFP includes the evaluation criteria the agency will use to
select a contractor for the contract. Bidders then submit
proposals in response to the RFP, and the agency evaluates all
the proposals, asks for clarifications and engages in
discussions with bidders if necessary. Agencies are encouraged
to award contracts on a best value basis. This means
that the contractor selected for the award should, in the
agencys judgment, provide the greatest overall benefit in
response to the requirement, including technical merit, cost and
relevant past performance considerations. This process can
sometimes take a year or more.

In some cases, full and open competition is not
required. Depending upon the circumstances, contracts can be
awarded to us or other contractors on a sole-source
basis. This can occur when the agencys need for the
services is of such an unusual and compelling urgency that the
U.S. government would be seriously injured unless the agency is
permitted to limit the number of sources from which it solicits
bids or proposals. A contract can also be awarded to a
contractor on a sole-source basis when the services needed by
the agency are available from only one responsible source or
only from a limited number of responsible sources and no other
type of services will satisfy the needs of the agency. From time
to time, we are awarded contracts on a sole-source basis.

Several statutory and regulatory changes have
significantly altered U.S. government procurement practices in
recent years, increasing the number of procurement
vehicles available to U.S. government customers to
satisfy their requirements. U.S. government agencies are now
more likely to use flexible contract

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vehicles that permit a number of firms to compete
for specific orders. The General Services Administration
(GSA) Multiple Award Schedule (MAS) Program is an
example of a flexible contract vehicle employed by the U.S.
government. The GSA contracts with multiple vendors to provide
commercial off-the-shelf information technology products and
services, at predetermined prices, to authorized buyers. Those
contracts involve services that are provided at fixed labor
rates and individual agencies may place orders, receive services
and make payments directly to contractors under the GSA MAS
contracts. Before placing an order, ordering offices are to
consider reasonably available information about the services
offered under GSA MAS contracts by using the GSA
Advantage! on-line shopping service or by reviewing
catalogs and pricelists of at least three schedule contractors.
Orders placed pursuant to a GSA MAS contract are generally
considered to be issued pursuant to full and open competition,
so when placing orders under GSA schedules, ordering offices
need not seek further competition.


In addition to the MAS Program, we also hold
other multiple award contracts with individual agencies called
indefinite delivery, indefinite quantity, or IDIQ, contracts.
IDIQ contracts (also known as task order contracts) are
essentially umbrella contracts that set forth the basic terms
and conditions under which the agency may order goods and
services from one, and in some cases, more than one, contractor.
Typically, these contracts will also specify the labor or skill
categories that the U.S. government agency believes are
necessary to perform the necessary contract work and may also
specify the labor rates applicable for each contract labor
and/or skill category. Federal law establishes a preference for
multiple award IDIQ contracts. IDIQ contracts do not obligate
the U.S. government to purchase goods or services above the
minimum levels set forth in the contract. When task orders over
$100,000 are issued under multiple award IDIQ Department of
Defense contracts, each awardee is entitled to fair notice of
the U.S. governments requirement, a fair opportunity to
submit a bid for the task order and fair consideration of any
bid it submits. The agency desiring contract services will
conduct a limited best value competition among the interested
awardees, resulting in the issuance of a task order to a single
contractor.

A task order calls for a specific set of services
to be delivered by the contractor to a particular customer
agency. Based on our experience, the key factors in bidding
successfully for these task orders are technical merit, cost,
relevant past performance considerations and customer trust. Our
experience has also been that after winning a task order and
providing the requested services, we will often receive
successive task orders from the same agency for follow-on
services as long as our customer is satisfied with our work.
From time to time, we are also party to Government-Wide Agency
Contracts, which are IDIQ contracts that permit the aggregation
of multiple agencies requirements in a single contract in
order to encourage contractors to offer the best possible prices
and to reduce the costs associated with multiple acquisitions.

Types of
Contracts

We hold essentially three different types of U.S.
government contracts, each of which involves a different payment
methodology and degree of risk of the cost of performance. These
types of contracts are typically referred to as cost
reimbursable, or cost-plus, contracts,
time-and-materials contracts and fixed-price contracts. Each of
these contract types is described below.

Cost-Plus Contracts.Cost-plus contracts provide for
reimbursement of costs, to the extent that such costs are
reasonable, allowable and allocable to the contract and for the
payment of a fee, which essentially represents the
profit margin negotiated between the contractor and the
contracting agency. Cost-plus incentive fee and cost-plus award
fee contracts provide for increases or decreases in the contract
fee, within specified limits, based upon actual results as
compared to contractual targets for factors such as cost,
quality, schedule and performance. The fee is generally either
fixed at the time of award (fixed fee) or is awarded based on
performance at the sole discretion of the U.S. government (award
fee). Contracts may require completion of defined tasks or
performance of a specific number of hours of service. Our total
cost incurred on our cost-plus contracts cannot exceed the
funded cost ceiling set forth in the contract without the
approval of the agency. If a contracted task has not been
completed or the specific number of hours of service have not
been performed at the time the authorized cost is expended, we
may be required to complete the work and be reimbursed for the
additional costs with no increase in fee or the fee may be
reduced proportionately to the number of hours actually
provided. Even though cost-plus contracts are generally thought
to involve a relatively low degree of

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risk, we carefully manage our cost-plus contracts
to ensure that they are performed within the estimated cost and
that the required work is completed and/or the minimum hours are
provided.


Time-and-Materials Contracts.Under a time-and-materials contract,
our compensation is based on a fixed hourly rate established for
specified labor or skill categories. We are paid at the
established hourly rates for the hours we expend performing the
work specified in the contract. Labor costs, overhead, general
and administrative costs and profit are included in the fixed
hourly rate. Materials, subcontractors, travel and other direct
costs are reimbursed at actual costs plus an amount for material
handling. We make critical pricing assumptions and decisions
when developing and proposing time-and-materials labor rates and
risk loss of profitability if our actual costs exceed the costs
incorporated into the fixed hourly labor rate. One variation of
a standard time-and-materials contract is a time-and-materials,
award fee contract. Under this type of contract, the profit or
fee we earn is determined based on a combination of
our internal cost control and the quality of our performance,
which is determined at the sole discretion of the U.S.
government.

Fixed-Price Contracts.In a fixed-price contract, we must
complete the work to receive the price, which is fixed and is
not affected by the cost of performance. Thus, if the costs are
greater than the price, we will suffer a loss; on the other
hand, the lower our costs, the greater our profits. Since we
agree to accept the cost risk for the contract, there is greater
risk involved with performing the contract, but also the
possibility of receiving higher profit margins than those
recognized on cost-plus and time-and-materials contracts if work
is performed or products are developed more efficiently than
anticipated.

The following table sets forth the percentage of
our revenues derived from each type of contract for the three
prior years.

|                             |  |                |      |               |  |      |      |      |  |  |      |   |  |  |      |  
|---------------------------- |  | -------------- | ---- | ------------- |  | ---- | ---- | ---- |  |  | ---- | - |  |  | ---- | -
|                             |  | 2002           |      | 2002          |  |      |      |     
|                             |  | (Pro Forma(1)) |      | (as Reported) |  | 2001 |      | 2000
|                             |  |                |      |               |  |      |      |     
|Cost-Plus Contracts          |  |                | 47.3 | %             |  |      | 50.7 | %    |  |  | 54.6 | % |  |  | 57.2 | %
|Time-and-Materials Contracts |  |                | 39.5 |               |  |      | 35.3 |      |  |  | 32.9 |   |  |  | 29.6 |  
|Fixed-Price Contracts        |  |                | 13.2 |               |  |      | 14.0 |      |  |  | 12.5 |   |  |  | 13.2 |  



---



|    |                                                                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Pro Forma to include revenues of SIGNAL
    Corporation for the period prior to the date of our acquisition
    (from January 1, 2002 to September 23, 2002).

Payment
Processes

Almost all of our payments ultimately come from
U.S. government agencies. An account receivable from an agency
enjoys the overall creditworthiness of the U.S. government. We
normally invoice our customers on a monthly basis, but can
invoice our customers bi-weekly under certain cost-plus and
time-and-materials contracts. Fixed-price contracts are often
financed by the agency in the form of periodic
progress or milestone payments made to us. Under the Prompt
Payment Act, certain payments from U.S. government agencies must
be made within 30 days of final invoice approval, or
interest must be paid. We receive most of our payments from
agencies via electronic funds transfer, further reducing
unreasonably long accounts receivable aging periods. Final
payments on U.S. government contracts are made after U.S.
government audit agencies complete their reviews of the contract.

Laws and
Regulations Affecting Our Business

U.S. government contracts are subject to a number
of federal statutes, the Federal Acquisition Regulation, or FAR,
and agency supplements to the FAR. The FAR contains several
regulations that affect us significantly.

The Anti-Deficiency Act prohibits U.S. government
employees from committing U.S. government funds, by contract or
otherwise, in excess or in advance of appropriations, unless
authorized by some specific statute. Thus, work on our contracts
may be limited by the availability of funds. Since Congress
usually appropriates funds on a fiscal year basis, many of our
contracts are incrementally funded by the agency as Congress
makes appropriations for future fiscal years. Additionally, the
U.S. government uses FAR clauses, such as the

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Limitation of Cost and Limitation of Funds
clauses, prescribed by FAR Subpart 32.7, to limit its liability
arising from its employees involving the U.S. government in
expenditures or liabilities beyond those authorized by Congress.
In many cases, contracts are awarded for only one year, with a
number of (often four) successive option years. Agencies are not
obligated to exercise these option years, but in our experience,
most renewal options are exercised and the scope and terms are
often expanded.


Disappointed bidders and firms excluded from
competition for U.S. government contracts and task orders can
avail themselves of FAR and General Accounting Office bid
protest remedies by submitting an objection to the contracting
officer or General Accounting Office within specified time
limits. The U.S. Court of Federal Claims also has bid protest
jurisdiction. Contract performance can be suspended while a
protest is pending and the contract can be terminated if found
to have been improperly awarded.

Larger contracts may also be subject to the Truth
in Negotiations Act and Cost Accounting Standards. The Truth in
Negotiations Act requires us to provide current, accurate and
complete cost or pricing data in connection with the negotiation
of a contract, modification or task order that is not subject to
full and open competition. Cost Accounting Standards require
consistency of accounting practices over time and compliance
with specific cost accounting criteria. FAR Part 31,
Contract Cost Principles and Procedures, sets forth
the rules regarding the allowability and allocability of costs
incurred in connection with U.S. government contracts.

The FAR Changes Clause, prescribed by FAR Subpart
43.2, permits a contracting officer to make unilateral changes
within the general scope of this contract at any time, by
written order, in a number of contract areas. If any such change
causes an increase or decrease in the estimated cost of, or the
time required for, performance of any part of the work under a
changed contract, or otherwise affects any other terms and
conditions of the contract, the contracting officer must make an
equitable adjustment in the estimated cost, delivery or
completion schedule, or both, the amount of any fixed fee, and
other affected terms, and modify the contract accordingly.

The U.S. government makes efforts to avoid
awarding contracts to companies that may have an organizational
conflict of interest, or OCI. FAR Subpart 9.5 describes the
situations that may result in an OCI and provides guidance to
contracting officers in order to avoid and/or mitigate an actual
or potential OCI. An OCI involves a situation that arises or
might arise because the nature of the work to be performed by a
contractor may, absent some restriction on future activities,
result in an unfair competitive advantage to the contractor,
impair the contractors objectivity in performing the
contract work or make the contractor potentially unable to
render impartial assistance or advice to the U.S. government.
The contracting officer is responsible for resolving any
significant potential OCIs before a contract award is made. We
have a company-wide policy regarding acceptance of and
compliance with contractual OCI provisions and a database in
which OCI restrictions are logged.

To the extent that we fail to comply with
procurement requirements, the U.S. government may demand an
adjustment in contract prices. Additionally, changes in cost
accounting practices are subject to a required procedure for
determining the cost impact of the change. The U.S. government
is protected from paying increased costs resulting from a
contractors accounting changes.

Our books and records are subject to audit by the
Defense Contract Audit Agency, or DCAA, and other audit
agencies, to ensure that the costs and hourly rates for which we
invoice the U.S. government under cost-plus and
time-and-materials contracts are in compliance with the Cost
Principles, Cost Accounting Standards and FAR invoicing
regulations. These audits can result in adjustments to contract
costs and fees as well as penalties and interest costs. The U.S.
government retains a portion of the fee earned by us under
cost-plus contracts until contract completion and audit by the
DCAA. Audits of our business units by the DCAA have been
completed for all fiscal years through 1998 without material
adjustments. In the opinion of management, the audits for fiscal
years 1999 and beyond will not result in adjustments that would
have a material adverse effect on our financial position or
results of operations; however, future material adjustments are
possible. Additionally, our GSA MAS work is subject to audit by
the GSA Inspector General to ensure that we are in compliance
with the most favored customer, price reductions and other
provisions in our GSA MAS contracts.

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Competition

Our key competitors include divisions of large
defense contractors such as The Boeing Company, Computer
Sciences Corporation, Jacobs Engineering Group, Inc., Lockheed
Martin Corporation, Northrop Grumman Corporation, Raytheon
Company and Science Applications International Corporation, as
well as a number of smaller U.S. government contractors with
specialized capabilities. Because of the diverse requirements of
our U.S. government customers and the highly competitive nature
of large procurements, corporations frequently form teams to
pursue contract opportunities. The same companies listed as
competitors will, at times, team with us or subcontract to us in
the pursuit of new business.

We believe that the major competitive factors
that affect our ability to compete are technical competencies,
knowledge of the customer and their specific needs, the results
of past performance on similar engagements, our reputation, key
management and technical personnel, number and level of security
clearances and price. Although we believe that we compare
favorably with our competitors based on these factors, we may
not maintain our competitive position against current or
potential competitors. Some of our competitors have longer
operating histories, significantly greater research and
development capabilities and financial, technological, marketing
and human resources, greater name recognition and a larger
customer base than we have.

Proprietary Rights

Although we have patents, our operations are not
substantially dependent on these patents. We also rely
extensively on a combination of copyright law, trade secret law,
confidentiality procedures and contractual provisions to protect
our proprietary rights. Because the U.S. government cannot be
enjoined from using patented inventions, our patents would not
bar competitors from our government markets. In addition, when
the U.S. government directly funds research and development by
its contractors, it generally obtains licenses to use resulting
patents, copyrights and data for government purposes, and
sometimes for all purposes, including through other contractors.
We believe that the technological and creative skills of our
personnel, new software tool developments, frequent software
tool and service enhancements, name recognition and professional
services capabilities are essential to establishing and
maintaining a technology leadership position. Our competitors
may independently develop technologies that are similar to ours
or may duplicate any technology developed by us, or our
technology could infringe upon the patent rights of others.

Despite our efforts to protect our proprietary
rights, unauthorized parties may copy or use aspects of our
technology or obtain and use inventions, works or information
that we regard as proprietary. Policing unauthorized use of our
technology is difficult. We have not sought patents in foreign
countries to the same extent as in the United States. Litigation
may be necessary in the future to enforce our intellectual
property rights, to protect our trade secrets, to determine the
validity and scope of the proprietary rights of others or to
defend against claims of infringement or invalidity. This type
of litigation could result in substantial costs and diversion of
resources and could have an adverse effect on our business. To
date we have not been notified that technologies we have
developed infringe the proprietary rights of any third parties,
but third parties may, in the future, claim that our current or
future technologies infringe upon their proprietary rights.

Employees

We currently employ more than 7,100 employees,
including computer scientists, software development engineers,
systems analysts, scientists, engineers, technicians and mission
specialists. Fifty-six of our employees are represented by a
collective bargaining agreement, which expires on May 8,
2004. We have not experienced any work stoppages and believe
that we have a good relationship with our employees.

Subcontractors

The competitive and complex nature of our
business often leads us to subcontract a portion of the scope of
work under a contract. At times we must rely on our
subcontractors to fill critical roles in the completion of our
contract services. While approximately 18% of our sales for 2002
were attributable to work performed by subcontractors, we are
not dependent upon any one subcontractor or group of
subcontractors for providing any

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substantial degree of work for us. We also
operate in an environment where a subcontractor on one
engagement may be a competitor or a customer for other business
opportunities. Maintaining effective relationships with our
subcontractors is necessary to meet performance levels on our
contracts and to maintain our competitive position.


Environmental, Health and Safety
Matters

Some of our operations, particularly those in
connection with our test and evaluation facilities in Ashford
and Buffalo, New York, are subject to environmental, health and
safety regulations and similar standards contained in our
contracts with the U.S. government. At these facilities,
activities include aircraft testing and simulations, supersonic
wind tunnel and hyper-sonic shock tunnel testing and chemical
agent and military ordnance testing for the U.S. government. The
nature of these activities is inherently dangerous. As a result,
we risk incurring liability for personal injuries, death and
contamination of the environment in the event of an accidental
explosion or chemical release. All or some of these costs could
be disallowed as charges (i) under U.S. government contracts,
(ii) in excess of any applicable insurance limits or
(iii) not covered by insurance. For example, we do not
maintain insurance for environmental liabilities.

Risk Factors

Certain statements in this annual report contain
or are based on forward-looking information (that
Veridian believes to be within the definition in the Private
Securities Litigation Reform Act of 1995) and involve risks and
uncertainties, many of which are outside of our control. Words
such as may, will, intends,
should, expects, plan,
projects, anticipates,
believes, estimates,
predicts, potential,
continue, or opportunity, or the
negative of these terms or words of similar import, are intended
to identify forward-looking statements.

These forward-looking statements are subject to
known and unknown risks and uncertainties, which could cause
actual results to differ materially from those anticipated,
including, without limitation: adverse changes in U.S.
government spending priorities; failure to retain existing U.S.
government contracts or win new contracts; failure to obtain
task orders under U.S. government contracts; failure to obtain
funding under U.S. government contracts; risks of contract
performance; risks of contract termination, either for default
or for the convenience of the U.S. government; adverse results
of U.S. government audits of our U.S. government contracts; and
risks associated with complex U.S. government procurement laws
and regulations. These and other risk factors are more fully
discussed below, and from time to time in Veridians other
filings with the Securities and Exchange Commission, including
among others, its reports on Form 8-K and Form 10-Q.

The forward-looking statements included in this
annual report are only made as of the date of this annual report
and we undertake no obligation to publicly update any of the
forward-looking statements made herein, whether as a result of
new information, subsequent events or circumstances, changes in
expectations or otherwise.

Risks Related to Our Industry

We depend on contracts with the U.S.
government for substantially all of our revenues and the loss or
impairment of this relationship could adversely affect our
business.

Our revenues would decline substantially if the
U.S. government, or a significant U.S. government department or
agency, ceases to use, or uses less of, our services. For the
year ended December 31, 2002, we derived approximately 95%
of our revenues from contracts with U.S. government agencies. We
expect that U.S. government contracts will continue to be the
primary source of our revenues for the foreseeable future. Many
of our U.S. government customers are under stringent budgetary
constraints. The factors that could

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cause us to lose all or a substantial portion of
these contracts and would materially harm our business,
prospects, financial condition and results of operations include:




| |   |                                                                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | budget constraints affecting U.S. government
    spending generally, or specific departments or agencies (such as
    the intelligence agencies and the Department of Defense), and
    changes in fiscal policies or available funding;
|
| |  | changes in U.S. government programs or
    requirements;                                                                                                                                                                                
|
| |  | curtailment of the U.S. governments use of
    technology services providers;                                                                                                                                                          
|
| |  | the adoption of new laws or regulations
    pertaining to U.S. government procurement;                                                                                                                                                  
|
| |  | U.S. government appropriations delays or
    shutdowns;                                                                                                                                                                                 
|
| |  | suspension or prohibition from contracting with
    the U.S. government or any significant agency in the
    intelligence or defense community; and                                                                                     
|
| |  | impairment of our reputation or relationships
    with the U.S. government or any significant agency in the
    intelligence or defense community.                                                                                      

These or other factors described separately below
could cause U.S. government agencies to decrease the amount of
business they do with us, to exercise their rights to terminate
contracts or not to exercise options to renew contracts, any of
which could have a material adverse effect on our business,
prospects, financial condition and results of operations. In
particular, the factors affecting our reputation or relationship
with our customers could have a material adverse effect on our
business, prospects, financial conditions and results of
operations.

U.S. government spending priorities may
change in a manner adverse to our business.

Our business depends upon continued U.S.
government expenditures on intelligence and defense programs. A
significant decline in overall spending or the loss of or
substantial decline in spending on a large program in which we
participate could materially adversely affect our business. The
U.S. intelligence and defense budgets generally, and spending in
specific agencies with which we work, such as intelligence
agencies and the Department of Defense, have declined from time
to time for extended periods since the mid-1980s, resulting in
program delays, program cancellations and a slowing of new
program starts. Although spending on intelligence and
defense-related programs by the U.S. government has recently
increased, particularly since the terrorist attacks on
September 11, 2001, future levels of expenditures and
authorizations for those programs may decrease, remain constant
or shift to programs in areas where we do not currently provide
services. Moreover, even though our contract periods of
performance for a program may exceed one year, Congress must
usually approve funds for a given program each fiscal year and
may significantly reduce funding of a program in a particular
year. Significant reductions in these appropriations by Congress
or the award level of new defense contracts may affect our
ability to complete contracts, obtain new work and grow our
business. A significant decline in intelligence or defense
expenditures, or a shift of expenditures to programs in areas
where we do not currently provide services, could have a
material adverse effect on our business, prospects, financial
condition and results of operations.

Congress does not always enact spending bills by
the beginning of the new fiscal year. In the current fiscal year
2003, Congress did not pass eleven of the thirteen annual
appropriations bills until the fifth month of the year. These
delays tend to leave the affected agencies under-funded as long
as the delays persist. Future delays and uncertainties in
funding would impose additional business risks on us.

The Department of Homeland Security, bringing
together twenty-two U.S. government agencies, remains in its
organizational and integration stages. The departments
spending priorities, and the pace of homeland security spending,
remain particularly uncertain at this time. A significant delay
or decline in homeland security expenditures, or a shift of
expenditures to programs in areas where we do not currently
provide services, could have a material adverse effect on our
business, prospects, financial condition and results of
operations.

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Our contracts with the U.S. government may
be terminated or adversely modified prior to completion, which
could adversely affect our business.

U.S. government contracts generally contain
provisions and are subject to laws and regulations that give the
U.S. government rights and remedies not typically found in
commercial contracts, including providing the U.S. government
with the ability to unilaterally:



| |   |                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | terminate our existing contracts;                                                                                                                                        
|
| |  | reduce the value of our existing contracts;                                                                                                                              
|
| |  | modify some of the terms and conditions in our
    existing contracts;                                                                                                   
|
| |  | suspend or permanently prohibit us from doing
    business with the U.S. government or with any specific U.S.
    government agency;                                     
|
| |  | control and potentially prohibit the export of
    our products;                                                                                                         
|
| |  | cancel existing multi-year contracts and related
    orders if the necessary funds for contract performance for any
    subsequent year are not appropriated by Congress;
|
| |  | decline to exercise an option to extend an
    existing multi-year contract; and                                                                                         
|
| |  | claim rights in technologies and systems
    invented, developed or produced by us.                                                                                      

The U.S. government may terminate a contract with
us either for its own convenience (for instance, due to a change
in the customer agencys perceived needs or its desire to
consolidate work under another contractual vehicle) or if we
default by failing to perform the contract. If the U.S.
government terminates a contract with us for convenience, we
generally may recover only our incurred or committed costs,
settlement expenses and profit on the work completed, prior to
termination. If the U.S. government terminates a contract with
us for default, we are denied any recovery, and instead may be
liable for excess costs incurred by the U.S. government in
procuring undelivered items from an alternative source. We may
in the future receive show-cause or cure notices under contracts
that, if not addressed to the U.S. governments
satisfaction, could give the U.S. government the right to
terminate those contracts for default or to cease procuring our
services under those contracts in the future.

In addition, our U.S. government contracts
typically have terms of one or more base years and one or more
option years. Many of the option periods cover more than half of
the contracts potential term. U.S. government agencies
generally have the right not to exercise these option periods. A
decision not to exercise option periods or to terminate our
existing contracts would reduce the profitability of these
contracts to us and could have a material adverse effect on our
business, prospects, financial condition and results of
operations.

Failure to retain existing contracts or win
new contracts under the U.S. governments competitive
bidding process may adversely affect our revenues.

We obtain most of our U.S. government contracts
through a competitive bidding process, and substantially all of
the business that we expect to seek in the foreseeable future
likely will be subject to a competitive bidding process.
Competitive bidding presents a number of risks, including:



| |   |                                                                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the frequent need to compete against companies or
    teams of companies with more financial and marketing resources
    and more experience in bidding on and performing major contracts
    than we have;                                                          
|
| |  | the need to compete against companies or teams of
    companies that may be long-term, entrenched incumbents for a
    particular contract for which we are competing for and that
    have, as a result, greater domain expertise and better customer
    relations;
|
| |  | the need to compete on occasion to retain
    existing contracts that have in the past been awarded to us on a
    sole-source basis;                                                                                                                                
|
| |  | the frequent need to bid on programs in advance
    of the completion of their design, which may result in
    unforeseen technological difficulties, cost overruns or both;                                                                                         

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the substantial cost and managerial time and
    effort, including design, development and marketing activities,
    necessary to prepare bids and proposals for contracts that may
    not be awarded to us;                                                                                                                                                                                                 
|
| |  | the need to develop, introduce, and implement new
    and enhanced solutions to our customers needs;                                                                                                                                                                                                                                                                                                         
|
| |  | the need to accurately estimate the resources and
    cost structure that will be required to service any fixed-price
    contract that we are awarded; and                                                                                                                                                                                                                                                   
|
| |  | the expense and delay that may arise if our
    competitors protest or challenge new contract awards made to us
    pursuant to competitive bidding or subsequent contract
    modifications, and the risk that any of these protests or
    challenges could result in the resubmission of bids on modified
    specifications, or in the termination, reduction or modification
    of the awarded contract.

We may not be afforded the opportunity in the
future to bid on contracts that are held by other companies and
are scheduled to expire if the U.S. government determines to
extend the existing contract. If we are unable to win particular
contracts that are awarded through the competitive bidding
process, we may not be able to operate in the market for
services that are provided under those contracts for a number of
years. If we are unable to consistently retain existing
contracts or win new contract awards over any extended period,
our business, prospects, financial condition and results of
operations will be adversely affected.

U.S. government customers spend their
procurement budgets through multiple award contracts and our
failure to compete for post-award orders under these contracts
could adversely affect our business.

Budgetary pressures and reforms in the
procurement process have caused many of our U.S. government
customers to increasingly purchase goods and services through
indefinite delivery, indefinite quantity, or IDIQ, contracts,
General Services Administration, or GSA, schedule contracts and
other similar multiple-award and/or government-wide acquisition
contract vehicles. These contract vehicles guarantee only very
small amounts of work and have resulted in increased competition
and pricing pressure requiring that we make sustained post-award
efforts to realize revenues under the relevant contract. With
our recent acquisition of SIGNAL Corporation, we are more
dependent on orders under IDIQ contracts, GSA schedule contracts
and other similar multiple-award and/or government-wide
acquisition contract vehicles. We may not continue to
successfully sell our services or otherwise increase our
revenues under these contract vehicles. Our failure to compete
effectively in this procurement environment could have a
material adverse effect on our business, prospects, financial
condition and results of operations.

U.S. government audits of our U.S.
government contracts may result in a material change in our
earnings and may result in civil or criminal liability that
could harm our reputation.

As a U.S. government contractor, we are subject
to audits and investigations of our U.S. government contracts by
the Defense Contract Audit Agency, or DCAA, and other U.S.
government agencies. Under applicable laws, investigations can
be initiated by whistleblowers and supported by the U.S.
government. Audit and investigative agencies review our
performance on our contracts, pricing and billing practices,
cost structure and compliance with applicable laws, regulations
and standards. Like most large U.S. government contractors, our
contracts are audited and reviewed on a continual basis.
Although audits have been completed on our contracts through
1998, audits for certain contracts performed after 1998 remain
ongoing and, for much of our work in recent years, audits have
not yet commenced. In addition, non-audit reviews by the U.S.
government may still be conducted on all of our U.S. government
contracts.

Based on the results of its audits, including
audits of any of the companies we have acquired, the U.S.
government may adjust our contract costs and fees, including
allocated indirect costs. Costs that are disallowed will not be
reimbursed, and such costs that have already been reimbursed
must be refunded. Some of our acquired companies did not always
implement internal controls as rigorous as our own, which may
increase the likelihood that an audit of their performance of
U.S. government contracts could cause a charge to our earnings
or reduction in our cash position. Adjustments resulting from
U.S. government audits and reviews could have a material adverse
effect on our business, prospects, financial condition and
results of operations.

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In addition, if an audit or investigation finds
that some of our costs have been improperly charged to our U.S.
government contracts, including most financing costs, mergers
and acquisition costs, amortization of goodwill and other
intangible assets, portions of our research and development and
intellectual property costs and some marketing expenses, these
costs will not be reimbursed and revenues we have already
received may need to be refunded. On occasion in the past, we
have been subject to U.S. government investigations. If a U.S.
government audit or investigation results in allegations of
improper or illegal activities, we may be subject to civil and
criminal penalties and administrative sanctions, including
termination of our existing contracts, forfeitures of previous
payments, suspension of ongoing payments, fines and suspension
or prohibition from doing business with the U.S. government. Our
reputation could suffer serious harm if allegations of
impropriety were made against us. Any U.S. government allegation
or determination of impropriety or illegality could have a
material adverse effect on our business, prospects, financial
condition and results of operations.

We may be liable for civil or criminal
penalties under a variety of complex procurement laws and
regulations, and changes in governmental regulations could
adversely affect our business and financial
position.

We must comply with and are affected by laws and
regulations relating to the formation, administration and
performance of U.S. government contracts. Among the most
significant regulations are:



| |   |                                                                                                                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the Federal Acquisition Regulations and all
    department and agency supplements, which comprehensively
    regulate the formation, administration and performance of U.S.
    government contracts;                                               
|
| |  | the Truth in Negotiations Act, and implementing
    regulations, which require certification and disclosure of all
    cost and pricing data in connection with contract negotiations;                                                              
|
| |  | most favored customer and related price reduction
    regulations governing GSA schedule contracts, which require
    contractors to provide their best pricing to U.S. government
    customers or to provide retroactive price reductions;        
|
| |  | the Cost Principles and Cost Accounting
    Standards, which impose accounting rules that define allowable
    and unallowable costs and otherwise govern our right to
    reimbursement under certain cost-based U.S. government
    contracts; and
|
| |  | laws, regulations and executive orders
    restricting the use and dissemination of information classified
    for national security purposes and the exportation of certain
    products and technical data.                                       

These laws and regulations affect how we do
business with our customers, and in some instances, impose added
costs on our business. The U.S. government may reform its
procurement practices or adopt new contracting rules and
regulations, including cost accounting standards and practices
regarding competitive bidding, that could be costly to satisfy
or that could impair our ability to obtain new contracts. Any
changes in applicable rules and regulations could adversely
affect our business, prospects, financial condition and results
of operations affected by the changed rules and regulations.

Our failure to obtain and maintain the
necessary security clearances could result in the loss of U.S.
government contracts and reduce our revenues.

Many of our U.S. government contracts require our
employees to maintain various levels of security clearances, and
we are required to maintain certain facility security clearances
complying with the Department of Defense and other agency
requirements. Obtaining and maintaining security clearances for
employees involves a lengthy process, and it is difficult to
identify, recruit and retain employees who already hold security
clearances. If our employees are unable to obtain or retain
security clearances or if our employees who hold security
clearances terminate employment with us, the customer whose work
requires cleared employees could terminate our contract or
decide not to renew it upon its expiration. In addition, we
expect that many of the contracts on which we will bid will
require us to demonstrate our ability to obtain facility
security clearances and perform work with employees who hold
specified types of security clearances. To the extent we are
unable to obtain facility security clearances or engage
employees with the required security clearances for a particular

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contract, we may not be able to bid on or win new
contracts, or effectively re-bid on expiring contracts, which
could have a material adverse effect on our business, prospects,
financial condition and results of operations.


Security breaches in classified U.S.
government systems could result in the loss of customers and
damage our reputation.

We must continue to maintain the trust of our
customers in managing and protecting information involved in
intelligence, defense, national security and other classified
U.S. government functions. A security breach in any of our
programs could cause serious harm to our business, damage our
reputation and prevent us from being eligible for future work on
critical classified programs for U.S. government customers.
Losses that we could incur from any security breach could exceed
the policy limits of our general liability insurance which would
have an adverse effect on our business, prospects, financial
condition and results of operations.

Risks Relating to Our Business

Service and technology failures in the
systems we provide to our customers could expose us to liability
and have an adverse effect on our revenues.

Our services are often critical to the systems,
operations and security of our customers, including the U.S.
government. We have experienced in the past, and may in the
future experience, some systems and service failures, schedule
or delivery delays and other problems in connection with our
work. For instance, on occasion, we have experienced
difficulties and delays in software development for some of our
contracts. If our information solutions, services, products or
other applications have significant defects or errors, are
subject to delivery delays or fail to meet our customers
expectations, we may:



| |   |                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------
| |  | lose revenues due to adverse customer reaction;                                                                                            
|
| |  | be required to provide additional costly
    remediation services to a customer at no charge, or have
    contracts terminated for default;
|
| |  | receive negative publicity, which could damage
    our reputation and adversely affect our ability to attract or
    retain customers; and 
|
| |  | suffer claims for substantial damages against us,
    regardless of our responsibility for the failure.                                    

While many of our contracts with the U.S.
government limit our liability for damages that may arise from
negligent acts, errors, mistakes or omissions in rendering
services to our customers, these contractual provisions may not
protect us from liability for damages if we are sued.
Furthermore, our general liability insurance coverage may not
continue to be available on reasonable terms or in sufficient
amounts to cover one or more large claims, or the insurer may
disclaim coverage as to any future claim. The successful
assertion of any large claim against us could seriously harm our
business, prospects, financial condition and results of
operations. Even if not successful, large claims against us
could result in significant legal and other costs and may be a
distraction to our senior management.

Our success depends on key members of our
senior management, the loss of whom could disrupt our customer
relationships and our business operations.

We believe our continued success depends in large
part on the sustained contributions of our chief executive
officer, president and director, David H. Langstaff, and
our senior management team. We rely on our executive officers
and senior management to identify and pursue new business
opportunities and identify key growth opportunities. In
addition, the relationships and reputation that members of our
management team have established and maintained with agencies in
the intelligence and defense communities contribute to our
ability to maintain positive customer relations and to identify
new business opportunities. The loss of services of
Mr. Langstaff or one or more senior management members
could significantly impair our ability to identify and secure
new contracts and otherwise disrupt our operations. We have
entered into employment agreements with some of our executive
officers that contain non-compete and confidentiality covenants.
Despite these agreements, we may not be able to retain these
officers and may not be able to enforce the non-compete and

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confidentiality covenants in their employment
agreements. We do not maintain key person life insurance on any
of our senior management members.


We depend on technical personnel and may be
unable to retain those personnel or recruit additional qualified
technical personnel to support our growth
strategy.

Our business is labor intensive and we believe
that our continued success and our ability to grow our business
depends in large part on our ability to recruit and retain the
technical personnel necessary to serve our customers
effectively. Competition for skilled personnel is intense and is
likely to remain so for the foreseeable future.

Technology service companies often experience
high attrition among their skilled employees. Excessive
attrition among our technical personnel could interfere with our
ability to perform our contractual obligations, reduce our
ability to efficiently satisfy our customers needs and
constrain our future growth. In addition, we must often comply
with provisions in U.S. government contracts that require
employment of persons with specified levels of education, work
experience and security clearances. We will be required to
increase our number of employees in order to implement our
growth strategy and our failure to recruit and retain qualified
personnel could adversely affect our business. The loss of a
significant number of our existing key technical personnel or
the inability to attract and retain key technical personnel in
the future could have a material adverse effect on our business,
prospects, financial condition and results of operations.

Amounts authorized under our existing U.S.
government contracts and included in our backlog may not result
in actual revenues or translate into profits.

The contract values specified under our U.S.
government contracts are not necessarily indicative of the
revenues that we will actually realize under those contracts.
Our backlog may not result in actual revenues in any particular
period or at all. In addition, any contracts included in our
backlog that generate revenues may not be profitable. Our
backlog consists of funded backlog, which is based
upon amounts actually appropriated by a customer for payment of
goods and services, and unfunded backlog, which is
based upon managements estimate of the future potential of
our existing contracts to generate revenues for us. These
estimates are based on our experience under existing contracts
and similar contracts, and we believe the estimates to be
reasonable. However, our backlog may not ultimately be
recognized as revenues. If any amount of our backlog is not
recognized as revenues or Congress fails to fully fund any of
our existing contracts, our business, prospects, financial
condition and results of operations would be adversely effected.

Our quarterly results of operations may
vary widely.

Our quarterly revenues and results of operations
may fluctuate significantly in the future. A number of factors
cause our revenues, cash flow and results of operations to vary
from quarter to quarter, including:



| |   |                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------
| |  | fluctuations in revenues earned on fixed-price
    and cost-plus contracts;                                                           
|
| |  | commencement, completion or termination of
    contracts during any particular quarter;                                               
|
| |  | variable purchasing patterns under U.S.
    government GSA schedule contracts, blanket purchase agreements
    and IDIQ contracts;    
|
| |  | changes in presidential administrations and
    senior U.S. government officials that affect U.S. government
    procurement;         
|
| |  | changes in policy, budgetary or fiscal
    appropriations measures that adversely affect U.S. government
    contracts in general; and
|
| |  | acquisitions of other technology service
    providers.                                                                               

Changes in the volume of services provided under
existing contracts and the number of contracts commenced,
completed or terminated during any quarter may cause significant
variations in our cash flow from operations because a relatively
large amount of our expenses are fixed. We may incur significant
or

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unanticipated expenses when contracts expire or
are terminated or are not renewed. In addition, payments due to
us from U.S. government agencies may be delayed due to billing
cycles or as a result of the failure to obtain Congressional and
administrative approval of governmental budgets in a timely
manner.


We may lose money on our contracts if we
miscalculate the resources necessary to complete
them.

Our products and services are sold through
fixed-price, time-and-materials and cost-plus contracts.

