<PAGE>

                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                   FORM 10-Q

                                   (Mark one)

     [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

                 For the quarterly period ended April 30, 2002

                                       OR

    [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

             For the transition period from __________ to ________

                          Commission File No. 0-24015

                                STEELCLOUD, INC
             (Exact name of Registrant as specified in its charter)

                                    VIRGINIA
         (State or other jurisdiction of incorporation or organization)

                                   54-1890464
                      (I.R.S. Employer Identification No.)

                     1306 Squire Court, Sterling, VA. 20166
              (Address of principal executive offices) (zip code)

                                 (703) 450-0400
              (Registrant's telephone number, including area code)


         (Former name or former address, if changed since last report)

         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No______.

         As of June 1, 2002 there were 10,004,447 shares of the registrant's
common stock outstanding.


<PAGE>

                                SteelCloud, Inc.
                                Form 10-Q Index
                 For the Quarterly period ended April 30, 2002


<TABLE>
<CAPTION>
Description                                                                                        Page
<S>                                                                                                <C>
Part I.      Financial Information...............................................................    3

Item 1.      Financial Statements................................................................
             Consolidated Balance Sheets as of April 30, 2002 and October 31, 2001...............    3
             Consolidated Statements of Operations for the three and six month periods ended
             April 30, 2002 and 2001      .......................................................    4
             Consolidated Statements of Cash Flows for the six month periods ended April 30,
             2002 and 2001.......................................................................    5
             Notes to the Consolidated Financial Statements......................................    6

Item 2.      Management's Discussion and Analysis of Financial Condition and Results of
             Operations..........................................................................    9

Part II.     Other Information...................................................................   16

Item 1.      Legal Proceedings...................................................................   16

Item 6.      Exhibits and Reports on Form 8-K....................................................   16
</TABLE>

<PAGE>

PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

STEELCLOUD, INC.
CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                              October 31,      April 30,
                                                                                 2001            2002
                                                                             ------------    ------------
<S>                                                                         <C>             <C>
                                        ASSETS                                                (unaudited)
Current assets
   Cash and cash equivalents                                                 $    313,054    $  1,475,709
   Accounts receivable, net                                                     6,201,621       3,548,795
   Inventory, net                                                               5,099,436       5,119,743
   Income tax receivable                                                        1,400,424          82,250
   Deferred contract cost                                                            --         1,465,167
   Prepaid expenses and other current assets                                      173,695         133,454
                                                                             ------------    ------------

Total current assets                                                           13,188,230      11,825,118

   Property and equipment, net                                                    319,944         298,848
   Equipment on lease, net                                                        597,202         383,958
   Goodwill and other intangible assets, net                                    2,770,572       2,573,464
   Investments                                                                    150,000          75,000
   Other assets                                                                   108,599          97,622
                                                                             ------------    ------------

Total assets                                                                 $ 17,134,547    $ 15,254,010
                                                                             ============    ============

                   LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities
    Accounts payable                                                         $  3,293,030    $  1,220,186
    Accrued expenses                                                            2,277,993       2,798,146
    Notes payable, current                                                        114,985         635,600
    Unearned revenue                                                              213,385       1,807,477
                                                                             ------------    ------------

Total current liabilities                                                       5,899,393       6,461,409

   Notes payable, long-term                                                          --           247,942
   Line of credit - long-term                                                   3,836,754            --

Stockholders' equity
    Common stock, $.001 par value: 50,000,000 shares authorized,
           10,214,545 and 10,404,447 shares issued at October 31, 2001 and
           April 30, 2002, respectively;
                                                                                   10,215          10,404
    Additional paid in capital                                                 39,079,397      39,389,654
    Treasury stock, at cost, 400,000 shares;                                   (3,432,500)     (3,432,500)
    Accumulated deficit                                                       (28,258,712)    (27,422,899)
                                                                             ------------    ------------

Total stockholders' equity                                                      7,398,400       8,544,659
                                                                             ------------    ------------

Total liabilities and stockholders' equity                                   $ 17,134,547    $ 15,254,010
                                                                             ============    ============
</TABLE>


The accompanying notes are an integral part of these consolidated financial
statements.


                                                                               3
<PAGE>

STEELCLOUD, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)

<TABLE>
<CAPTION>
                                                            Three Months Ended              Six Months Ended
                                                                 April 30,                      April 30,
                                                        ---------------------------   ----------------------------
                                                            2001           2002           2001            2002
                                                                                       (restated)
                                                        ------------   ------------   ------------    ------------
<S>                                                    <C>            <C>            <C>             <C>
Net revenues                                            $  7,328,384   $  8,077,208   $ 14,517,283    $ 17,763,433
Cost of revenue                                            5,519,503      5,847,147     10,960,065      13,012,034
                                                        ------------   ------------   ------------    ------------

Gross profit                                               1,808,881      2,230,061      3,557,218       4,751,399

Selling and marketing                                        219,648        254,697        380,412         574,420
General and administrative                                 1,273,238      1,415,347      2,556,780       2,984,408
Amortization of goodwill                                      98,554         98,554        197,108         197,108
                                                        ------------   ------------   ------------    ------------

Income from operations                                       217,441        461,463        422,918         995,463

Interest expense, net                                         23,955         11,893        122,210          62,342
Other expense, net                                            26,396        100,264         26,396          96,109
                                                        ------------   ------------   ------------    ------------

Income from operations before income taxes                   167,090        349,306        274,312         837,012
Provision for income taxes                                      --             --             --             1,200
                                                        ------------   ------------   ------------    ------------

Net income                                                   167,090        349,306        274,312         835,812

Dividends to preferred stockholders                           37,500           --           75,000            --
Cumulative effect of change in accounting principle             --             --          576,001            --
                                                        ------------   ------------   ------------    ------------

Net income (loss) attributable to common stockholders   $    129,590   $    349,306   $   (376,689)   $    835,812



       Basic earnings (loss) per share                  $       0.01   $       0.04   $      (0.04)   $       0.08

       Diluted earnings (loss) per share                $       0.01   $       0.03   $      (0.04)   $       0.08
</TABLE>


The accompanying notes are an integral part of these consolidated statements.


                                                                               4
<PAGE>

STEELCLOUD, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)

<TABLE>
<CAPTION>
                                                                             Six Months Ended
                                                                                 April 30,
                                                                        --------------------------
                                                                           2001           2002
                                                                        -----------    -----------
<S>                                                                    <C>            <C>
Operating activities
Net income                                                              $   274,312    $   835,812
Adjustments to reconcile net income to net cash provided by operating
  activities:
Depreciation and amortization of property and equipment                     868,950        427,277
Amortization of goodwill and other intangibles                              197,108        197,108
Provision for bad debt                                                         --          100,577
Impairment charge - investment                                                 --           75,000
Stock Compensation Expense                                                     --           17,500

  Changes in operating assets and liabilities:
  Accounts receivable                                                     4,208,063      2,552,249
  Income tax receivable                                                  (1,259,047)     1,318,174
  Inventory                                                                 621,140        (20,307)
  Deferred contract cost                                                       --       (1,465,167)
  Prepaid expenses and other assets                                          78,820         51,219
  Accounts payable                                                       (4,946,697)    (2,072,844)
  Accrued expenses                                                         (228,835)       824,813
  Deferred tax credit                                                     1,108,386           --
  Unearned revenue and other liabilities                                    105,429      1,594,092
                                                                        -----------    -----------

Net cash provided by operating activities                                 1,027,629      4,435,503

Investing activities
 Purchase of property and equipment                                        (451,184)      (192,939)


Financing activities
Proceeds from exercise of common stock options                                 --          228,288
(Payments) on notes payable                                                (216,767)      (196,443)
Proceeds on notes payable                                                      --          725,000
Repayments on line of credit, net                                          (525,112)    (3,836,754)
                                                                        -----------    -----------

Net cash used in financing activities                                      (741,879)    (3,079,909)

Net (decrease) increase in cash and cash equivalents                       (165,434)     1,162,655
Cash and cash equivalents at beginning of period                            363,958        313,054
                                                                        -----------    -----------

Cash and cash equivalents at end of period                              $   198,524    $ 1,475,709


Supplemental cash flow information
Interest paid                                                           $    49,391    $    65,525

Income taxes paid                                                       $      --      $     1,200
</TABLE>


The accompanying notes are an integral part of these consolidated financial
statements.


                                                                               5
<PAGE>

STEELCLOUD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.       Basis of Presentation

The consolidated financial statements for the three and six month periods ended
April 30, 2002 and 2001 are unaudited and include all adjustments which, in the
opinion of management, are necessary to present fairly the results of operations
for the periods then ended. All such adjustments are of a normal and recurring
nature. These consolidated financial statements should be read in conjunction
with the Annual Report on Form 10-K of SteelCloud, Inc. (the "Company") which
includes consolidated financial statements and notes thereto for the years ended
October 31, 2001 and 2000.