In a fixed-price contract, we must fully absorb
cost overruns. Unlike time-and-materials and cost-plus
contracts, for which we are reimbursed based on our actual
expenditures of resources, fixed-price contracts require us to
price our contracts by predicting our expenditures in advance.
If we miscalculate the resources necessary to complete
fixed-price contracts, our results of operations could be
seriously harmed because we will not be compensated for the
additional costs. The risk that we may miscalculate the
resources we need is greater for us than companies in other
businesses because we work with complex technologies in
compressed time periods.

In a time-and-materials contract, we provide
services at fixed hourly labor rates. If we miscalculate the
costs of salaries, employee benefits and other indirect
expenses, we must absorb the excess costs. If we significantly
miscalculate these costs, our results of operations could be
seriously harmed.

In a cost-plus contract, we are allowed to
recover our approved costs plus a fee. The total price on a
cost-plus contract is based primarily on allowable costs
incurred, but generally is subject to a maximum contract funding
limit. U.S. government regulations require us to notify our
customers of any cost overruns or underruns on a cost-plus
contract. If we incur unallowable costs or costs in excess of
the funding limitation specified in the contract, we may not be
able to recover these cost overruns and our results of
operations could be seriously harmed.

Unforeseen events may adversely affect our
estimates of contract costs, revenues and profits.

Our fixed-price and cost-plus contracts are
accounted for using the percentage-of-completion method whereby
revenues are recognized as work progresses towards completion.
Unforeseen events may alter the estimates of final costs,
revenues and profit associated with a particular contract.
Anticipated losses on contracts are charged to earnings as soon
as these losses can be estimated. Changes in estimated profits
on contracts are recorded during the period in which the change
in estimate occurs. Revenue recognition and profitability may be
adversely effected to the extent cost estimates or incentive or
award fee estimates are revised, costs are overrun, delivery or
completion schedules are delayed or progress under a contract is
otherwise impeded.

Accounting system upgrades and conversions
may delay billing and collections of our accounts
receivable.

From time to time, we have made, and may be
required to make in the future, changes to our accounting system
to upgrade to new technologies and as a result of our efforts to
integrate acquired businesses. In the past, these accounting
system conversions have caused delays in billing and collection
of accounts receivable under our contracts, thus increasing the
level of our debt. Future accounting system changes may cause
similar negative cash flow and increases in debt.

We may be unable to successfully identify,
execute or effectively integrate future acquisitions, which may
harm our results of operations.

One of our key operating strategies is to
selectively pursue acquisitions. While we do not currently have
any commitments, agreements or understandings to acquire any
specific businesses or other material operations, we have made a
number of acquisitions in the past and will continually evaluate
other acquisitions for the future. Although we regularly engage
in discussions with and submit proposals to acquisition
candidates, and are actively evaluating several potential
acquisitions, one or more of which could be material to us,
suitable acquisitions may not be available in the future on
terms reasonable to us. If we do identify an appropriate
acquisition candidate, we may be unable to successfully
negotiate the terms of an acquisition,

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finance the acquisition or, if the acquisition
occurs, effectively integrate the acquired business into our
existing business. Negotiations of potential acquisitions and
the integration of acquired business operations may require a
disproportionate amount of managements attention and our
resources. Even if we complete additional acquisitions,
continued acquisition financing may not be available or
available on reasonable terms, any new businesses may not
generate revenues comparable to our existing businesses, the
anticipated cost efficiencies or synergies may not be realized
and these businesses may not be integrated successfully or
operated profitably. For example, we may encounter difficulties
in the ongoing integration of SIGNAL Corporation. In addition,
we may be required to enter into novation agreements with the
U.S. government in order to succeed to the acquired
business U.S. government contracts. Novation can be a
lengthy process that often occurs after the consummation of an
acquisition. Accordingly, our failure to obtain any required
novation, on reasonable terms, could have a material adverse
effect on the value to us of an acquired business.


We conduct due diligence in connection with each
of our acquisitions. In connection with any acquisition made by
us, there may be liabilities that we fail to discover or that we
inadequately assess in our due diligence efforts. In particular,
to the extent that prior owners of any acquired businesses or
properties failed to comply with or otherwise violated
applicable laws or regulations, including health, safety and
environmental laws, or failed to fulfill their contractual
obligations to the U.S. government or other customers, we, as
the successor owner, may be financially responsible for these
violations and failures, may suffer reputational harm or
otherwise be adversely affected. The discovery of any material
liabilities associated with our acquisitions could harm our
results of operations. For example, we may still discover
material liabilities not yet known to us, associated with our
acquisition of SIGNAL Corporation.

In addition, acquisitions of businesses may
require additional debt or equity financing, resulting in
additional leverage or dilution of ownership. Our credit
facility contains covenants restricting, among other things,
acquisitions and capital expenditures and limits the incurrence
of additional indebtedness. These covenants may further limit
our ability to complete additional acquisitions.

Our level of indebtedness may adversely
affect our financial and operating activity.

As of December 31, 2002, we had
approximately $292.6 million of gross indebtedness
outstanding under our credit facility and other long-term debt
obligations. In the future we may incur additional indebtedness,
subject to the limitations imposed on us by our credit facility.

Our level of indebtedness has important
consequences to you and your investment in our common stock. For
example, our level of indebtedness may:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | require us to use a substantial portion of our
    operational cash flow to pay interest and principal on our debt,
    which would reduce the availability of that cash flow for other
    purposes such as capital expenditures, research and development
    and other investments;                                                                                                                                                                                                                                                                                                                                           
|
| |  | limit our ability to obtain additional financing
    for acquisitions, investments, working capital and other
    expenditures, which may limit our ability to carry out our
    business strategy;                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | result in higher interest expenses if interest
    rates increase on our floating rate borrowings;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | heighten our vulnerability to downturns in our
    business or in the general economy and restrict us from making
    acquisitions, introducing new technology and products or
    exploiting business opportunities; or                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | subject us to covenants that limit our ability to
    borrow additional funds, dispose of assets or pay cash dividends
    or that require us to maintain or meet specified financial
    ratios or tests, with any failure by us to comply with those
    covenants potentially resulting in an event of default on that
    debt and a foreclosure on the assets securing that debt
    including all of the equity interests of our subsidiaries that
    are held directly or indirectly by us, which would have a
    material adverse effect on our business, prospects, financial
    condition and results of operations.

22



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##### Table of Contents



The covenants in our credit facility
restrict our financial and operational flexibility and our
failure to comply with them could have a material adverse effect
on our business, financial condition and results of
operations.

Our credit facility imposes significant financial
and operational restrictions on us and our subsidiaries and
requires us to satisfy certain financial tests. These
restrictions include, among other things, limitations on our
ability to incur debt outside of the amounts committed under the
credit facility, incur or create any lien with respect to our
assets and properties, make particular types of investments,
make other restricted payments, merge, consolidate, liquidate,
wind-up or dissolve, make acquisitions, pay dividends or
distributions on our common stock and sell or otherwise dispose
of assets. Our credit facility requires us to comply with
financial covenants relating to a maximum total leverage ratio,
maximum capital expenditures, minimum adjusted EBITDA, a minimum
fixed charge coverage ratio and a minimum asset coverage ratio.
Our ability to satisfy these financial covenants can be affected
by events beyond our control, and we may not be able to satisfy
those ratios. Default under our credit facility could allow the
lenders to declare all amounts outstanding to be immediately due
and payable. We pledged substantially all of our assets to
secure the debt under our credit facility. Our domestic
subsidiaries guaranteed our obligations under the credit
facility and pledged substantially all of their assets to secure
those obligations. If the lenders declare amounts outstanding
under the credit facility to be due, the lenders could proceed
against those assets. Any event of default, therefore, could
have a material adverse effect on our business, financial
condition and results of operations if the creditors determine
to exercise their rights.

We may also incur future debt obligations that
might subject us to restrictive covenants that could affect our
financial and operational flexibility or subject us to other
events of default. Any restrictive covenants in any future debt
obligations we incur could limit our ability to fund our
businesses with equity investments or intercompany advances,
which would impede our ability to operate and expand our
business.

From time to time, we may require consents or
waivers from our lenders to permit actions that are prohibited
by our credit facility. If in the future our lenders refuse to
provide waivers of our credit facilitys restrictive
covenants and/or financial covenants, then we may be in default
under our credit facility, and we may be prohibited from
undertaking actions that are necessary to maintain and expand
our business.

Our failure to remain competitive with our
numerous competitors, many of which have substantially greater
resources, could harm our ability to retain existing customers
and obtain future business.

We operate in highly competitive markets and
generally encounter intense competition to win U.S. government
contracts. Although we have developed a strong position in U.S.
government information systems markets, numerous competitors are
attracted by the size and growth potential within this industry.
We compete directly with a number of companies for contracts
with intelligence and defense agencies. In addition, although
the downsizing of the intelligence and defense industry in the
early 1990s has resulted in a reduction in the number of
competitors, the consolidation has also strengthened the
capabilities of some of the remaining competitors and continued
consolidation in the industry may further strengthen our
competitors.

Overall, we compete with numerous companies,
ranging from small specialized firms to large diversified firms,
many of which have substantially greater financial, technical,
marketing, manufacturing and distribution resources than we do
and could potentially provide a more complete range of solutions
to U.S. government customers. Our competitors may be able to
provide customers with different or greater capabilities or
benefits than we can provide in areas such as technical
qualifications, past contract performance, geographic presence,
price and the availability of key professional personnel. In
some cases of contract re-competitions where we have not been
the incumbent contractor, we compete against one or more
incumbent contractors, who may have superior domain expertise
and the advantage of knowing the customers requirements
through their own past performance experience. More broadly, our
ability to successfully compete for almost all contracts depends
on:



| |   |                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------
| |  | the effectiveness of the research and development
    that we conduct;                                  
|
| |  | our ability to develop, introduce, and implement
    new and enhanced solutions to our customers needs;

23



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| |   |                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------
| |  | our ability to offer better program performance
    than our competitors at a lower cost;                           
|
| |  | our ability to retain and attract highly skilled
    and experienced technical and program management personnel; and
|
| |  | the readiness of our facilities, equipment and
    personnel to undertake the programs for which we compete.        

If we are unable to successfully compete against
our competitors, our business, prospects, financial condition
and results of operations may be adversely affected. Moreover,
the U.S. government may open to competition programs for
which we are currently the sole suppliers. In addition, our
competitors also have established or may establish relationships
among themselves or with third parties to increase their ability
to address customer needs. Accordingly, it is possible that new
competitors or alliances among competitors may emerge. The
proliferation of new competitors or alliances among existing
competitors for contracts with the U.S. government could
adversely affect our ability to retain our existing customers
and obtain new customers.

Our inability to maintain strong
relationships with other contractors could result in a decline
in our revenues.

A part of our growth strategy involves competing
for bids in particular programs with other contractors who we
subcontract to or joint venture with in other programs, and the
loss or impairment of our relationship with those contractors
could adversely affect our business. For the year ended
December 31, 2002, we derived 21% of our revenues from
other contractors in connection with programs in which we acted
as a subcontractor to them. We expect to continue to depend on
relationships with other contractors for a portion of our
revenues in the foreseeable future. Our business, prospects,
financial condition and results of operations could be adversely
affected if other contractors eliminate or reduce their
subcontracts or joint venture relationships with us, either
because they choose to establish relationships with our
competitors or because they offer services that compete with our
business, or if the U.S. government terminates or reduces
these other contractors programs or does not award them
new contracts.

Failure to perform by one of our
subcontractors could materially and adversely affect our prime
contract performance and our ability to obtain future
business.

Our performance of U.S. government contracts
frequently involves the issuance of subcontracts to other
companies, upon which we rely to perform all or a portion of the
work we are obligated to deliver to our customers. A failure by
one or more of our subcontractors to satisfactorily deliver on a
timely basis the agreed-upon supplies or perform the agreed-upon
services may materially and adversely affect our ability to
perform our obligations as a prime contractor. Any subcontractor
performance deficiencies could result in the U.S. government
terminating our contract for default, which, in turn, could
expose us to liability for excess costs of reprocurement by the
U.S. government and have a material adverse effect on our
ability to compete for future contracts and task orders.

Failure to obtain future U.S. government
research funds and to keep pace with technological advances may
adversely affect our business.

Our businesses and contracts require us to keep
pace with rapid advancements in technology. To succeed in the
future we will need to design, develop, test, market and support
new products and enhancements on a timely and cost-effective
basis. Historically, our technology has been developed through
research and development incurred in connection with
U.S. government contracts, a substantial portion of which
was effectively funded by our customers, as well as through
acquisitions and from internally funded research and
development. We may not be able to maintain the same level of
funding for research and development incurred in connection with
U.S. government contracts in the future. In addition, when
we work on these contracts, we seek to protect our proprietary
technologies by taking steps to maintain ownership of
intellectual property and data rights for our core
technologies, source codes and other developments to the extent
permitted by applicable rules and regulations. The
U.S. government may constrain the use of intellectual
property and data developed through our U.S. government
contracts. Failure to sustain the level of research

24



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##### Table of Contents



and development necessary to stay current on
recent technological developments or constraint of the use of
intellectual property and data rights under U.S. government
contracts could adversely affect our business, prospects,
financial condition and results of operations.


Third parties may claim we are infringing
on their intellectual property, and we could face significant
infringement claims or licensing expenses which could harm our
reputation and business.

We have received, and may in the future receive,
communications from third parties claiming that one or more of
our products infringe upon the intellectual property rights of
that third party. If an employee or a third party were to make a
valid claim, we would likely need to obtain a license from the
third party on commercial terms, which would likely increase our
costs. If licenses are not available at a reasonable price, we
could be precluded from using technology necessary for our
operations or to remain competitive. Litigation, which could
result in substantial cost to us and a diversion of our
resources, could be necessary to enforce patents or other of our
intellectual property rights or to defend us against claimed
infringement of the intellectual property rights of others.

Infringement cases could be brought against us
from time to time. It is not possible to predict the outcomes of
any of these lawsuits. The failure to obtain necessary licenses
or an adverse outcome in any pending or future litigation
relating to patent infringement or other intellectual property
matters could have a material adverse effect on our business,
prospects, financial condition and results of operations.

Our failure to adequately protect our
confidential information and proprietary rights may harm our
competitive position.

Our intellectual property is very important in
the operation of our business. Although we intend to protect our
intellectual property rights vigorously, we may not be
successful in doing so. Our employees develop some of the
software and other forms of intellectual property that we use to
provide information-based solutions to our customers and they
may assert intellectual property rights against us. In many
instances where the U.S. government has provided funding for our
development of intellectual property, the U.S. government
retains a royalty-free right to use the intellectual property in
any manner it deems appropriate, including providing it to our
competitors in connection with their performance of other
U.S. government contracts.

In addition to patents and licenses, we also rely
upon a combination of trade secrets, proprietary know-how and
continuing technological innovation to remain competitive. We
have taken measures to protect our trade secrets and know-how,
including the use of confidentiality and non-solicitation
agreements with our customers, potential customers, employees,
consultants and advisors. It is possible that these agreements
may be breached and that any remedies for a breach will not be
adequate to compensate us for the damages incurred. We generally
control and limit access to, and the distribution of, our
technical documentation and other proprietary information.
However, those efforts may be ineffective, or other parties may
independently develop our know-how or otherwise obtain access to
our technology. If third parties infringe, misappropriate or
independently develop our trade secrets, proprietary know-how or
technological innovation, our competitive position could be
materially harmed.

Environmental, health and safety laws and
regulations may subject us to significant liabilities.
Specifically, we have been named as a potentially responsible
party with respect to several Superfund sites.

Some of our operations are subject to
U.S. federal, state and local environmental, health and
safety laws and regulations, as well as requirements contained
in our contracts with the U.S. government, relating to
worker health and safety and the discharge, handling, disposal
and remediation of hazardous materials. One of our facilities is
involved in the testing of chemical agents and military
ordnances for the U.S. government. These activities involve
potential hazards, such as explosions and releases of toxic
chemicals, that could expose us to liabilities for injuries to
third parties or damages to the environment. In the past, we
have been named as a potentially responsible party with respect
to several Superfund sites in connection with waste transported
from one or more of our facilities to those sites, and we may be
named as a potentially responsible party in the future. Because
Superfund liability can be imposed retroactively without regard
to fault, we may be required to

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##### Table of Contents



share in the cleanup costs of several Superfund
sites. These costs could be material to our business. We
currently do not maintain insurance for environmental
liabilities.


Terrorist attacks and any future military
actions could have an adverse effect on our
business.

The impact of terrorist attacks, or future events
arising as a result of actual or threatened terrorist attacks,
including without limitation, military actions in the United
States or Iraq or elsewhere abroad, future terrorist activities
or threats of such activities, biological, chemical or nuclear
weapons attacks, political unrest and instability throughout the
world, and riots and protests, have on our intelligence and
defense customers, the U.S. economy, the global economy and the
global financial markets, and our facilities, business
operations and employees cannot presently be determined with any
predictability. In addition, terrorist attacks, or future
emergencies or other events arising as a result of terrorist
attacks or military actions in the United States or abroad,
could result in a shift in national security spending priorities
away from some of our customers and programs towards more
immediate priorities. The current uncertain social, political
and economic environment could adversely affect our business in
numerous ways and we may be unable to foresee events that could
have an adverse effect on our business.

The carrying value of our assets could be
subject to impairment write-downs.

In July 2001, the Financial Accounting Standards
Board issued Statement of Financial Accounting
Standards 142, Goodwill and Other Intangible Assets,
which establishes a new standard of accounting for goodwill
acquired in business combinations, effective January 1,
2002. SFAS 142 continues to require recognition of goodwill
as an asset, but does not permit amortization of this goodwill
as was previously required. SFAS 142 has likely made our
acquisition-related charges less predictable than before the
effectiveness of SFAS 142 in any given reporting period.
Pursuant to the new statement, goodwill is separately tested at
least once per year for impairment using a fair-value based
approach when an event occurs indicating the potential for
impairment. If the carrying value of our goodwill exceeds the
fair value, we are required to report goodwill impairment
charges as an operating expense in the income statement. The
change from an amortization approach to an impairment approach
applies to previously recorded goodwill, as well as goodwill
arising from acquisitions completed after the application of the
new standard.

Effective January 1, 2002, our goodwill
amortization charges ceased. We completed the required
impairment tests of goodwill during 2002, and determined that an
adjustment to the carrying value of our goodwill was not
required. However, it is possible that in the future we may
incur impairment charges related to the goodwill already
recorded or arising out of future acquisitions. This policy may
subject our future earnings to significant volatility,
particularly on a period-to-period basis. Accordingly, the
impairment of our goodwill or other intangible assets could
adversely affect our results of operations.

We may need to raise additional capital on
terms unfavorable to our stockholders.

Based on our current level of operations, we
believe that our cash flow from operations, together with
amounts we are able to borrow under our credit facility, will be
adequate to meet our anticipated operating, capital expenditure
and debt service requirements for the foreseeable future. We do
not have complete control over our future performance because it
is subject to economic, political, financial, competitive,
regulatory and other factors affecting the U.S. government
contracting industry. It is possible that our business may not
generate sufficient cash flow from operations, and we may not
otherwise have the capital resources, to allow us to make
necessary capital expenditures. If this occurs, we may have to
sell assets, restructure our debt or obtain additional equity
capital, which could be on terms dilutive to our stockholders.
We may not be able to take any of the foregoing actions and we
may not be able to do so on terms favorable to us or you.

We are a holding company and our only
source of cash to pay the amounts outstanding under our credit
facility is distributions from our subsidiaries.

We are a holding company with no business
operations of our own. Our only significant asset is and will be
the capital stock of our subsidiaries. We conduct all of our
business operations through our subsidiaries.

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Accordingly, our only source of cash to make
payments on our credit facility is distributions with respect to
ownership interests in our subsidiaries from the net earnings
and cash flows generated by our subsidiaries.


Anti-takeover provisions in our second
amended and restated certificate of incorporation, our amended
and restated bylaws and Delaware law could prohibit a change of
control that our stockholders may favor and which could
negatively affect our stock price.

Provisions in our second amended and restated
certificate of incorporation, our amended and restated bylaws
and applicable provisions of the Delaware General Corporation
Law may make it more difficult and expensive for a third party
to acquire control of us even if a change of control would be
beneficial to the interests of our stockholders. These
provisions could discourage potential takeover attempts and
could adversely affect the market price of our common stock. Our
second amended and restated certificate of incorporation and
amended and restated bylaws:



| |   |                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | authorize the issuance of blank check preferred
    stock that could be issued by our board of directors to thwart a
    takeover attempt;                                                                       
|
| |  | classify the board of directors into staggered,
    three-year terms, which may lengthen the time required to gain
    control of our board of directors;                                                        
|
| |  | prohibit cumulative voting in the election of
    directors, which would otherwise allow holders of less than a
    majority of stock to elect some directors;                                                   
|
| |  | require super-majority voting to effect
    amendments to provisions of our amended and restated bylaws
    concerning the number of directors;                                                                  
|
| |  | limit who may call special meetings;                                                                                                                                                                             
|
| |  | prohibit stockholder action by written consent,
    requiring all actions to be taken at a meeting of the
    stockholders;                                                                                      
|
| |  | establish advance notice requirements for
    nominating candidates for election to the board of directors or
    for proposing matters that can be acted upon by stockholders at
    stockholders meetings; and
|
| |  | require that vacancies on the board of directors,
    including newly-created directorships, be filled only by a
    majority vote of directors then in office.                                                  

In addition, Section 203 of the Delaware
General Corporation Law may discourage, delay or prevent a
change in control by prohibiting us from engaging in a business
combination with an interested stockholder for a period of three
years after the person becomes an interested stockholder.

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Executive Officers

The following table sets forth information
concerning our executive officers, including their respective
ages and positions held with Veridian. There are no family
relationships between any of our executive officers or
directors. Our executive officers serve at the discretion of our
board of directors.

|                        |  |     |    |               |  |                                                              
|----------------------- |  | --- | -- | ------------- |  | -------------------------------------------------------------
|Name                    |  | Age |    | Position Held
|                        |  |     |    |              
|Dr. Joseph P. Allen, IV |  |     | 65 |               |  | Chairman of the Board of Directors                           
|David H. Langstaff      |  |     | 48 |               |  | President, Chief Executive Officer and Director              
|James P. Allen          |  |     | 54 |               |  | Senior Vice President and Chief Financial Officer            
|Dr. Michael G. Hansen   |  |     | 56 |               |  | Senior Vice President, Organizational Capability             
|Jerald S. Howe, Jr.     |  |     | 47 |               |  | Senior Vice President, General Counsel and
    Secretary     
|Ronald C. Jones         |  |     | 44 |               |  | Senior Vice President, Corporate and Business
    Development
|Dr. Robert M. Farrell   |  |     | 55 |               |  | Senior Vice President                                        
|Scott M. Goss           |  |     | 37 |               |  | Senior Vice President                                        
|Keith E. Jackson        |  |     | 43 |               |  | Senior Vice President                                        
|Robert A. Pattishall    |  |     | 57 |               |  | Senior Vice President                                        
|S. Mark Monticelli      |  |     | 42 |               |  | Vice President and Controller                                

Dr. Joseph P. Allen, IV.Dr. Joseph P. Allen, IV has
served as a director and the chairman of the board since 1997.
From 1995 until 1997, Dr. Allen served as chairman of the
board of Calspan SRL Corporation, or CSRL (a predecessor to
Veridian). From 1994 until 1995, Dr. Allen was president
and chief executive officer of CSRL. From 1967 until 1985,
Dr. Allen served with NASA as an astronaut, flying once
aboard Columbiafor the first shuttle mission to deliver
cargo to space and once aboard Discoveryfor the first
space salvaging mission in history. Dr. Allen also served
as a mission controller for three Apollo and Space Shuttle
flights. Dr. Allen also served as the Assistant
Administrator of NASA (Legislative Affairs) and as the Director
of Astronaut Training. Dr. Allen is the chairman of the
board of the Challenger Learning Centers.

David H. Langstaff.Mr. Langstaff has served as our
chief executive officer and director since 1997. He was
appointed president in July 1999. From 1997 until September
2002, Mr. Langstaff served as vice chairman of Veridian.
From 1995 until 1997, Mr. Langstaff served as chief
executive officer, president and director of CSRL. From 1993
until 1995, Mr. Langstaff was a director, executive vice
president and chief financial officer of CSRL. From 1984 to
1993, Mr. Langstaff served as a director, senior and
executive vice president, chief operating officer and chief
financial officer of predecessor companies of Veridian and CSRL.

James P. Allen.Mr. Allen has served as our
senior vice president and chief financial officer since May
2000. From January 1999 to April 2000, Mr. Allen served as
senior vice president and chief financial officer of GRC
International. Mr. Allen served as executive vice president
and chief financial officer for CACI International from March
1996 to December 1998.

Dr. Michael G. Hansen.Dr. Hansen has served as our
senior vice president for organizational capability since
December 1998. From 1992 until joining us, Dr. Hansen was
director of the MITRE Institute and the MITRE Corporation, where
he was responsible for corporate education, training,
organizational development, performance and learning policy
initiatives and programs.

Jerald S. Howe, Jr.Mr. Howe has served as our senior
vice president, general counsel and secretary since February
2000. As a partner in the law firm of Steptoe & Johnson
L.L.P. from 1991 through January 2000, Mr. Howe served as
outside counsel to Veridian and its predecessors, as well as a
number of other defense, aerospace and information technology
companies.

Ronald C. Jones.Mr. Jones has served as our
senior vice president for corporate and business development
since 1997. From December 1994 until August 1997, Mr. Jones
served as vice president of marketing and business development
for CSRL.

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Dr. Robert M. Farrell.Dr. Farrell has served as our
senior vice president and as the president of Veridian
Information Solutions, Inc., one of our operating subsidiaries,
since January 2000. From 1993 until 2000, Dr. Farrell
served as president of MRJs Information Systems Group,
which focused on building information technology-based systems
for the Department of Defense and the intelligence community.
From 1986 until 1993, Dr. Farrell served in other
capacities with MRJ.

Scott M. Goss.Mr. Goss has served as our senior
vice president and as president of Veridian IT Services, Inc.,
formerly known as SIGNAL Corporation, one of our operating
subsidiaries, since September 2002. From August 1998 until
September 2002, Mr. Goss served as senior vice president,
chief financial officer and chief information officer for
SIGNAL. From September 1996 until August 1998, Mr. Goss
served as vice president  finance and accounting for
SIGNAL.

Keith E. Jackson.Mr. Jackson has served as our
senior vice president and as the president of Veridian
Engineering, Inc., one of our operating subsidiaries, since
January 1999. From September 1997 until January 1999, Mr.
Jackson served as marketing director for Veridian Engineering.
From 1994 until September 1997, Mr. Jackson served as a
manager of development with Veda International, Inc., a
predecessor company of Veridian.

Robert A. Pattishall.Mr. Pattishall has served as our
senior vice president and as the president for Veridian Systems,
Inc., one of our operating subsidiaries, since January 2001.
From May 2000 until December 2000, Mr. Pattishall led that
subsidiarys Advanced Engineering and Analysis Sector.
Prior to joining us, Mr. Pattishalls last position
was with the CIA in the Office of Development and Engineering.
Mr. Pattishall was assigned by the CIA to the National
Reconnaissance Office where his last position was Director of
the Advanced Systems and Technology Directorate, which was
created to provide a strong central focus for all advanced
technology within the National Reconnaissance Office.

S. Mark Monticelli.Mr. Monticelli has served as our
vice president and controller since September 2000. From 1991
until 2000, Mr. Monticelli was a senior manager with KPMG
LLP where he provided financial accounting, auditing and merger
and acquisitions assistance to Veridian and other defense,
aerospace and technology companies.




Item 2.     Properties

Our corporate headquarters are located in leased
facilities in Arlington, Virginia. We lease a total of
approximately 1.45 million square feet of office and
laboratory space in 79 facilities nationwide. We also own
approximately 673 acres of land and approximately
400,000 square feet of office space and testing facilities
in Buffalo and Ashford, New York.

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##### Table of Contents



The following chart provides summary information
on our owned facilities and facilities that have an annual rent
commitment of at least $500,000.

|                                        |  |                    |  |             |         |            |  |  |          | 
|--------------------------------------- |  | ------------------ |  | ----------- | ------- | ---------- |  |  | -------- | 
|                                        |  |                    |  |             |         | Lease     
|Facility                                |  | Location           |  | Square Feet |         | Expiration
|                                        |  |                    |  |             |         |           
|Corporate Headquarters                  |  | Arlington, VA      |  |             | 33,680  |            |  |  | 05/31/10 | 
|Veridian(4)                             |  | Alexandria, VA     |  |             | 22,837  |            |  |  | 09/30/06 | 
|Veridian Engineering                    |  | Buffalo, NY        |  |             | 390,027 |            |  |  | Owned    | 
|Veridian Engineering                    |  | Ashford, NY        |  |             | 13,232  |            |  |  | Owned    | 
|Veridian Engineering                    |  | Dayton, OH         |  |             | 37,193  |            |  |  | 12/31/07 | 
|Veridian Engineering                    |  | Lexington Park, MD |  |             | 98,860  |            |  |  | 12/14/12 | 
|Veridian Engineering                    |  | Lexington Park, MD |  |             | 44,830  |            |  |  | 06/30/13 | 
|Veridian IT Services(1)                 |  | Fairfax, VA        |  |             | 66,798  |            |  |  | 07/31/07 | 
|Veridian Information Solutions(2)       |  | Falls Church, VA   |  |             | 27,543  |            |  |  | 08/31/03 | 
|Veridian Information Solutions(3)       |  | Fairfax, VA        |  |             | 109,232 |            |  |  | 10/31/04 | 
|Veridian Information Solutions          |  | Oakton, VA         |  |             | 70,322  |            |  |  | 02/28/05 | 
|Veridian Systems                        |  | Chantilly, VA      |  |             | 84,652  |            |  |  | 02/28/11 | 
|Veridian Systems                        |  | Ann Arbor, MI      |  |             | 136,341 |            |  |  | 09/06/04 | 
|Veridian Systems                        |  | Herndon, VA        |  |             | 19,876  |            |  |  | 06/30/04 | 
|Veridian Systems                        |  | Herndon, VA        |  |             | 28,000  |            |  |  | 06/30/10 | 
|Veridian Systems                        |  | Arlington, VA      |  |             | 65,916  |            |  |  | 10/31/08 | 
|Veridian Commercial Operations, Inc.(4) |  | Reston, VA         |  |             | 25,431  |            |  |  | 05/30/09 | 



---



|    |                                                                                                       
|--- | ------------------------------------------------------------------------------------------------------
|(1) | We sublet 12,431 square feet of this
    facility to third parties.                                   
|   
|(2) | We sublet 10,717 square feet of this
    facility to third parties.                                   
|   
|(3) | Facility includes three separate leases totaling
    108,936 square feet that expire October 31, 2004.
|   
|(4) | We sublet the entire facility to a third party.                                                       




Item 3.     Legal
Proceedings

From time to time, we are a party to litigation
or other legal proceedings that we consider to be a part of the
ordinary course of our business. We are not involved currently
in legal proceedings that could reasonably be expected to have a
material adverse effect on our business, prospects, financial
condition or results of operations. We may become involved in
material legal proceedings in the future.

In the past, we have been named as a potentially
responsible party with respect to several Superfund sites, in
connection with waste transported from one or more of our
facilities and disposed of at those sites. Because Superfund
liability can be imposed retroactively without regard to fault,
we may be required to share in the cleanup costs of several
Superfund sites. We have settled, or will settle, our liability
at each of these sites for de minimisamounts.

We recently made the final payment for our
allocable share of the total cost of the remedial activities
conducted at the Pfohl Brothers Landfill in Cheektowaga, New
York. The construction of the remedy is substantially complete
except for a few minor items that will likely be addressed in
the spring of 2003. The costs of the remaining items necessary
to complete the remediation cannot currently be estimated until
site conditions can be evaluated. We are only exposed to
possible future costs to the extent that the cost of future
construction efforts exceeds our remaining account balance with
the New York State Department of Environmental Conservation and
any other monies recovered from other potentially responsible
parties. We do not currently expect any exposure for future
costs related to the Pfohl Brothers site, although such exposure
remains possible. In the event that we face such exposure, the
amount is expected to be de minimis.




Item 4.     Submission
of Matters to a Vote of Security Holders

No matters were submitted to a vote of
stockholders during the fourth quarter of the fiscal year ended
December 31, 2002.

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##### Table of Contents






PART II




Item 5.     Market
for Registrants Common Equity and Related Stockholder
Matters

Trading in our common stock commenced on the New
York Stock Exchange on June 5, 2002 under the symbol
VNX. At March 10, 2003, there were
approximately 155 holders of record of our common stock.
This number does not include any beneficial owners for whom
shares of common stock may be held in nominee or
street name. The following table sets forth the high
and low sales price per share of the common stock as reported on
the New York Stock Exchange for the periods shown:

|     |                                        |             |   |       |  |  |   |       | 
|---- | -------------------------------------- | ----------- | - | ----- |  |  | - | ----- | 
|     |                                        |            
|     |                                        | Price Range
|     |                                        |            
|     |                                        | High        |   | Low  
|     |                                        |             |   |      
|2002 |                                        |             |   |       |  |  |   |      
|     | Second Quarter (from June 5, 2002)     |             | $ | 24.10 |  |  | $ | 17.65 | 
|     | Third Quarter                          |             | $ | 26.00 |  |  | $ | 17.50 | 
|     | Fourth Quarter                         |             | $ | 25.40 |  |  | $ | 17.94 | 
|2003 |                                        |             |   |       |  |  |   |      
|     | First Quarter (through March 10, 2003) |             | $ | 21.86 |  |  | $ | 17.50 | 

On March 10, 2003, the last reported sale
price of our common stock on the New York Stock Exchange was
$17.50 per share.

We have never declared or paid any cash dividends
on our common stock. We anticipate that any earnings will be
retained for development and expansion of our business and we do
not anticipate paying any cash dividends in the foreseeable
future. Our credit facility restricts our ability to issue cash
dividends under certain circumstances. Any future dividends
declared would be at the discretion of our board of directors
and would depend on our financial condition, results of
operations, capital requirements, contractual obligations, the
terms of our credit facility and other financing agreements at
the time the dividend is considered, and other relevant factors.
Our only source of cash to pay dividends is distributions from
our subsidiaries. There are no restrictions on the ability of
our subsidiaries to make distributions to us as the sole
stockholder of those subsidiaries.

During the fourth quarter of 2002, certain
current and former employees purchased 44,428 shares of our
common stock by exercising outstanding stock options for an
aggregate sales price of approximately $457,939. These
transactions occurred in reliance upon the exemptions from the
registration requirements of the Securities Act of 1933, as
amended, afforded by Rule 701, pursuant to certain
compensatory benefit plans and contracts, as a transaction
involving the offer and sale of securities relating to
compensation. We believe that exemptions other than the
foregoing may exist for these transactions.

In addition, during the fourth quarter of 2002,
certain institutional investors purchased 1,048,432 shares
of our common stock by exercising outstanding warrants for an
aggregate sales price of approximately $105. These transactions
occurred in reliance upon the exemptions from the registration
requirements of the Securities Act of 1933, as amended, afforded
by Section 4(2) promulgated thereunder, as the transactions
involved only certain institutional investors and thereby did
not constitute a general solicitation.

Finally, during the fourth quarter of 2002, we
issued 5,024 shares of our common stock having an aggregate
value of approximately $100,708, based on a price per share of
$19.92, as partial payment for the services of the non-employee
members of our board of directors. Certain of the non-employee
directors also opted to receive an additional 3,239 shares
of our common stock having an aggregate value of approximately
$64,521, based on a price per share of $19.92, in lieu of the
cash portion of their annual retainer payment. These
transactions occurred in reliance upon the exemptions from the
registration requirements of the Securities Act of 1933, as
amended, afforded by Section 4(2) promulgated thereunder,
as the offers and sales were made only to our non-employee
directors and thereby did not constitute a general solicitation.

31



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Information concerning securities authorized for
issuance under equity compensation plans is set forth in our
Proxy Statement for the 2003 Annual Meeting of Stockholders,
which will be filed within 120 days of December 31,
2002, and is incorporated herein by reference.




Item 6.     Selected
Financial Data.