2.       Debt

On January 18, 2002, the Company amended its primary line of credit whereby the
maximum availability was increased from $5 million to $7.5 million. The note
bears interest at the lower of (a) the Lender's Prime Rate per annum or (b) the
LIBOR Market Index Rate plus 2.5%. The line of credit expires on March 31, 2003.
The outstanding balance on the line of credit at October 31, 2001 and April 30,
2002 was approximately $3,837,000 and $0, respectively.

On February 1, 2002, the Company executed a promissory note in conjunction with
its line of credit in the amount of $725,000. The note bears interest at the
lower of (a) the Lender's Prime Rate per annum or (b) the LIBOR Market Index
Rate plus 2.5% and matures on July 5, 2003. The Company makes monthly principal
payments of approximately $43,000. The outstanding balance on the promissory
note at April 30, 2002 was approximately $640,000.

On April 1, 2002, the Company executed a two-year promissory note in conjunction
with a litigation settlement for approximately $240,000. The promissory note
bears interest at the prime rate and matures in May 2004. The Company makes
monthly payments of $10,000 plus accrued interest. The outstanding balance on
the note at April 30, 2002 was approximately $240,000.

3.       Series A Convertible Preferred Stock

On March 13, 2000, the Company sold 3,000 shares of its Series A Convertible
Preferred Stock in a private placement, which is exempt from registration
provided by Regulation D Rule 506 promulgated by the Securities and Exchange
Commission under the Securities Act of 1933, as amended. The Company received
net proceeds of approximately $2.7 million, which was used to fund current and
future operations.

In addition, the Company issued warrants to the preferred investor and broker of
the transaction in the amount of 247,525 and 75,000 to purchase shares of the
Company's common stock at $3.64 and $4.57 per share, respectively.


                                                                               6
<PAGE>

During 2001, the Company implemented Emerging Issues Task Force ("EITF") Issue
No. 00-27, "Application of EITF Issue No. 98-5, Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios," to Certain Convertible Instruments" ("EITF 00-27"). Issue 1
of EITF 00-27 modified the calculation of beneficial conversion features for
convertible securities issued with detachable instruments for all transactions
subject to EITF Issue No. 98-5. In accordance with the transition provision of
EITF 00-27, companies are required to report any changes in the beneficial
conversion feature as a result of applying Issue 1 of EITF 00-27 as a cumulative
effect of a change in accounting principle at the time of implementation in
accordance with APB Opinion No. 20, "Accounting Changes". As a result of the
implementation of EITF 00-27, the Company restated its results for the six
months ended April 30, 2001 to record a charge representing an additional
allocation of value to the beneficial conversion feature of $576,001, or $0.06
per share, as a cumulative effect of a change in accounting principle.

In August 2001, the Company completed a transaction with its Preferred
Shareholders to redeem all of its outstanding Series A Convertible Preferred
Stock. Under the Redemption Agreement, the preferred shareholders retained
approximately 247,000 warrants previously issued. The Company delivered $2.5
million to its preferred shareholders in exchange for the then outstanding 2,620
shares of its Series A Convertible Preferred Stock. As a result of this
redemption, the Company had no outstanding shares of Series A Convertible
Preferred Stock as of October 31, 2001.

4.       Contract Revenue

For the three months ended April 30, 2002, the Company deferred recognition of
approximately $1.7 million in revenue related to its significant server
appliance contract awarded in January 2002. The deferred revenue represents
payments received for milestones achieved. This revenue will be recognized over
the remaining life of the contract, which is scheduled for completion in July
2003.

5.       Earnings Per Share

Basic earnings per share is based on the weighted average number of common
shares outstanding during the period and is calculated by dividing the net
earnings (loss) available to common shareholders by the weighted average number
of common shares outstanding. Diluted earnings per share is based on the
weighted average number of common shares outstanding plus common stock
equivalents associated with preferred stock, stock options and warrants to
purchase shares of common stock and is calculated by dividing net earnings
(loss) available to common shareholders by the weighted average number of common
shares outstanding used in the basic earnings per share calculation plus common
stock equivalents associated with preferred stock, stock options and warrants to
purchase shares of common stock. Due to their anti-dilutive effects, outstanding
stock options were excluded from the computation of diluted earnings per share
for the three months ended April 30, 2001.