The selected financial data presented below for
each of the years in the five-year period ended
December 31, 2002, are derived from our audited
consolidated financial statements. You should read the
information set forth below in conjunction with our consolidated
financial statements, the notes to our consolidated financial
statements and Managements Discussion and Analysis
of Financial Condition and Results of Operations.

|                                                                                 |                                                                  |                                               |         |         |         |      |         |         |         |      |         |         |         |   |         |         |         |   |         |         |         | 
|-------------------------------------------------------------------------------- | ---------------------------------------------------------------- | --------------------------------------------- | ------- | ------- | ------- | ---- | ------- | ------- | ------- | ---- | ------- | ------- | ------- | - | ------- | ------- | ------- | - | ------- | ------- | ------- | 
|                                                                                 |                                                                  |                                              
|                                                                                 |                                                                  | Year Ended December 31,                      
|                                                                                 |                                                                  |                                              
|                                                                                 |                                                                  | 2002                                          |         | 2001    |         | 2000 |         | 1999    |         | 1998
|                                                                                 |                                                                  |                                               |         |         |         |      |         |         |         |     
|                                                                                 |                                                                  |                                              
|                                                                                 |                                                                  | (Dollars in thousands, except per share data)
|Consolidated Statements of Operations
    Data:                                  |                                                                  |                                               |         |         |         |      |         |         |         |      |         |         |         |   |         |         |         |   |         |        
|Revenues                                                                         |                                                                  | $                                             | 834,077 |         |         | $    | 690,225 |         |         | $    | 632,270 |         |         | $ | 399,814 |         |         | $ | 271,281 |        
|Costs and expenses:                                                              |                                                                  |                                               |         |         |         |      |         |         |         |      |         |         |         |   |         |         |         |   |         |        
|                                                                                 | Direct costs                                                     |                                               |         | 564,199 |         |      |         | 446,719 |         |      |         | 415,927 |         |   |         | 275,777 |         |   |         | 191,835 |        
|                                                                                 | Indirect costs, selling, general and
    administrative expenses |                                               |         | 197,078 |         |      |         | 187,090 |         |      |         | 164,801 |         |   |         | 94,435  |         |   |         | 63,432  |        
|                                                                                 | Depreciation expense                                             |                                               |         | 11,153  |         |      |         | 10,606  |         |      |         | 9,947   |         |   |         | 6,232   |         |   |         | 2,764   |        
|                                                                                 | Amortization expense                                             |                                               |         | 1,075   |         |      |         | 11,760  |         |      |         | 12,579  |         |   |         | 6,217   |         |   |         | 3,105   |        
|                                                                                 | Acquisition and integration related charges                      |                                               |         |        |         |      |         | 2,067   |         |      |         | 4,637   |         |   |         | 6,271   |         |   |         | 2,348   |        
|                                                                                 | (Gain) loss from pension plan settlement                         |                                               |         | (512    | )       |      |         | 1,119   |         |      |         |        |         |   |         | (190    | )       |   |         | (1,259  | )      
|                                                                                 |                                                                  |                                               |         |         |         |      |         |         |         |      |         |         |         |   |         |         |         |   |         |        
|                                                                                 |                                                                  | Total costs and expenses                      |         |         | 772,993 |      |         |         | 659,361 |      |         |         | 607,891 |   |         |         | 388,742 |   |         |         | 262,225 | 
|                                                                                 |                                                                  |                                               |         |         |         |      |         |         |         |      |         |         |         |   |         |         |         |   |         |        
|Income from operations                                                           |                                                                  |                                               | 61,084  |         |         |      | 30,864  |         |         |      | 24,379  |         |         |   | 11,072  |         |         |   | 9,056   |        
|Other (income) expense:                                                          |                                                                  |                                               |         |         |         |      |         |         |         |      |         |         |         |   |         |         |         |   |         |        
|                                                                                 | Interest income                                                  |                                               |         | (976    | )       |      |         | (844    | )       |      |         | (380    | )       |   |         | (97     | )       |   |         | (137    | )      
|                                                                                 | Interest expense                                                 |                                               |         | 18,899  |         |      |         | 29,076  |         |      |         | 34,658  |         |   |         | 18,541  |         |   |         | 4,694   |        
|                                                                                 | Gain from sale of assets                                         |                                               |         |        |         |      |         |        |         |      |         | (723    | )       |   |         |        |         |   |         |        |        
|                                                                                 | Other (income) expense, net                                      |                                               |         | (50     | )       |      |         | 227     |         |      |         | 69      |         |   |         | 50      |         |   |         | 397     |        
|                                                                                 |                                                                  |                                               |         |         |         |      |         |         |         |      |         |         |         |   |         |         |         |   |         |        
|                                                                                 |                                                                  | Other (income) expense, net                   |         |         | 17,873  |      |         |         | 28,459  |      |         |         | 33,624  |   |         |         | 18,494  |   |         |         | 4,954   | 
|                                                                                 |                                                                  |                                               |         |         |         |      |         |         |         |      |         |         |         |   |         |         |         |   |         |        
|Income from continuing operations before income
    taxes and extraordinary loss |                                                                  |                                               | 43,211  |         |         |      | 2,405   |         |         |      | (9,245  | )       |         |   | (7,422  | )       |         |   | 4,102   |        
|Income tax expense (benefit) on continuing
    operations                        |                                                                  |                                               | 17,648  |         |         |      | 6,222   |         |         |      | 1,823   |         |         |   | 378     |         |         |   | 1,745   |        
|                                                                                 |                                                                  |                                               |         |         |         |      |         |         |         |      |         |         |         |   |         |         |         |   |         |        
|Income (loss) from continuing operations
    before extraordinary loss           |                                                                  |                                               | 25,563  |         |         |      | (3,817  | )       |         |      | (11,068 | )       |         |   | (7,800  | )       |         |   | 2,357   |        
|Loss from discontinued operations, net of taxes                                  |                                                                  |                                               |        |         |         |      | (11,277 | )       |         |      | (7,110  | )       |         |   | (163    | )       |         |   |        |        
|Loss on disposal of discontinued operations, net
    of taxes                    |                                                                  |                                               | (2,341  | )       |         |      | (6,355  | )       |         |      |        |         |         |   |        |         |         |   |        |        
|                                                                                 |                                                                  |                                               |         |         |         |      |         |         |         |      |         |         |         |   |         |         |         |   |         |        
|Income (loss) before extraordinary loss                                          |                                                                  |                                               | 23,222  |         |         |      | (21,449 | )       |         |      | (18,178 | )       |         |   | (7,963  | )       |         |   | 2,357   |        
|Extraordinary loss from early extinguishments of
    debt, net of taxes          |                                                                  |                                               | (10,938 | )       |         |      |        |         |         |      | (925    | )       |         |   | (659    | )       |         |   |        |        
|                                                                                 |                                                                  |                                               |         |         |         |      |         |         |         |      |         |         |         |   |         |         |         |   |         |        
|Net income (loss)                                                                |                                                                  |                                               | 12,284  |         |         |      | (21,449 | )       |         |      | (19,103 | )       |         |   | (8,622  | )       |         |   | 2,357   |        
|Dividend requirements on preferred stock                                         |                                                                  |                                               | (58,740 | )       |         |      | (8,208  | )       |         |      | (6,635  | )       |         |   | (1,880  | )       |         |   |        |        
|                                                                                 |                                                                  |                                               |         |         |         |      |         |         |         |      |         |         |         |   |         |         |         |   |         |        
|Net income (loss) available to common
    stockholders                           |                                                                  | $                                             | (46,456 | )       |         | $    | (29,657 | )       |         | $    | (25,738 | )       |         | $ | (10,502 | )       |         | $ | 2,357   |        
|                                                                                 |                                                                  |                                               |         |         |         |      |         |         |         |      |         |         |         |   |         |         |         |   |         |        
|Basic earnings per share from continuing
    operations                          |                                                                  | $                                             | (1.52   | )       |         | $    | (1.61   | )       |         | $    | (2.64   | )       |         | $ | (1.26   | )       |         | $ | 0.29    |        
|                                                                                 |                                                                  |                                               |         |         |         |      |         |         |         |      |         |         |         |   |         |         |         |   |         |        
|Diluted earnings per share from continuing
    operations                        |                                                                  | $                                             | (1.52   | )       |         | $    | (1.61   | )       |         | $    | (2.64   | )       |         | $ | (1.26   | )       |         | $ | 0.27    |        
|                                                                                 |                                                                  |                                               |         |         |         |      |         |         |         |      |         |         |         |   |         |         |         |   |         |        

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|                                 |                                                |                    |   |         |  |      |   |         |   |      |   |         |  |  |   |         |  |  |   |         | 
|-------------------------------- | ---------------------------------------------- | ------------------ | - | ------- |  | ---- | - | ------- | - | ---- | - | ------- |  |  | - | ------- |  |  | - | ------- | 
|                                 |                                                |                   
|                                 |                                                | As of December 31,
|                                 |                                                |                   
|                                 |                                                | 2002               |   | 2001    |  | 2000 |   | 1999    |   | 1998
|                                 |                                                |                    |   |         |  |      |   |         |   |     
|Consolidated Balance Sheet Data: |                                                |                    |   |         |  |      |   |         |   |      |   |         |  |  |   |         |  |  |   |        
|                                 | Cash                                           |                    | $ | 11,653  |  |      | $ | 2,105   |   |      | $ | 2,324   |  |  | $ | 4,715   |  |  | $ | 2,042   | 
|                                 | Working capital                                |                    |   | 123,898 |  |      |   | 117,911 |   |      |   | 98,581  |  |  |   | 112,953 |  |  |   | 43,747  | 
|                                 | Accounts receivable, net                       |                    |   | 237,766 |  |      |   | 202,163 |   |      |   | 159,106 |  |  |   | 171,799 |  |  |   | 90,603  | 
|                                 | Property, plant and equipment, net             |                    |   | 50,357  |  |      |   | 48,423  |   |      |   | 43,967  |  |  |   | 42,162  |  |  |   | 21,627  | 
|                                 | Goodwill                                       |                    |   | 379,971 |  |      |   | 207,855 |   |      |   | 219,286 |  |  |   | 232,197 |  |  |   | 61,981  | 
|                                 | Total assets                                   |                    |   | 751,887 |  |      |   | 485,375 |   |      |   | 456,194 |  |  |   | 491,561 |  |  |   | 187,657 | 
|                                 | Long-term debt, including current installments |                    |   | 292,650 |  |      |   | 245,746 |   |      |   | 215,507 |  |  |   | 234,500 |  |  |   | 85,689  | 
|                                 | Redeemable preferred stock, Series A           |                    |   |        |  |      |   | 46,816  |   |      |   | 39,305  |  |  |   | 32,627  |  |  |   |        | 
|                                 | Redeemable Class A common stock                |                    |   |        |  |      |   | 108,183 |   |      |   | 107,486 |  |  |   | 106,811 |  |  |   |        | 
|                                 | Common stockholders equity (deficit)          |                    |   | 309,617 |  |      |   | (21,959 | ) |      |   | 8,100   |  |  |   | 20,221  |  |  |   | 41,374  | 

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|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
    of Financial Condition and Results of Operation

The following discussion of our financial
condition and results of operations should be read together with
our consolidated financial statements and the notes to those
statements that appear elsewhere in this Form 10-K. This
discussion contains forward-looking statements that involve
risks and uncertainties. For additional information regarding
some of the risks and uncertainties that affect our business and
the industry in which we operate, please read Risk
Factors, included elsewhere in this Form 10-K. This
discussion addresses only our continuing operations, except in
the discussion under the heading Discontinued
Operations. For more information on our discontinued
operations, please read note 17 to our consolidated financial
statements.

Overview

We are a leading provider of information-based
systems, integrated solutions and services to the
U.S. government. We derived approximately 95% of our
revenues in 2002 from contracts with U.S. government
agencies. Our two largest customer groups are the Department of
Defense, which represents approximately 48% of our revenues for
2002, and U.S. government intelligence agencies, which
represent approximately 37% of our revenues for 2002. We also
provide services to U.S. government civilian agencies,
state and local governments and commercial customers.

Critical Accounting Policies



| |                                         
| | ----------------------------------------
| | Revenue and Related Cost
    Recognition

We recognize revenues under our
U.S. government contracts when a contract has been
executed, the contract price is fixed and determinable, delivery
of the services or products has occurred and collectibility of
the contract price is considered probable. Our contracts with
agencies of the U.S. government are subject to periodic
funding by the respective contracting agency. Funding for a
contract may be provided in full at inception of the contract or
ratably throughout the term of the contract as the services are
provided. In evaluating the probability of funding for purposes
of assessing collectibility of the contract price, we consider
our previous experiences with the customer, communications with
the customer regarding funding status and our knowledge of
available funding for the contract or program. If funding is not
assessed as probable, revenue recognition is deferred until
realization is probable.

We recognize revenue under our
U.S. government contracts based on allowable contract
costs, as mandated by the U.S. governments cost
accounting standards. The costs we incur under
U.S. government contracts are subject to regulation and
audit by certain agencies of the U.S. government. We
provide an allowance for estimated contract disallowances based
on the amount of probable cost disallowances. Such amounts have
not historically been significant. We may be exposed to
variations in profitability, including potential losses, if we
encounter variances from estimated fees earned under award fee
contracts and estimated costs under fixed-price contracts.

Our revenues consist primarily of payments for
the work of our employees, and to a lesser extent, the
pass-through of costs for materials, contract-related travel and
subcontract efforts under contracts with our customers. We enter
into three types of U.S. government contracts: cost-plus,
time-and-materials (including fixed-price, level-of-effort
contracts where we are paid fixed hourly rates to deliver
certain labor hours) and fixed-price. For cost-plus contracts,
we are reimbursed for all of our allowable costs of performing
the work plus a fee. For time-and-materials contracts, we are
paid for labor at pre-negotiated hourly billing rates and
reimbursed the actual cost of certain other expenses. We assume
financial risk for time-and-materials contracts because we
assume the risk of performing those contracts at negotiated
hourly rates. For fixed-price contracts, we perform specific
tasks for a fixed price. Compared to cost-plus contracts,
fixed-price contracts generally offer higher margin
opportunities since we receive the benefit of cost savings, but
involve greater financial risk because we bear the impact of
cost overruns.

We recognize revenue under our cost-plus
contracts based on reimbursable costs incurred plus estimated
fees earned on these contracts. Fees include an estimate of
incentive and award fees earned, even though they

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may be determined and awarded at a later date.
When we are able to make a reasonably dependable estimate of the
amount of the award fee that we will ultimately receive, we
include such estimate in our revenue in the period of
performance. In making this assessment, we consider such factors
as our award fee history for similar work and for the particular
customer, industry trends, interim performance reviews with the
customer and all other available information. We perform this
review on a contract-by-contract basis at the end of each
reporting period. Adjustments to the expected award fee rate are
recorded in the period in which we change our estimate. Such
adjustments have historically been insignificant.


We recognize revenue under our time-and-materials
contracts based on fixed billable rates for hours delivered plus
reimbursable costs. We recognize revenue under our fixed-price
contracts using the percentage-of-completion method based on the
ratio of costs incurred to estimated total costs upon
completion. We recognize revenues under some of our long-term,
fixed-price contracts that require product deliveries on a
percentage-of-completion basis using the units of delivery as
the measurement basis for effort accomplished. Anticipated
losses on contracts are charged to earnings as soon as these
losses are known. Revenue recognized under fixed-price contracts
in each reporting period may be different, if different
assumptions are used regarding estimated total costs upon
completion of the contracts. Changes in estimated profits on
contracts are recorded during the period in which the change in
estimate occurs.

Our direct costs include the cost of direct labor
for the performance of contract services, the fringe benefits
associated with that direct labor and other direct costs related
to contract performance, including the cost of materials and
equipment, travel and subcontract costs. Some of these other
direct costs are an integral part of our contract services for
which we may be able to earn a fee. Other components of direct
costs may be reimbursed by our customers with only a minor
handling charge added. The amount of these other direct costs
can vary substantially from period to period and may reduce
overall operating margins when they are not fee-bearing.

Indirect costs, selling, general and
administrative expenses are the costs of delivering our contract
services other than the direct costs described above and
depreciation and amortization. Significant elements include
labor for management and administrative activities, fringe
benefits on indirect labor, facility costs and incentive
compensation. They also include business development, marketing,
selling, bid and proposal and independent research and
development costs. Most of these costs are allowable costs under
the cost accounting rules for contracting with the U.S.
government. As such, they may be directly reimbursed to us in
cost-plus contracts, or they may be included in cost estimates
used for bidding time-and-materials and fixed-price contracts.

Indirect costs, as a percentage of revenues, may
be influenced by a number of factors including: the level of
other direct costs, our ability to manage personnel levels to
meet constantly shifting contract demands and shifts in the mix
of labor required for our contracts. For example, an increase in
labor services that are performed at our customers
facilities may increase the relative proportion of direct costs,
because we do not have to incur indirect costs related to the
facilities used by those employees.

The majority of our revenues are earned under
contracts with various departments and agencies, or prime
contractors, of the U.S. government. Certain revenues and
payments we receive are based on provisional billings and
payments that are subject to adjustment under audit.
U.S. government agencies and departments have the right to
challenge our cost estimates and allocation methodologies with
respect to U.S. government contracts. Also, contracts with
such agencies are also subject to audit and possible adjustment
to give effect to unallowable costs under cost-type contracts or
to other regulatory requirements affecting both cost-type and
fixed-price contracts.

Recapitalization

In June 2002, we completed several transactions
that together resulted in a major recapitalization of our
balance sheet. The most significant of these transactions was
the initial public offering of 15,525,000 shares of our common
stock at $16 per share. The majority of the net proceeds of
$226.8 million from this offering were used to retire
long-term debt and preferred stock. Concurrent with the initial
public offering, we refinanced our then-existing credit facility
(referred to as the 2000 Facility) with a $200 million
facility consisting of a

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$130 million term facility and a
$70 million revolving facility (referred to as the 2002
Facility). We also converted Class A common stock with a
carrying value of $108.5 million to common stock.


The effect of the recapitalization transactions
was a net decrease in long-term debt of $113.0 million, a
decrease in redeemable preferred stock of $50.6 million, a
decrease in Class A common stock of $108.5 million,
and an increase in stockholders equity of
$315.5 million. In addition, after retiring the preferred
stock and long-term debt, and paying transaction expenses, we
retained $31.2 million of offering proceeds that were
available to fund working capital requirements and future
business acquisitions.

In connection with our acquisition of SIGNAL
Corporation on September 24, 2002, we subsequently expanded
our 2002 Facility, as described below.

The individual transactions comprising the
recapitalization are more fully described in note 2 to the
consolidated financial statements as included in this annual
report.

Acquisition of Signal Corporation

On September 24, 2002, we acquired SIGNAL
Corporation, a diversified high technology company providing a
wide array of information technology and engineering services to
the Department of Defense and to other U.S. agencies.
SIGNAL now operates as the Veridian IT Services Division,
our fourth operating division.

Under the terms of the acquisition agreement, we
acquired all of SIGNALs common stock and related assets
for $227 million in cash and notes. Financing for the
acquisition consisted of $25 million in seven-year
subordinated notes bearing interest initially at 9.50% (Seller
Notes) and increasing thereafter, and available cash and
borrowings under an expanded credit facility.

In connection with the consummation of the
acquisition of SIGNAL, we expanded our 2002 Facility from
$200 million to $360 million, consisting of a six-year
$270 million term loan and a five-year $90 million
revolving line of credit (referred to as the Amended 2002
Facility). Upon the consummation of the acquisition, our total
debt outstanding under our Amended 2002 Facility was
$310 million, including the subordinated seller notes. The
operating results of SIGNAL Corporation are included in our
consolidated operating results effective September 24,
2002, the date of the acquisition.

We have conducted an assessment of the fair
values of the assets acquired, and assigned values of
$15.6 million to net tangible assets, $2 million to
completed-technology intangible assets, and $38 million to
customer-related intangible assets. The excess of the purchase
consideration over the assigned values of $172.1 million
was allocated to goodwill. From a tax perspective, we will be
permitted to amortize goodwill and other intangible assets over
a 15-year period, thus providing substantial future cash tax
benefits.

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Results of Operations

The following table sets forth our condensed
consolidated results of operations based on the amounts and
percentage relationship of the items listed to contract revenues
during the periods presented (dollars in thousands):

|                       |                                                                  |                          |         |         |         |      |       |      |      |   |         |         |         |  |       |      |      |   |         |         |         |  |       |      |      | 
|---------------------- | ---------------------------------------------------------------- | ------------------------ | ------- | ------- | ------- | ---- | ----- | ---- | ---- | - | ------- | ------- | ------- |  | ----- | ---- | ---- | - | ------- | ------- | ------- |  | ----- | ---- | ---- | 
|                       |                                                                  |                         
|                       |                                                                  | Year Ended December 31  
|                       |                                                                  |                         
|                       |                                                                  |                          |         |         |         |     
|                       |                                                                  | 2002                     |         | 2001    |         | 2000
|                       |                                                                  |                          |         |         |         |     
|                       |                                                                  |                          |         |         |         |      |       |      |      |   |         |        
|Revenues               |                                                                  | $                        | 834,077 |         |         |      | 100.0 | %    |      | $ | 690,225 |         |         |  | 100.0 | %    |      | $ | 632,270 |         |         |  | 100.0 | %   
|Costs and expenses     |                                                                  |                          |         |         |         |      |       |      |      |   |         |         |         |  |       |      |      |   |         |         |         |  |       |     
|                       | Direct costs                                                     |                          |         | 564,199 |         |      |       | 67.7 |      |   |         | 446,719 |         |  |       | 64.7 |      |   |         | 415,927 |         |  |       | 65.8 |     
|                       | Indirect costs, selling, general and
    administrative expenses |                          |         | 197,078 |         |      |       | 23.6 |      |   |         | 187,090 |         |  |       | 27.1 |      |   |         | 164,801 |         |  |       | 26.0 |     
|                       | Depreciation expense                                             |                          |         | 11,153  |         |      |       | 1.3  |      |   |         | 10,606  |         |  |       | 1.6  |      |   |         | 9,947   |         |  |       | 1.6  |     
|                       | Amortization expense                                             |                          |         | 1,075   |         |      |       | 0.1  |      |   |         | 11,760  |         |  |       | 1.7  |      |   |         | 12,579  |         |  |       | 2.0  |     
|                       | Acquisition, integration and related expenses                    |                          |         |        |         |      |       |     |      |   |         | 2,067   |         |  |       | 0.3  |      |   |         | 4,637   |         |  |       | 0.7  |     
|                       | (Gain) Loss from pension plan settlement                         |                          |         | (512    | )       |      |       |     |      |   |         | 1,119   |         |  |       | 0.1  |      |   |         |        |         |  |       |     |     
|                       |                                                                  |                          |         |         |         |      |       |      |      |   |         |         |         |  |       |      |      |   |         |         |         |  |       |     
|                       |                                                                  | Total costs and expenses |         |         | 772,993 |      |       |      | 92.7 |   |         |         | 659,361 |  |       |      | 95.5 |   |         |         | 607,891 |  |       |      | 96.1 | 
|                       |                                                                  |                          |         |         |         |      |       |      |      |   |         |         |         |  |       |      |      |   |         |         |         |  |       |     
|Income from operations |                                                                  | $                        | 61,084  |         |         |      | 7.3   | %    |      | $ | 30,864  |         |         |  | 4.5   | %    |      | $ | 24,379  |         |         |  | 3.9   | %   
|                       |                                                                  |                          |         |         |         |      |       |      |      |   |         |         |         |  |       |      |      |   |         |         |         |  |       |     

2002 Compared to 2001

Revenues.Revenues
increased by $144 million, or 21%, from revenues of
$690 million in 2001 to revenues of $834 million in
2002. Of the increase in revenues, $83 million is
attributable to SIGNAL Corporation for the period from
September 24, 2002 (the date of closing of the SIGNAL
acquisition) to December 31, 2002. The remaining
$61 million of the increase in revenues was over a broad
range of service offerings and contracts. The growth is a
continuation of the strength in the defense and intelligence
business that we have experienced since the second quarter of
2001. The announced growth in the defense budgets following the
terrorist attacks on September 11, 2001 has affected a
number of our programs, but there does not appear to have been a
significant effect on our overall revenues. Increased activity
in certain areas has been offset by delays in programs and
procurement decisions in other areas as our customers reassessed
and changed priorities. Consolidated revenues in the fourth
quarter of 2002 were $273.1 million, compared to
$181.6 million of revenues in the fourth quarter of 2001.
Revenues from SIGNAL Corporation were $77.1 million in the
fourth quarter of 2002 and increased approximately 32% from
SIGNALs fourth quarter of 2001 as a result of an increase
in new orders from both its defense and U.S. government
civilian agency customers in 2002. Fourth quarter 2002 revenues
from SIGNAL included approximately $10 million of equipment
sales above the normal expected level.

Costs and Expenses.Costs of operations increased by
$113.6 million in 2002 to $773.0 million to keep pace
with the increased activity across all business areas and
service offerings. Direct contract costs grew to 67.7% of
revenues in 2002, compared to 64.7% of revenues in 2001. Two
significant factors explain the increase in the percentage of
direct costs in 2002. First, SIGNALs business is
characterized by a higher level of direct pass-through costs for
subcontractors and equipment purchases, and by a greater
proportion of labor services that are performed on customer
sites which holds down the indirect operating costs such as
facilities expenses. SIGNAL also operates in its market segments
with a higher level of labor productivity, keeping indirect
costs at a lower level. Direct contract costs on the sales from
SIGNAL were at 82.2%. The second important factor driving the
increase in the percentage of direct contract costs to revenue
in 2002 was the improvement in labor productivity that was
achieved during 2002 in the remainder of the business. These
productivity gains resulted in an increase in indirect operating
expenses of less than 1%, while business activity, as measured
by direct

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labor, increased at a rate of approximately 10%.
In the fourth quarter of 2002, direct contract costs were 70.7%
of revenues, which reflects the full impact of the consolidation
of the operating results of SIGNAL.


Indirect expenses declined to 23.6% of revenues
in 2002, compared to 27.1% of revenues in 2001. The decline is
primarily the result of efforts implemented during the second
half of 2001 to improve labor productivity and reduce indirect
support staff, and the resulting reductions in indirect labor
costs that continued through 2002. The lower percentage is also
the result of the inclusion of the operating results of SIGNAL
which, as discussed above, have a lower proportion of indirect
costs due to the higher direct costs associated with its
business. In the fourth quarter of 2002, which again reflects
the full impact of the consolidation of the operating results of
SIGNAL, indirect expenses were 20.4% of revenues.

Depreciation expense in 2002 was
$11.2 million, or 1.3% of revenues, compared to
$10.6 million, or 1.6% of revenues in 2001. The decline in
depreciation as a percentage of revenues reflects a lower rate
of capital expenditures in 2002 and the inclusion of the
operations of SIGNAL, which require less property and equipment
since a high proportion of employees work on customer sites.
Depreciation expense in the fourth quarter of 2002 was $3.1
million, or 1.1% of revenues, following the consolidation of the
operations of SIGNAL.

Amortization of goodwill of $11.8 million in
2001 was discontinued for 2002 due to the implementation of SFAS
No. 142, effective January 1, 2002. Amortization in
2002 of $1.1 million relates to identified intangible
assets of SIGNAL Corporation. The annual rate of amortization of
these intangible assets is $4.3 million.

The $0.5 million gain from pension
settlement in 2002 came from a refund on an insurance contract
that was purchased to satisfy pension obligations of a
terminated pension plan in prior years.

Income from Operations.Operating income rose to
$61.1 million in 2002, compared to $30.9 million in
2001. Operating margins were 7.3% in 2002, compared to 4.5% in
2001. The improvement in operating margins reflects the
additional profit on our time-and-materials and fixed-price
contracts related to the reduction in indirect labor costs
discussed above, and the higher levels of acquisition and
integration-related charges, pension settlement costs, and
amortization in 2001.

Interest Expense and Income.Interest expense was
$18.9 million in 2002, as compared to $29.1 million in
2001. The decrease in interest expense was the result of a
reduction in debt outstanding following our initial public
offering in June 2002, lower interest rates as the more
expensive subordinated debt was eliminated through application
of the proceeds of the stock offering, and the effect of
declining LIBOR rates on our variable interest rate debt. We
substantially increased our debt as a result of the acquisition
of SIGNAL. Interest expense in the fourth quarter of 2002
following the acquisition was $5.0 million. Interest income
of $1.0 million in 2002 and $0.8 million in 2001 is
primarily related to interest accrued on notes receivable from
our Leadership Stock Purchase Plan that are classified as an
offset in stockholders equity.

Income (Loss) from Continuing Operations.Income from continuing operations was
$25.6 million in 2002, as compared to a loss of
$3.8 million in 2001. The improvement was primarily due to
the increase of $30.2 million of income from operations and
a $10.2 million reduction in interest expense, and
partially offset by an increase in income tax expense of
$11.4 million related to the increase in taxable income.
Income from continuing operations in the fourth quarter of 2002
was $9.3 million.

2001 Compared to 2000

Revenues.Revenues
increased by 9% from revenues of $632 million in 2000 to
revenues of $690 million in 2001. The business growth was
very broad based in a number of technology and customer areas.
There was no single contract or group of contracts that was
responsible for the growth. The growth in demand was
particularly pronounced in the last three quarters of 2001 where
revenues increased 12% over the same period of 2000. During
2001, we experienced reduced staff turnover and an ease in
filling high technology positions due to softening in our labor
markets. As a result, we were better able to meet the increased
demand and increase our revenues in 2001. There was an increase
in customer demand, particularly from our intelligence agency
customers, following the September 11, 2001 terrorist
attacks on the United States, and our employees involved in
critical national security activities were deployed to meet the
heightened needs of our customers.

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Costs and Expenses.Costs of operations in 2001 generally
kept pace with the increase in revenues. Indirect costs and
selling, general and administrative expenses increased at a
faster rate than direct contract costs. This increase in
indirect costs and selling, general and administrative expenses,
from 26.0% of revenues in 2000 to 27.1% of revenues in 2001, was
the result of shifts in the specific requirements of our
contracts. The increase was also due to lower labor productivity
in the first several months of 2001. Labor productivity improved
in the second half of 2001 as demand increased and management
directed more labor to contracts. Amortization expense fell from
$12.6 million in 2000 to $11.8 million in 2001 as a
result of downward revisions in the estimate of goodwill
associated with the 1999 acquisitions. These revisions were made
in late 2000 and reduced amortization in 2001. Acquisition,
integration and related expenses in 2001 included
$1.4 million of severance and key employee retention
bonuses related to the 1999 acquisitions and $0.7 million
of excess facility costs associated with the consolidation of
several facilities from our acquired businesses into a single
new facility. The $4.6 million of such expenses in 2000 was
primarily related to severance and retention bonuses. In 2001,
we charged to expense $1.1 million to write off the balance
of prepaid pension costs related to a defined benefit pension
plan that was terminated in prior years. The plan obligations
were fully satisfied in 2001.

Income from Operations.Income from operations rose to
$30.9 million, or 4.5% of revenues, in 2001 from
$24.4 million, or 3.9% of revenues, in 2000. When the
effects of amortization, acquisition, integration and related
expenses and the loss from the pension plan settlement are
eliminated, the operating margins were 6.6% of revenues in 2000
and 2001. Income from operations in 2001 reflects cost
reductions in certain areas that improved contract profitability
and high levels of award fees on contracts as a result of good
contract performance. Much of the indirect cost increases
referred to above were absorbed by our cost-plus contracts,
mitigating the effect on operating income. Also, in 2001 we
recognized a gain of $0.7 million from the settlement of a
contract claim for less than the amount reserved. The loss
reserve was initially established in 2000.

Income (Loss) from Continuing Operations.Loss from continuing operations
declined to $3.8 million in 2001, compared to the loss of
$11.1 million in 2000. $6.5 million of the improvement
was from the increase in income from operations which was
primarily related to revenue increases. Further improvement came
from a reduction of interest expense from $34.7 million in
2000 to $29.1 million in 2001. Interest expense in 2000 was
higher because of transaction costs associated with the senior
subordinated debt that was put in place to fund the 1999
acquisitions. This debt was replaced with permanent financing in
September 2000, which reduced the interest expense in 2001.
These improvements to income from continuing operations were
offset by a $4.4 million increase in income tax
attributable to continuing operations.

Income Taxes

The effective income tax rate on income from
continuing operations was 40.8% in 2002. This rate is higher
than the United States federal statutory rate of 35% due to
state and local income taxes. The effective income tax rate for
2001 was 258.7%, which results primarily from the
non-deductibility of goodwill amortization. The effective income
tax rate, absent the goodwill amortization, was 43.9% for 2001.
Income taxes of $1.8 million were provided against the
pretax loss in 2000 of $9.2 million. Again, the
disproportionate tax rate was primarily due to the goodwill
amortization in 2000, which was not deductible for tax purposes.

Discontinued Operations

In June 2002, we completed a sale of
substantially all of the net assets and operations of our wholly
owned subsidiary, Veritect, Inc. (subsequently renamed Veridian
Commercial Operations, Inc.) to RedSiren Technologies, Inc. for
$0.5 million in cash. In 2001, we had recognized a loss for
the discontinuance of Veritects operations, as well as a
provision for the estimated losses of Veritect from
January 1, 2002 to the estimated sale date, based upon our
commitment to dispose of Veritects operations in December
2001. The actual loss from the sale exceeded our initial
estimates by $2.3 million, net of an income tax benefit of
$1.6 million, and was recorded in 2002.

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Extraordinary Loss on Early Extinguishment of
Debt

In connection with the early retirement of our
subordinated notes, we incurred and paid a $5.7 million
prepayment penalty and wrote off $7.9 million of
unamortized discount on the subordinated notes. We also
wrote-off $2.8 million of deferred financing costs associated
with the 2000 Facility, and issued stock purchase warrants
valued at $2.1 million to the subordinated noteholders as a
result of the conversion of our Class A Common Stock.
Collectively, these amounts, net of an income tax benefit of
$7.6 million, were recognized as an extraordinary loss on
debt extinguishment in the second quarter of 2002.

Net Loss Attributable to Common
Stockholders

During 2002 and 2001, adjustments to derive net
loss attributable to common stockholders totaled
$58.7 million and $8.2 million, respectively. A
detailed schedule listing these transactions and the respective
amounts, together with their effects on income from continuing
operations before extraordinary loss, is included in note 13 to
the consolidated financial statements. Descriptions of the
individual transactions are included in note 2 of the
consolidated financial statements.

Earnings Per Share

Basic and diluted earnings (loss) per share
(EPS) are as follows:

|                                |                                             |                    |      |                         |  |      |      |       |   |      |       |       |   |   |       |       |   |   |       |       |  
|------------------------------- | ------------------------------------------- | ------------------ | ---- | ----------------------- |  | ---- | ---- | ----- | - | ---- | ----- | ----- | - | - | ----- | ----- | - | - | ----- | ----- | -
|                                |                                             |                    |      |                         |  |      |      |      
|                                |                                             | Three Months Ended |      |                        
|                                |                                             |                    |      | Year Ended December 31,
|                                |                                             | September 30,      |      | December 31,            |  |     
|                                |                                             | 2002               |      | 2002                    |  | 2002 |      | 2001  |   | 2000
|                                |                                             |                    |      |                         |  |      |      |       |   |     
|Basic income (loss) per share   |                                             |                    |      |                         |  |      |      |       |   |      |       |       |   |   |       |       |   |   |       |      
|                                | Income (loss) from continuing operations    |                    | $    | 0.22                    |  |      | $    | 0.28  |   |      | $     | (1.52 | ) |   | $     | (1.61 | ) |   | $     | (2.64 | )
|                                | Loss from discontinued operations           |                    |      |                        |  |      |      | (0.04 | ) |      |       | (0.11 | ) |   |       | (2.35 | ) |   |       | (1.06 | )
|                                | Extraordinary loss from debt extinguishment |                    |      |                        |  |      |      |      |   |      |       | (0.50 | ) |   |       |      |   |   |       | (0.14 | )
|                                |                                             |                    |      |                         |  |      |      |       |   |      |       |       |   |   |       |       |   |   |       |      
|                                |                                             | $                  | 0.22 |                         |  | $    | 0.24 |       |   | $    | (2.13 | )     |   | $ | (3.96 | )     |   | $ | (3.84 | )    
|                                |                                             |                    |      |                         |  |      |      |       |   |      |       |       |   |   |       |       |   |   |       |      
|Diluted income (loss) per share |                                             |                    |      |                         |  |      |      |       |   |      |       |       |   |   |       |       |   |   |       |      
|                                | Income (loss) from continuing operations    |                    | $    | 0.21                    |  |      | $    | 0.26  |   |      | $     | (1.52 | ) |   | $     | (1.61 | ) |   | $     | (2.64 | )
|                                | Loss from discontinued operations           |                    |      |                        |  |      |      | (0.03 | ) |      |       | (0.11 | ) |   |       | (2.35 | ) |   |       | (1.06 | )
|                                | Extraordinary loss from debt extinguishment |                    |      |                        |  |      |      |      |   |      |       | (0.50 | ) |   |       |      |   |   |       | (0.14 | )
|                                |                                             |                    |      |                         |  |      |      |       |   |      |       |       |   |   |       |       |   |   |       |      
|                                |                                             | $                  | 0.21 |                         |  | $    | 0.23 |       |   | $    | (2.13 | )     |   | $ | (3.96 | )     |   | $ | (3.84 | )    
|                                |                                             |                    |      |                         |  |      |      |       |   |      |       |       |   |   |       |       |   |   |       |      

Basic earnings (loss) per share (EPS) is computed
by dividing net income available, or loss attributable, to
common stockholders by the weighted average number of
outstanding shares of common stock. Diluted EPS for the years
ended December 31, 2002, 2001, and 2000, is computed in the
same manner as the basic EPS, since adjustments related to the
effects of the stock options, stock warrants and conversion of
Class A common stock would have been anti-dilutive.
Following our initial public offering in June 2002 we have had
positive net earnings, and diluted EPS for the three months
ended September 30 and December 31, 2002 include the
effect of potentially dilutive securities. The increase in
shares in the calculation of EPS for the last two quarters of
2002 also reflect the full effect of shares issued in the
initial public offering in June 2002.

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The weighted average number of shares used in the
calculations of basic and diluted EPS from continuing operations
for the three months ended September 30, 2002 and
December 31, 2002, and the years ended December 31,
2002, 2001, and 2000, are as follows (in thousands):

|                                                                    |  |                    |        |                          |  |      |        |      |  |      |        |  |  |  |       |  |  |  |       | 
|------------------------------------------------------------------- |  | ------------------ | ------ | ------------------------ |  | ---- | ------ | ---- |  | ---- | ------ |  |  |  | ----- |  |  |  | ----- | 
|                                                                    |  |                    |        |                         
|                                                                    |  | Three Months Ended |        | Years Ended December 31,
|                                                                    |  |                    |        |                         
|                                                                    |  | September 30,      |        | December 31,             |  |     
|                                                                    |  | 2002               |        | 2002                     |  | 2002 |        | 2001 |  | 2000
|                                                                    |  |                    |        |                          |  |      |        |      |  |     
|Weighted average number of shares 
    basic                       |  |                    | 32,982 |                          |  |      | 33,255 |      |  |      | 21,784 |  |  |  | 7,480 |  |  |  | 6,711 | 
|Potentially dilutive shares used in computations
    of diluted EPS |  |                    | 2,382  |                          |  |      | 2,324  |      |  |      |       |  |  |  |      |  |  |  |      | 
|                                                                    |  |                    |        |                          |  |      |        |      |  |      |        |  |  |  |       |  |  |  |       | 
|Total weighted average number of shares used in
    diluted EPS     |  |                    | 35,364 |                          |  |      | 35,579 |      |  |      | 21,784 |  |  |  | 7,480 |  |  |  | 6,711 | 
|                                                                    |  |                    |        |                          |  |      |        |      |  |      |        |  |  |  |       |  |  |  |       | 

Liquidity and Capital Resources

On June 10, 2002, we closed our initial
public offering of 15,525,000 shares of our common stock,
including an over-allotment of 2,025,000 shares granted to the
underwriters, at the price of $16 per share. We realized net
proceeds of $226.8 million after deducting underwriters
fees and other transactional costs. Most of the proceeds were
used to retire long-term and preferred stock as indicated below:

|                                                                                                    |  |                        |         | 
|--------------------------------------------------------------------------------------------------- |  | ---------------------- | ------- | 
|                                                                                                    |  | (Dollars in thousands)
|Early retirement of subordinated notes, including
    prepayment penalty of $5,700                  |  | $                      | 100,700 | 
|Redemption of preferred stock, including
    liquidation preference of $6,969 and accrued dividends |  |                        | 66,371  | 
|Net reduction in loans under credit agreement                                                       |  |                        | 28,436  | 
|Cash available for working capital requirements                                                     |  |                        | 31,273  | 
|                                                                                                    |  |                        |         | 
|                                                                                                    |  | $                      | 226,780 | 
|                                                                                                    |  |                        |         | 

Concurrent with the initial public offering, we
also entered into the 2002 Facility. Upon the closing of the
2002 Facility, we had borrowed the full amount of the term loan
of $130 million, but had not drawn on the revolving credit.
We subsequently amended the 2002 Facility in connection with our
acquisition of SIGNAL Corporation to permit term loans of up to
$270 million and revolving credit loans totaling
$90 million.