                                                                               7
<PAGE>

6.       Contingencies

Microsoft Licensing Agreement

In November 1998, International Data Products, Inc. (IDP), a wholly-owned
subsidiary of the Company, entered into a Government Integrator Agreement, as
amended, with Microsoft Corporation (Microsoft) for the licensing of certain
Microsoft software. On October 31, 2000, Microsoft filed suit against the
Company, and its subsidiary IDP, for breach of contract in the amount of
approximately $1.3 million. In response to that suit, the Company submitted a
motion to dismiss the case and filed a counterclaim of fraud on behalf of IDP in
the amount of $500,000. In March 2002, the Company and Microsoft agreed to
settle the dispute. Pursuant to the settlement, the Company and Microsoft
exchanged mutual full releases and the Company agreed to pay Microsoft
approximately $315,000. In accordance with the settlement, the Company paid
approximately $75,000 in cash and executed a two-year promissory note for the
balance of $240,000, maturing in May 2004 and bearing interest at the prime
rate. This will not have an impact on the Company's current operations as this
contingency was previously accrued in the Company's consolidated financial
statements.


                                                                               8
<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS


Certain statements contained herein may constitute forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
Because such statements include risks and uncertainties, actual results may
differ materially from those expressed or implied by such forward-looking
statements. Factors that could cause actual results to differ materially
include, but are not limited to, risks associated with the integration of
businesses following an acquisition, competitors with broader product lines and
greater resources, emergence into new markets, the termination of any of the
Company's significant contracts, the Company's inability to maintain working
capital requirements to fund future operations or the Company's inability to
attract and retain highly qualified management, technical and sales personnel.

The following discussion should be read in conjunction with the consolidated
financial statements and notes thereto included in Item 1 in this Quarterly
Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended
October 31, 2001 filed by the Company with the Securities and Exchange
Commission.

OVERVIEW

Founded in 1987, SteelCloud, Inc, based in Dulles, Virginia, designs, develops
and manufactures customized computer servers and network appliances. The
Company's primary business focus is to develop and manufacture products on an
OEM basis ("Original Equipment Manufacturer") for strategic software,
technology, and managed services partners. With its strategic partners,
SteelCloud creates and uniquely brands ready-to-use turnkey network server
appliance solutions combining both hardware and software. The Company integrates
its partner's, or other third-party software, into a custom designed server
platform. SteelCloud manufactures the resulting product under the partner's
brand name allowing the partner to deliver a complete turnkey solution.
SteelCloud's customer is its OEM partner rather than the end-user. The partner
is responsible for selling and distributing the OEM products developed by
SteelCloud. The Company enhances its product development and manufacturing
capability by providing custom supply chain and logistics support services to
its partners.

In addition to delivering computer products to the OEM market, SteelCloud
develops specialized servers and infrastructure products for large commercial
and government integrators, and certain governmental agencies. The Company is a
value-added reseller for the software products of its strategic partners and
certain other software providers. SteelCloud also provides Information
Technology (IT) support services to both the public sector and commercial
customers.


                                                                               9
<PAGE>

FISCAL 2002

The following summarizes significant activity for the six-month period ended
April 30, 2002.

Significant Contract

In January 2002 the Company was awarded several contracts by Lockheed Martin
valued at more than $10.5 million for customized servers. The Company commenced
work under the contract during the three months ended April 30, 2002 and is
expected to complete the contract by July 2003. During the six months ended
April 30, 2002, the Company recognized revenue of approximately $1.6 million and
deferred revenue of approximately $1.7 million that will be recognized over the
life of the contract.

Settlement of Licensing Claim

In November 1998, International Data Products, Inc. (IDP), a wholly-owned
subsidiary of the Company, entered into a Government Integrator Agreement, as
amended, with Microsoft Corporation (Microsoft) for the licensing of certain
Microsoft software. On October 31, 2000, Microsoft filed suit against the
Company, and its subsidiary IDP, for breach of contract in the amount of
approximately $1.3 million. In response to that suit, the Company submitted a
motion to dismiss the case and filed a counterclaim of fraud on behalf of IDP in
the amount of $500,000. In March 2002, the Company and Microsoft agreed to
settle the dispute. Pursuant to the settlement, the Company and Microsoft
exchanged mutual full releases and the Company agreed to pay Microsoft
approximately $315,000. In accordance with the settlement, the Company paid
approximately $75,000 in cash and executed a two-year promissory note for the
balance of $240,000, maturing in May 2004 and bearing interest at the prime
rate. This will not have an impact on the Company's current operations as this
contingency was previously accrued in the Company's consolidated financial
statements.