The term loans under the Amended 2002 Facility
are due in six years. The revolving credit commitment expires in
five years. Interest on the loans is at a floating rate based on
LIBOR. At December 31, 2002, the interest rates on the term
loans averaged 5.3 percent. The Amended 2002 Facility
contains customary financial covenants related to maintaining
minimum EBITDA, fixed charge ratio and asset coverage ratio and
maximum total debt ratio and capital expenditures. The credit
agreement permits acquisitions having an aggregate cash
consideration of up to $25 million, and aggregate total
consideration of up to $50 million.

Required principal payments on the term loans,
together with amounts due under the Seller Notes and lease
agreements, are as follows:

Payments due by Period

(dollars in thousands)


|                 |  |       |         |           |  |       |        |       |  |         |        |  |  |  |         |  |  |  |         | 
|---------------- |  | ----- | ------- | --------- |  | ----- | ------ | ----- |  | ------- | ------ |  |  |  | ------- |  |  |  | ------- | 
|                 |  |       |         | Less than |  | 1-3   |        | 4-5   |  | After 5
|                 |  | Total |         | 1 year    |  | Years |        | Years |  | Years  
|                 |  |       |         |           |  |       |        |       |  |        
|Long-term debt   |  | $     | 292,650 |           |  |       | 10,473 |       |  |         | 27,928 |  |  |  | 126,843 |  |  |  | 127,406 | 
|Lease agreements |  |       | 195,754 |           |  |       | 28,715 |       |  |         | 50,456 |  |  |  | 38,868  |  |  |  | 77,715  | 
|                 |  |       |         |           |  |       |        |       |  |         |        |  |  |  |         |  |  |  |         | 
|                 |  | $     | 488,404 |           |  |       | 39,188 |       |  |         | 78,384 |  |  |  | 165,711 |  |  |  | 205,121 | 
|                 |  |       |         |           |  |       |        |       |  |         |        |  |  |  |         |  |  |  |         | 

Net cash provided by operations has varied widely
over the three-year period ending December 31, 2002, from
net cash provided in 2002 of $69.0 million, to net cash
used of $9.6 million in 2001 and net cash provided

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of $20.5 million in 2000. The primary source
of operating cash flow is income from continuing operations
before extraordinary items and depreciation and amortization,
which was $37.8 million, $18.6 million and
$10.7 million in 2002, 2001 and 2000, respectively.
Variability in operating cash flow from year-to-year has been
driven by wide swings in certain working capital items,
particularly in the levels of accounts receivable. Accounts
receivable levels, as measured by days sales outstanding (DSO),
were at 79, 101 and 90 days at the end of the 2002, 2001
and 2000, respectively. The increase in accounts receivable of
$42.6 million in 2001 was, in part, due to the growth in
revenues from 2000 to 2001, but also due to the increase in DSO
of 11 days. The increase was the results of delays in
billing and collection activities related to the implementation
of new accounting systems. The systems conversion was completed
during early 2002 and receivables returned to more normal
levels, resulting in a reduction of accounts receivable of
$14.6 million in 2002. The improvement in billings and
collections and the addition of the operations of SIGNAL
Corporation, which has historically enjoyed lower levels of
accounts receivable, have had the combined effect of reducing
our DSO to 79 days at December 31, 2002.


We also fund our expenditures for property and
equipment out of our operating cash flows and our existing line
of credit. Capital expenditures were $11.5 million,
$13.9 million and $11.9 million in 2002, 2001 and
2000, respectively. The higher rate of capital expenditures in
2001 was due to $2.7 million related to the move of several
offices of the acquired companies into a new consolidated
facility in 2001 and $2.9 million for new accounting
systems. As of December 31, 2002, there were no
individually large outstanding commitments for capital
expenditures.

Cash of $4.2 million and $8.1 million
was used to fund the discontinued operations of Veritect in 2001
and 2000, respectively. As part of the loss on disposal of
discontinued operations, we accrued an amount for expected
future operating losses of Veritect up to the projected date of
disposal. The estimated amount of $5.6 million was included
in accrued expenses at December 31, 2001. During 2002 we
added an additional reserve of $2.3 million and used
$8.1 million in cash in 2002 to complete the sale and wind
up Veritects operation.

With the completion of the capital restructuring
associated with the initial public offering, we have
substantially reduced our interest costs, and through the sale
of Veritect we have ended the cash requirements of supporting
that operation. With the acquisition of SIGNAL, we increased our
total debt to approximately $293 million at
December 31, 2002. Annual interest costs on this debt at
current interest rates are approximately $18 million. We
believe that our operating cash flow and funds available under
the Amended 2002 Facility are sufficient to meet our operating
needs and our debt service requirements for at least the next
12 months. To the extent that the financial requirements of
any business acquisition opportunity exceeds the limits set
forth under the Amended 2002 Facility, we will need to raise
additional debt or equity financing.

Impact of Inflation

The nature of our contracts with the U.S.
government sharply reduces exposure to the potential negative
financial effects of inflation. We are able to directly recover
increased costs for those costs charged directly to, or
allocated to, our cost-plus contracts, which account for
approximately 50% of our business. On our other contracts, we
propose fixed prices or labor rates that reflect our
expectations of future cost increases.

New Accounting Pronouncements

In recent years, the Financial Accounting
Standards Board (FASB) and the Emerging Issues Task Force (EITF)
have issued several pronouncements, many of which have or will
have an effect on our financial reporting. One pronouncement
that has had a significant impact upon our operating results is
SFAS No. 142, Goodwill and Other Intangible Assets,
issued by the FASB in June 2001. SFAS No. 142 is effective
for fiscal years beginning after December 15, 2001. Under
the new rules, goodwill and indefinite-lived intangible assets
are no longer amortized but are subject to annual impairment
tests in accordance with the SFAS No. 142. Other intangible
assets continue to be amortized over their useful lives.

42



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##### Table of Contents



On January 1, 2002, we began to apply the
new rules on accounting for goodwill and other intangible assets
and ceased the amortization of goodwill. The effect of adopting
SFAS No. 142 was an increase in income from operations of
$11.8 million for the year ended December 31, 2002.
The impact of this pronouncement on income from continuing
operations and net income (loss) attributed to common
stockholders was the same as the impact on operating income as
goodwill amortization is nondeductible for income tax reporting
purposes. A schedule outlining the impact of SFAS No. 142
on our income from operations, net income (loss) attributable to
common stockholders, and basic and diluted earnings (loss) per
share, is presented in note 4 to the consolidated financial
statements.

SFAS No. 142 also requires companies to
periodically assess the carrying of intangible assets and make
adjustments to reflect impairments to carrying values based on
assessments of estimated fair values. We have completed the
required impairment tests of goodwill during 2002, and have
determined that no adjustment to the carrying value of its
goodwill is required.

Another pronouncement that had a material effect
on our financial statement was SFAS No. 141, Business
Combinations(SFAS No. 141). SFAS No. 141 requires
that the purchase method of accounting be used for all business
combinations completed after June 30, 2001, and specifies
criteria that intangible assets acquired in a business
combination must meet to be recognized and reported separately
from goodwill.

We applied the provisions of SFAS No. 141 to
our acquisition of SIGNAL. We have performed an assessment of
the values of tangible and intangible assets acquired, and we
have allocated $38 million of the purchase consideration to
customer-related intangible assets, $2 million to
completed-technology intangible assets, $15.6 million to
net tangible assets, and $172.1 million to goodwill.
Amortization of the completed-technology and customer-related
intangible assets will be recognized on a straight-line basis
over 4 and 10-year periods, respectively, beginning
October 1, 2002. We will not amortize goodwill in
accordance with SFAS No. 142, and will conduct annual
assessments of impairment.

In addition to SFAS No. 141 and SFAS
No. 142, the other recent pronouncements affecting, or that
may affect, our financial reporting are as follows:



| |   |                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------
| |  | SFAS No. 143, Accounting for Asset
    Retirement Obligations                                                                                        
|
| |  | SFAS No. 144, Accounting for the
    Impairment or Disposal of Long-Lived Assets                                                                     
|
| |  | SFAS No. 145, Rescission of FASB
    Statements 4, 44 and 64, Amendment of FASB Statement
    No. 13, and Technical Corrections                      
|
| |  | SFAS No. 146, Accounting for Costs
    Associated with Exit or Disposal Activities                                                                   
|
| |  | SFAS No. 148, Accounting for Stock-Based
    Compensation  Transition and Disclosure                                                                
|
| |  | FASB Interpretation No. 45,
    Guarantors Accounting and Disclosure requirements for
    Guarantees, including Guarantees of Indebtedness of Others

Descriptions of these pronouncements and their
effective dates are included in note 4 of the consolidated
financial statements.






|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures
    About Market Risk

Our principal exposure to market risk relates to
changes in interest rates. At December 31, 2002, we had
outstanding under our Amended 2002 Facility $267.7 million
of loans with interest rates that are tied to changes in the
LIBOR or prime rate. The interest rate on our Amended 2002
Facility at December 31, 2002, was 5.32%. Each 1% increase
in these rates could add $2.68 million to our interest
expense.






|        |                                                
|------- | -----------------------------------------------
|Item 8. | Financial Statements and Supplementary
    Data

Our Consolidated Financial Statements are
included in this report beginning on page F-1.

43



---



##### Table of Contents








|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|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

Information concerning our directors is set forth
in our Proxy Statement for the 2003 Annual Meeting of
Stockholders, and is incorporated herein by reference. For
information regarding our executive officers, see page 27
hereof. Other information for this item, including information
concerning compliance with Section 16(a) of the Exchange
Act of 1934, is set forth in our Proxy Statement for the 2003
Annual Meeting of Stockholders, which will be filed within
120 days of December 31, 2002, and is incorporated
herein by reference.




Item 11.     Executive
Compensation

Information for this item is set forth in our
Proxy Statement for the 2003 Annual Meeting of Stockholders,
which will be filed within 120 days of December 31,
2002, and is incorporated herein by reference.




Item 12.     Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters

Information for this item, including information
concerning securities authorized for issuance under equity
compensation plans, is set forth in our Proxy Statement for the
2003 Annual Meeting of Stockholders, which will be filed within
120 days of December 31, 2002, and is incorporated
herein by reference.




Item 13.     Certain
Relationships and Related Transactions

Information for this item is set forth in our
Proxy Statement for the 2003 Annual Meeting of Stockholders,
which will be filed within 120 days of December 31,
2002, and is incorporated herein by reference.




Item 14.     Controls
and Procedures

(a) Evaluation of disclosure controls and
procedures.

The term disclosure controls and procedures is
defined in Rules 13a-14(c) and 15d-14(c) of the Securities
Exchange Act of 1934. These rules refer to the controls and
other procedures of a company that are designed to ensure that
information required to be disclosed by a company in the reports
that it files under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the
Securities and Exchange Commissions rules and forms.
Furthermore, we have designed our disclosure controls and
procedures to ensure that information that we are required to
disclose in our report is accumulated and communicated to
management (including our Chief Executive Officer and Chief
Financial Officer) in a manner that permits timely decisions to
be made regarding required disclosure.

Our Chief Executive Officer and our Chief
Financial Officer have evaluated the effectiveness of our
disclosure controls and procedures as of a date within
90 days prior to the date of the filing of this annual
report, and they have concluded that such disclosure controls
and procedures were effective at ensuring that they were alerted
in a timely manner as to all material information that we are
required to include in our reports with the Securities and
Exchange Commission.

(b) Changes in internal
controls.

We maintain a system of internal accounting
controls that is designed to provide reasonable assurance that
our books and records accurately reflect our transactions and
that our established policies and procedures

44



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##### Table of Contents



are followed. Since the date of the evaluation of
our disclosure controls and procedures by our Chief Executive
Officer and Chief Financial Officer, there have been no
significant changes to our internal controls or in other factors
that could significantly affect our internal controls subsequent
to the date of the most recent evaluation.





PART IV






|         |                                                                    
|-------- | -------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K

(a) List of documents filed as part of this
report or incorporated herein by reference:



| |     |                     
| | --- | --------------------
| | (1) | Financial Statements

The following financial statements are included
in Part II of this Annual Report:

Independent Auditors Report

Consolidated Balance Sheets


Consolidated Statements of Operations


Consolidated Statements of Stockholders
Equity


Consolidated Statements of Cash Flows


Notes to Consolidated Financial Statements




| |     |                              
| | --- | -----------------------------
| | (2) | Financial Statement Schedules

Schedule II  Valuation and
Qualifying Accounts (included in paragraph (d) of this
Item 15)

(3) Exhibits:

|        |     |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                         
|------- | --- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |     |            
|No.     |     | Description
|        |     |            
|        | 2  | .1          |  | Stock Purchase Agreement, dated as of
    August 12, 2002, by and among SIGNAL Corporation, Roger
    Mody, Lori Mody and Veridian Corporation (filed as
    Exhibit 2.1 to Veridian Corporations Current Report
    on Form 8-K, as filed with the Commission on
    September 26, 2002, and incorporated by reference herein).                                                                                                       
|        | *3  | .1          |  | Second Amended and Restated Certificate of
    Incorporation of Veridian Corporation.                                                                                                                                                                                                                                                                                                                                                   
|        | *3  | .2          |  | Restated Bylaws of Veridian Corporation.                                                                                                                                                                                                                                                                                                                                                                                                
|        | 4  | .1          |  | Specimen of Common Stock Certificate (filed as
    Exhibit 4.1 to Veridian Corporations Registration
    Statement on Form S-1 (No. 333-83792), as filed with
    the Commission on March 6, 2002, as amended, and
    incorporated by reference herein).                                                                                                                                                                              
|        | 10 | .1          |  | First Amendment, dated September 24, 2002,
    to Credit Agreement, dated as of June 10, 2002, by and
    among Veridian Corporation, the lenders from time to time party
    to the Credit Agreement and Wachovia Bank, National Association
    (filed as Exhibit 10.1 to Veridian Corporations
    Current Report on Form 8-K, as filed with the Commission on
    September 26, 2002, and incorporated by reference herein).       
|        | 10 | .2          |  | Credit Agreement, dated as of June 10, 2002,
    as amended and restated on September 24, 2002, by and among
    Veridian Corporation, the lenders who are or may become a party
    to the Credit Agreement and Wachovia Bank, National Association
    (filed as Exhibit 10.2 to Veridian Corporations
    Current Report on Form 8-K, as filed with the Commission on
    September 26, 2002, and incorporated by reference herein).
|        | *10 | .3          |  | Form of Revolving Credit Note pursuant to Credit
    Agreement.                                                                                                                                                                                                                                                                                                                                                                         
|        | *10 | .4          |  | Form of Swingline Note pursuant to Credit
    Agreement.                                                                                                                                                                                                                                                                                                                                                                                
|        | *10 | .5          |  | Form of Term Note pursuant to Credit Agreement.                                                                                                                                                                                                                                                                                                                                                                                         

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##### Table of Contents



|        |      |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|------- | ---- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |      |            
|No.     |      | Description
|        |      |            
|        | 10  | .6          |  | Master Equityholders Agreement, dated
    September 14, 2000, by and among Veridian Corporation,
    Monitor Clipper Equity Partners, L.P., Monitor Clipper Equity
    Partners (Foreign), L.P., CIBC WG Argosy Merchant
    Fund 3, L.L.C., Texas Growth Fund II1 1998
    Trust, Argotyche, L.P., Santaeus, L.P., David H. Langstaff,
    Monitor Company Group Limited Partnership, Monitor Consulting,
    L.P., First Union Investors, Inc., The Northwestern Mutual Life
    Insurance Company, A.G. Investment Advisory Services, Inc.,
    Merit Life Insurance Co., Lincoln National Life Insurance
    Company, J.H. Whitney Mezzanine Fund, L.P.,
    J.H. Whitney Market Value Fund, L.P., American General Life
    and Accident Insurance Company and Magnetite Asset Investors,
    L.L.C. (filed as Exhibit 10.12 to Veridian
    Corporations Registration Statement on Form S-1
    (No. 333-83792), as filed with the Commission on
    March 6, 2002, as amended, and incorporated by reference
    herein).
|        | +10 | .7          |  | Employment Agreement of James P. Allen (filed as
    Exhibit 10.16 to Veridian Corporations Registration
    Statement on Form S-1 (No. 333-83792), as filed with
    the Commission on March 6, 2002, as amended, and
    incorporated by reference herein).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|        | +10 | .8          |  | Employment Agreement of Dr. Robert M.
    Farrell (filed as Exhibit 10.15 to Veridian
    Corporations Registration Statement on Form S-1
    (No. 333-83792), as filed with the Commission on
    March 6, 2002, as amended, and incorporated by reference
    herein).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|        | +10 | .9          |  | Employment Agreement of Scott M. Goss (filed as
    Exhibit 10.3 to Veridian Corporations Current Report
    on Form 8-K, as filed with the Commission on
    September 26, 2002, and incorporated by reference herein).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|        | +10 | .10         |  | Employment Agreement of Jerald S. Howe, Jr.
    (filed as Exhibit 10.14 to Veridian Corporations
    Registration Statement on Form S-1 (No. 333-83792), as
    filed with the Commission on March 6, 2002, as amended, and
    incorporated by reference herein).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|        | +10 | .11         |  | Employment Agreement of Ronald C. Jones (filed as
    Exhibit 10.17 to Veridian Corporations Registration
    Statement on Form S-1 (No. 333-83792), as filed with
    the Commission on March 6, 2002, as amended, and
    incorporated by reference herein).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|        | +10 | .12         |  | Employment Agreement of David H. Langstaff (filed
    as Exhibit 10.13 to Veridian Corporations
    Registration Statement on Form S-1 (No. 333-83792), as
    filed with the Commission on March 6, 2002, as amended, and
    incorporated by reference herein).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|        | 10  | .13         |  | Amended and Restated Warrant Agreement (filed as
    Exhibit 10.18 to Veridian Corporations Registration
    Statement on Form S-1 (No. 333-83792), as filed with
    the Commission on March 6, 2002, as amended, and
    incorporated by reference herein).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|        | +10 | .14         |  | Calspan SRL Corporation 1995 Stock Incentive Plan
    (filed as Exhibit 10.19 to Veridian Corporations
    Registration Statement on Form S-1 (No. 333-83792), as
    filed with the Commission on March 6, 2002, as amended, and
    incorporated by reference herein).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|        | +10 | .15         |  | Veda International, Inc. Stock Option Plan (filed
    as Exhibit 10.20 to Veridian Corporations
    Registration Statement on Form S-1 (No. 333-83792), as
    filed with the Commission on March 6, 2002, as amended, and
    incorporated by reference herein).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|        | +10 | .16         |  | Veridian Corporation 1998 Stock Incentive Plan
    (filed as Exhibit 10.21 to Veridian Corporations
    Registration Statement on Form S-1 (No. 333-83792), as
    filed with the Commission on March 6, 2002, as amended, and
    incorporated by reference herein).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|        | +10 | .17         |  | Veridian Corporation 2000 Stock Incentive Plan
    (filed as Exhibit 10.22 to Veridian Corporations
    Registration Statement on Form S-1 (No. 333-83792), as
    filed with the Commission on March 6, 2002, as amended, and
    incorporated by reference herein).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|        | +10 | .18         |  | Amended and Restated Veridian Retirement Savings
    Plan (filed as Exhibit 10.23 to Veridian Corporations
    Registration Statement on Form S-1 (No. 333-83792), as
    filed with the Commission on March 6, 2002, as amended, and
    incorporated by reference herein).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|        | *10  | .19         |  | Sale and Assignment Agreement, dated
    August 12, 2002, by and between Scott Goss and Veridian
    Corporation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|        | *10  | .20         |  | Amendment to Sale and Assignment Agreement, dated
    September 24, 2002, by and between Scott Goss and Veridian
    Corporation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|        | *21  | .1          |  | List of Subsidiaries of Veridian Corporation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

46



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|        |     |             |  |                                                                                                                                                      
|------- | --- | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |     |            
|No.     |     | Description
|        |     |            
|        | *23 | .1          |  | Consent of KPMG LLP.                                                                                                                                 
|        | *99 | .1          |  | Certification of David H. Langstaff pursuant to
    18 U.S.C. Section 1350, as adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002.
|        | *99 | .2          |  | Certification of James P. Allen pursuant to
    18 U.S.C. Section 1350, as adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002.    



---



|  |                                                             
|- | ------------------------------------------------------------
|* | Filed herewith.                                             
| 
| | Incorporated by reference.                                  
| 
|+ | Management contract or compensatory plan or
    arrangement.

The registrant hereby undertakes, pursuant to
Regulation S-K, Item 601(b),
paragraph (4) (iii), to furnish to the Securities and
Exchange Commission upon request all constituent instruments
defining the rights of holders of our long-term debt and our
consolidated subsidiaries not filed herewith for the reason that
the total amount of securities authorized under any of such
instruments does not exceed 10 percent of our total
consolidated assets.

(b) During the three months ended
December 31, 2002, the Company filed the following reports
on Form 8-K:

On October 8, 2002, the Company filed a
Form 8-K, under Item 5, to report that Charles J.
Simons had been named as the new vice chairman of the board of
directors of the Company.

On November 7, 2002, the Company filed a
Form 8-K, under Item 9, announcing its earnings for
the three and nine month periods ended September 30, 2002.

On December 9, 2002, the Company filed a
Form 8-K/ A, amending the Form 8-K filed by the
Company on September 26, 2002, to include Item 7(a)(1)
audited financial statements of the business acquired,
Item 7(a)(2) unaudited financial statements of the business
acquired, and Item 7(b) pro forma financial information for
the acquisition of SIGNAL Corporation.

47



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##### Table of Contents



Independent Auditors Report

The Board of Directors and Stockholders

Veridian Corporation and Subsidiaries:


Under the date of February 10, 2003, we
reported on the consolidated balance sheets of Veridian
Corporation and subsidiaries as of December 31, 2002 and
2001, and the related consolidated statements of operations,
stockholders equity (deficit), and cash flows for each of
the years in the three-year period ended December 31, 2002,
which are included in the December 31, 2002, annual report
on Form 10-K of Veridian Corporation. In connection with
our audits of the aforementioned consolidated financial
statements, we also audited the related consolidated financial
statement schedule. This financial statement schedule is the
responsibility of the Companys management. Our
responsibility is to express an opinion on this financial
statement schedule based on our audits.

In our opinion, such financial statement
schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.

/s/ KPMG LLP




McLean, Virginia

February 10, 2003


48



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##### Table of Contents



(d) Financial Statement Schedules

Veridian

Schedule II


Valuation and Qualifying Accounts


(dollars in thousands)


Activity in the Companys allowance accounts
for the years ended December 31, 2000, 2001 and 2002 was as
follows:

Doubtful Accounts

|       |  |                     |       |                  |  |                |       |            |  |               |     |  |  |   |        |   |  |   |       | 
|------ |  | ------------------- | ----- | ---------------- |  | -------------- | ----- | ---------- |  | ------------- | --- |  |  | - | ------ | - |  | - | ----- | 
|       |  |                     |       |                  |  |                |       |           
|       |  |                     |       | Additions        |  |                |       |           
|       |  |                     |       |                  |  |                |       |           
|       |  | Balance at          |       | Charged to Costs |  | Charged to     |       |            |  | Balance at   
|Period |  | Beginning of Period |       | and Expenses     |  | Other Accounts |       | Deductions |  | End of Period
|       |  |                     |       |                  |  |                |       |            |  |              
|2000   |  | $                   | 3,842 |                  |  | $              | 679   |            |  | $             |    |  |  | $ | (1,981 | ) |  | $ | 2,540 | 
|2001   |  | $                   | 2,540 |                  |  | $              | 1,389 |            |  | $             |    |  |  | $ | (1,679 | ) |  | $ | 2,250 | 
|2002   |  | $                   | 2,250 |                  |  | $              | 459   |            |  | $             | 522 |  |  | $ | (1,173 | ) |  | $ | 2,058 | 

Reserve for Excess or Obsolete
Inventories

|       |  |                     |     |                  |  |                |     |            |  |               |     |  |  |   |      |   |  |   |     | 
|------ |  | ------------------- | --- | ---------------- |  | -------------- | --- | ---------- |  | ------------- | --- |  |  | - | ---- | - |  | - | --- | 
|       |  |                     |     |                  |  |                |     |           
|       |  |                     |     | Additions        |  |                |     |           
|       |  |                     |     |                  |  |                |     |           
|       |  | Balance at          |     | Charged to Costs |  | Charged to     |     |            |  | Balance at   
|Period |  | Beginning of Period |     | and Expenses     |  | Other Accounts |     | Deductions |  | End of Period
|       |  |                     |     |                  |  |                |     |            |  |              
|2000   |  | $                   | 218 |                  |  | $              | 133 |            |  | $             | 158 |  |  | $ | (175 | ) |  | $ | 334 | 
|2001   |  | $                   | 334 |                  |  | $              | 69  |            |  | $             |    |  |  | $ | (82  | ) |  | $ | 321 | 
|2002   |  | $                   | 321 |                  |  | $              | 400 |            |  | $             |    |  |  | $ | (37  | ) |  | $ | 684 | 

49



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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.



| |                     
| | --------------------
| | VERIDIAN CORPORATION



| |     |                       
| | --- | ----------------------
| | By: | /s/ DAVID H. LANGSTAFF

| |                                          
| | -----------------------------------------
| |                                          
| | David H. Langstaff                       
| | President and Chief Executive
    Officer



Date: March 13, 2003

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 and on the dates indicated.

|                                           |  |                                                                                     |  |                |  | 
|------------------------------------------ |  | ----------------------------------------------------------------------------------- |  | -------------- |  | 
|                                           |  |                                                                                     |  |               
|Name                                       |  | Title                                                                               |  | Date          
|                                           |  |                                                                                     |  |               
|                                          
|/s/ JOSEPH P. ALLENDr. Joseph P. Allen, IV |  | Chairman of the Board of Directors                                                  |  | March 13, 2003
|                                          
|/s/ CHARLES J. SIMONSCharles J. Simons     |  | Vice Chairman and Director                                                          |  | March 13, 2003
|                                          
|/s/ DAVID H. LANGSTAFFDavid H. Langstaff   |  | President, Chief Executive Officer and Director
    (Principal Executive Officer)   |  | March 13, 2003
|                                          
|/s/ JAMES P. ALLENJames P. Allen           |  | Senior Vice President and Chief Financial Officer
    (Principal Financial Officer) |  | March 13, 2003
|                                          
|/s/ S. MARK MONTICELLIS. Mark Monticelli   |  | Vice President and Controller (Principal
    Accounting Officer)                    |  | March 13, 2003
|                                          
|/s/ MICHAEL A. BELLMichael A. Bell         |  | Director                                                                            |  | March 13, 2003
|                                          
|/s/ JOEL S. BIRNBAUMDr. Joel S. Birnbaum   |  | Director                                                                            |  | March 13, 2003
|                                          
|/s/ RUSSELL P. FRADINRussell P. Fradin     |  | Director                                                                            |  | March 13, 2003
|                                          
|/s/ GEORGE R. HORNIGGeorge R. Hornig       |  | Director                                                                            |  | March 13, 2003
|                                          
|/s/ JAMES J. KOZLOWSKIJames J. Kozlowski   |  | Director                                                                            |  | March 13, 2003

50



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##### Table of Contents



|                                         |  |          |  |                |  | 
|---------------------------------------- |  | -------- |  | -------------- |  | 
|                                         |  |          |  |               
|Name                                     |  | Title    |  | Date          
|                                         |  |          |  |               
|                                        
|/s/ LYNN AMATO MADONNALynn Amato Madonna |  | Director |  | March 13, 2003
|                                        
|/s/ SALLY K. RIDEDr. Sally K. Ride       |  | Director |  | March 13, 2003

51



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##### Table of Contents






CERTIFICATION

I, David H. Langstaff, certify that:

1.     I have reviewed
this annual report on Form 10-K of Veridian Corporation;

2.     Based on my
knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this annual
report;

3.     Based on my
knowledge, the financial statements, and other financial
information included in this annual report, fairly present in
all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this annual report;

4.     The
registrants other certifying officers and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and
15d-14) for the registrant and have:



| |                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | (b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | (c) presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                

5.     The
registrants other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrants auditors and the audit committee of
registrants board of directors (or persons performing the
equivalent functions):



| |                                                                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | (b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    

6.     The
registrants other certifying officers and I have indicated
in this annual report whether there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regard
to significant deficiencies and material weaknesses.



| |                         
| | ------------------------
| | /s/ DAVID H. LANGSTAFF  
| |                         
| | Name: David H. Langstaff

| |        |                        
| | ------ | -----------------------
| | Title: | Chief Executive Officer

| |                     
| | --------------------
| | Veridian Corporation

Date: March 13, 2003

52



---



##### Table of Contents






CERTIFICATION

I, James P. Allen, certify that:

1.     I have reviewed
this annual report on Form 10-K of Veridian Corporation;

2.     Based on my
knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this annual
report;

3.     Based on my
knowledge, the financial statements, and other financial
information included in this annual report, fairly present in
all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this annual report;

4.     The
registrants other certifying officers and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and
15d-14) for the registrant and have:



| |                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | (b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | (c) presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                

5.     The
registrants other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrants auditors and the audit committee of
registrants board of directors (or persons performing the
equivalent functions):



| |                                                                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | (b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    

6.     The
registrants other certifying officers and I have indicated
in this annual report whether there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regard
to significant deficiencies and material weaknesses.



| |                     
| | --------------------
| | /s/ JAMES P. ALLEN  
| |                     
| | Name: James P. Allen

| |        |                        
| | ------ | -----------------------
| | Title: | Chief Financial Officer

| |                     
| | --------------------
| | Veridian Corporation

Date: March 13, 2003

53



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##### Table of Contents






FINANCIAL STATEMENTS

VERIDIAN CORPORATION AND
SUBSIDIARIES

TABLE OF CONTENTS

|                                                    |  |      |     | 
|--------------------------------------------------- |  | ---- | --- | 
|                                                    |  | Page
|                                                    |  |     
|Independent Auditors Report                        |  |      | F-1 | 
|Consolidated Balance Sheets                         |  |      | F-2 | 
|Consolidated Statements of Operations               |  |      | F-3 | 
|Consolidated Statements of Stockholders
    Equity |  |      | F-4 | 
|Consolidated Statements of Cash Flows               |  |      | F-6 | 
|Notes to Consolidated Financial Statements          |  |      | F-8 | 



---



##### Table of Contents



Independent Auditors Report

The Board of Directors and Stockholders

Veridian Corporation and Subsidiaries:


We have audited the accompanying consolidated
balance sheets of Veridian Corporation and subsidiaries as of
December 31, 2002 and 2001, and the related consolidated
statements of operations, stockholders equity (deficit),
and cash flows for each of the years in the three-year period
ended December 31, 2002. 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
auditing standards generally accepted in the United States of
America. 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 Veridian Corporation and
subsidiaries as of December 31, 2002 and 2001, and the
results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 2002, in
conformity with accounting principles generally accepted in the
United States of America.

As discussed in note 4(u) to the
consolidated financial statements, effective January 1,
2002, Veridian Corporation adopted the provisions of Statement
of Financial Standards No. 142, Goodwill and Other
Intangible Assets.

/s/ KPMG LLP




McLean, Virginia

February 10, 2003


F-1



---



##### Table of Contents



VERIDIAN CORPORATION AND
SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31, 2002 and 2001


|                                                                                                                                                                                                                      |                                                                                                                                                                                                      |                                            |         |         |         |  |         |         |         |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------- | ------- | ------- |  | ------- | ------- | ------- | -
|                                                                                                                                                                                                                      |                                                                                                                                                                                                      | 2002                                       |         | 2001   
|                                                                                                                                                                                                                      |                                                                                                                                                                                                      |                                            |         |        
|                                                                                                                                                                                                                      |                                                                                                                                                                                                      |                                           
|                                                                                                                                                                                                                      |                                                                                                                                                                                                      | (In thousands, except                     
|                                                                                                                                                                                                                      |                                                                                                                                                                                                      | share data)                               
|ASSETS                                                                                                                                                                                                               
|Current assets:                                                                                                                                                                                                       |                                                                                                                                                                                                      |                                            |         |         |         |  |         |        
|                                                                                                                                                                                                                      | Cash and cash equivalents                                                                                                                                                                            |                                            | $       | 11,653  |         |  | $       | 2,105   |        
|                                                                                                                                                                                                                      | Receivables, net of allowance of $2,058 and
    $2,250 in 2002 and 2001, respectively                                                                                                                |                                            |         | 237,766 |         |  |         | 202,163 |        
|                                                                                                                                                                                                                      | Inventories, net                                                                                                                                                                                     |                                            |         | 1,843   |         |  |         | 2,511   |        
|                                                                                                                                                                                                                      | Income taxes receivable                                                                                                                                                                              |                                            |         | 5,862   |         |  |         | 630     |        
|                                                                                                                                                                                                                      | Deferred income taxes                                                                                                                                                                                |                                            |         | 7,950   |         |  |         | 5,750   |        
|                                                                                                                                                                                                                      | Other current assets                                                                                                                                                                                 |                                            |         | 9,654   |         |  |         | 4,918   |        
|                                                                                                                                                                                                                      |                                                                                                                                                                                                      |                                            |         |         |         |  |         |        
|                                                                                                                                                                                                                      |                                                                                                                                                                                                      | Total current assets                       |         |         | 274,728 |  |         |         | 218,077 |  
|                                                                                                                                                                                                                      |                                                                                                                                                                                                      |                                            |         |         |         |  |         |        
|Property, plant and equipment:                                                                                                                                                                                        |                                                                                                                                                                                                      |                                            |         |         |         |  |         |        
|                                                                                                                                                                                                                      | Land                                                                                                                                                                                                 |                                            |         | 222     |         |  |         | 222     |        
|                                                                                                                                                                                                                      | Buildings and improvements                                                                                                                                                                           |                                            |         | 15,254  |         |  |         | 13,334  |        
|                                                                                                                                                                                                                      | Machinery, furniture and equipment                                                                                                                                                                   |                                            |         | 33,633  |         |  |         | 29,415  |        
|                                                                                                                                                                                                                      | Computer equipment and software                                                                                                                                                                      |                                            |         | 41,262  |         |  |         | 33,279  |        
|                                                                                                                                                                                                                      | Construction in progress                                                                                                                                                                             |                                            |         | 2,667   |         |  |         | 3,868   |        
|                                                                                                                                                                                                                      |                                                                                                                                                                                                      |                                            |         |         |         |  |         |        
|                                                                                                                                                                                                                      |                                                                                                                                                                                                      |                                            | 93,038  |         |         |  | 80,118  |        
|                                                                                                                                                                                                                      | Less accumulated depreciation and amortization                                                                                                                                                       |                                            |         | 42,681  |         |  |         | 31,695  |        
|                                                                                                                                                                                                                      |                                                                                                                                                                                                      |                                            |         |         |         |  |         |        
|                                                                                                                                                                                                                      |                                                                                                                                                                                                      | Net property, plant and equipment          |         |         | 50,357  |  |         |         | 48,423  |  
|                                                                                                                                                                                                                      |                                                                                                                                                                                                      |                                            |         |         |         |  |         |        
|Goodwill, net of accumulated amortization of
    $34,155 in 2002 and 2001, respectively                                                                                                                               |                                                                                                                                                                                                      |                                            | 379,971 |         |         |  | 207,855 |        
|Other intangible assets, net of accumulated
    amortization of $1,075 in 2002                                                                                                                                        |                                                                                                                                                                                                      |                                            | 38,925  |         |         |  |        |        
|Deferred financing costs                                                                                                                                                                                              |                                                                                                                                                                                                      |                                            | 6,023   |         |         |  | 2,474   |        
|Deferred income taxes                                                                                                                                                                                                 |                                                                                                                                                                                                      |                                            | 816     |         |         |  | 7,696   |        
|Other assets                                                                                                                                                                                                          |                                                                                                                                                                                                      |                                            | 1,067   |         |         |  | 850     |        
|                                                                                                                                                                                                                      |                                                                                                                                                                                                      |                                            |         |         |         |  |         |        
|                                                                                                                                                                                                                      |                                                                                                                                                                                                      | Total assets                               |         | $       | 751,887 |  |         | $       | 485,375 |  
|                                                                                                                                                                                                                      |                                                                                                                                                                                                      |                                            |         |         |         |  |         |        
|LIABILITIES, REDEEMABLE STOCK AND
    STOCKHOLDERS EQUITY (DEFICIT)                                                                                                                                                 
|Current liabilities:                                                                                                                                                                                                  |                                                                                                                                                                                                      |                                            |         |         |         |  |         |        
|                                                                                                                                                                                                                      | Current installments of long-term debt                                                                                                                                                               |                                            | $       | 10,473  |         |  | $       | 1,100   |        
|                                                                                                                                                                                                                      | Accounts payable                                                                                                                                                                                     |                                            |         | 48,030  |         |  |         | 25,463  |        
|                                                                                                                                                                                                                      | Accrued employee compensation costs                                                                                                                                                                  |                                            |         | 73,395  |         |  |         | 58,112  |        
|                                                                                                                                                                                                                      | Other accrued expenses                                                                                                                                                                               |                                            |         | 18,932  |         |  |         | 9,904   |        
|                                                                                                                                                                                                                      | Provision for loss on disposal of discontinued
    operations                                                                                                                                        |                                            |         |        |         |  |         | 5,587   |        
|                                                                                                                                                                                                                      |                                                                                                                                                                                                      |                                            |         |         |         |  |         |        
|                                                                                                                                                                                                                      |                                                                                                                                                                                                      | Total current liabilities                  |         |         | 150,830 |  |         |         | 100,166 |  
|Long-term debt, less current installments                                                                                                                                                                             |                                                                                                                                                                                                      |                                            | 282,177 |         |         |  | 244,646 |        
|Postretirement medical and insurance benefits                                                                                                                                                                         |                                                                                                                                                                                                      |                                            | 6,091   |         |         |  | 6,438   |        
|Other long-term liabilities                                                                                                                                                                                           |                                                                                                                                                                                                      |                                            | 3,172   |         |         |  | 1,085   |        
|                                                                                                                                                                                                                      |                                                                                                                                                                                                      |                                            |         |         |         |  |         |        
|                                                                                                                                                                                                                      |                                                                                                                                                                                                      | Total liabilities                          |         |         | 442,270 |  |         |         | 352,335 |  
|                                                                                                                                                                                                                      |                                                                                                                                                                                                      |                                            |         |         |         |  |         |        
|Senior redeemable exchangeable preferred stock,
    Series A; 300,000 shares authorized, 53,886 shares issued
    and outstanding in 2001; liquidation preference of $55,598 in
    the aggregate in 2001             |                                                                                                                                                                                                      |                                            |        |         |         |  | 46,816  |        
|Redeemable convertible Class A common stock,
    $0.0001 par value; 7,318,325 shares authorized; 7,318,325 shares
    issued and outstanding in 2001; liquidation preference of
    $110,050 in the aggregate in 2001 |                                                                                                                                                                                                      |                                            |        |         |         |  | 108,183 |        
|Stockholders equity (deficit):                                                                                                                                                                                       |                                                                                                                                                                                                      |                                            |         |         |         |  |         |        
|                                                                                                                                                                                                                      | Class B common stock, $0.0001 par value;
    none authorized, issued and outstanding pro forma (unaudited);
    24,497,500 shares authorized and 7,471,033 shares issued and
    outstanding in 2001 |                                            |         |        |         |  |         | 1       |        
|                                                                                                                                                                                                                      | Common stock, $0.0001 par value; 130,000,000
    shares authorized and 34,092,260 issued and outstanding in 2002                                                                                     |                                            |         | 4       |         |  |         |        |        
|                                                                                                                                                                                                                      | Additional paid-in capital                                                                                                                                                                           |                                            |         | 414,570 |         |  |         | 37,784  |        
|                                                                                                                                                                                                                      | Notes receivable                                                                                                                                                                                     |                                            |         | (10,427 | )       |  |         | (11,675 | )      
|                                                                                                                                                                                                                      | Accumulated deficit                                                                                                                                                                                  |                                            |         | (94,530 | )       |  |         | (48,069 | )      
|                                                                                                                                                                                                                      |                                                                                                                                                                                                      |                                            |         |         |         |  |         |        
|                                                                                                                                                                                                                      |                                                                                                                                                                                                      | Total stockholders equity (deficit)       |         |         | 309,617 |  |         |         | (21,959 | )
|                                                                                                                                                                                                                      |                                                                                                                                                                                                      |                                            |         |         |         |  |         |        
|                                                                                                                                                                                                                      |                                                                                                                                                                                                      | Total liabilities and stockholders equity |         | $       | 751,887 |  |         | $       | 485,375 |  
|                                                                                                                                                                                                                      |                                                                                                                                                                                                      |                                            |         |         |         |  |         |        

See accompanying notes to consolidated financial
statements.

F-2



---



##### Table of Contents



VERIDIAN CORPORATION AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF
OPERATIONS

Years ended December 31, 2002, 2001 and
2000


|                                                                                                                                  |                                                    |                                                                                          |         |            |         |      |         |            |         |   |         |            |         |  
|--------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------- | ---------------------------------------------------------------------------------------- | ------- | ---------- | ------- | ---- | ------- | ---------- | ------- | - | ------- | ---------- | ------- | -
|                                                                                                                                  |                                                    | 2002                                                                                     |         | 2001       |         | 2000
|                                                                                                                                  |                                                    |                                                                                          |         |            |         |     
|                                                                                                                                  |                                                    |                                                                                         
|                                                                                                                                  |                                                    | (In thousands, except share data)                                                       
|Revenues                                                                                                                          |                                                    | $                                                                                        | 834,077 |            |         | $    | 690,225 |            |         | $ | 632,270 |           
|Direct costs                                                                                                                      |                                                    |                                                                                          | 564,199 |            |         |      | 446,719 |            |         |   | 415,927 |           
|Indirect costs, selling, general and
    administrative expenses                                                                  |                                                    |                                                                                          | 197,077 |            |         |      | 187,090 |            |         |   | 164,801 |           
|Depreciation expense                                                                                                              |                                                    |                                                                                          | 11,154  |            |         |      | 10,606  |            |         |   | 9,947   |           
|Amortization expense                                                                                                              |                                                    |                                                                                          | 1,075   |            |         |      | 11,760  |            |         |   | 12,579  |           
|Acquisition, integration and related expenses                                                                                     |                                                    |                                                                                          |        |            |         |      | 2,067   |            |         |   | 4,637   |           
|(Gain) loss from pension plan settlements                                                                                         |                                                    |                                                                                          | (512    | )          |         |      | 1,119   |            |         |   |        |           
|                                                                                                                                  |                                                    |                                                                                          |         |            |         |      |         |            |         |   |         |           
|                                                                                                                                  |                                                    | Total costs and expenses                                                                 |         |            | 772,993 |      |         |            | 659,361 |   |         |            | 607,891 |  
|                                                                                                                                  |                                                    |                                                                                          |         |            |         |      |         |            |         |   |         |           
|                                                                                                                                  |                                                    | Income from operations                                                                   |         |            | 61,084  |      |         |            | 30,864  |   |         |            | 24,379  |  
|                                                                                                                                  |                                                    |                                                                                          |         |            |         |      |         |            |         |   |         |           
|Other (income) expense:                                                                                                           |                                                    |                                                                                          |         |            |         |      |         |            |         |   |         |           
|                                                                                                                                  | Interest income                                    |                                                                                          |         | (976       | )       |      |         | (844       | )       |   |         | (380       | )      
|                                                                                                                                  | Interest expense                                   |                                                                                          |         | 18,899     |         |      |         | 29,076     |         |   |         | 34,658     |        
|                                                                                                                                  | Gain from sale of assets                           |                                                                                          |         |           |         |      |         |           |         |   |         | (723       | )      
|                                                                                                                                  | Other (income) expense, net                        |                                                                                          |         | (50        | )       |      |         | 227        |         |   |         | 69         |        
|                                                                                                                                  |                                                    |                                                                                          |         |            |         |      |         |            |         |   |         |           
|                                                                                                                                  |                                                    | Other (income) expense, net                                                              |         |            | 17,873  |      |         |            | 28,459  |   |         |            | 33,624  |  
|                                                                                                                                  |                                                    |                                                                                          |         |            |         |      |         |            |         |   |         |           
|                                                                                                                                  |                                                    | Income (loss) from continuing operations
    before income taxes and extraordinary items |         |            | 43,211  |      |         |            | 2,405   |   |         |            | (9,245  | )
|Income tax expense                                                                                                                |                                                    |                                                                                          | 17,648  |            |         |      | 6,222   |            |         |   | 1,823   |           
|                                                                                                                                  |                                                    |                                                                                          |         |            |         |      |         |            |         |   |         |           
|                                                                                                                                  |                                                    | Income (loss) from continuing operations
    before extraordinary items                  |         |            | 25,563  |      |         |            | (3,817  | ) |         |            | (11,068 | )
|Loss from discontinued operations, net of income
    tax                                                                          |                                                    |                                                                                          |        |            |         |      | (11,277 | )          |         |   | (7,110  | )         
|Loss on disposal of discontinued operations, net
    of income tax                                                                |                                                    |                                                                                          | (2,341  | )          |         |      | (6,355  | )          |         |   |        |           
|                                                                                                                                  |                                                    |                                                                                          |         |            |         |      |         |            |         |   |         |           
|                                                                                                                                  |                                                    | Income (loss) before extraordinary items                                                 |         |            | 23,222  |      |         |            | (21,449 | ) |         |            | (18,178 | )
|Extraordinary items  loss on early
    extinguishment of debt, net of income tax benefit                                         |                                                    |                                                                                          | (10,938 | )          |         |      |        |            |         |   | (925    | )         
|                                                                                                                                  |                                                    |                                                                                          |         |            |         |      |         |            |         |   |         |           
|                                                                                                                                  |                                                    | Net income (loss)                                                                        |         |            | 12,284  |      |         |            | (21,449 | ) |         |            | (19,103 | )
|Recapitalization charges, preferred stock
    dividends and accretion to preferred and Class A common
    stock redemption values |                                                    |                                                                                          | (58,740 | )          |         |      | (8,208  | )          |         |   | (6,635  | )         
|                                                                                                                                  |                                                    |                                                                                          |         |            |         |      |         |            |         |   |         |           
|                                                                                                                                  |                                                    | Net loss attributable to common stockholders                                             |         | $          | (46,456 | )    |         | $          | (29,657 | ) |         | $          | (25,738 | )
|                                                                                                                                  |                                                    |                                                                                          |         |            |         |      |         |            |         |   |         |           
|Earnings per common share  basic and
    diluted                                                                                 |                                                    |                                                                                          |         |            |         |      |         |            |         |   |         |           
|                                                                                                                                  | Income (loss) from continuing operations           |                                                                                          | $       | (1.52      | )       |      | $       | (1.61      | )       |   | $       | (2.64      | )      
|                                                                                                                                  | Loss from discontinued operations                  |                                                                                          |         | (0.11      | )       |      |         | (2.35      | )       |   |         | (1.06      | )      
|                                                                                                                                  | Extraordinary loss on early extinguishment of debt |                                                                                          |         | (0.50      | )       |      |         |           |         |   |         | (0.14      | )      
|                                                                                                                                  |                                                    |                                                                                          |         |            |         |      |         |            |         |   |         |           
|                                                                                                                                  |                                                    | $                                                                                        | (2.13   | )          |         | $    | (3.96   | )          |         | $ | (3.84   | )         
|                                                                                                                                  |                                                    |                                                                                          |         |            |         |      |         |            |         |   |         |           
|Weighted average number of shares:                                                                                                |                                                    |                                                                                          |         |            |         |      |         |            |         |   |         |           
|                                                                                                                                  | Basic                                              |                                                                                          |         | 21,784,148 |         |      |         | 7,479,979  |         |   |         | 6,710,679  |        
|                                                                                                                                  |                                                    |                                                                                          |         |            |         |      |         |            |         |   |         |           
|                                                                                                                                  | Diluted                                            |                                                                                          |         | 28,653,855 |         |      |         | 19,342,003 |         |   |         | 17,583,299 |        
|                                                                                                                                  |                                                    |                                                                                          |         |            |         |      |         |            |         |   |         |           

See accompanying notes to consolidated financial
statements.

F-3



---



##### Table of Contents



VERIDIAN CORPORATION AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY (DEFICIT)

Years ended December 31, 2002, 2001 and
2000


|                                                       |  |                                   |            |            |  |         |   |              |  |               |         |           |  |   |         |   |  |   |         |   |  |   |         |  
|------------------------------------------------------ |  | --------------------------------- | ---------- | ---------- |  | ------- | - | ------------ |  | ------------- | ------- | --------- |  | - | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                                       |  |                                   |            |            |  |         |   | Retained     |  | Total        
|                                                       |  | Common Stock                      |            | Additional |  |         |   | Earnings     |  | Stockholders
|                                                       |  |                                   |            | Paid-in    |  | Notes   |   | (Accumulated |  | Equity       
|                                                       |  | Shares                            |            | Amount     |  | Capital |   | Receivable   |  | Deficit)      |         | (Deficit)
|                                                       |  |                                   |            |            |  |         |   |              |  |               |         |          
|                                                       |  |                                  
|                                                       |  | (In thousands, except share data)
|Balances at January 1, 2000                            |  |                                   | 6,366,838  |            |  | $       | 1 |              |  | $             | 12,895  |           |  | $ |        |   |  | $ | 7,326   |   |  | $ | 20,222  |  
|Exercise of stock options and stock issuance           |  |                                   | 340,380    |            |  |         |  |              |  |               | 4,787   |           |  |   |        |   |  |   |        |   |  |   | 4,787   |  
|Issuance of stock warrants                             |  |                                   |           |            |  |         |  |              |  |               | 9,754   |           |  |   |        |   |  |   |        |   |  |   | 9,754   |  
|Sale of common stock for notes receivable              |  |                                   | 836,353    |            |  |         |  |              |  |               | 12,168  |           |  |   | (12,168 | ) |  |   |        |   |  |   |        |  
|Repurchases of common stock                            |  |                                   | (133       | )          |  |         |  |              |  |               | (2      | )         |  |   |        |   |  |   |        |   |  |   | (2      | )
|Reduction of stock warrants outstanding                |  |                                   |           |            |  |         |  |              |  |               | (738    | )         |  |   |        |   |  |   |        |   |  |   | (738    | )
|Interest on notes receivable                           |  |                                   |           |            |  |         |  |              |  |               |        |           |  |   | (185    | ) |  |   |        |   |  |   | (185    | )
|Preferred stock dividends                              |  |                                   |           |            |  |         |  |              |  |               |        |           |  |   |        |   |  |   | (5,060  | ) |  |   | (5,060  | )
|Accretion to preferred stock redemption value          |  |                                   |           |            |  |         |  |              |  |               |        |           |  |   |        |   |  |   | (880    | ) |  |   | (880    | )
|Accretion to Class A common stock redemption
    value |  |                                   |           |            |  |         |  |              |  |               |        |           |  |   |        |   |  |   | (695    | ) |  |   | (695    | )
|Net loss                                               |  |                                   |           |            |  |         |  |              |  |               |        |           |  |   |        |   |  |   | (19,103 | ) |  |   | (19,103 | )
|                                                       |  |                                   |            |            |  |         |   |              |  |               |         |           |  |   |         |   |  |   |         |   |  |   |         |  
|Balances at December 31, 2000                          |  |                                   | 7,543,438  |            |  | $       | 1 |              |  | $             | 38,864  |           |  | $ | (12,353 | ) |  | $ | (18,412 | ) |  | $ | 8,100   |  
|Exercise of stock options and stock issuance           |  |                                   | 16,144     |            |  |         |  |              |  |               | 219     |           |  |   |        |   |  |   |        |   |  |   | 219     |  
|Sale of common stock for notes receivable              |  |                                   | 70,055     |            |  |         |  |              |  |               | 1,029   |           |  |   | (1,029  | ) |  |   |        |   |  |   |        |  
|Repurchases of common stock                            |  |                                   | (158,604   | )          |  |         |  |              |  |               | (2,328  | )         |  |   | 2,308   |   |  |   |        |   |  |   | (20     | )
|Interest on notes receivable, net of cash received     |  |                                   |           |            |  |         |  |              |  |               |        |           |  |   | (601    | ) |  |   |        |   |  |   | (601    | )
|Preferred stock dividends                              |  |                                   |           |            |  |         |  |              |  |               |        |           |  |   |        |   |  |   | (6,568  | ) |  |   | (6,568  | )
|Accretion to preferred stock redemption value          |  |                                   |           |            |  |         |  |              |  |               |        |           |  |   |        |   |  |   | (943    | ) |  |   | (943    | )
|Accretion to Class A common stock redemption
    value |  |                                   |           |            |  |         |  |              |  |               |        |           |  |   |        |   |  |   | (697    | ) |  |   | (697    | )
|Net loss                                               |  |                                   |           |            |  |         |  |              |  |               |        |           |  |   |        |   |  |   | (21,449 | ) |  |   | (21,449 | )
|                                                       |  |                                   |            |            |  |         |   |              |  |               |         |           |  |   |         |   |  |   |         |   |  |   |         |  
|Balances at December 31, 2001                          |  |                                   | 7,471,033  |            |  | $       | 1 |              |  | $             | 37,784  |           |  | $ | (11,675 | ) |  | $ | (48,069 | ) |  | $ | (21,959 | )
|Exercise of stock options and stock issuance           |  |                                   | 1,163,350  |            |  |         |  |              |  |               | 1,378   |           |  |   |        |   |  |   |        |   |  |   | 1,378   |  
|Sale of stock in initial public offering               |  |                                   | 15,525,000 |            |  |         | 2 |              |  |               | 228,378 |           |  |   |        |   |  |   | (1,600  | ) |  |   | 226,780 |  

F-4



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##### Table of Contents



|                                                           |  |                                   |            |            |  |         |   |              |  |               |         |           |  |   |         |   |  |   |         |   |  |   |         |  
|---------------------------------------------------------- |  | --------------------------------- | ---------- | ---------- |  | ------- | - | ------------ |  | ------------- | ------- | --------- |  | - | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                                           |  |                                   |            |            |  |         |   | Retained     |  | Total        
|                                                           |  | Common Stock                      |            | Additional |  |         |   | Earnings     |  | Stockholders
|                                                           |  |                                   |            | Paid-in    |  | Notes   |   | (Accumulated |  | Equity       
|                                                           |  | Shares                            |            | Amount     |  | Capital |   | Receivable   |  | Deficit)      |         | (Deficit)
|                                                           |  |                                   |            |            |  |         |   |              |  |               |         |          
|                                                           |  |                                  
|                                                           |  | (In thousands, except share data)
|Issuance of stock warrants                                 |  |                                   |           |            |  |         |  |              |  |               | 4,127   |           |  |   |        |   |  |   | (1,989  | ) |  |   | 2,138   |  
|Repurchases of common stock                                |  |                                   | (58,012    | )          |  |         |  |              |  |               | (880    | )         |  |   | 880     |   |  |   |        |   |  |   |        |  
|Interest on notes receivable, net of cash received         |  |                                   |           |            |  |         |  |              |  |               |        |           |  |   | (683    | ) |  |   |        |   |  |   | (683    | )
|Redemption of notes receivable                             |  |                                   |           |            |  |         |  |              |  |               |        |           |  |   | 1,051   |   |  |   |        |   |  |   | 1,051   |  
|Conversion of Class A stock to common stock                |  |                                   | 9,990,889  |            |  |         | 1 |              |  |               | 143,783 |           |  |   |        |   |  |   | (35,306 | ) |  |   | 108,478 |  
|Preferred stock dividends and early redemption
    premium |  |                                   |           |            |  |         |  |              |  |               |        |           |  |   |        |   |  |   | (10,276 | ) |  |   | (10,276 | )
|Accretion to preferred stock redemption value              |  |                                   |           |            |  |         |  |              |  |               |        |           |  |   |        |   |  |   | (9,279  | ) |  |   | (9,279  | )
|Accretion to Class A common stock redemption
    value     |  |                                   |           |            |  |         |  |              |  |               |        |           |  |   |        |   |  |   | (295    | ) |  |   | (295    | )
|Net income                                                 |  |                                   |           |            |  |         |  |              |  |               |        |           |  |   |        |   |  |   | 12,284  |   |  |   | 12,284  |  
|                                                           |  |                                   |            |            |  |         |   |              |  |               |         |           |  |   |         |   |  |   |         |   |  |   |         |  
|Balances at December 31, 2002                              |  |                                   | 34,092,260 |            |  | $       | 4 |              |  | $             | 414,570 |           |  | $ | (10,427 | ) |  | $ | (94,530 | ) |  | $ | 309,617 |  
|                                                           |  |                                   |            |            |  |         |   |              |  |               |         |           |  |   |         |   |  |   |         |   |  |   |         |  

See accompanying notes to consolidated financial
statements.

F-5



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##### Table of Contents



VERIDIAN CORPORATION AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH
FLOWS

Years ended December 31, 2002, 2001 and
2000


|                                      |                                                                                                         |                                                                                |                                     |                                                         |        |        |          |         |        |         |         |         |        |        |         |  
|------------------------------------- | ------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------ | ----------------------------------- | ------------------------------------------------------- | ------ | ------ | -------- | ------- | ------ | ------- | ------- | ------- | ------ | ------ | ------- | -
|                                      |                                                                                                         | 2002                                                                           |                                     | 2001                                                    |        | 2000  
|                                      |                                                                                                         |                                                                                |                                     |                                                         |        |       
|                                      |                                                                                                         |                                                                               
|                                      |                                                                                                         | (In thousands)                                                                
|Cash flows from operating activities: |                                                                                                         |                                                                                |                                     |                                                         |        |        |          |         |        |         |         |        
|                                      | Net income (loss)                                                                                       |                                                                                | $                                   | 12,284                                                  |        |        | $        | (21,449 | )      |         | $       | (19,103 | )     
|                                      | Adjustments to reconcile net income
    (loss) to net cash provided (used) by operating
    activities: |                                                                                |                                     |                                                         |        |        |          |         |        |         |         |         |       
|                                      |                                                                                                         | Depreciation and amortization                                                  |                                     |                                                         | 12,228 |        |          |         | 22,366 |         |         |         | 21,849 |       
|                                      |                                                                                                         | Extraordinary loss, pretax                                                     |                                     |                                                         | 18,494 |        |          |         |       |         |         |         | 1,541  |       
|                                      |                                                                                                         | Noncash interest expense                                                       |                                     |                                                         | 1,311  |        |          |         | 1,758  |         |         |         | 3,703  |       
|                                      |                                                                                                         | Noncash stock compensation expense                                             |                                     |                                                         | 165    |        |          |         | 206    |         |         |         | 467    |       
|                                      |                                                                                                         | Noncash interest income on stock purchase notes                                |                                     |                                                         | (691   | )      |          |         | (706   | )       |         |         | (185   | )     
|                                      |                                                                                                         | Gain from sale of assets                                                       |                                     |                                                         |       |        |          |         |       |         |         |         | (723   | )     
|                                      |                                                                                                         | (Gain) loss from pension plan settlements                                      |                                     |                                                         | (512   | )      |          |         | 1,119  |         |         |         |       |       
|                                      |                                                                                                         | Loss from discontinued operations                                              |                                     |                                                         |       |        |          |         | 11,277 |         |         |         | 7,110  |       
|                                      |                                                                                                         | Loss on disposal of discontinued operations                                    |                                     |                                                         | 2,341  |        |          |         | 6,355  |         |         |         |       |       
|                                      |                                                                                                         | Loss on disposal of property, plant and equipment                              |                                     |                                                         | 140    |        |          |         | 237    |         |         |         | 185    |       
|                                      |                                                                                                         | Deferred income tax expense (benefit)                                          |                                     |                                                         | 4,680  |        |          |         | (2,860 | )       |         |         | (2,687 | )     
|                                      |                                                                                                         | Change in assets and liabilities, net of effects
    of business acquisitions: |                                     |                                                         |        |        |          |         |        |         |         |         |        |       
|                                      |                                                                                                         |                                                                                | Receivables                         |                                                         |        | 14,585 |          |         |        | (42,579 | )       |         |        | 12,252 |        
|                                      |                                                                                                         |                                                                                | Inventories                         |                                                         |        | 668    |          |         |        | 586     |         |         |        | 384    |        
|                                      |                                                                                                         |                                                                                | Income taxes receivable             |                                                         |        | (3,574 | )        |         |        | (630    | )       |         |        | 6,208  |        
|                                      |                                                                                                         |                                                                                | Other assets                        |                                                         |        | (3,334 | )        |         |        | 187     |         |         |        | (582   | )      
|                                      |                                                                                                         |                                                                                | Accounts payable                    |                                                         |        | 1,447  |          |         |        | 8,604   |         |         |        | (6,391 | )      
|                                      |                                                                                                         |                                                                                | Income taxes payable                |                                                         |        |       |          |         |        | (746    | )       |         |        | 346    |        
|                                      |                                                                                                         |                                                                                | Accrued employee compensation costs |                                                         |        | 3,535  |          |         |        | 9,391   |         |         |        | 4,955  |        
|                                      |                                                                                                         |                                                                                | Other accrued expenses              |                                                         |        | 4,262  |          |         |        | (2,396  | )       |         |        | (8,130 | )      
|                                      |                                                                                                         |                                                                                | Post-retirement benefits            |                                                         |        | (347   | )        |         |        | (343    | )       |         |        | (554   | )      
|                                      |                                                                                                         |                                                                                | Other long-term liabilities         |                                                         |        | 1,329  |          |         |        | (4      | )       |         |        | (107   | )      
|                                      |                                                                                                         |                                                                                |                                     |                                                         |        |        |          |         |        |         |         |        
|                                      |                                                                                                         |                                                                                |                                     | Net cash provided by (used in) operating
    activities |        |        | 69,011   |         |        |         | (9,627  | )       |        |        | 20,538  |  
|                                      |                                                                                                         |                                                                                |                                     |                                                         |        |        |          |         |        |         |         |        
|Cash flows from investing activities: |                                                                                                         |                                                                                |                                     |                                                         |        |        |          |         |        |         |         |        
|                                      | Purchases of property, plant and equipment                                                              |                                                                                |                                     | (11,476                                                 | )      |        |          | (13,892 | )      |         |         | (11,929 | )     
|                                      | Proceeds from disposals of property, plant and
    equipment                                            |                                                                                |                                     | 9                                                       |        |        |          | 425     |        |         |         |        |       
|                                      | Proceeds from sale of assets                                                                            |                                                                                |                                     | 500                                                     |        |        |          |        |        |         |         | 5,586   |       
|                                      | Cash used by discontinued operations                                                                    |                                                                                |                                     | (8,087                                                  | )      |        |          | (4,224  | )      |         |         | (8,123  | )     
|                                      | Acquisitions of businesses, net of cash acquired                                                        |                                                                                |                                     | (202,727                                                | )      |        |          | (1,500  | )      |         |         |        |       
|                                      |                                                                                                         |                                                                                |                                     |                                                         |        |        |          |         |        |         |         |        
|                                      |                                                                                                         |                                                                                |                                     | Net cash used in investing activities                   |        |        | (221,781 | )       |        |         | (19,191 | )       |        |        | (14,466 | )
|                                      |                                                                                                         |                                                                                |                                     |                                                         |        |        |          |         |        |         |         |        



(Continued)


F-6



---



##### Table of Contents



|                                                                           |                                                                                                   |                                                          |        |          |         |      |       |          |        |   |       |          |        |  
|-------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------- | -------------------------------------------------------- | ------ | -------- | ------- | ---- | ----- | -------- | ------ | - | ----- | -------- | ------ | -
|                                                                           |                                                                                                   | 2002                                                     |        | 2001     |         | 2000
|                                                                           |                                                                                                   |                                                          |        |          |         |     
|                                                                           |                                                                                                   |                                                         
|                                                                           |                                                                                                   | (In thousands)                                          
|Cash flows from financing activities:                                      |                                                                                                   |                                                          |        |          |         |      |       |          |        |   |       |         
|                                                                           | Proceeds from borrowings of long-term debt, net
    of transaction costs                          |                                                          |        | 398,284  |         |      |       | 300,650  |        |   |       | 224,531  |       
|                                                                           | Proceeds from initial public offering, net of
    transaction costs                               |                                                          |        | 226,780  |         |      |       |         |        |   |       |         |       
|                                                                           | Proceeds from exercise of stock options and stock
    issuance                                    |                                                          |        | 1,213    |         |      |       | 14       |        |   |       | 4,321    |       
|                                                                           | Proceeds from interest on notes receivable                                                        |                                                          |        | 8        |         |      |       | 105      |        |   |       |         |       
|                                                                           | Principal payments of long-term debt                                                              |                                                          |        | (296,896 | )       |      |       | (271,650 | )      |   |       | (237,293 | )     
|                                                                           | Principal payments of notes payable assumed in
    acquisitions                                   |                                                          |        |         |         |      |       | (500     | )      |   |       |         |       
|                                                                           | Retirement of subordinated notes, including
    prepayment penalty                                |                                                          |        | (100,700 | )       |      |       |         |        |   |       |         |       
|                                                                           | Redemption of preferred stock, including
    liquidation premium and dividends                    |                                                          |        | (66,371  | )       |      |       |         |        |   |       |         |       
|                                                                           | Repurchases of common stock                                                                       |                                                          |        |         |         |      |       | (20      | )      |   |       | (2       | )     
|                                                                           | Other                                                                                             |                                                          |        |         |         |      |       |         |        |   |       | (20      | )     
|                                                                           |                                                                                                   |                                                          |        |          |         |      |       |          |        |   |       |         
|                                                                           |                                                                                                   | Net cash provided by (used in) financing
    activities  |        |          | 162,318 |      |       |          | 28,599 |   |       |          | (8,463 | )
|                                                                           |                                                                                                   |                                                          |        |          |         |      |       |          |        |   |       |         
|                                                                           |                                                                                                   | Net increase (decrease) in cash and cash
    equivalents |        |          | 9,548   |      |       |          | (219   | ) |       |          | (2,391 | )
|Cash and cash equivalents at beginning of period                           |                                                                                                   |                                                          | 2,105  |          |         |      | 2,324 |          |        |   | 4,715 |         
|                                                                           |                                                                                                   |                                                          |        |          |         |      |       |          |        |   |       |         
|Cash and cash equivalents at end of period                                 |                                                                                                   | $                                                        | 11,653 |          |         | $    | 2,105 |          |        | $ | 2,324 |         
|                                                                           |                                                                                                   |                                                          |        |          |         |      |       |          |        |   |       |         
|Supplemental disclosures of cash flow information:                         |                                                                                                   |                                                          |        |          |         |      |       |          |        |   |       |         
|                                                                           | Cash paid during the year for interest                                                            |                                                          | $      | 16,978   |         |      | $     | 26,507   |        |   | $     | 34,975   |       
|                                                                           | Cash paid during the period for income taxes                                                      |                                                          |        | 8,837    |         |      |       | 2,708    |        |   |       | 940      |       
|Supplemental disclosure of noncash investing and
    financing activities: |                                                                                                   |                                                          |        |          |         |      |       |          |        |   |       |         
|                                                                           | Preferred stock dividends                                                                         |                                                          | $      | 3,307    |         |      | $     | 6,568    |        |   | $     | 5,060    |       
|                                                                           | Accretion to preferred stock and Class A
    common stock redemption values                       |                                                          |        | 9,569    |         |      |       | 1,640    |        |   |       | 1,575    |       
|                                                                           | Conversion of Class A common stock                                                                |                                                          |        | 143,784  |         |      |       |         |        |   |       |         |       
|                                                                           | Issuance of anti-dilutive warrants to
    Series A preferred stockholders                         |                                                          |        | 1,989    |         |      |       |         |        |   |       |         |       
|                                                                           | Issuance of subordinated notes as partial
    consideration for acquisition of SIGNAL Corporation |                                                          |        | 25,000   |         |      |       |         |        |   |       |         |       
|                                                                           | Sale of common stock in exchange for promissory
    notes receivable and accrued interest         |                                                          |        |         |         |      |       | 1,029    |        |   |       | 12,353   |       
|                                                                           | Repurchase of common stock in exchange for
    forgiveness of promissory notes receivable         |                                                          |        | 880      |         |      |       | 2,308    |        |   |       |         |       
|                                                                           | Acquisition of net assets of business in exchange
    for promissory note payable                 |                                                          |        |         |         |      |       | 500      |        |   |       |         |       

See accompanying notes to consolidated financial
statements.

F-7



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##### Table of Contents



VERIDIAN CORPORATION AND
SUBSIDIARIES

Notes to Consolidated Financial
Statements

(Dollars in thousands, except share
data)


(1) Organization and Basis of
Presentation



| |                                    
| | -----------------------------------
| | (a) Organization and
    Operations

Veridian Corporation (the Company) provides a
variety of information-based systems, integrated solutions and
services primarily to the U.S. government. The
Companys offerings include the design, development,
deployment, operation and protection of vital networks,
databases and other information and intelligence services.
Revenues from the U.S. government, including work as a
subcontractor for other government prime contractors,
represented approximately 95 percent, 92 percent and
91 percent of revenues for the years ended
December 31, 2002, 2001, and 2000, respectively.

On December 12, 2001, the Company adopted a
formal plan to exit its commercial network security business
operated through its wholly-owned subsidiary, Veritect, Inc.
(Veritect), and completed the sale of Veritect operations in
June 2002. The assets and liabilities not retained by the
Company, and results of operations and cash flows of Veritect,
have been recorded in the accompanying financial statements as
discontinued operations (note 17).

The Company is subject to all of the risks
associated with conducting business with the U.S. federal
government, including the risk of contract terminations at the
convenience of the government. In addition, government funding
continues to be dependent on congressional approval of program
level funding and on contracting agency approval for the
Companys work. The extent to which the Companys
existing contracts will be funded in the future cannot be
determined.



| |                                                         
| | --------------------------------------------------------
| | (b) Business Segment and Geographic
    Area Information

The Company maintains four operating segments:
Veridian Engineering, Veridian Information Solutions, Veridian
Systems, and Veridian IT Services. All four operating segments
provide a broad range of technology and engineering services
primarily to agencies of the U.S. government. The operating
segments have been aggregated for financial reporting purposes
based on similarities and consistencies in the customer base,
economic characteristics, methods of marketing, selling and
providing services, and workforces of each of the operating
segments. Also, each of the operating segments is subject to the
same Federal Acquisition Regulations that govern bid and
proposal procedures, and utilizes similar contract vehicles to
provide services to the U.S. government.

The Companys services are provided
primarily in the United States. The Company has two contracts
with government agencies that have annual revenues in excess of
$50,000 each. One of the contracts, with a total value of more
than $300,000, expires in September 2003. The other contract
expires in May 2005 and has an estimated value of $280,000.



| |                                    
| | -----------------------------------
| | (c) Principles of
    Consolidation

The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All
significant intercompany balances and transactions have been
eliminated in consolidation.

Veridian is a holding company with no independent
operations and no significant assets other than its investments
in its subsidiaries. As such, Veridian is dependent on its
subsidiaries for funding to meet its obligations, including
those related to bank credit facilities, and seller notes.

(2) Recapitalization



| |                                
| | -------------------------------
| | (a) Initial Public
    Offering

On June 10, 2002, the Company closed on the
initial public offering of 15,525,000 shares of common stock,
including the sale of 2,025,000 shares to cover over-allotments
granted to underwriters, at $16 per share,

F-8



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##### Table of Contents



VERIDIAN CORPORATION AND
SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)

(Dollars in thousands, except share
data)


generating net cash proceeds of $226,780. The
majority of the proceeds were used to retire long-term debt and
preferred stock. $100,700 was used to retire the Companys
14.50 percent senior subordinated notes (subordinated
notes) due July 31, 2008, including a 6 percent early
extinguishment penalty of $5,700 of the face amount of the
subordinated notes, and $66,371 was used to redeem all of its
senior redeemable exchangeable preferred stock, Series A
(Series A preferred stock), including a 12 percent
early redemption penalty of $6,969 and accrued dividends of
$1,328. The proceeds were also used to fund the repayment of
$28,436 of outstanding principal due under revolving loans of
the Companys then existing credit facility (the 2000
facility) that were not funded by proceeds of the refinancing
(note 2(b)). The remaining proceeds of $31,273 were
available to fund working capital requirements and business
acquisitions.



| |                
| | ---------------
| | (b) Refinancing

Concurrent with the closing of the initial public
offering, the Company replaced the 2000 credit facility with a
new facility (the 2002 facility) provided by a syndicate of
financial institutions. The Company received proceeds of
$130,000, net of transaction costs of $2,561, to repay $108,075
and $19,364 of principal due under term and revolving loans,
respectively, that were outstanding under the 2000 credit
facility. An additional $28,436 of revolving loan principal
outstanding under the 2000 facility was repaid with proceeds
from the initial public offering. The 2002 facility was
subsequently expanded in connection with the acquisition of
SIGNAL Corporation (SIGNAL) (note 3).



| |                                           
| | ------------------------------------------
| | (c) Conversion of Class A Common
    Stock

In connection with the initial public offering,
all of the Companys outstanding Class A common stock
was converted into common stock in accordance with the
Class A common stock purchase agreement dated
September 7, 1999 (the Class A agreement). Under the
terms of the Class A agreement, based on the common stock
offering price of $16 per share, the Class A common stock
was converted at the maximum permissible rate of 1.365188 shares
of common stock for each share of Class A common stock. In
total, 7,318,325 shares of Class A common stock were
converted into 9,990,889 shares of common stock. Upon the
conversion, the Company recognized the transfer of $35,306 of
value from the common stockholders to the Class A common
stockholders. This amount is reflected as a beneficial
conversion to the Class A common stockholders in deriving
the net loss attributable to common stockholders in the
accompanying statement of operations for the year ended
December 31, 2002.



| |                                                     
| | ----------------------------------------------------
| | (d) Stock Split and Changes in
    Authorized Shares

In contemplation of the initial public offering,
on May 16, 2002, the Company affected a 1.33-for-1 stock
split of the Companys Class A and Class B common
stock. Also on May 16, 2002, the Company effected a
conversion of Class B common stock to common stock, on a
share-for-share basis, increased the number of authorized shares
of common stock to 130,000,000, adjusted the number of
authorized preferred shares to 20,000,000, and increased the
number of shares of common stock reserved for issuance under the
2000 Stock Incentive Plan from 4,123,000 to 4,788,000 shares.

All share, per share, and conversion amounts
relating to the Class A and Class B common stock,
stock options, and stock purchase warrants included in the
accompanying consolidated financial statements have been
retroactively adjusted to reflect the stock split.



| |                                
| | -------------------------------
| | (e) Stock Purchase
    Warrants

In connection with the conversion of the
Class A common stock, the Company issued 124,328 and
133,628 warrants to purchase common stock to the former holders
of the Series A preferred stock and subordinated notes,
respectively. The warrants were issued in accordance with
anti-dilutive clauses contained

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##### Table of Contents



VERIDIAN CORPORATION AND
SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)

(Dollars in thousands, except share
data)


in the purchase agreements covering the original
sale of the Series A preferred stock and subordinated
notes. Each warrant issued entitles its holder to purchase one
share of common stock at $0.000075 per share. Warrants issued to
both the former Series A preferred stockholders and
subordinated noteholders are effective through September 7,
2010.