Sales Office Expansion

In December 2001 and March 2002, the Company established sales offices in
California and Boston, respectively, in order to meet the Company's growing
demands. These new office locations allow SteelCloud to expand its customer base
and to develop and deploy new products for its customers to promote future
revenue growth.


                                                                              10
<PAGE>

CRITICAL ACCOUNTING POLICIES

The Company believes the following represents an update of its critical
accounting policies from October 31, 2001:


Significant Customers

As of April 30, 2002, approximately 42% of the Company's accounts receivable
were attributable to two commercial customers. Network Associates and its
subsidiaries ("NAI") accounted for approximately 24% and approximately 18% was
due from Lockheed Martin. As of June 1, 2002 88% of these accounts receivables
have been collected. For the three months ended April 30, 2002, these two
customers accounted for approximately 66% of net revenues, or 45% and 21%,
respectively. Given the nature of the products manufactured by the Company as
well as the delivery schedules established by its partners, revenue and accounts
receivable concentration by any single customer will fluctuate from quarter to
quarter. The Company anticipates that concentration levels will decrease as
their OEM customer base expands in future periods. Future revenues and results
of operations could be adversely affected should these customers reduce their
purchases, eliminate product lines or choose not to continue to buy products and
services from SteelCloud.


                                                                              11
<PAGE>

RESULTS OF OPERATIONS

For the three and six months ended April 30, 2002 compared to the three and six
months ended April 30, 2001

Net revenues for the three months ended April 30, 2002 were $8,077,208 as
compared to $7,328,384, an increase of approximately 10% over the three months
ended April 30, 2001. The increase is attributable to several factors. For the
three months ended April 30, 2001, the Company completed a significant contract
with the Puerto Rican government for approximately $2.8 million. During fiscal
2002, the revenue decline from that completed contract was offset by the
Company's significant server appliance contract with Lockheed Martin, which was
awarded in January 2002. In addition, the Company experienced revenue growth
from its other server appliance customers for the three months ended April 30,
2002 compared to the same period in the prior year as a result of the Company's
development of several high-end solutions for its expanding partner base. A
higher price per unit is achieved for these high-end solutions given the
technological capabilities of these appliances. The Company anticipates this
trend will continue as its customer base expands and its partners focus on
developing and delivering high-end appliance server solutions to their end-user
customers. For the six month period ended April 30, 2002 and 2001, net revenues
were $17,763,433 and $14,517,283, respectively. This was the result of the
Company's growth trend experienced during its first two quarters of fiscal 2002.

Although economic, market and business factors have had a negative impact on the
Technology industry, the Company continued its trend of improved operating
margins for the three and six months ended April 30, 2002. As a percentage of
net revenues, gross margin increased to 27.6% for the three months ended April
30, 2002 from 24.7% for the three months ended April 30, 2001. On a year to date
basis, gross margin increased from 24.5% during the first six months of fiscal
2001 to 26.7% during the same period of fiscal 2002. This increase in gross
margin is primarily the result of the Company's product lines and product mix it
sells. The Company has been transitioning to the customized server appliance
model, which yields higher margins than the direct end-user Federal Government
business that the Company focused on in prior years. In addition, the
integration and support services, when bundled with the hardware, contribute to
the increase in gross margins. Traditionally, development costs associated with
new products initially lower the gross margins and will improve over time as
production volumes increase. Accordingly, gross margins as a percentage of
revenues, will fluctuate from quarter to quarter.

For the three months ended April 30, selling and marketing expenses increased to
$254,697 in fiscal 2002 from $219,648 in fiscal 2001, an increase of
approximately 16%. Selling and marketing expenses increased due to higher
marketing costs and selling expenses associated with sales, sales initiatives
and new product releases. For the six months ended April 30, selling and
marketing expenses increased from $380,412 in fiscal 2001 to $574,420 in fiscal
2002, approximately a 51% increase. The increase can be attributable to certain
investments in its sales and marketing programs as evidenced by the Company
expanding sales offices into California and Boston during fiscal 2002. In
addition, sales commissions and incentives increased as a result of the
significant revenue growth experienced during the three and six months ended
April 30, 2002. The Company continues to invest in selling and marketing
initiatives in order to expand its customer base, and develop and introduce new
products for its partners, which allow the company to maintain its diverse
product line and product mix to promote future revenue growth.


                                                                              12
<PAGE>

General and administrative expenses increased to $1,415,347 for the three months
ended April 30, 2002 from $1,273,238 for the same period in fiscal 2001, an
increase of approximately 11%. This increase in general and administrative
expenses increased in proportion with the revenue and margin growth the Company
experienced during the three month period ended April 30, 2002 compared to the
same period in fiscal 2001. For the six month period ended April 30, general and
administrative expenses increased to $2,984,408 in fiscal 2002 from $2,556,780
in fiscal 2001, an increase of approximately 17%. Although an increase in
general and administrative expenses resulted for the three and six-month periods
ended April 30, 2002, general and administrative expenses as a percentage of net
revenues declined. Management manages expenses relative to its sales growth. As
a result, general and administrative expenses, as a percentage of revenue
declined to 14.5% in the second quarter of fiscal 2002, down from 17.4% in
fiscal 2001. For the six month period ended April 30, general and administrative
expenses as a percentage of net revenues declined to 15.4% for fiscal 2002, down
from 17.6% for fiscal 2001. Management believes that the Company will continue
to improve efficiencies and manage its costs relative to its net revenues and
gross margins to optimize overall profitability.

Interest expense, net of interest income, decreased to $11,893 for the three
months ended April 30, 2002 from $23,955 for the three months ended April 30,
2001. For the six months ended April 30, interest expense, net of interest
income, decreased to $62,342 in fiscal 2002 from $122,210 in fiscal 2001. The
decrease is the result of the Company's reduction in its outstanding debt during
fiscal 2002 as well as an overall decline in the short-term interest rate in
fiscal 2002 compared to fiscal 2001.

Other expense, net of other income, primarily includes an impairment charge for
a permanent decline in fair value of an investment recorded under the cost
method. During fiscal 2002, the Company recorded a $75,000 impairment charge for
its investment in a private entity based on a decline in the fair value of that
investment below cost. For the three and six month periods ended April 30, other
expense, net of other income, increased to $100,264 and $96,109, respectively in
fiscal 2002 from $26,396 and $26,396, respectively in fiscal 2001. The increase
is the result of recording a write down in the carrying value of its investment.

The Company reported net income of $349,306 for the three months ended April 30,
2002, as compared to net income of $167,090 for the same period in the prior
year. For the six months ended April 30, the Company reported net income of
$835,812 for fiscal 2002 as compared to a net income of $274,312 for fiscal
2001. This was a result of the Company's growth in gross margins derived from a
higher net revenue base during the three and six month periods ended April 30,
2002 as well as the Company's efforts to manage costs relative to its net
revenues.


                                                                              13
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

The principal source of the Company's cash is from its operations. For the six
months ended April 30, 2002, the Company generated approximately $4,435,503 in
cash flow from its operating activities. The Company generated net income of
$835,812, collected approximately $2,552,249 of its receivables and received
unearned revenue of $1,594,092. In addition, the Company collected cash of
approximately $1,318,174 relating to its income tax receivables. The cash
generated was primarily used to pay accounts payable of approximately $2,072,844
and deferred contract costs of $1,465,167.

Funds used for investing activities consisted of the purchase of property,
equipment and leased assets of approximately $192,939. Net cash used for
financing activities consisted of net repayments on the line of credit of
approximately $3,836,754. During fiscal year 2002, the Company financed cash
though notes payable, net of ordinary payments, of approximately $528,557.

On January 18, 2002, the Company amended its existing line of credit from $5
million to $7.5 million, with an expiration date of March 31, 2003, bearing
interest at the lower of (a) prime rate or (b) the LIBOR Market Index Rate plus
2.5%. As of April 30, 2002, the Company had no advances on its line of credit;
however, the available borrowing capacity was approximately $2.1 million.

On February 1, 2002, the Company executed a promissory note in conjunction with
their line of credit in the amount of $725,000. The note bears interest at the
lower of (a) the Lender's Prime Rate per annum or (b) the LIBOR Market Index
Rate plus 2.5% and matures on July 5, 2003. The Company makes monthly principal
payments of approximately $43,000. The outstanding balance on the promissory
note at June 1, 2002 was approximately $597,000.