The Company valued the warrants under the fair
value method as required under SFAS No. 123. The
Black-Scholes method was used with the following assumptions: a
risk free interest rate of 4.85 percent, expected common
stock market price volatility of 50 percent, and a term of
8.25 years. The value of the warrants issued to the
Series A preferred stockholders totaled $1,989, and is
deducted from net income for the year ended December 31,
2002, in deriving the net loss attributable to common
stockholders. The value of the warrants issued to the former
subordinated noteholders totaled $2,138. This amount, net of an
income tax benefit of $859, is included as a component of the
extraordinary loss from early extinguishment of long-term debt
in the accompanying consolidated statement of operations for the
year ended December 31, 2002.

(3) Acquisition of SIGNAL
Corporation

On September 24, 2002, the Company acquired
all of the common stock and related assets of SIGNAL for
$227,727, including the assumption of certain debt of SIGNAL and
transaction costs incurred in the acquisition. The Company
financed the acquisition from available cash, an expansion of
its 2002 facility from $200,000 to $360,000 (Note 7(a)),
and the issuance of two promissory notes aggregating $25,000
payable to the selling shareholders (Note 7(b)).

SIGNAL provides a wide-array of information
technology, multi-media and engineering and consulting services
primarily to the United States Department of Defense and
various federal civilian agencies. SIGNAL also provides various
information technology services to various state and local
governments, commercial companies, and other governmental
contractors.

The Company has performed its assessment of the
fair values of tangible and intangible assets acquired, and
allocated approximately $172,116 of the purchase consideration
to goodwill based on the excess of the purchase consideration
over the estimated fair values of $15,611 of net tangible
assets, $2,000 of completed-technology assets, and $38,000 of
customer-related intangible assets. The Company is amortizing,
effective October 1, 2002, the completed-technology and
customer-related intangible assets on a straight-line basis over
4 and 10-year periods, respectively.

A summary of the fair value of assets acquired
and liabilities assessed in connection with the acquisition of
SIGNAL is as follows:

|                                          |  |   |         |  
|----------------------------------------- |  | - | ------- | -
|Accounts receivable                       |  | $ | 50,188  |  
|Prepaid expenses and other current assets |  |   | 665     |  
|Property and equipment                    |  |   | 1,760   |  
|Software rights                           |  |   | 2,000   |  
|Customer related intangible assets        |  |   | 38,000  |  
|Goodwill                                  |  |   | 172,116 |  
|Accounts payable and accrued expenses     |  |   | (37,002 | )
|                                          |  |   |         |  
|                                          |  | $ | 227,727 |  
|                                          |  |   |         |  

SIGNAL contributed $82,733 to the Companys
revenues during the year ended December 31, 2002.

F-10



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##### Table of Contents



VERIDIAN CORPORATION AND
SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)

(Dollars in thousands, except share
data)


The following unaudited pro forma information
presents consolidated information as if the acquisition of
SIGNAL had occurred on January 1, 2001. The pro forma
information is provided for informational purposes only and is
based on historical data that does not necessarily reflect
actual results that would have occurred, nor is it necessarily
indicative of future results of operations of the combined
entity:

|                                                  |  |                         |           |      |  |  |         |  
|------------------------------------------------- |  | ----------------------- | --------- | ---- |  |  | ------- | -
|                                                  |  |                        
|                                                  |  | Year Ended December 31,
|                                                  |  |                        
|                                                  |  | 2002                    |           | 2001
|                                                  |  |                         |           |     
|Total revenues                                    |  | $                       | 1,015,908 |      |  |  | 939,513 |  
|Operating income                                  |  |                         | 75,942    |      |  |  | 48,944  |  
|Net loss attributable to common stockholders      |  |                         | (30,196   | )    |  |  | (11,666 | )
|                                                  |  |                         |           |      |  |  |         |  
|Net loss per common share  basic and
    diluted |  | $                       | (1.39     | )    |  |  | (1.56   | )
|                                                  |  |                         |           |      |  |  |         |  

(4) Summary of Significant Accounting
Policies



| |                                  
| | ---------------------------------
| | (a) Cash and Cash
    Equivalents

Cash and cash equivalents include cash in banks
and highly liquid investments having a maturity of three months
or less on the date of purchase. Cash equivalents at
December 31, 2002 were $3,400. There were no cash
equivalents held at December 31, 2001.



| |                
| | ---------------
| | (b) Inventories

Inventories are stated at the lower of cost or
market under the first-in, first-out (FIFO) cost method.



| |                        
| | -----------------------
| | (c) Revenue Recognition

The Companys revenue is derived from
services performed under cost-plus, fixed-price and
time-and-materials contracts. Revenue on cost-plus contracts is
recognized based on reimbursable costs incurred plus estimated
fees earned thereon. Revenue on fixed-price contracts is
recognized using the percentage-of-completion method based on
the ratio of costs incurred to estimated total costs upon
completion. Revenues under certain long-term fixed-price
contracts that require product deliveries are recognized on a
percentage-of-completion basis using the units of delivery as
the measurement basis for effort accomplished. Revenue on
time-and-materials contracts is based on fixed billable rates
for hours delivered plus reimbursable costs.

The majority of the Companys contracts are
either cost-plus-fixed-fee, cost-plus-award-fee or time and
materials contracts. These contracts may either require the
Company to work on defined tasks or deliver a specific number of
hours of service. In either case, costs are reimbursed up to the
contract-authorized cost ceiling as they are incurred. If a
contracted task has not been completed, or the specific number
of hours of service has not been delivered at the time the
authorized cost is expended, the Company may be required to
complete the work or provide additional labor hours. The Company
will be reimbursed for the additional costs but may not receive
an additional fee, or the fee may be prorated proportionately to
the number of labor hours actually provided. For
cost-plus-award-fee contracts, the Company recognizes the
expected fee to be awarded by the customer at the time such fee
can be reasonably estimated based on factors such as customer
communications of Company performance, prior award experience,
and interim performance evaluations.

The Company recognizes revenue under its
contracts when a contract has been executed, the contract price
is fixed and determinable, delivery of the services or products
has occurred, and collectibility of the contract price is
considered probable. The Companys contracts with agencies
of the U.S. federal government are subject to periodic funding
by the respective contracting agency. Funding for a contract may
be provided in full at inception of the contract or ratably
throughout the contract as the services are provided. In
evaluating

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##### Table of Contents



VERIDIAN CORPORATION AND
SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)

(Dollars in thousands, except share
data)


the probability of funding for purposes of
assessing collectibility of the contract price, the Company
considers its previous experiences with the customers,
communications with the customers regarding funding status, and
the Companys knowledge of available funding to the
contract or program. If funding is not assessed as probable,
revenue recognition is deferred until realization is probable.

The Company recognizes revenue under its U.S.
federal government contracts based on allowable contract costs
in accordance with U.S. federal governments cost
accounting standards.

The costs incurred by the Company under
U.S. federal government contracts are subject to regulation
and audit by certain agencies of the U.S. federal
government. The Company provides an allowance for estimated
contract disallowances based on the amount of probable cost
disallowances. Such amounts have not been significant.

Anticipated losses on contracts are charged to
earnings as soon as such losses are known. Changes in estimated
profits on contracts are recorded during the period in which the
change in estimate occurs.



| |                                      
| | -------------------------------------
| | (d) Property, Plant and
    Equipment

Property, plant and equipment is stated at cost.
Depreciation is provided using either the straight-line or
double-declining balance method over the following useful lives:
5 to 20 years for buildings and improvements; 3 to
20 years for machinery, furniture and equipment; and 3 to
10 years for computer equipment and software. Leasehold
improvements are amortized using the straight-line method over
the shorter of the useful lives of the improvements or the terms
of the related leases.



| |                                 
| | --------------------------------
| | (e) System Development
    Costs

The Company follows the provisions of Statement
of Position 98-1 (SOP 981), Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use,as issued by the American Institute of Certified Public
Accountants. SOP 98-1 requires that both internal and external
costs incurred to develop internal-use computer software during
the application development stage be capitalized and
subsequently amortized over the estimated economic useful life
of the software. The Company amortizes such costs over periods
ranging from 5 to 10 years.

The Company has capitalized costs incurred for
the development and implementation of accounting and financial
reporting systems. The net carrying value of capitalized
development costs for these systems was $6,832 and $7,707, at
December 31, 2002 and 2001, respectively.



| |                                 
| | --------------------------------
| | (f) Deferred Financing
    Costs

Costs associated with obtaining the
Companys financing arrangements are deferred and amortized
over the term of the financing arrangements using a method that
approximates the effective interest method.



| |             
| | ------------
| | (g) Goodwill

Through December 31, 2001, goodwill was
amortized on a straight-line basis over an estimated useful life
of 20 years. Effective January 1, 2002, the Company
ceased amortizing goodwill in accordance with the provisions of
the Financial Accounting Standards Boards (FASB) Statement
of Financial Accounting Standards No. 142, Goodwill and
Other Intangible Assets(SFAS No. 142) (note 1(u)).
SFAS No. 142 instead requires that goodwill be assessed
annually for impairment for each of the Companys reporting
units. The amount of goodwill impairment, if any, is measured
based on projected discounted future operating cash flows using
a discount rate reflecting the Companys average cost of
funds.

F-12



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##### Table of Contents



VERIDIAN CORPORATION AND
SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)

(Dollars in thousands, except share
data)


(h) Other
Intangible Assets

Other intangible assets include the fair value of
customer contracts and associated customer relationships and the
cost of software rights acquired in connection with the
Companys purchase of SIGNAL (note 3). The
customer-related intangible assets and software rights are
expected to have no residual value, and are amortized on a
straight-line basis over estimated useful lives of 10 and
4 years, respectively. The expected amortization expense of
other intangible assets for the 5 years beginning
January 1, 2003 is as follows: 2003, $4,300; 2004, $4,300;
2005, $4,300; 2006, $4,175; and 2007, $3,800.

(i) Impairment
of Long-Lived Assets

For periods through December 31, 2001, the
Company evaluated the recoverability of its long-lived assets in
accordance with Statement of Financial Accounting Standards
No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of(SFAS
No. 121), annually. The Company recognized impairment
charges for certain long-term assets of Veritect in December
2001 (note 17). Effective January 1, 2002, the Company
adopted the provisions of Statement of Financial Accounting
Standards No. 144, Accounting for the Impairment on
Disposal of Long-Lived Assets(SFAS No. 144)
(note 1(u)).

(j) Costs
of Acquisitions

Costs incurred by legal, financial and other
professional advisors that are directly related to successful
acquisitions are capitalized as a cost of the acquisition, while
costs incurred by the Company for unsuccessful or terminated
acquisition opportunities are expensed when the Company
determines that the opportunity will no longer be pursued. Costs
incurred on anticipated acquisitions are deferred.

(k) Acquisition,
Integration and Related Expenses

Acquisition, integration and related expenses
include costs specifically related to the Companys
business acquisitions, subsequent activities to integrate the
acquired businesses into its organization, and costs associated
with an unsuccessful financing. Expenses included in this
category are limited to those types of expenses that are not
allowable as contract costs under the Federal Acquisition
Regulations. The following is a summary of acquisition,
integration and related expenses:

|                                                        |  |                         |   |      |  |      |       |  |  |   |       | 
|------------------------------------------------------- |  | ----------------------- | - | ---- |  | ---- | ----- |  |  | - | ----- | 
|                                                        |  |                        
|                                                        |  | Year Ended December 31,
|                                                        |  |                        
|                                                        |  | 2002                    |   | 2001 |  | 2000
|                                                        |  |                         |   |      |  |     
|Employee retention costs                                |  | $                       |  |      |  | $    | 1,417 |  |  | $ | 2,620 | 
|Employee severance costs                                |  |                         |  |      |  |      |      |  |  |   | 1,755 | 
|Uncapitalized transaction expenses                      |  |                         |  |      |  |      |      |  |  |   | 262   | 
|Excess facility costs                                   |  |                         |  |      |  |      | 650   |  |  |   |      | 
|                                                        |  |                         |   |      |  |      |       |  |  |   |       | 
|Total acquisition, integration and related
    expenses |  | $                       |  |      |  | $    | 2,067 |  |  | $ | 4,637 | 
|                                                        |  |                         |   |      |  |      |       |  |  |   |       | 

(l) Stock-Based
Compensation

The Company applies the intrinsic value-based
method of accounting prescribed by Accounting Principles Board
(APB) Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations
including FASB Interpretation No. 44, Accounting for
Certain Transactions involving Stock Compensation an
interpretation of APB Opinion No. 25 issued in March
2000, to account for its fixed plan stock options. Under this
method, compensation expense is recorded on the date of grant
only if the current market price of the underlying stock exceeds
the exercise price. SFAS No. 123, Accounting for
Stock-Based Compensation, established accounting and
disclosure requirements using a fair value-based method of

F-13



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##### Table of Contents



VERIDIAN CORPORATION AND
SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)

(Dollars in thousands, except share
data)


accounting for stock-based employee compensation
plans. As allowed by SFAS No. 123, the Company has elected
to continue to apply the intrinsic value-based method of
accounting described above, and has adopted the disclosure
requirements of SFAS No. 123. The table below illustrates
the effect on the net loss attributable to common stockholders
if the fair-value-based method had been applied to employee
stock benefits. Assumptions used in computing the pro forma
effect of stock-based compensation for employees is presented in
note 16.

|                                                            |                    |                         |   |         |       |      |   |         |       |   |   |         |       |  
|----------------------------------------------------------- | ------------------ | ----------------------- | - | ------- | ----- | ---- | - | ------- | ----- | - | - | ------- | ----- | -
|                                                            |                    |                        
|                                                            |                    | Year Ended December 31,
|                                                            |                    |                        
|                                                            |                    | 2002                    |   | 2001    |       | 2000
|                                                            |                    |                         |   |         |       |     
|Net loss attributable to common stockholders:               |                    |                         |   |         |       |      |   |         |       |   |   |        
|                                                            | As reported        |                         | $ | (46,456 | )     |      | $ | (29,657 | )     |   | $ | (25,738 | )    
|                                                            |                    |                         |   |         |       |      |   |         |       |   |   |        
|                                                            | Pro forma          |                         |   | (47,516 | )     |      |   | (29,949 | )     |   |   | (26,043 | )    
|                                                            |                    |                         |   |         |       |      |   |         |       |   |   |        
|Net loss per share attributable to common
    stockholders: |                    |                         |   |         |       |      |   |         |       |   |   |        
|                                                            | Basic and diluted: |                         |   |         |       |      |   |         |       |   |   |         |      
|                                                            |                    | As reported             |   | $       | (2.13 | )    |   | $       | (3.96 | ) |   | $       | (3.84 | )
|                                                            |                    |                         |   |         |       |      |   |         |       |   |   |        
|                                                            |                    | Pro forma               |   |         | (2.18 | )    |   |         | (4.00 | ) |   |         | (3.88 | )
|                                                            |                    |                         |   |         |       |      |   |         |       |   |   |        

All equity-based awards to non-employees are
accounted for at a fair value in accordance with SFAS
No. 123.

(m) Research
and Development

Company-sponsored research and development costs,
including costs to develop proprietary software prior to
technological feasibility, are expensed as incurred and amounted
to $5,941, $6,218 and $5,795 in 2002, 2001 and 2000,
respectively. Such expenses are included in indirect costs,
selling and general and administrative expenses.

(n) Income
Taxes

Income taxes are accounted for using the asset
and liability method whereby deferred tax assets and liabilities
are recognized for the future tax consequences attributable to
differences between the consolidated financial statement
carrying amounts of assets and liabilities and their respective
tax bases and operating loss and tax credit carryforwards.
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
due to a change in tax rates is recognized in income in the
period that includes the enactment date. Estimates of the
realizability of deferred tax assets are based on the scheduled
reversal of deferred tax liabilities, projected future taxable
income, and tax planning strategies.

(o) Earnings
(Loss) Per Share

Basic and diluted earnings and loss per share are
presented in conformity with Statement of Financial Accounting
Standards No. 128, Earnings Per Share(SFAS 128), and SEC Staff Accounting Bulletin
No. 98 (SAB 98). Basic earnings or loss per share is
computed using the sum of the weighted-average number of
outstanding shares of common stock. Diluted earnings or loss per
share is computed in a manner similar to that used for basic
earnings per share after giving effect to the dilutive effects
of the exercise of stock options, the exercise of stock
warrants, and the conversion of Class A common stock.
Except for the three-month periods ended December 31,
September 30, and March 31, 2002, potentially dilutive
securities are excluded

F-14



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##### Table of Contents



VERIDIAN CORPORATION AND
SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)

(Dollars in thousands, except share
data)


from the Companys diluted loss per share
computations as their inclusion would be anti-dilutive for
periods in which the Company reports losses.

(p) Concentrations
of Credit Risk

Financial instruments that potentially subject
the Company to credit risk include accounts receivable and cash
and cash equivalents. Management believes that credit risk
related to the Companys accounts receivable is limited due
to a large number of customers in differing segments and
agencies of the U.S. government. Accounts receivable credit risk
is also limited due to the creditworthiness of the U.S.
government. Management believes the credit risk associated with
the Companys cash equivalents is limited due to the credit
worthiness of the obligors of the investments underlying the
cash equivalents.

(q) Fair
Value of Financial Instruments

The carrying amounts of cash and cash
equivalents, receivables, accounts payable and amounts included
in other current assets and current liabilities that meet the
definition of a financial instrument approximate fair value
because of the short-term nature of these amounts.

The fair value of the Companys long-term
debt is estimated by discounting the future cash flows at rates
currently offered to the Company for similar debt instruments of
comparable maturities by the Companys lenders. The fair
value of the Companys interest rate swap at
December 31, 2002 and 2001 was based on current market
pricing models (note 7).

(r) Derivative
Instrument and Hedging Activities

The Company accounts for derivative instruments
and hedging activities in accordance with the Statement of
Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities(SFAS 133), as amended, effective January 1, 2001.
Derivatives are recognized as either assets or liabilities in
the consolidated balance sheet, and gains and losses are
recognized based on changes in the fair values. Gains and losses
on derivatives designated as a hedge, and deemed to be effective
hedges, are deferred and recognized upon contract completion.
Gains and losses on derivatives that are not designated as a
hedge, or that are not deemed to be effective hedges, are
recognized upon the change in fair values. The classification of
gains and losses resulting from the changes in fair values is
dependent on the intended use of the derivative and its
resulting designation.

The Company does not hold or issue such financial
instruments for trading purposes, nor is it a party to leveraged
derivatives.

(s) Commitments
and Contingencies

Liabilities for loss contingencies, including
environmental remediation costs, arising from claims,
assessments, litigation, fines and penalties and other sources
are recorded when it is probable that a liability has been
incurred and the amount of the assessment and/or remediation can
be reasonably estimated. The Company accrues for losses
associated with environmental remediation obligations when such
losses are probable and reasonably estimable. Accruals for
estimated losses from environmental remediation obligations
generally are recognized no later than completion of the
remedial feasibility study. Such accruals are adjusted as
further information develops or circumstances change. Costs of
future expenditures for environmental remediation obligations
are not discounted to their present value.

F-15



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##### Table of Contents



VERIDIAN CORPORATION AND
SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)

(Dollars in thousands, except share
data)


(t) Use
of Estimates

The preparation of consolidated financial
statements in conformity with accounting principles generally
accepted in the United States of America requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses
during the reported periods. The significant management
estimates include estimated costs to complete fixed-price
contracts, estimated award fees, deferred tax asset valuation
allowance, recoverability of long-lived assets, reserve for
accounts receivable, and loss contingencies. Actual results
could differ from these estimates.

(u) Recently
Issued Accounting Standards

In June 2001, the Financial Accounting Standards
Board (the FASB) issued SFAS No. 141, Business
Combinations(SFAS No. 141), and SFAS No. 142. In
August, 2001, the FASB issued SFAS No. 144. The Company
adopted the provisions of SFAS No. 141 as of July 1,
2001, and the provisions of SFAS No. 142 and SFAS
No. 144 as of January 1, 2002.

SFAS No. 141 requires that the purchase
method of accounting be used for all business combinations
completed after June 30, 2001, and specifies criteria that
intangible assets acquired in a business combination must meet
to be recognized and reported separately from goodwill. The
Company has applied the provisions of SFAS No. 141 to its
acquisition of SIGNAL (note 3). SFAS No. 142 requires
that goodwill and intangible assets with indefinite useful lives
no longer be amortized, but instead be tested for impairment at
least annually. SFAS No. 142 also requires that intangible
assets with estimable useful lives be amortized over their
respective estimated useful lives to their estimated residual
values, and reviewed for impairment in accordance with SFAS
No. 144.

In accordance with SFAS No. 141, goodwill
acquired in purchase business combinations completed before
June 30, 2001, has been amortized through December 31,
2001. For the years ended December 31, 2001 and 2000,
goodwill amortization was $11,760 and $12,579, respectively. The
following information reconciles reported net income and
earnings per share to adjusted net income and earnings per
share, excluding the goodwill amortization previously recognized.

|                                           |                                                                                  |                          |           |        |   |  |           |         |  
|------------------------------------------ | -------------------------------------------------------------------------------- | ------------------------ | --------- | ------ | - |  | --------- | ------- | -
|                                           |                                                                                  |                         
|                                           |                                                                                  | Years Ended December 31,
|                                           |                                                                                  |                         
|                                           |                                                                                  | 2001                     |           | 2000  
|                                           |                                                                                  |                          |           |       
|Net income                                 |                                                                                  |                          |           |        |   |  |           |        
|                                           | Loss from continuing operations                                                  |                          | $         | (3,817 | ) |  | $         | (11,068 | )
|                                           | Add back goodwill amortization                                                   |                          |           | 11,760 |   |  |           | 12,579  |  
|                                           |                                                                                  |                          |           |        |   |  |           |        
|                                           | Adjusted income from continuing operations                                       |                          | $         | 7,943  |   |  | $         | 1,511   |  
|                                           |                                                                                  |                          |           |        |   |  |           |        
|                                           | Adjusted net loss attributable to common
    stockholders                        |                          | $         | (9,689 | ) |  | $         | (6,524  | )
|                                           |                                                                                  |                          |           |        |   |  |           |        
|Basic and diluted earnings per share       |                                                                                  |                          |           |        |   |  |           |        
|                                           | Loss from continuing operations attributable to
    common stockholders          |                          | $         | (1.61  | ) |  | $         | (2.64   | )
|                                           | Add back goodwill amortization                                                   |                          |           | 1.57   |   |  |           | 1.87    |  
|                                           |                                                                                  |                          |           |        |   |  |           |        
|                                           | Adjusted loss from continuing operations
    attributable to common stockholders |                          | $         | (0.04  | ) |  | $         | (0.77   | )
|                                           |                                                                                  |                          |           |        |   |  |           |        
|                                           | Adjusted net loss attributable to common
    stockholders                        |                          | $         | (2.39  | ) |  | $         | (1.97   | )
|                                           |                                                                                  |                          |           |        |   |  |           |        
|Weighted average common shares outstanding |                                                                                  |                          | 7,479,979 |        |   |  | 6,710,679 |        
|                                           |                                                                                  |                          |           |        |   |  |           |        

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##### Table of Contents



VERIDIAN CORPORATION AND
SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)

(Dollars in thousands, except share
data)


With the adoption of SFAS No. 142, the
Company evaluated goodwill acquired in purchase business
combinations completed prior to June 30, 2001, and
determined that reclassifications to conform with the new
classification criteria of SFAS No. 141 were not required.
The Company also reassessed the useful lives and residual values
of all intangible assets acquired in purchase business
combinations completed prior to June 30, 2001, and
determined that estimated useful lives as assigned were proper.

Also, in accordance with SFAS No. 142, the
Company completed two impairment tests of goodwill during 2002.
The transitional impairment test was conducted in the second
quarter based on the carrying amount of unamortized goodwill of
$207,855 at January 1, 2002. The Company performed the
required annual impairment test for goodwill based on the
goodwill carrying value of $379,971 at December 31, 2002,
including $172,116 of goodwill acquired in connection with the
acquisition of SIGNAL (note 3). For both tests the Company
determined that no adjustment to the carrying value is required.

SFAS No. 144 addresses financial accounting
and reporting for the impairment or disposal of long-lived
assets and replaces SFAS No. 121. SFAS No. 144
requires that long-lived assets, excluding goodwill, be reviewed
for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to
future net cash flows expected to be generated by the asset. If
the carrying amount of an asset exceeds its estimated future
cash flows, an impairment charge is recognized by the amount by
which the carrying amount of the asset exceeds the fair value of
the asset.

SFAS No. 144 also supersedes the accounting
and reporting provisions of Accounting Principles Board Opinion
No. 30 (APB No. 30), Reporting the Results of
Operations  Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and
infrequently Occurring Events and Transactionsfor the
disposal of a segment of a business (as previously defined in
APB No. 30). SFAS No. 144 requires companies to
separately report discontinued operations and extends that
reporting to a component of an entity that either has been
disposed of (by sale, abandonment, or in a distribution to
owners) or is classified as held for sale. Assets to be disposed
of are reported at the lower of the carrying amount or fair
value less costs to sell. The provisions of SFAS No. 144
were not applied to the Companys disposal of Veritect
(note 17) as the Company committed to this disposal prior
to January 1, 2002.

In July 2001, the FASB issued Statement of
Financial Accounting Standards No. 143, Accounting for
Asset Retirement Obligations(SFAS No. 143), which will
be effective for fiscal years beginning after June 15,
2002. SFAS No. 143 requires that the fair value of a
liability for an asset retirement obligation be recognized in
the period in which it is incurred, if a reasonable estimate of
fair value can be made. The Company does not expect that this
statement will have a significant effect on its consolidated
financial position or results of operations.

In April 2002, the FASB issued SFAS No. 145,
Recission of FASB Statements 4, 44 and 64, Amendment of
FASB Statement No. 13, and Technical Corrections(SFAS 145). SFAS No. 145 eliminates the
requirement to report material gains or losses from debt
extinguishments as an extraordinary item, net of any applicable
income tax effect, in an entitys statement of operations.
SFAS No. 145 instead requires that a gain or loss
recognized from a debt extinguishment be classified as an
extraordinary item only when the extinguishment meets the
criteria of both unusual in nature and
infrequent in occurrence as prescribed under
Accounting Principles Bulletin No. 30. The provisions of
SFAS No. 145 are effective for fiscal years beginning after
December 15, 2002. The Company has recognized extraordinary
losses from debt extinguishments in 2002 and 2000, and beginning
in 2003, will reclassify its extraordinary losses on debt
extinguishments to operating expenses, and the tax benefits
associated with the debt extinguishments to income tax expense
(benefit).

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##### Table of Contents



VERIDIAN CORPORATION AND
SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)

(Dollars in thousands, except share
data)


In June 2002, the FASB issued SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal
Activities(SFAS No. 146). SFAS No. 146 requires
that liabilities associated with the exit or disposal activity
be recognized only when the liability is incurred. SFAS
No. 146 is effective for exit and disposal activities that
are initiated after December 31, 2002. The Company does not
expect SFAS No. 146 to have a material impact upon its
financial statements.

In December 2002, the FASB issued SFAS
No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure(SFAS
No. 148), which amends SFAS No. 123. SFAS No. l48
provides alternate methods of transition for a voluntary change
to the fair value based method of accounting for stock-based
compensation, and requires enhanced disclosure about the method
used and the effect of the method used on requested results.
Under SFAS No. 148, stock-based compensation disclosures
must be included with the summary of significant accounting
policies, and made both quarterly and annually. The Company does
not plan to adopt the fair value method of accounting for
stock-based compensation, but in accordance with the disclosure
provisions of SFAS No. 148, has included the pro forma
effects of stock-based compensation in note 1(l).

In November 2002, the FASB issued FASB
Interpretation No. 45, Guarantors Accounting and
Disclosure requirements for Guarantees, including Guarantees of
Indebtedness of Others(FIN 45), which elaborates on
existing disclosure of most guarantees and clarifies when a
company must recognize an initial liability for the fair value
of obligations it assumes under guarantee agreements. The
initial recognition and measurement provisions apply on a
prospective basis to guarantees issued or modified after
December 31, 2002. The disclosure requirements of
FIN 45 are effective for the Companys year ended
December 31, 2002. The Company does not expect the adoption
of FIN 45 to have a material impact on its financial
position, results of operations or disclosures.

(5) Receivables

Receivables consist of the following:

|                                              |           |              |         |         |         |  |         |        |         | 
|--------------------------------------------- | --------- | ------------ | ------- | ------- | ------- |  | ------- | ------ | ------- | 
|                                              |           |             
|                                              |           | December 31,
|                                              |           |             
|                                              |           | 2002         |         | 2001   
|                                              |           |              |         |        
|U.S. Government agencies:                     |           |              |         |         |         |  |         |       
|                                              | Billed    |              | $       | 110,165 |         |  | $       | 91,370 |        
|                                              | Unbilled  |              |         | 108,525 |         |  |         | 91,696 |        
|                                              | Retainage |              |         | 4,820   |         |  |         | 9,617  |        
|                                              |           |              |         |         |         |  |         |       
|                                              |           |              | 223,510 |         |         |  | 192,683 |       
|                                              |           |              |         |         |         |  |         |       
|Other government and commercial customers:    |           |              |         |         |         |  |         |       
|                                              | Billed    |              |         | 9,852   |         |  |         | 9,462  |        
|                                              | Unbilled  |              |         | 6,462   |         |  |         | 2,268  |        
|                                              |           |              |         |         |         |  |         |       
|                                              |           |              | 16,314  |         |         |  | 11,730  |       
|                                              |           |              |         |         |         |  |         |       
|                                              |           |              | 239,824 |         |         |  | 204,413 |       
|Less  reserve for uncollectible
    balances |           |              | (2,058  | )       |         |  | (2,250  | )     
|                                              |           |              |         |         |         |  |         |       
|                                              |           | Total        |         | $       | 237,766 |  |         | $      | 202,163 | 
|                                              |           |              |         |         |         |  |         |       

Unbilled receivables reflect revenue recognized
in excess of amounts billed. It includes revenues from the month
preceding the balance sheet date that will be billed in the
following month, as well as various contract

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##### Table of Contents



VERIDIAN CORPORATION AND
SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)

(Dollars in thousands, except share
data)


hold-backs and retainage which are not currently
billable under the terms of the contract. The Company estimates
that substantially all of the unbilled receivables at
December 31, 2002 will be billed within one year.

(6) Inventories

Inventory balances consist of the following:

|                                                     |  |              |       |      |  |   |       |  
|---------------------------------------------------- |  | ------------ | ----- | ---- |  | - | ----- | -
|                                                     |  |             
|                                                     |  | December 31,
|                                                     |  |             
|                                                     |  | 2002         |       | 2001
|                                                     |  |              |       |     
|Raw materials                                        |  | $            | 1,049 |      |  | $ | 1,073 |  
|Work in process                                      |  |              | 315   |      |  |   | 492   |  
|Finished goods                                       |  |              | 550   |      |  |   | 414   |  
|Supplies and spare parts                             |  |              | 613   |      |  |   | 853   |  
|                                                     |  |              |       |      |  |   |       |  
|                                                     |  |              | 2,527 |      |  |   | 2,832 |  
|Less  reserve for excess and obsolete
    inventory |  |              | (684  | )    |  |   | (321  | )
|                                                     |  |              |       |      |  |   |       |  
|                                                     |  | $            | 1,843 |      |  | $ | 2,511 |  
|                                                     |  |              |       |      |  |   |       |  

(7) Long-Term Debt

Long-term debt consists of the following:

|                                                                                   |                        |                                             |         |         |         |  |         |         |         | 
|---------------------------------------------------------------------------------- | ---------------------- | ------------------------------------------- | ------- | ------- | ------- |  | ------- | ------- | ------- | 
|                                                                                   |                        |                                            
|                                                                                   |                        | December 31,                               
|                                                                                   |                        |                                            
|                                                                                   |                        | 2002                                        |         | 2001   
|                                                                                   |                        |                                             |         |        
|Bank credit facilities:                                                            |                        |                                             |         |         |         |  |         |        
|                                                                                   | Revolving credit loans |                                             | $       |        |         |  | $       | 50,550  |        
|                                                                                   | Term loans             |                                             |         | 267,650 |         |  |         | 108,350 |        
|Seller notes                                                                       |                        |                                             | 25,000  |         |         |  |        |        
|Subordinated notes, net of unamortized discount
    of $8,154 at December 31, 2001 |                        |                                             |        |         |         |  | 86,846  |        
|                                                                                   |                        |                                             |         |         |         |  |         |        
|                                                                                   |                        |                                             | 292,650 |         |         |  | 245,746 |        
|Less  current installments                                                        |                        |                                             | 10,473  |         |         |  | 1,100   |        
|                                                                                   |                        |                                             |         |         |         |  |         |        
|                                                                                   |                        | Long-term debt, net of current installments |         | $       | 282,177 |  |         | $       | 244,646 | 
|                                                                                   |                        |                                             |         |         |         |  |         |        

(a) Revolving
Credit Facilities and Term Loans

Effective June 10, 2002, concurrent with the
closing of the initial public offering, the Company replaced its
2000 facility with the 2002 facility (Note 2(b)), under
which it may borrow up to $200,000. This facility consisted of a
$130,000 term loan facility and a $70,000 revolving credit
facility, and also provided for aggregate stand-by letters of
credit of $20,000, which reduced the funds available under the
revolving credit facility when issued.

With its acquisition of SIGNAL (note 3), the
Company amended the 2002 facility (the Amended 2002
Facility) whereby the term loan facility was increased from
$130,000 to $270,000, and the revolving credit facility was
increased from $70,000 to $90,000. The provision for aggregate
stand-by letters of credit remained consistent at $20,000, and
any issued letters of credit continue to reduce the funds
available under the revolving credit facility. The revolving
credit and term loan facilities expiration dates of
June 30, 2007 and 2008, respectively, were not amended.

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##### Table of Contents



VERIDIAN CORPORATION AND
SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)

(Dollars in thousands, except share
data)


Borrowings under the Amended 2002 Facility bear
interest at rates based on LIBOR or the prime rate, as elected
by the Company. The effective LIBOR and prime based rates
included margins of 2.25 to 3.50 percent and 1.00 to
2.25 percent, respectively. Interest on borrowings under
the 2002 Facility were also based on LIBOR and the prime rate,
and included margins of 2.25 to 3.25 percent and 1.00 to
2.00 percent, respectively.

Interest is due and payable either quarterly or
at various monthly intervals based on the underlying type of
loan. To date, the Company has elected to apply LIBOR to
outstanding borrowings. At December 31, 2002, the effective
interest rate, including the effect of amortization of debt
issuance costs and other bank fees, for the outstanding
borrowings under the term loan facility was 5.32 percent.

At December 31, 2002, the Company had two
LIBOR loans outstanding under the term facility, and no amounts
outstanding under the revolving credit facility. The Company
also had approximately $2,317 of outstanding stand-by letters of
credit at December 31, 2002, and $87,683 of borrowing
capacity under the revolving facility.

The Amended 2002 Facility contains covenants that
stipulate minimum amounts of earnings before interest, taxes,
depreciation and amortization (EBITDA), fixed charge coverage
and asset coverage ratios, as well as maximum total leverage
ratio and capital expenditures. The facility also contains
negative covenants that impose limitations upon: certain
investments; creation of liens; mergers and liquidation; sale of
assets; payment of cash dividends and distributions; exchanges
and issuances of capital stock; transactions with affiliates;
certain accounting changes and organizational document
amendments; amendments to, and payments and prepayments of,
subordinated debt; restrictive agreements; alterations to the
nature of the business; impairment of security interests; and
the incurrence of additional indebtedness. Substantially all of
the Companys assets serve as collateral under the Amended
2002 Facility. At December 31, 2002, the Company was in
compliance with the financial covenants of the Amended 2002
Facility.

The Company capitalized $2,561 of debt issuance
costs in June 2002 associated with the 2002 Facility,
consisting primarily of legal fees and underwriting fees paid to
the administrative agent for the account of the lenders. The
Company capitalized an additional $3,955 of underwriting fees
paid to the administrative agent for the account of the lenders
in connection with the expansion of the 2002 Facility. All of
the debt issuance costs are being amortized from the date
incurred to June 30, 2007, the expiration date of the
revolving credit facility. The unamortized balance of $6,023 at
December 31, 2002, is included as deferred financing costs
in the accompanying consolidated balance sheet as of that date.

Effective September 14, 2000, the Company
entered into an amended credit facility (the 2000 facility)
under which it could borrow up to $199,500, subject to certain
limitations. The 2000 facility consisted of an $89,500 revolving
credit facility and a $110,000 term loan. The 2000 facility also
provided for aggregate stand-by letters of credit of $20,000,
which reduced available funds under the revolving credit
facility when issued.

Borrowings under the 2000 facility bore interest
at LIBOR plus 2.50 to 3.75 percent, or the prime rate plus
1.25 to 2.50 percent. The weighted average effective
interest rate for outstanding term and revolving loans was
6.55 percent at December 31, 2001. All outstanding
borrowings and obligations under the 2000 facility were repaid
and fulfilled on June 10, 2002, with proceeds received
under the 2002 facility and from the initial public offering of
the Companys stock.

Effective September 7, 1999, the Company
entered into a senior revolving credit facility (the 1999
facility) under which it could borrow up to $150,000, subject to
certain limitations. The 1999 facility was obtained to provide
working capital for ongoing operations, to partially fund the
cost of acquisitions, and to refinance debt under a prior credit
facility. Borrowings under the 1999 facility bore interest
at LIBOR plus 1.75 to 2.50 percent, or the prime rate plus
0.25 to 1.0 percent. All outstanding borrowings and
obligations

F-20



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##### Table of Contents



VERIDIAN CORPORATION AND
SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)

(Dollars in thousands, except share
data)


under the 1999 facility were repaid and fulfilled
on September 14, 2000, with proceeds received under the
2000 facility and the sale of senior subordinated notes.

In connection with the refinancing of the 2000
and 1999 facilities, the Company wrote off $2,771 and $1,541,
respectively, of unamortized debt issuance costs. These
write-offs, net of income tax benefits of $1,125 in 2002 and
$616 in 2000, are reflected as extraordinary losses in the 2002
and 2000 consolidated statements of operations.

(b) Seller
Notes

In connection with the acquisition of SIGNAL
(Note 3), the Company issued two senior subordinated
promissory notes payable (the Seller Notes) with an aggregate
principal amount of $25,000 to the selling shareholders of
SIGNAL. The seller notes bear interest at 9.50 percent per
annum through December 23, 2003, 11.50 percent from
December 24, 2003 to December 23, 2004, and at rates
increasing incrementally 1 percent per twelve-month period
thereafter. Interest is due and payable quarterly on the last
day of each November, February, May and August. Principal
payments commence when the Companys total leverage ratio
falls below 3.0 to 1.0, and are thereafter due and payable
quarterly in amounts based on the defined leverage ratios in a
note agreement underlying the seller notes. Any principal
outstanding beyond September 30, 2007, is due in full on
December 31, 2007.

The Seller Notes contain covenants that,
effective beginning with the calendar quarter ending
December 31, 2002, stipulate minimum amounts of EBITDA, a
minimum fixed charge coverage and a maximum total leverage
ratio. The Seller Notes also contain negative covenants that
impose limitations upon: certain investments; creation of liens;
mergers and liquidation; sale of assets; payment of cash
dividends and distributions; exchanges, redemptions and
issuances of capital stock; transactions with affiliates;
certain accounting changes and organizational document
amendments; restrictive agreements; alterations to the nature of
our business; and the incurrence of additional indebtedness. The
Company was in compliance with the covenants of the Seller Notes
as of December 31, 2002.

(c) Subordinated
Notes

Effective September 14, 2000, the Company
sold $95,000 of senior subordinated notes (the 2000 notes) with
a scheduled maturity date of July 31, 2008. The 2000 notes
bore interest at 14.5 percent per annum, and interest was
due and payable quarterly. The Company had the option, through
June 30, 2005, of paying 1.5 percent of the interest
in like-kind notes, but elected to pay all interest in cash.

The 2000 notes were carried at the face amount of
$95,000 less a discount equal to the fair value of Class B
common stock warrants issued in connection with the sale of the
notes (see note 12). The discount was amortized to interest
expense over the term of the notes.

In connection with the early retirement of the
2000 notes, the Company incurred a prepayment fee equal to
6 percent of the face value of the 2000 notes, or
$5,700. The Company also wrote-off $7,885 of unamortized
discount associated with the 2000 notes. These two amounts, net
of an aggregate income tax benefit of $5,464, are included as a
component of the extraordinary loss from debt extinguishment
reported in the consolidated statement of operations for the
year ended December 31, 2002.

Effective September 7, 1999, the Company
sold senior subordinated notes (the 1999 notes) totaling
$175,000. The initial term of the notes was seven years, but the
Company retained an option to redeem them in the first year from
proceeds of permanent financing. The 1999 subordinated notes
together with accrued interest and cancellation fees were paid
in full on September 14, 2000 with proceeds from the sale
of the 2000 notes and from the 2000 facility.

F-21



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##### Table of Contents



VERIDIAN CORPORATION AND
SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)

(Dollars in thousands, except share
data)


Interest on the 1999 notes was payable
semi-annually on March 1 and September 1 of each year,
beginning on March 1, 2000. The interest rate was initially
11.96 percent and increased 0.50 percent every 90 days
through September 14, 2000. For the year ended
December 31, 2000, the Company recorded interest expense on
the 1999 notes based on an effective interest rate of
13.7 percent.

In connection with the sale of the 1999 notes,
the Company incurred various funding and placement fees totaling
2.5 percent of the face value of the notes ($4,375). The
fees were amortized to interest expense over the one-year period
that the 1999 notes were expected to be outstanding.

The 1999 notes also contained a fee equal to
3 percent of the outstanding principal balance in the event
of prepayment or refinancing. This fee of $5,250, which was paid
September 14, 2000, was amortized to interest expense over
the one-year period that the 1999 notes were expected to be
outstanding.

(d) Extraordinary
Loss on Debt Extinguishment

A summary of the components of extraordinary
losses on debt extinguishments for the periods presented is as
follows:

|                                                                                                          |                                              |                         |        |        |  |      |   |   |  |   |       |     | 
|--------------------------------------------------------------------------------------------------------- | -------------------------------------------- | ----------------------- | ------ | ------ |  | ---- | - | - |  | - | ----- | --- | 
|                                                                                                          |                                              |                        
|                                                                                                          |                                              | Year Ended December 31,
|                                                                                                          |                                              |                        
|                                                                                                          |                                              | 2002                    |        | 2001   |  | 2000
|                                                                                                          |                                              |                         |        |        |  |     
|Loss associated with 2000 and 1999
    facilities  write-off of unamortized deferred
    financing costs |                                              | $                       | 2,771  |        |  | $    |  |   |  | $ | 1,541 |    
|Loss associated with subordinated notes:                                                                  |                                              |                         |        |        |  |      |   |   |  |   |       |    
|                                                                                                          | Write-off of unamortized discount            |                         |        | 7,885  |  |      |   |  |  |   |       |    | 
|                                                                                                          | Prepayment penalty                           |                         |        | 5,700  |  |      |   |  |  |   |       |    | 
|                                                                                                          | Issuance of anti-dilutive warrants           |                         |        | 2,138  |  |      |   |  |  |   |       |    | 
|                                                                                                          |                                              |                         |        |        |  |      |   |   |  |   |       |    
|                                                                                                          |                                              |                         | 18,494 |        |  |      |  |   |  |   | 1,541 |    
|Less income tax benefit                                                                                   |                                              |                         | 7,556  |        |  |      |   |   |  |   | 616   |    
|                                                                                                          |                                              |                         |        |        |  |      |   |   |  |   |       |    
|                                                                                                          | Extraordinary loss from debt extinguishments |                         | $      | 10,938 |  |      | $ |  |  |   | $     | 925 | 
|                                                                                                          |                                              |                         |        |        |  |      |   |   |  |   |       |    

(e) Swap
Agreement

The Company is party to an interest rate swap
agreement under which it exchanges floating-rate interest
payments for fixed-rate interest payments. The agreement has a
notional amount of $20,000, and expires in February 2003. The
fair value of the swap agreement at December 31, 2002 and
2001 is ($215) and ($807), respectively.

The Company adopted the provisions of SFAS 133,
effective January 1, 2001, and concluded that the swap
agreement does not qualify as an effective hedge. Accordingly,
the (increase) and decrease in the fair value of the swap
of ($592) and $788 during the years ended December 31, 2002
and 2001, respectively, are recognized as components of net
interest expense. Also, the fair value of the swap at
January 1, 2001 of ($19) is not considered significant, and
therefore, has been recorded as interest expense and not a
cumulative effect of a change in accounting principle.

F-22



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##### Table of Contents



VERIDIAN CORPORATION AND
SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)

(Dollars in thousands, except share
data)




| |                                  
| | ---------------------------------
| | (f) Maturities and Fair
    Value

The aggregate maturities of long-term debt at
December 31, 2002, are as follows:

|           |  |   |         | 
|---------- |  | - | ------- | 
|2003       |  | $ | 10,473  | 
|2004       |  |   | 13,964  | 
|2005       |  |   | 13,964  | 
|2006       |  |   | 15,128  | 
|2007       |  |   | 111,715 | 
|Thereafter |  |   | 127,406 | 
|           |  |   |         | 
|           |  | $ | 292,650 | 
|           |  |   |         | 

The estimated fair value of the Companys
long-term debt is as follows:

|                   |  |              |         |      |  |   |         | 
|------------------ |  | ------------ | ------- | ---- |  | - | ------- | 
|                   |  |             
|                   |  | December 31,
|                   |  |             
|                   |  | 2002         |         | 2001
|                   |  |              |         |     
|Revolver facility  |  | $            |        |      |  | $ | 50,550  | 
|Term loans         |  |              | 267,650 |      |  |   | 108,350 | 
|Seller notes       |  |              | 25,000  |      |  |   |        | 
|Subordinated notes |  |              |        |      |  |   | 100,700 | 
|                   |  |              |         |      |  |   |         | 
|                   |  | $            | 292,650 |      |  | $ | 259,600 | 
|                   |  |              |         |      |  |   |         | 

The fair value of the subordinated notes at
December 31, 2001, represents the amount required to redeem
those notes with the proceeds from the initial public offering
of common stock at their face amount plus a 6% early redemption
fee. The fair values of the revolver facility, term loans and
Seller Notes are based on the estimated cash flows of these
debts.

(8) Leases

The Company leases office facilities and certain
equipment. Future minimum lease payments under such
noncancellable leases as of December 31, 2002, are as
follows:

|            |  |   |         | 
|----------- |  | - | ------- | 
|2003        |  | $ | 28,715  | 
|2004        |  |   | 26,816  | 
|2005        |  |   | 23,640  | 
|2006        |  |   | 20,685  | 
|2007        |  |   | 18,183  | 
|Later years |  |   | 77,715  | 
|            |  |   |         | 
|            |  | $ | 195,754 | 
|            |  |   |         | 

The amounts above include $791 due under capital
lease arrangements with an average effective interest rate of
8.6 percent. The principal portion of $736 of these
non-cancelable future minimum lease payments is included in
other long-term liabilities.

F-23



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##### Table of Contents



VERIDIAN CORPORATION AND
SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)

(Dollars in thousands, except share
data)


Future minimum sublease income scheduled under
noncancelable sublease agreements is as follows:

|            |  |   |        | 
|----------- |  | - | ------ | 
|2003        |  | $ | 3,489  | 
|2004        |  |   | 2,018  | 
|2005        |  |   | 1,886  | 
|Later years |  |   | 5,027  | 
|            |  |   |        | 
|            |  | $ | 12,420 | 
|            |  |   |        | 

Rent expense was $26,098, $20,459 and $19,525 in
2002, 2001 and 2000, respectively.

(9) Income Taxes

The total income taxes are allocated as follows:

|                                              |                                    |                         |        |       |  |      |        |        |   |   |        |        |  
|--------------------------------------------- | ---------------------------------- | ----------------------- | ------ | ----- |  | ---- | ------ | ------ | - | - | ------ | ------ | -
|                                              |                                    |                        
|                                              |                                    | Year Ended December 31,
|                                              |                                    |                        
|                                              |                                    | 2002                    |        | 2001  |  | 2000
|                                              |                                    |                         |        |       |  |     
|Income from continuing operations             |                                    | $                       | 17,648 |       |  | $    | 6,222  |        |   | $ | 1,823  |       
|Loss from discontinued operations             |                                    |                         |       |       |  |      | (5,149 | )      |   |   | (4,013 | )     
|Loss on disposal of discontinued operations   |                                    |                         | (1,561 | )     |  |      | (3,881 | )      |   |   |       |       
|Stockholders equity                          |                                    |                         | (542   | )     |  |      |       |        |   |   |       |       
|Extraordinary loss on extinguishments of debt |                                    |                         | (7,556 | )     |  |      |       |        |   |   | (616   | )     
|                                              |                                    |                         |        |       |  |      |        |        |   |   |        |       
|                                              | Total income tax expense (benefit) |                         | $      | 7,989 |  |      | $      | (2,808 | ) |   | $      | (2,806 | )
|                                              |                                    |                         |        |       |  |      |        |        |   |   |        |       

The components of income tax expense attributable
to income (loss) from continuing operations before
extraordinary items are as follows:

|          |         |                                                                                       |   |       |        |      |   |       |       |  |   |        |        |  
|--------- | ------- | ------------------------------------------------------------------------------------- | - | ----- | ------ | ---- | - | ----- | ----- |  | - | ------ | ------ | -
|          |         |                                                                                      
|          |         | Year Ended December 31,                                                              
|          |         |                                                                                      
|          |         | 2002                                                                                  |   | 2001  |        | 2000
|          |         |                                                                                       |   |       |        |     
|Current:  |         |                                                                                       |   |       |        |      |   |       |       |  |   |       
|          | Federal |                                                                                       | $ | 9,210 |        |      | $ | 4,299 |       |  | $ | 3,270  |       
|          | State   |                                                                                       |   | 2,971 |        |      |   | 1,022 |       |  |   | 908    |       
|          |         |                                                                                       |   |       |        |      |   |       |       |  |   |       
|          |         | Total current                                                                         |   |       | 12,181 |      |   |       | 5,321 |  |   |        | 4,178  |  
|          |         |                                                                                       |   |       |        |      |   |       |       |  |   |       
|Deferred: |         |                                                                                       |   |       |        |      |   |       |       |  |   |       
|          | Federal |                                                                                       |   | 4,819 |        |      |   | 745   |       |  |   | (2,085 | )     
|          | State   |                                                                                       |   | 648   |        |      |   | 156   |       |  |   | (270   | )     
|          |         |                                                                                       |   |       |        |      |   |       |       |  |   |       
|          |         | Total deferred                                                                        |   |       | 5,467  |      |   |       | 901   |  |   |        | (2,355 | )
|          |         |                                                                                       |   |       |        |      |   |       |       |  |   |       
|          |         | Total income tax expense attributable to income
    (loss) from continuing operations |   | $     | 17,648 |      |   | $     | 6,222 |  |   | $      | 1,823  |  
|          |         |                                                                                       |   |       |        |      |   |       |       |  |   |       

F-24



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##### Table of Contents



VERIDIAN CORPORATION AND
SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)

(Dollars in thousands, except share
data)


The income tax expense attributable to income
(loss) from continuing operations before extraordinary
items differs from the amounts computed by applying the U.S.
federal income tax rate of 35 percent to pretax income
(loss) before extraordinary items as a result of the
following:

|                                                            |                                                                                       |                         |        |        |  |      |       |       |  |   |        |       | 
|----------------------------------------------------------- | ------------------------------------------------------------------------------------- | ----------------------- | ------ | ------ |  | ---- | ----- | ----- |  | - | ------ | ----- | 
|                                                            |                                                                                       |                        
|                                                            |                                                                                       | Year Ended December 31,
|                                                            |                                                                                       |                        
|                                                            |                                                                                       | 2002                    |        | 2001   |  | 2000
|                                                            |                                                                                       |                         |        |        |  |     
|Expected tax expense (benefit) computed at
    federal rate |                                                                                       | $                       | 15,124 |        |  | $    | 842   |       |  | $ | (3,236 | )    
|State and local taxes, net of federal benefit               |                                                                                       |                         | 2,352  |        |  |      | 766   |       |  |   | 415    |      
|Goodwill amortization                                       |                                                                                       |                         |       |        |  |      | 4,124 |       |  |   | 4,403  |      
|Nondeductible expenses                                      |                                                                                       |                         | 464    |        |  |      | 474   |       |  |   | 471    |      
|Other, net                                                  |                                                                                       |                         | (292   | )      |  |      | 16    |       |  |   | (230   | )    
|                                                            |                                                                                       |                         |        |        |  |      |       |       |  |   |        |      
|                                                            | Total income tax expense attributable to income
    (loss) from continuing operations |                         | $      | 17,648 |  |      | $     | 6,222 |  |   | $      | 1,823 | 
|                                                            |                                                                                       |                         |        |        |  |      |       |       |  |   |        |      

The tax effects of temporary differences that
give rise to significant portions of the deferred tax assets and
liabilities are presented below:

|                                          |                                      |                         |        |         |   |   |        |         |  
|----------------------------------------- | ------------------------------------ | ----------------------- | ------ | ------- | - | - | ------ | ------- | -
|                                          |                                      |                        
|                                          |                                      | Year Ended December 31,
|                                          |                                      |                        
|                                          |                                      | 2002                    |        | 2001   
|                                          |                                      |                         |        |        
|Deferred tax assets:                      |                                      |                         |        |         |   |   |        |        
|Net operating loss carryforwards          |                                      | $                       | 3,205  |         |   | $ | 4,511  |        
|Receivables, inventory and other reserves |                                      |                         | 2,897  |         |   |   | 3,484  |        
|Pension and postretirement benefits       |                                      |                         | 2,472  |         |   |   | 2,617  |        
|Other accrued expenses                    |                                      |                         | 10,155 |         |   |   | 9,345  |        
|Other                                     |                                      |                         | 1,642  |         |   |   | 5,410  |        
|                                          |                                      |                         |        |         |   |   |        |        
|                                          | Total gross deferred tax assets      |                         |        | 20,371  |   |   |        | 25,367  |  
|                                          |                                      |                         |        |         |   |   |        |        
|Deferred tax liabilities:                 |                                      |                         |        |         |   |   |        |        
|Retainages                                |                                      |                         | (4,791 | )       |   |   | (5,810 | )      
|Change in tax accounting method           |                                      |                         |       |         |   |   | (1,847 | )      
|Work in progress                          |                                      |                         |       |         |   |   | (423   | )      
|Goodwill amortization                     |                                      |                         | (1,146 | )       |   |   |       |        
|Other                                     |                                      |                         | (5,668 | )       |   |   | (3,841 | )      
|                                          |                                      |                         |        |         |   |   |        |        
|                                          | Total gross deferred tax liabilities |                         |        | (11,605 | ) |   |        | (11,921 | )
|                                          |                                      |                         |        |         |   |   |        |        
|                                          | Net deferred tax asset               |                         | $      | 8,766   |   |   | $      | 13,446  |  
|                                          |                                      |                         |        |         |   |   |        |        

There was no valuation allowance at
December 31, 2002, 2001 or 2000. Based upon the level of
historical taxable income and projections for future taxable
income over the periods in which the deferred tax assets are
deductible, management believes it is more likely than not the
Company will realize the benefits of these deductible
differences. The amount of the deferred tax asset considered
realizable, however, could be reduced if estimates of future
taxable income during the carryforward period are reduced.

At December 31, 2002, the Company has net
operating loss carryforwards for federal and state income tax
purposes of $8,780 which expire in 2008 through 2019. All of
these loss carryforwards are subject to the ownership change
limitations under Section 382 of the Internal Revenue Code,
which limits the amount of the acquired net operating loss
carryforwards that may be used to $1,741 per year.

F-25



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##### Table of Contents



VERIDIAN CORPORATION AND
SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)

(Dollars in thousands, except share
data)


(10) Series A Redeemable Preferred
Stock

In September 1999, the Company completed an
offering of 40,000 units, with each unit consisting of one share
of Senior redeemable, exchangeable preferred stock,
Series A (the Series A redeemable preferred stock) and
14.74 warrants to purchase shares of common stock
(note 12). The dividend rate on the Series A
redeemable preferred stock of 13.50 percent on
September 7, 1999 was subject to adjustment in the event
that the subordinated notes (note 7(c)) were refinanced. On
September 14, 2000, the Company refinanced the subordinated
notes, and as a result the dividend rate on the Series A
redeemable preferred stock increased to an annual rate of
15.25 percent. The Company had the option of paying the
dividends in cash or in like-kind preferred stock, and elected
to pay all dividends with like-kind preferred stock. Dividends
accrued daily, were payable quarterly, and dividends on
like-kind preferred stock compounded quarterly. Dividends paid
with like-kind preferred stock were accrued at the estimated
fair value of the preferred stock.

At the date of issuance, the Company recorded the
Series A redeemable preferred stock at its estimated fair
value by allocating a portion of the total proceeds to the
warrants issued concurrently with the Series A redeemable
preferred stock (note 12). The Company accreted the
difference between the fair value at the date of issue and the
aggregate liquidation value, together with issue costs, over the
period from the issue date to the mandatory redemption date.

Holders of the Series A redeemable preferred
stock had no conversion rights. Also, holders of the
Series A redeemable preferred stock had no voting rights
except if the Company failed to pay dividends in respect to
three or more quarterly dividend periods in the aggregate,
failed to make a mandatory redemption or purchase offer upon a
change of control or failed to comply with certain covenants.

The Series A redeemable preferred stock had
a liquidation preference of $1,000 per share plus all declared
and unpaid dividends. Accrued dividends at December 31,
2001 and 2000 totaled, $1,468 and $1,239, respectively, and are
included with Series A redeemable preferred stock in the
consolidated balance sheets.

Effective June 10, 2002, in connection with
the initial public offering of its common stock, the Company
redeemed all outstanding Series A preferred stock,
including a 12 percent early redemption penalty of $6,969
and accrued dividends of $1,328 (note 2(a)). The early
redemption penalty, the dividends, and the remaining difference
between the fair value of Series A preferred stock and its
liquidation value, are reflected as a deduction from net loss to
derive net loss attributable to common stockholders.

(11) Common Stock



| |                                                    
| | ---------------------------------------------------
| | (a) Redeemable Convertible
    Class A Common Stock

Effective September 7, 1999, the Company
sold 7,318,325 shares of Class A common stock. In connection
with the Companys initial public offering of its common
stock, on June 10, 2002, all of the Class A common
stock was converted into common stock at the rate of 1.365188
shares of common stock for each share of Class A common
stock, (note 2(c)).

Holders of a majority of Class A common
stock had the right to elect two directors, and to consent to
certain specified actions involving cash and stock dividends,
acquisitions, mergers, divestitures, and debt and equity
offerings. For all other matters, including the election of all
remaining directors, Class A stockholders voted on a
share-for-share basis with common stockholders. However, at no
time were Class A stockholders entitled to vote more than
50 percent of the total outstanding stock.

Also effective September 7, 1999,
Class A stockholders were granted the right to purchase
pro-rata shares of any equity offering at fair market value, and
the right to redeem their shares five years after the original
issue date at the greater of its fair market value or $15.04 per
share. Accordingly, Class A common stock was excluded from
stockholders equity. The Company accreted the difference
between the net proceeds from the

F-26



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##### Table of Contents



VERIDIAN CORPORATION AND
SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)

(Dollars in thousands, except share
data)


sale of the Class A common stock and the
minimum redemption value of $15.04 per share over the period
from the issue date to the mandatory redemption date. The
difference remaining upon the conversion of the Class A
common stock on June 10, 2002 (note 2(c)) has been deducted
from net loss to derive the net loss attributable to common
stockholders.



| |                 
| | ----------------
| | (b) Common Stock

On May 16, 2002, the Company effected a
1.33-for-1 stock split of the Companys Class B common
stock, and the conversion of Class B common stock to common
stock on a share-for-share basis (note 2(d)). The
Companys common stock began trading on the New York Stock
Exchange on June 5, 2002, under the ticker symbol
VNX.

(12) Stock Warrants

As part of its September 7, 1999 sale of
40,000 units including Series A redeemable preferred stock
and stock warrants, the Company issued warrants to purchase
783,921 shares of common stock (subsequently adjusted to
warrants to purchase 733,181 shares of common stock as
discussed below). Each warrant entitles its holder to purchase
one share of common stock at $0.000075 per share. Warrants may
be exercised at any time through September 7, 2010. The
proceeds from the sale of the 40,000 units were allocated to the
Series A redeemable preferred stock and the warrants based
on the estimated value of the warrants.

Effective with the refinancing of the 1999
facility and the 1999 notes, the preferred stockholders remitted
50,740 warrants to the Company in exchange for the increase
in the preferred dividend rate from 13.50 percent to
15.25 percent. The remittance of the warrants has been
reflected as a $738 adjustment to additional paid-in capital and
retained earnings based on the warrant value at
September 14, 2000 using the Black-Scholes method and the
following assumptions: a risk-free interest rate of
5.78 percent, expected common stock market price volatility
factor of 50 percent, and a term of 10 years.

In connection with the sale of the 2000 notes
(note 7(c)), the Company issued warrants to purchase
815,890 shares of common stock. Each warrant entitles its
holder to purchase one share of common stock at $0.000075 per
share. Warrants may be exercised at any time through
September 14, 2008.

The Company valued the warrants under the fair
value method as required by SFAS 123. The Black-Scholes method
was used with assumptions consistent with those used in the
valuation of the concurrent remittance of warrants from
preferred stockholders. The fair value of these warrants was
estimated to be $9,754 at September 14, 2000. This amount
was reflected as a discount to the face amount of the 2000
notes, and was amortized on a straight-line basis over the term
of the notes. Concurrent with the prepayment of the 2000 notes
on June 10, 2002, the Company wrote-off unamortized
discount of $7,885 (note 2(e)).

Effective June 10, 2002, in connection with
the conversion of Class A common stock to common stock, the
Company issued 257,956 additional warrants to purchase common
stock, to the Series A preferred stockholders and 2000
noteholders, in accordance with anti-dilutive clauses in the
respective preferred stock and note agreements. These warrants
have been valued using the Black-Scholes method. The value of
warrants issued to the 2000 noteholders has been recorded as a
component of the extraordinary loss on debt extinguishment, and
the value of warrants issued to the former Series A
preferred stockholders has been recorded as a deduction to net
income to derive the net loss attributable to common
stockholders (note 7(d)).

F-27



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##### Table of Contents



VERIDIAN CORPORATION AND
SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)

(Dollars in thousands, except share
data)


A summary of the activity related to stock
warrants is as follows:

|                                          |                                                                      |                         |           |            |   |      |           |   |  |  |           |         |  
|----------------------------------------- | -------------------------------------------------------------------- | ----------------------- | --------- | ---------- | - | ---- | --------- | - |  |  | --------- | ------- | -
|                                          |                                                                      |                        
|                                          |                                                                      | Year Ended December 31,
|                                          |                                                                      |                        
|                                          |                                                                      | 2002                    |           | 2001       |   | 2000
|                                          |                                                                      |                         |           |            |   |     
|Warrants outstanding at beginning of year |                                                                      |                         | 1,549,071 |            |   |      | 1,549,071 |   |  |  | 783,921   |        
|                                          | Warrants issued to holders of 2000 notes                             |                         |           |           |   |      |           |  |  |  |           | 815,890 |  
|                                          | Warrants exchanged for increase in preferred
    stock dividend rate |                         |           |           |   |      |           |  |  |  |           | (50,740 | )
|                                          | Warrants issued upon conversion of Class A
    common stock          |                         |           | 257,956    |   |      |           |  |  |  |           |        |  
|                                          | Warrants exercised                                                   |                         |           | (1,048,432 | ) |      |           |  |  |  |           |        |  
|                                          |                                                                      |                         |           |            |   |      |           |   |  |  |           |        
|Warrants outstanding at end of year       |                                                                      |                         | 758,595   |            |   |      | 1,549,071 |   |  |  | 1,549,071 |        
|                                          |                                                                      |                         |           |            |   |      |           |   |  |  |           |        

(13) Earnings Per Share

Basic earnings (loss) per share (EPS) is computed
by dividing net income available, or loss attributable, to
common stockholders by the weighted average number of
outstanding shares of common stock.

Diluted earnings per share for the three months
ended December 31, September 30 and March 31,
2002 (unaudited) (note 20), is based on the net income and
the weighted average number of outstanding shares of common
stock as adjusted for the dilutive effect of stock options and
warrants under the treasury stock method. Diluted loss per share
for the years ended December 31, 2002, 2001 and 2000, does
not include the weighted average effect of potentially dilutive
securities since the effect would be anti-dilutive, and as such
is computed in the same manner as the basic earnings (loss)
share. The weighted average number of shares used in the
computations of basic and diluted EPS are as follows:

|                                                                               |  |                         |            |      |  |      |           |  |  |  |           | 
|------------------------------------------------------------------------------ |  | ----------------------- | ---------- | ---- |  | ---- | --------- |  |  |  | --------- | 
|                                                                               |  |                        
|                                                                               |  | Year Ended December 31,
|                                                                               |  |                        
|                                                                               |  | 2002                    |            | 2001 |  | 2000
|                                                                               |  |                         |            |      |  |     
|Basic EPS                                                                      |  |                         | 21,784,148 |      |  |      | 7,479,979 |  |  |  | 6,710,679 | 
|Potentially dilutive securities used in
    computations of EPS                |  |                         |           |      |  |      |          |  |  |  |          | 
|                                                                               |  |                         |            |      |  |      |           |  |  |  |           | 
|Total weighted average number of shares used in
    computation of diluted EPS |  |                         | 21,784,148 |      |  |      | 7,479,979 |  |  |  | 6,710,679 | 
|                                                                               |  |                         |            |      |  |      |           |  |  |  |           | 

Had the effect of the Class A common stock,
stock options and warrants been dilutive, the following weighted
average number of shares would have been added to the basic
average number of shares, and the resulting weighted average
number of diluted shares as shown would be used to compute
diluted EPS:

|                                                                                                                                              |                            |                         |            |           |  |      |            |           |  |  |            |           | 
|--------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ----------------------- | ---------- | --------- |  | ---- | ---------- | --------- |  |  | ---------- | --------- | 
|                                                                                                                                              |                            |                        
|                                                                                                                                              |                            | Year Ended December 31,
|                                                                                                                                              |                            |                        
|                                                                                                                                              |                            | 2002                    |            | 2001      |  | 2000
|                                                                                                                                              |                            |                         |            |           |  |     
|Potentially dilutive securities added when effect
    is dilutive:                                                                            |                            |                         |            |           |  |      |            |           |  |  |            |          
|                                                                                                                                              | Class A common stock       |                         |            | 4,412,643 |  |      |            | 9,990,889 |  |  |            | 9,436,069 | 
|                                                                                                                                              | Stock options and warrants |                         |            | 2,457,064 |  |      |            | 1,871,135 |  |  |            | 1,436,551 | 
|                                                                                                                                              |                            |                         |            |           |  |      |            |           |  |  |            |          
|Total weighted average number of shares used in
    computation of diluted EPS when effect of potentially dilutive
    securities is dilutive |                            |                         | 28,653,855 |           |  |      | 19,342,003 |           |  |  | 17,583,299 |          
|                                                                                                                                              |                            |                         |            |           |  |      |            |           |  |  |            |          

F-28



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##### Table of Contents



VERIDIAN CORPORATION AND
SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)

(Dollars in thousands, except share
data)


The net loss attributable to common stockholders
for the years ended December 31, 2001 and 2000 is based on
net loss from continuing operations before extraordinary items,
as adjusted for preferred stock dividends and the accretion of
differences between the carrying and liquidation values of
preferred stock and Class A common stock. During the year
ended December 31, 2002, in addition to preferred stock
dividends and accretion amounts, there were several
non-recurring transactions related to the recapitalization of
the Company that are recognized as deductions to derive net loss
attributable to common stockholders. The transactions and the
respective amounts, including the preferred dividends and
accretion, together with the effects on income (loss) from
continuing operations before extraordinary items, are as follows:

|                                                                                                  |                                                                          |                                                                                             |         |        |        |      |         |       |       |   |         |       |       | 
|------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------- | ------- | ------ | ------ | ---- | ------- | ----- | ----- | - | ------- | ----- | ----- | 
|                                                                                                  |                                                                          |                                                                                            
|                                                                                                  |                                                                          | Year Ended December 31,                                                                    
|                                                                                                  |                                                                          |                                                                                            
|                                                                                                  |                                                                          | 2002                                                                                        |         | 2001   |        | 2000
|                                                                                                  |                                                                          |                                                                                             |         |        |        |     
|Income (loss) from continuing operations before
    extraordinary items                           |                                                                          | $                                                                                           | 25,563  |        |        | $    | (3,817  | )     |       | $ | (11,068 | )    
|Adjustments for net income (loss) attributable to
    common stockholders:                        |                                                                          |                                                                                             |         |        |        |      |         |       |       |   |         |      
|                                                                                                  | Preferred stock dividends                                                |                                                                                             |         | 3,307  |        |      |         | 6,568 |       |   |         | 5,060 |      
|                                                                                                  | Premium due upon early redemption of preferred
    stock                 |                                                                                             |         | 6,969  |        |      |         |      |       |   |         |      |      
|                                                                                                  | Accretion to redemption values of preferred and
    Class A common stock |                                                                                             |         | 9,569  |        |      |         | 1,640 |       |   |         | 1,575 |      
|                                                                                                  | Beneficial conversion of Class A common stock                            |                                                                                             |         | 35,306 |        |      |         |      |       |   |         |      |      
|                                                                                                  | Issuance of anti-dilutive warrants to preferred
    stockholders         |                                                                                             |         | 1,989  |        |      |         |      |       |   |         |      |      
|                                                                                                  | Liquidity event fee paid to Class A common
    stockholders              |                                                                                             |         | 1,600  |        |      |         |      |       |   |         |      |      
|                                                                                                  |                                                                          |                                                                                             |         |        |        |      |         |       |       |   |         |      
|                                                                                                  |                                                                          | Total adjustments to income (loss) from
    continuing operations before extraordinary loss |         |        | 58,740 |      |         |       | 8,208 |   |         |       | 6,635 | 
|                                                                                                  |                                                                          |                                                                                             |         |        |        |      |         |       |       |   |         |      
|Loss from continuing operations before
    extraordinary loss attributable to common stockholders |                                                                          | $                                                                                           | (33,177 | )      |        | $    | (12,025 | )     |       | $ | (17,703 | )    
|                                                                                                  |                                                                          |                                                                                             |         |        |        |      |         |       |       |   |         |      

(14) Employee Benefit Plans



| |                                   
| | ----------------------------------
| | (a) Defined Contribution
    Plans

The Company maintains two defined contribution
plans, the Veridian Retirement Savings Plan (the VRSP) and the
SIGNAL Corporation 401(k) Plan (the SIGNAL 401(k)) to provide
retirement benefits to eligible employees. Substantially all
employees are eligible to participate in the VRSP or the SIGNAL
401(k). The Company also has maintained various defined
contribution plans including 401(k) and employee stock ownership
plans that were inherited with business acquisitions completed
in recent years. All of these 401(k) plans, with the exception
of the SIGNAL 401(k), have been merged into the VRSP, and the
Company is in the process of terminating the employee stock
ownership plans. Participants of the employee stock ownership
plans have the option of transferring their account balances to
the VRSP or another qualified retirement plan, or of receiving
distributions.

The Companys matching and discretionary
contributions to its defined contribution plans were $23,503,
$22,993, and $17,697 during 2002, 2001 and 2000, respectively.
Also, as of December 31, 2002 and 2001, the VRSP held
2,440,388 and 2,490,014 shares of common stock, respectively,
which represented approximately 7 and 33 percent,
respectively, of total outstanding shares of common stock.

F-29



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##### Table of Contents



VERIDIAN CORPORATION AND
SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)

(Dollars in thousands, except share
data)




| |                              
| | -----------------------------
| | (b) Defined Benefit
    Plans

The Company had maintained defined benefit plans
for certain employee groups and in November 2001, completed the
termination process and distribution of assets of its last
remaining defined benefit plan. The Company recognized a
settlement loss of $1,119 for the year ended December 31,
2001 related to this plan termination and resulting settlement.
The Company also recognized a gain of $512 during the year ended
December 31, 2002, related to the previous termination of
another benefit plan.

The net pension cost (income) consists of
the following:

|                                                  |                                                  |                                    |   |      |     |   |   |      |      |  
|------------------------------------------------- | ------------------------------------------------ | ---------------------------------- | - | ---- | --- | - | - | ---- | ---- | -
|                                                  |                                                  |                                   
|                                                  |                                                  | Year Ended                        
|                                                  |                                                  | December 31,                      
|                                                  |                                                  |                                   
|                                                  |                                                  | 2001                               |   | 2000
|                                                  |                                                  |                                    |   |     
|Components of net periodic pension cost (income): |                                                  |                                    |   |      |     |   |   |     
|                                                  | Service cost                                     |                                    | $ | 46   |     |   | $ | 7    |     
|                                                  | Interest accrued on projected benefit obligation |                                    |   | 137  |     |   |   | 220  |     
|                                                  | Expected return on plan assets                   |                                    |   | (207 | )   |   |   | (352 | )   
|                                                  | Recognized net actuarial gain                    |                                    |   | 1    |     |   |   | (12  | )   
|                                                  |                                                  |                                    |   |      |     |   |   |     
|                                                  |                                                  | Net periodic pension cost (income) |   | $    | (23 | ) |   | $    | (137 | )
|                                                  |                                                  |                                    |   |      |     |   |   |     

Changes in the plans assets and benefit
obligation are as follows:

|                               |                                                    |                                          |   |        |   | 
|------------------------------ | -------------------------------------------------- | ---------------------------------------- | - | ------ | - | 
|                               |                                                    | Year Ended                              
|                               |                                                    | December 31,                            
|                               |                                                    |                                         
|                               |                                                    | 2001                                    
|                               |                                                    |                                         
|Changes in plan assets:        |                                                    |                                          |   |       
|                               | Fair value of plan assets at beginning of year     |                                          | $ | 4,784  |  
|                               | Actual return on plan assets                       |                                          |   | 280    |  
|                               | Reversion of residual assets                       |                                          |   | (160   | )
|                               | Benefits paid, including termination distributions |                                          |   | (4,904 | )
|                               |                                                    |                                          |   |       
|                               |                                                    | Fair value of plan assets at end of year |   |        |  | 
|                               |                                                    |                                          |   |       
|Changes in benefit obligation: |                                                    |                                          |   |       
|                               | Benefit obligation at beginning of year            |                                          |   | 3,106  |  
|                               | Service cost                                       |                                          |   | 46     |  
|                               | Interest cost                                      |                                          |   | 137    |  
|                               | Actuarial loss                                     |                                          |   | 633    |  
|                               | Settlement loss                                    |                                          |   | 982    |  
|                               | Benefits paid, including termination distributions |                                          |   | (4,904 | )
|                               |                                                    |                                          |   |       
|                               |                                                    | Benefit obligation at end of year        |   | $      |  | 
|                               |                                                    |                                          |   |       

(15) Other Postretirement
Benefits

The Company provides retiree health benefits to
certain individuals who retired from Calspan SRL Corporation
(CSRL) (previously a wholly-owned subsidiary of the Company that
has been merged into another wholly-owned subsidiary of the
Company) prior to November 1, 1995, and to certain
employees and retirees of ERIM. The benefits are provided under
two plans.

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##### Table of Contents



VERIDIAN CORPORATION AND
SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)

(Dollars in thousands, except share
data)


The retiree health plan covering CSRL retirees
was contributory based on years of service, with contributions
adjusted annually. The Company does not pre-fund these benefits
and, effective January 1, 1996, the Company eliminated the
medical cost escalation benefit for retirees.

The plan covering ERIM employees and retirees is
a contributory plan under which benefits are based upon years of
service. Employees become eligible for benefits after meeting
certain age and service requirements. The Company funds this
plan via annual contributions that are actuarially determined.