On April 1, 2002, the Company settled its litigation with Microsoft. In
conjunction with the settlement, the Company executed a two-year promissory note
with Microsoft for approximately $240,000 bearing interest at the prime rate and
with a maturity date of May 2004. The note is payable in monthly payments of
$10,000 plus accrued interest. As of June 1, 2002 the outstanding balance on the
note was approximately $230,000.

As of April 30, 2002, the Company had working capital of approximately $5.4
million and cash on hand of approximately $1.5 million compared to working
capital of approximately $7.3 million and cash on hand of approximately $313,000
as of October 31, 2001. The decrease in working capital is due the
classification of the line of credit as long-term at October 31, 2001.
Accordingly, the $3.8 million line of credit balance was not included in the
working capital computation. The increase in cash is due to the collection of
trade receivables and tax refunds. The Company believes the bank facility,
together with cash on hand, and projected cash generated from operations will
provide sufficient financial resources to finance the current operations of the
Company through fiscal 2002.

From time to time, the Company may pursue strategic acquisitions or mergers,
which may require significant additional capital, and additional capital may be
required to satisfy unusual or infrequent expenses. In such event, the Company
may seek additional financing of debt and/or equity.


                                                                              14
<PAGE>

OFF-BALANCE SHEET ARRANGEMENTS

Contractual Obligations and Commercial Commitments

The Company's significant contractual obligations as of April 30, 2002 are for
debt and operating leases. Debt by year of maturity and future rental payments
under operating lease agreements are presented below. As of April 30, 2002, the
Company does not have an outstanding balance on its line of credit and does not
have any purchase obligations. The Company has not engaged in off-balance sheet
financing, commodity contract trading or significant related party transactions.

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
Contractual Obligations                                             Payments Due by Period
------------------------------------------------------------------------------------------------------------------
                                         Total          Less than 1       1-3 years       4-5 years      After 5
                                                           year                                           years
------------------------------------------------------------------------------------------------------------------
<S>                                   <C>               <C>               <C>                <C>           <C>
Notes payable - current                $  635,600        $  635,600           --              --            --
------------------------------------------------------------------------------------------------------------------
Notes payable - long term                 247,942              --          247,942            --            --
------------------------------------------------------------------------------------------------------------------
Operating lease                         1,467,111           696,281        770,830            --            --
------------------------------------------------------------------------------------------------------------------
</TABLE>

The Company will receive $541,401 in aggregate sublease income through fiscal
2003.


                                                                              15
<PAGE>

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Settlement of Licensing Claim

In November 1998, International Data Products, Inc. (IDP), a wholly-owned
subsidiary of the Company, entered into a Government Integrator Agreement, as
amended, with Microsoft Corporation (Microsoft) for the licensing of certain
Microsoft software. On October 31, 2000, Microsoft filed suit against the
Company, and its subsidiary IDP, for breach of contract in the amount of
approximately $1.3 million. In response to that suit, the Company submitted a
motion to dismiss the case and filed a counterclaim of fraud on behalf of IDP in
the amount of $500,000. In March 2002, the Company and Microsoft agreed to
settle the dispute. Pursuant to the settlement, the Company and Microsoft
exchanged mutual full releases and the Company agreed to pay Microsoft
approximately $315,000. In accordance with the settlement, the Company paid
approximately $75,000 in cash and executed a two-year promissory note for the
balance of $240,000, maturing in May 2004 and bearing interest at the prime
rate. This will not have an impact on the Company's current operations as this
contingency was previously accrued in the Company's consolidated financial
statements.

There are routine legal claims pending against the Company, that occur in the
ordinary course of business but in the opinion of management, liabilities, if
any, arising from such claims will not have a material adverse effect on the
financial condition and results of operation of the Company.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

Exhibit 11.1: Statement of computation of earnings per share.

(b) Reports on Form 8-K

None


                                                                              16
<PAGE>

                                   SIGNATURES

Pursuant to the requirements 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.

                                             SteelCloud, Inc
                                             (Registrant)



Date:    June 7, 2002                By: /s/ Thomas P. Dunne
                                             -----------------------------------
                                             Thomas P. Dunne
                                             Chief Executive Officer





Date:    June 7, 2002                By: /s/ Kevin M. Murphy
                                             -----------------------------------
                                             Kevin M. Murphy
                                             Vice President, Finance


                                                                              17