The components of the net periodic postretirement
expense are as follows:

|                                                                   |                                     |              |     |      |  |      |      |     |  |   |     |     | 
|------------------------------------------------------------------ | ----------------------------------- | ------------ | --- | ---- |  | ---- | ---- | --- |  | - | --- | --- | 
|                                                                   |                                     |             
|                                                                   |                                     | Year Ended  
|                                                                   |                                     | December 31,
|                                                                   |                                     |             
|                                                                   |                                     | 2002         |     | 2001 |  | 2000
|                                                                   |                                     |              |     |      |  |     
|Interest cost on accumulated postretirement
    benefit obligation |                                     | $            | 559 |      |  | $    | 582  |     |  | $ | 582 |    
|Service costs                                                      |                                     |              | 53  |      |  |      | 64   |     |  |   | 57  |    
|Expected return on assets                                          |                                     |              | (98 | )    |  |      | (110 | )   |  |   | (77 | )  
|Net amortization and deferral                                      |                                     |              | (10 | )    |  |      | (19  | )   |  |   | (42 | )  
|                                                                   |                                     |              |     |      |  |      |      |     |  |   |     |    
|                                                                   | Net periodic postretirement expense |              | $   | 504  |  |      | $    | 517 |  |   | $   | 520 | 
|                                                                   |                                     |              |     |      |  |      |      |     |  |   |     |    

Changes in the plans assets and benefit
obligations are as follows:

|                                   |                                                |                                          |   |       |       |  |   |       |       | 
|---------------------------------- | ---------------------------------------------- | ---------------------------------------- | - | ----- | ----- |  | - | ----- | ----- | 
|                                   |                                                |                                         
|                                   |                                                | Year Ended                              
|                                   |                                                | December 31,                            
|                                   |                                                |                                         
|                                   |                                                | 2002                                     |   | 2001 
|                                   |                                                |                                          |   |      
|Change in the benefit obligations: |                                                |                                          |   |       |       |  |   |      
|                                   | Benefit obligation at beginning of year        |                                          | $ | 8,098 |       |  | $ | 7,794 |      
|                                   | Interest costs                                 |                                          |   | 559   |       |  |   | 582   |      
|                                   | Service costs                                  |                                          |   | 53    |       |  |   | 64    |      
|                                   | Actuarial (gain) loss                          |                                          |   | 675   |       |  |   | 241   |      
|                                   | Benefits paid                                  |                                          |   | (888  | )     |  |   | (583  | )    
|                                   |                                                |                                          |   |       |       |  |   |      
|                                   |                                                | Benefit obligation at end of year        |   |       | 8,497 |  |   |       | 8,098 | 
|                                   |                                                |                                          |   |       |       |  |   |      
|Change in plan assets:             |                                                |                                          |   |       |       |  |   |      
|                                   | Fair value of plan assets at beginning of year |                                          |   | 1,975 |       |  |   | 1,766 |      
|                                   | Actual return on plan assets                   |                                          |   | (116  | )     |  |   | (69   | )    
|                                   | Employer contribution                          |                                          |   | 888   |       |  |   | 861   |      
|                                   | Benefits paid                                  |                                          |   | (888  | )     |  |   | (583  | )    
|                                   |                                                |                                          |   |       |       |  |   |      
|                                   |                                                | Fair value of plan assets at end of year |   | $     | 1,859 |  |   | $     | 1,975 | 
|                                   |                                                |                                          |   |       |       |  |   |      

Unrecognized net gains or losses are amortized on
a straight-line basis over the average remaining service period
of active employees expected to receive benefits from the plans.
The amounts are only amortized to the extent that their value
exceeds 10% of the accumulated postretirement benefit obligation.

F-31



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##### Table of Contents



VERIDIAN CORPORATION AND
SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)

(Dollars in thousands, except share
data)


The accrued postretirement benefit costs in the
accompanying balance sheets are comprised of the following
components:

|                                       |                                     |              |       |       |  |   |       |       | 
|-------------------------------------- | ----------------------------------- | ------------ | ----- | ----- |  | - | ----- | ----- | 
|                                       |                                     |             
|                                       |                                     | Year Ended  
|                                       |                                     | December 31,
|                                       |                                     |             
|                                       |                                     | 2002         |       | 2001 
|                                       |                                     |              |       |      
|APBO  Retirees                        |                                     | $            | 6,638 |       |  | $ | 6,123 |      
|Unrecognized net actuarial gain (loss) |                                     |              | (547  | )     |  |   | 315   |      
|                                       |                                     |              |       |       |  |   |       |      
|                                       | Accrued postretirement benefit cost |              | $     | 6,091 |  |   | $     | 6,438 | 
|                                       |                                     |              |       |       |  |   |       |      

Actuarial assumptions used in the calculation of
the liability for postretirement benefits are as follows:

|                                     |  |                         |       |      |  |      |      |   |  |  |      |  
|------------------------------------ |  | ----------------------- | ----- | ---- |  | ---- | ---- | - |  |  | ---- | -
|                                     |  |                        
|                                     |  | Year Ended December 31,
|                                     |  |                        
|                                     |  | 2002                    |       | 2001 |  | 2000
|                                     |  |                         |       |      |  |     
|Discount rate                        |  |                         | 6.75  | %    |  |      | 7.25 | % |  |  | 7.50 | %
|Health care cost trend rate          |  |                         | 10.00 | %    |  |      | 6.42 | % |  |  | 7.01 | %
|Ultimate trend rate                  |  |                         | 5.00  | %    |  |      | 5.25 | % |  |  | 5.50 | %
|Year ultimate trend rate is achieved |  |                         | 2004  |      |  |      | 2004 |   |  |  | 2004 |  

Assumed health care cost trend rates have a
significant effect on the amounts reported for the healthcare
plans. A one-percentage point change in assumed health care cost
trend rates would have the following effects:

|                                                            |  |                |     |                |  |   |      |  
|----------------------------------------------------------- |  | -------------- | --- | -------------- |  | - | ---- | -
|                                                            |  | 1-Percentage   |     | 1-Percentage  
|                                                            |  | Point Increase |     | Point Decrease
|                                                            |  |                |     |               
|Effect on total of service and interest cost
    components |  | $              | 14  |                |  | $ | (12  | )
|Effect on accumulated postretirement benefit
    obligation |  |                | 228 |                |  |   | (202 | )

(16) Stock Awards

The Company adopted the Veridian Corporation 2000
Stock Incentive Plan (the Plan) on June 14, 2000 to promote
the interests of the Company by encouraging participants to
acquire an, or increase their equity interest in, the Company.
The adoption represented the amendment and restatement of the
Veridian Corporation Incentive Stock Option Plan. Employees,
consultants, and non-employee directors of the Company or its
affiliates are eligible to participate. The Plan provides for
the granting of stock options, the leveraged purchase of common
stock by employees, and the award of restricted and phantom
stock. A total of 4,788,000 shares of common stock are reserved
for awards and purchases under the Plan. As of December 31,
2002, a total of 516,984 shares were reserved for future awards
under the Plan.

Under the Plan, options are granted with exercise
prices that are no less than 100 percent of the estimated
fair market value of the Companys common stock at the date
of grant, and options granted are exercisable for up to ten
years from the date of grant. Many of the options granted after
1999 were at an exercise price of two times estimated fair
market value. Stock options granted under the Plan gradually
vest over four years.

F-32



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##### Table of Contents



VERIDIAN CORPORATION AND
SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)

(Dollars in thousands, except share
data)


The following table summarizes the activity of
the Plan since January 1, 2000:

|                                                               |  |           |           |          |  |   |       | 
|-------------------------------------------------------------- |  | --------- | --------- | -------- |  | - | ----- | 
|                                                               |  |           |           | Weighted
|                                                               |  |           |           | Average 
|                                                               |  | Number of |           | Exercise
|                                                               |  | Shares    |           | Price   
|                                                               |  |           |           |         
|Outstanding options, January 1, 2000                           |  |           | 1,189,327 |          |  | $ | 6.48  | 
|Options issued                                                 |  |           | 1,283,743 |          |  |   | 21.57 | 
|Options exercised                                              |  |           | (12,471   | )        |  |   | 5.87  | 
|Options cancelled                                              |  |           | (155,458  | )        |  |   | 5.38  | 
|                                                               |  |           |           |          |  |   |       | 
|Outstanding options, December 31, 2000                         |  |           | 2,305,141 |          |  |   | 15.02 | 
|                                                               |  |           |           |          |  |   |       | 
|Options exerciseable December 31, 2000                         |  |           | 740,899   |          |  |   | 6.03  | 
|                                                               |  |           |           |          |  |   |       | 
|Weighted-average fair value of options granted
    during 2000 |  |           |           |          |  |   | 8.79  | 
|                                                               |  |           |           |          |  |   |       | 
|Options issued                                                 |  |           | 169,777   |          |  |   | 21.15 | 
|Options exercised                                              |  |           | (2,184    | )        |  |   | 6.48  | 
|Options cancelled                                              |  |           | (250,416  | )        |  |   | 19.45 | 
|                                                               |  |           |           |          |  |   |       | 
|Outstanding options, December 31, 2001                         |  |           | 2,222,318 |          |  |   | 14.99 | 
|                                                               |  |           |           |          |  |   |       | 
|Options exerciseable December 31, 2001                         |  |           | 980,876   |          |  |   | 8.36  | 
|                                                               |  |           |           |          |  |   |       | 
|Weighted-average fair value of options granted
    during 2001 |  |           |           |          |  |   | 8.76  | 
|                                                               |  |           |           |          |  |   |       | 
|Options issued                                                 |  |           | 1,439,517 |          |  |   | 18.44 | 
|Options exercised                                              |  |           | (106,702  | )        |  |   | 6.30  | 
|Options cancelled                                              |  |           | (130,536  | )        |  |   | 16.68 | 
|                                                               |  |           |           |          |  |   |       | 
|Outstanding options, December 31, 2002                         |  |           | 3,424,597 |          |  |   | 16.61 | 
|                                                               |  |           |           |          |  |   |       | 
|Options exerciseable, December 31, 2002                        |  |           | 1,821,463 |          |  |   | 14.68 | 
|                                                               |  |           |           |          |  |   |       | 
|Weighted-average fair value of options granted
    during 2002 |  |           |           |          |  | $ | 10.14 | 
|                                                               |  |           |           |          |  |   |       | 

F-33



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##### Table of Contents



VERIDIAN CORPORATION AND
SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)

(Dollars in thousands, except share
data)


As required by SFAS 123, the Company has
determined the pro forma information as if the Company had
accounted for stock options granted since January 1, 1995,
under the fair value method prescribed in SFAS 123, and
presented the pro forma information in note 1(l). The
Black-Scholes option pricing model was used with the following
weighted-average assumptions for 2002, 2001 and 2000: risk-free
interest rates of 3.6 percent in 2002, 4.5 percent in
2001, and 5.1 percent in 2000, expected common stock market
price volatility factor of 50 percent for 2002, and
0 percent for 2001 and 2000, and an average expected option
life of five years.

Information regarding outstanding options is as
follows:

|                         |  |                     |           |                     |  |                  |       |           |  |          |      |  |  |  |           |  |  |   |       | 
|------------------------ |  | ------------------- | --------- | ------------------- |  | ---------------- | ----- | --------- |  | -------- | ---- |  |  |  | --------- |  |  | - | ----- | 
|                         |  |                    
|                         |  | December 31, 2002  
|                         |  |                    
|                         |  |                     |           |                    
|                         |  | Options Outstanding |           | Options Exercisable
|                         |  |                     |           |                    
|                         |  |                     |           | Weighted            |  | Weighted         |       |           |  | Weighted
|                         |  |                     |           | Average             |  | Average          |       |           |  | Average 
|                         |  | Number of           |           | Exercise            |  | Remaining        |       | Number of |  | Exercise
|Range of Exercise Prices |  | Options             |           | Price               |  | Contractual Life |       | Options   |  | Price   
|                         |  |                     |           |                     |  |                  |       |           |  |         
|Less than $5.00          |  |                     | 264,938   |                     |  | $                | 0.72  |           |  |          | 3.07 |  |  |  | 264,935   |  |  | $ | 0.72  | 
|$5.00  $9.99            |  |                     | 198,958   |                     |  | $                | 6.14  |           |  |          | 4.57 |  |  |  | 198,959   |  |  | $ | 6.14  | 
|$10.00  $14.99          |  |                     | 955,049   |                     |  | $                | 13.10 |           |  |          | 6.46 |  |  |  | 873,320   |  |  | $ | 12.97 | 
|$15.00  $19.99          |  |                     | 1,226,005 |                     |  | $                | 17.67 |           |  |          | 9.21 |  |  |  | 7,315     |  |  | $ | 15.03 | 
|$20.00  $29.36          |  |                     | 779,647   |                     |  | $                | 27.31 |           |  |          | 7.95 |  |  |  | 476,934   |  |  | $ | 29.10 | 
|                         |  |                     |           |                     |  |                  |       |           |  |          |      |  |  |  |           |  |  |   |       | 
|Total                    |  |                     | 3,424,597 |                     |  | $                | 16.61 |           |  |          | 7.41 |  |  |  | 1,821,463 |  |  | $ | 14.68 | 
|                         |  |                     |           |                     |  |                  |       |           |  |          |      |  |  |  |           |  |  |   |       | 

Under the Plan, during 2001 and 2000, the Company
sold 70,055 and 836,355 shares of common stock, respectively, to
various employees at $14.68 and $14.55 per share, respectively.
The Company received promissory note agreements from each
purchaser as payment for the common stock. The notes bear
interest at 6.05 percent per annum, are full-recourse, and
are secured by the shares of the common stock for which the
notes were made. Interest compounds monthly, but is not due
until the earlier of the sale of the common stock or ten years
from the date of the promissory note. Interest on the notes
receivable was $691, $706 and $185 during the years ended
December 31, 2002, 2001 and 2000, respectively. Both the
principal and the accrued interest due under the note receivable
agreements are included as a reduction to stockholders
equity.

During the years ended December 31, 2002 and
2001, certain employees holding common stock under the Plan left
the Company. Upon their termination, the Company recognized
interest receipts of $8 in 2002 and $105 in 2001, and
repurchased the shares held by these employees in exchange for
the cancellation of their promissory note agreements.

F-34



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##### Table of Contents



VERIDIAN CORPORATION AND
SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)

(Dollars in thousands, except share
data)


(17) Discontinued Operations

On December 12, 2001, the Company adopted a
formal plan to exit its commercial network security business
operated through its wholly-owned subsidiary, Veritect. The
business was acquired September 7, 1999, as part of the
Companys acquisition of Trident Data Systems, Inc. and was
established as a separate subsidiary in 2000. The business was
further developed to address the market for remote managed
network security services. Revenues of Veritect for the years
ended December 31, 2001 and 2000 totaled $13,560 and
$17,359, respectively.

Based on available market information and
interest expressed in this business, the Company estimated the
net loss expected from the disposal of the business to be
$6,355, net of an income tax benefit of $3,881. This estimate
was recognized as a loss on disposal of discontinued operations
in the consolidated statement of operations for the year ended
December 31, 2001, and included an estimation of operating
losses of $5,587 of the business from January 1, 2002 to
the estimated date of disposal, and impairment charges resulting
from the elimination of the net carrying value of property and
equipment of $1,950 and goodwill and other intangible assets of
$2,699.

Effective June 18, 2002, the Company
completed the sale of substantially all of the net assets and
operations of Veritect to RedSiren Technologies, Inc. for $500
in cash. During the year ended December 31, 2002, the
Company recognized an additional pre-tax loss of $3,902,
including $2,091 recognized during the three months ended
December 31, 2002. The additional loss on the disposal of
discontinued operations recognized subsequent to the sale is
attributed primarily to the impairment of computer equipment
retained and final adjustments related to obligations under
lease agreements.

The assets and liabilities at December 31,
2001, and results of operations and cash flows of Veritect for
the years ended December 31, 2001 and 2000 have been
reported in the accompanying financial statements as
discontinued operations. The net amount assets and liabilities
of Veritect are classified as non-current assets of discontinued
operations. This net balance at December 31, 2001, is
reported after giving effect to the estimated impairment charges
recognized for the reduction of the property and equipment and
goodwill and other intangible asset carrying values.

The carrying values of assets and liabilities are
as follows:

|                                  |                                       |                                  |            |        |        |       | 
|--------------------------------- | ------------------------------------- | -------------------------------- | ---------- | ------ | ------ | ----- | 
|                                  |                                       | December 31,                    
|                                  |                                       | 2001                            
|                                  |                                       |                                 
|Current assets (liabilities):     |                                       |                                  |            |       
|                                  | Accounts receivable, net              |                                  | $          | 2,299  |       
|                                  | Accounts payable and accrued expenses |                                  |            | (4,446 | )     
|                                  | Other, net                            |                                  |            | 299    |       
|                                  |                                       |                                  |            |       
|                                  |                                       | Net Current assets (liabilities) |            |        | (1,848 | )    
|                                  |                                       |                                  |            |       
|Non-current assets (liabilities): |                                       |                                  |            |       
|                                  | Property, plant and equipment, net    |                                  |            | 6,887  |       
|                                  | Goodwill, net                         |                                  |            | 2,699  |       
|                                  | Other long-term liabilities           |                                  |            | (3,089 | )     
|                                  |                                       |                                  |            |       
|                                  |                                       | Net non-current assets           |            |        | 6,497  |      
|                                  |                                       |                                  |            |       
|                                  |                                       |                                  | Net assets |        |        | 4,649 | 
|                                  |                                       |                                  |            |       
|Provision for impairment charge   |                                       |                                  | (4,649     | )     
|                                  |                                       |                                  |            |       
|Net carrying balance              |                                       | $                                |           |       
|                                  |                                       |                                  |            |       

F-35



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##### Table of Contents



VERIDIAN CORPORATION AND
SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)

(Dollars in thousands, except share
data)


(18) Related Party Transactions

In connection with the sale of Class A
common stock and Series A redeemable preferred stock
effective September 7, 1999, CIBC World Markets Corp.
(CIBC), First Union Investors, Inc. (First Union Investors),
Monitor Clipper Equity Partners, L.P. (Monitor) and various
affiliates of CIBC and Monitor, became stockholders of the
Company.

The Company and a predecessor of Monitor Company
Group Limited Partnership (the Monitor Company Group), which is
an affiliate of Monitor, entered into a consulting agreement
under which the Monitor Company Group provided various business
development, strategic planning, and other management consulting
services to assist the Company in its efforts to integrate the
operations of companies acquired in 1999. The Monitor Company
Group provided $65 of services under the agreement during the
year ended December 31, 2000. Also, the Monitor Company
Group provided $509 of services to Veritect under another
consulting agreement during the year ended December 31,
2001.

On June 10, 2002, the Company paid a fee of
$1,600 to Monitor Clipper Partners upon the closing of the
initial public offering of its common stock (note 2(a)).

Effective September 7, 1999, the Company
entered into a senior subordinated increasing rate note
agreement (the subordinated agreement) with CIBC and First Union
Investors, and a revolving credit agreement with First Union
National Bank (now known as Wachovia National Bank) (First Union
National Bank and First Union Investors are collectively
referred to as Wachovia). CIBC and Wachovia earned interest at
various rates during 2000 (note 7) under the subordinated
note and revolving credit agreements.

In connection with the refinancing of the
subordinated and revolving credit agreements (notes 7(a)
and (c)), the Company paid cancellation fees relating to the
repayment of the 1999 notes of $3,150 and $2,100 to CIBC and
Wachovia, respectively. The Company also paid underwriting,
arrangement and administrative fees totaling $3,910, $2,075 and
$1,755 to Wachovia for its role in the funding and placement of
the Amended 2002, the 2002, and the 2000 facilities,
respectively.

(19) Commitments and
Contingencies



| |                                  
| | ---------------------------------
| | (a) Environmental
    Remediation

In the past, the Company has been named as a
potentially responsible party with respect to several Superfund
sites, in connection with waste transported from one or more of
our facilities to those sites. The Company has settled, or will
settle, its liability at each of these sites for de minimisamounts.

Remediation of the Pfohl Brothers site has been
conducted in stages and is scheduled for final completion in
2003. The total estimated remediation cost of $34 million
for the Pfohl Brothers site was calculated by determining the
total response costs including removal, construction and
administrative costs. The Company and a majority of the other
potential responsible parties agreed upon an allocation of those
response costs, with the Companys portion estimated to be
an average of approximately 1.2% of the total administrative,
removal, and construction costs. As of December 31, 2002,
the Company had funded substantially all of its portion of the
estimated liability.



| |                         
| | ------------------------
| | (b) Contract Cost Audits

The majority of the Companys revenues are
earned under contracts with various departments and agencies, or
prime contractors, of the U.S. government. Certain revenues and
payments made to the Company are based on provisional billings
and payments that are subject to adjustment under audit. U.S.
government agencies and departments have the right to challenge
the Companys cost estimates and allocation methodologies
with respect to government contracts. Also, contracts with such
agencies are also subject to audit and possible adjustment to
give effect to unallowable costs under cost-type contracts or to
other regulatory requirements affecting both cost-type and
fixed-price contracts.

F-36



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##### Table of Contents



VERIDIAN CORPORATION AND
SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)

(Dollars in thousands, except share
data)


At December 31, 2002, audits had been
completed on the Companys incurred contract costs through
1998. Reports on several completed audits have not been issued
pending resolution of minor items. The Company has included an
allowance for excess billings and contract losses that it
believes is adequate based on its interpretation and applicable
regulations. There can be no assurance, however, that this
allowance will be adequate. In the opinion of management, any
adjustments likely to result from inquiries or audits will not
have a material adverse effect on the Companys financial
condition or its results of operations.



| |                  
| | -----------------
| | (c) Legal Matters

From time to time, the Company is a party to
litigation or other legal proceedings that is considered to be
part of the ordinary course of business. The Company is not
currently involved in legal proceedings that could reasonably be
expected to have a material adverse effect on its business,
financial condition or results of operations. However, on
occasion, the Company or its competitors file bid protests in
connection with specific contract awards, as permitted under
U.S. government procurement regulations. Historically, these
proceedings have not had any material effect on the
Companys business, financial condition or results of
operations. The Company may become involved in material legal
proceedings or contract bid proceedings in the future. The
Company is involved in various other claims and legal actions
arising in the ordinary course of business. In the opinion of
management, the ultimate disposition of these matters will not
have a material adverse effect on the Companys results of
operations, financial position, or liquidity.

(20) Quarterly Financial Data
(Unaudited)

The following quarterly financial data is
unaudited, but in the opinion of management, all adjustments
necessary for a fair presentation of the selected data for these
interim periods have been included.

|                              |                                                                                                      |                                          |   |         |   |       |   |         |   |  |   |         |  |  |   |         |  
|----------------------------- | ---------------------------------------------------------------------------------------------------- | ---------------------------------------- | - | ------- | - | ----- | - | ------- | - |  | - | ------- |  |  | - | ------- | -
|                              |                                                                                                      | First                                    |   | Second  |   | Third |   | Fourth 
|                              |                                                                                                      |                                          |   |         |   |       |   |        
|                              |                                                                                                      |                                          |   |        
|                              |                                                                                                      | (dollars in thousands, except per share) |   |        
|Year Ended December 31, 2002: |                                                                                                      |                                          |   |         |   |       |   |         |   |  |   |         |  |  |   |        
|                              | Revenues                                                                                             |                                          | $ | 176,602 |   |       | $ | 192,606 |   |  | $ | 191,795 |  |  | $ | 273,074 |  
|                              | Income from continuing operations before
    extraordinary items                                     |                                          |   | 3,570   |   |       |   | 5,261   |   |  |   | 7,395   |  |  |   | 9,337   |  
|                              | Loss from discontinued operations                                                                    |                                          |   | (1,103  | ) |       |   |        |   |  |   |        |  |  |   | (1,238  | )
|                              | Loss from extraordinary items                                                                        |                                          |   |        |   |       |   | (10,938 | ) |  |   |        |  |  |   |        |  
|                              |                                                                                                      |                                          |   |         |   |       |   |         |   |  |   |         |  |  |   |        
|                              | Net income (loss)                                                                                    |                                          | $ | 2,467   |   |       | $ | (5,677  | ) |  | $ | 7,395   |  |  | $ | 8,099   |  
|                              |                                                                                                      |                                          |   |         |   |       |   |         |   |  |   |         |  |  |   |        
|                              | Net income (loss) attributable to common
    stockholders                                            |                                          | $ | 214     |   |       | $ | (62,164 | ) |  | $ | 7,395   |  |  | $ | 8,099   |  
|                              |                                                                                                      |                                          |   |         |   |       |   |         |   |  |   |         |  |  |   |        
|Earnings per share  Basic:   |                                                                                                      |                                          |   |         |   |       |   |         |   |  |   |         |  |  |   |        
|                              | Income from continuing operations before
    extraordinary items attributable to common stockholders |                                          | $ | 0.18    |   |       | $ | (3.90   | ) |  | $ | 0.22    |  |  | $ | 0.28    |  
|                              | Loss from discontinued operations                                                                    |                                          |   | (0.15   | ) |       |   |        |   |  |   |        |  |  |   | (0.04   | )
|                              | Loss from extraordinary items                                                                        |                                          |   |        |   |       |   | (0.83   | ) |  |   |        |  |  |   |        |  
|                              |                                                                                                      |                                          |   |         |   |       |   |         |   |  |   |         |  |  |   |        
|                              | Net income (loss)                                                                                    |                                          | $ | 0.03    |   |       | $ | (4.73   | ) |  | $ | 0.22    |  |  | $ | 0.24    |  
|                              |                                                                                                      |                                          |   |         |   |       |   |         |   |  |   |         |  |  |   |        
|Earnings per share  Diluted: |                                                                                                      |                                          |   |         |   |       |   |         |   |  |   |         |  |  |   |        
|                              | Income from continuing operations before
    extraordinary items attributable to common stockholders |                                          | $ | 0.07    |   |       | $ | (3.90   | ) |  | $ | 0.21    |  |  | $ | 0.26    |  
|                              | Loss from discontinued operations                                                                    |                                          |   | (0.06   | ) |       |   |        |   |  |   |        |  |  |   | (0.03   | )
|                              | Loss from extraordinary items                                                                        |                                          |   |        |   |       |   | (0.83   | ) |  |   |        |  |  |   |        |  
|                              |                                                                                                      |                                          |   |         |   |       |   |         |   |  |   |         |  |  |   |        
|                              | Net income (loss)                                                                                    |                                          | $ | 0.01    |   |       | $ | (4.73   | ) |  | $ | 0.21    |  |  | $ | 0.23    |  
|                              |                                                                                                      |                                          |   |         |   |       |   |         |   |  |   |         |  |  |   |        

F-37



---



##### Table of Contents



VERIDIAN CORPORATION AND
SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)

(Dollars in thousands, except share
data)


|                                                          |                                                                           |                                          |   |            |   |       |   |            |   |  |   |            |   |  |   |            |  
|--------------------------------------------------------- | ------------------------------------------------------------------------- | ---------------------------------------- | - | ---------- | - | ----- | - | ---------- | - |  | - | ---------- | - |  | - | ---------- | -
|                                                          |                                                                           | First                                    |   | Second     |   | Third |   | Fourth    
|                                                          |                                                                           |                                          |   |            |   |       |   |           
|                                                          |                                                                           |                                          |   |           
|                                                          |                                                                           | (dollars in thousands, except per share) |   |           
|Weighted average shares used in per share
    computation |                                                                           |                                          |   |            |   |       |   |            |   |  |   |            |   |  |   |           
|                                                          | Basic                                                                     |                                          |   | 7,469,883  |   |       |   | 13,134,533 |   |  |   | 32,981,790 |   |  |   | 33,254,805 |  
|                                                          |                                                                           |                                          |   |            |   |       |   |            |   |  |   |            |   |  |   |           
|                                                          | Diluted                                                                   |                                          |   | 19,983,988 |   |       |   | 13,134,533 |   |  |   | 35,363,555 |   |  |   | 35,578,746 |  
|                                                          |                                                                           |                                          |   |            |   |       |   |            |   |  |   |            |   |  |   |           
|Year ended December 31, 2001:                             |                                                                           |                                          |   |            |   |       |   |            |   |  |   |            |   |  |   |           
|                                                          | Revenues                                                                  |                                          | $ | 162,723    |   |       | $ | 173,479    |   |  | $ | 172,419    |   |  | $ | 181,604    |  
|                                                          | Income from continuing operations before
    extraordinary items          |                                          |   | (1,103     | ) |       |   | (632       | ) |  |   | (1,062     | ) |  |   | (1,019     | )
|                                                          | Loss from discontinued operations                                         |                                          |   | (3,099     | ) |       |   | (3,216     | ) |  |   | (2,612     | ) |  |   | (8,705     | )
|                                                          |                                                                           |                                          |   |            |   |       |   |            |   |  |   |            |   |  |   |           
|                                                          | Net loss                                                                  |                                          | $ | (4,202     | ) |       | $ | (3,848     | ) |  | $ | (3,674     | ) |  | $ | (9,724     | )
|                                                          |                                                                           |                                          |   |            |   |       |   |            |   |  |   |            |   |  |   |           
|                                                          | Net loss attributable to common stockholders                              |                                          | $ | (6,140     | ) |       | $ | (5,859     | ) |  | $ | (5,764     | ) |  | $ | (11,893    | )
|                                                          |                                                                           |                                          |   |            |   |       |   |            |   |  |   |            |   |  |   |           
|Earnings per share  basic and diluted:                   |                                                                           |                                          |   |            |   |       |   |            |   |  |   |            |   |  |   |           
|                                                          | Income from continuing operations attributable to
    common stockholders |                                          | $ | (0.40      | ) |       | $ | (0.35      | ) |  | $ | (0.42      | ) |  | $ | (0.43      | )
|                                                          | Loss from discontinued operations                                         |                                          |   | (0.42      | ) |       |   | (0.43      | ) |  |   | (0.35      | ) |  |   | (1.17      | )
|                                                          |                                                                           |                                          |   |            |   |       |   |            |   |  |   |            |   |  |   |           
|                                                          | Net loss                                                                  |                                          | $ | (0.82      | ) |       | $ | (0.78      | ) |  | $ | (0.77      | ) |  | $ | (1.60      | )
|                                                          |                                                                           |                                          |   |            |   |       |   |            |   |  |   |            |   |  |   |           
|Weighted average shares used in per share
    computation |                                                                           |                                          |   |            |   |       |   |            |   |  |   |            |   |  |   |           
|                                                          | Basic and diluted                                                         |                                          |   | 7,531,134  |   |       |   | 7,524,786  |   |  |   | 7,449,335  |   |  |   | 7,412,385  |  
|                                                          |                                                                           |                                          |   |            |   |       |   |            |   |  |   |            |   |  |   |           

F-38



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##### Table of Contents



EXHIBIT INDEX

|        |      |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|------- | ---- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |      |            
|No.     |      | Description
|        |      |            
|        | 2   | .1          |  | Stock Purchase Agreement, dated as of
    August 12, 2002, by and among SIGNAL Corporation, Roger
    Mody, Lori Mody and Veridian Corporation (filed as
    Exhibit 2.1 to Veridian Corporations Current Report
    on Form 8-K, as filed with the Commission on
    September 26, 2002, and incorporated by reference herein).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|        | *3   | .1          |  | Second Amended and Restated Certificate of
    Incorporation of Veridian Corporation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|        | *3   | .2          |  | Restated Bylaws of Veridian Corporation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|        | 4   | .1          |  | Specimen of Common Stock Certificate (filed as
    Exhibit 4.1 to Veridian Corporations Registration
    Statement on Form S-1 (No. 333-83792), as filed with
    the Commission on March 6, 2002, as amended, and
    incorporated by reference herein).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|        | 10  | .1          |  | First Amendment, dated September 24, 2002,
    to Credit Agreement, dated as of June 10, 2002, by and
    among Veridian Corporation, the lenders from time to time party
    to the Credit Agreement and Wachovia Bank, National Association
    (filed as Exhibit 10.1 to Veridian Corporations
    Current Report on Form 8-K, as filed with the Commission on
    September 26, 2002, and incorporated by reference herein).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|        | 10  | .2          |  | Credit Agreement, dated as of June 10, 2002,
    as amended and restated on September 24, 2002, by and among
    Veridian Corporation, the lenders who are or may become a party
    to the Credit Agreement and Wachovia Bank, National Association
    (filed as Exhibit 10.2 to Veridian Corporations
    Current Report on Form 8-K, as filed with the Commission on
    September 26, 2002, and incorporated by reference herein).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|        | *10  | .3          |  | Form of Revolving Credit Note pursuant to Credit
    Agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|        | *10  | .4          |  | Form of Swingline Note pursuant to Credit
    Agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|        | *10  | .5          |  | Form of Term Note pursuant to Credit Agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|        | 10  | .6          |  | Master Equityholders Agreement, dated
    September 14, 2000, by and among Veridian Corporation,
    Monitor Clipper Equity Partners, L.P., Monitor Clipper Equity
    Partners (Foreign), L.P., CIBC WG Argosy Merchant
    Fund 3, L.L.C., Texas Growth Fund II  1998
    Trust, Argotyche, L.P., Santaeus, L.P., David H. Langstaff,
    Monitor Company Group Limited Partnership, Monitor Consulting,
    L.P., First Union Investors, Inc., The Northwestern Mutual Life
    Insurance Company, A.G. Investment Advisory Services, Inc.,
    Merit Life Insurance Co., Lincoln National Life Insurance
    Company, J.H. Whitney Mezzanine Fund, L.P.,
    J.H. Whitney Market Value Fund, L.P., American General Life
    and Accident Insurance Company and Magnetite Asset Investors,
    L.L.C. (filed as Exhibit 10.12 to Veridian
    Corporations Registration Statement on Form S-1
    (No. 333-83792), as filed with the Commission on
    March 6, 2002, as amended, and incorporated by reference
    herein).
|        | +10 | .7          |  | Employment Agreement of James P. Allen (filed as
    Exhibit 10.16 to Veridian Corporations Registration
    Statement on Form S-1 (No. 333-83792), as filed with
    the Commission on March 6, 2002, as amended, and
    incorporated by reference herein).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|        | +10 | .8          |  | Employment Agreement of Dr. Robert M.
    Farrell (filed as Exhibit 10.15 to Veridian
    Corporations Registration Statement on Form S-1
    (No. 333-83792), as filed with the Commission on
    March 6, 2002, as amended, and incorporated by reference
    herein).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|        | +10 | .9          |  | Employment Agreement of Scott M. Goss (filed as
    Exhibit 10.3 to Veridian Corporations Current Report
    on Form 8-K, as filed with the Commission on
    September 26, 2002, and incorporated by reference herein).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|        | +10 | .10         |  | Employment Agreement of Jerald S. Howe, Jr.
    (filed as Exhibit 10.14 to Veridian Corporations
    Registration Statement on Form S-1 (No. 333-83792), as
    filed with the Commission on March 6, 2002, as amended, and
    incorporated by reference herein).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|        | +10 | .11         |  | Employment Agreement of Ronald C. Jones (filed as
    Exhibit 10.17 to Veridian Corporations Registration
    Statement on Form S-1 (No. 333-83792), as filed with
    the Commission on March 6, 2002, as amended, and
    incorporated by reference herein).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   



---



##### Table of Contents



|        |      |             |  |                                                                                                                                                                                                                                                                              
|------- | ---- | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |      |            
|No.     |      | Description
|        |      |            
|        | +10 | .12         |  | Employment Agreement of David H. Langstaff (filed
    as Exhibit 10.13 to Veridian Corporations
    Registration Statement on Form S-1 (No. 333-83792), as
    filed with the Commission on March 6, 2002, as amended, and
    incorporated by reference herein).           
|        | 10  | .13         |  | Amended and Restated Warrant Agreement (filed as
    Exhibit 10.18 to Veridian Corporations Registration
    Statement on Form S-1 (No. 333-83792), as filed with
    the Commission on March 6, 2002, as amended, and
    incorporated by reference herein).               
|        | +10 | .14         |  | Calspan SRL Corporation 1995 Stock Incentive Plan
    (filed as Exhibit 10.19 to Veridian Corporations
    Registration Statement on Form S-1 (No. 333-83792), as
    filed with the Commission on March 6, 2002, as amended, and
    incorporated by reference herein).    
|        | +10 | .15         |  | Veda International, Inc. Stock Option Plan (filed
    as Exhibit 10.20 to Veridian Corporations
    Registration Statement on Form S-1 (No. 333-83792), as
    filed with the Commission on March 6, 2002, as amended, and
    incorporated by reference herein).           
|        | +10 | .16         |  | Veridian Corporation 1998 Stock Incentive Plan
    (filed as Exhibit 10.21 to Veridian Corporations
    Registration Statement on Form S-1 (No. 333-83792), as
    filed with the Commission on March 6, 2002, as amended, and
    incorporated by reference herein).       
|        | +10 | .17         |  | Veridian Corporation 2000 Stock Incentive Plan
    (filed as Exhibit 10.22 to Veridian Corporations
    Registration Statement on Form S-1 (No. 333-83792), as
    filed with the Commission on March 6, 2002, as amended, and
    incorporated by reference herein).       
|        | +10 | .18         |  | Amended and Restated Veridian Retirement Savings
    Plan (filed as Exhibit 10.23 to Veridian Corporations
    Registration Statement on Form S-1 (No. 333-83792), as
    filed with the Commission on March 6, 2002, as amended, and
    incorporated by reference herein).
|        | *10  | .19         |  | Sale and Assignment Agreement, dated
    August 12, 2002, by and between Scott Goss and Veridian
    Corporation.                                                                                                                                                            
|        | *10  | .20         |  | Amendment to Sale and Assignment Agreement, dated
    September 24, 2002, by and between Scott Goss and Veridian
    Corporation.                                                                                                                                            
|        | *21  | .1          |  | List of Subsidiaries of Veridian Corporation.                                                                                                                                                                                                                                
|        | *23  | .1          |  | Consent of KPMG LLP.                                                                                                                                                                                                                                                         
|        | *99  | .1          |  | Certification of David H. Langstaff pursuant to
    18 U.S.C. Section 1350, as adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                        
|        | *99  | .2          |  | Certification of James P. Allen pursuant to
    18 U.S.C. Section 1350, as adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                            



---



|  |                
|- | ---------------
|* | Filed herewith.



|  |                           
|- | --------------------------
| | Incorporated by reference.



|  |                                                             
|- | ------------------------------------------------------------
|+ | Management contract or compensatory plan or
    arrangement.