SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                  FORM 10-KSB

              Annual Report pursuant to Section 13 or 15(d) of the
                        Securities Exchange Act of 1934

                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
                          Commission File No. 0-22405

                       INFORMATION ANALYSIS INCORPORATED
             (Exact name of Registrant as specified in its charter)

           Virginia                                              54-1167364
(State or other jurisdiction of                                 (IRS Employer
incorporation or organization)                               Identification No.)

           11240 Waples Mill Road, Suite 400 Fairfax, Virginia 22030
            (Address of principal executive offices)      (Zip Code)

                                 (703) 383-3000
              (Registrant's telephone number, including area code)

          Securities registered pursuant to Section 12(b) of the Act:
                                      None

          Securities registered pursuant to Section 12(g) of the Act:
                         Common Stock, $0.01 Par Value
                                (Title of Class)

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

The issuer's revenue for its most recent fiscal year was $8,080,549.

The aggregate market value of the Registrant's Common Stock held by
non-affiliates as of December 31, 1997 was approximately $53,183,466.

As of December  31, 1997 the Registrant had 5,993,819 shares of Common Stock
outstanding.

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                                     PART I

ITEM 1.  BUSINESS DESCRIPTION

OVERVIEW

         Founded in 1979, Information Analysis Incorporated ("IAI" or "the
Company") is in the business of modernizing client information systems. Since
its inception, IAI has performed software development and conversion projects
for over 70 commercial and government clients including Arbitron, MCI, Computer
Sciences Corporation, IBM, Sprint, Citibank, U.S. Customs Service, U.S.
Department of Energy, U.S. Army, U.S. Air Force, Veterans Administration and the
Federal Deposit Insurance Corporation.

         Today, IAI primarily concentrates on applying its technology, services
and experience to Year 2000 compliance and legacy software migration.

         IAI's Year 2000 compliance and software migration strategy is based
around a proprietary software tool called UNICAST. IAI acquired the rights to
UNICAST in 1996. Originally, the product was viewed as an automation tool to aid
the migration from older computer languages and systems to newer ones; an
ability consistent with the Company's historic scope of services. Over time, IAI
recognized UNICAST's broader functionality for reengineering software lacking
the capacity to distinguish years subsequent to 1999 as the year 2000 and
beyond. During the past two years, IAI has actively worked to develop a family
of specialized products based on UNICAST.

         Today, UNICAST provides IAI opportunities in two areas:

1. UNICAST can generate license fees from systems integrators or end users that
use the product to automate the correction of date impacts ("remediation")
either on site or in large volume production environments ("solution
factories").

2. UNICAST facilitates the Company's ability to provide systems modernization
services to companies that seek to migrate from mainframe legacy systems to
modern environments, including languages; data bases; and mainframe, midrange,
and client-server platforms. The Company believes that UNICAST provides the
opportunity to grow and expand its product and services revenue base beyond the
Year 2000.

THE "YEAR 2000 PROBLEM"

         The Year 2000 challenge refers to the problem inherent in existing
software applications whereby a two-digit date representation has been used to
depict the year with the century component fixed as "19". This means that many
computer systems will not recognize or be able to process transactions in which
reference to years after 1999 is required. The origin of this problem relates to
evolution of computer systems in the 1960's and 1970's, when computer memory and
storage capacity were expensive and scarce. To save memory, programmers
abbreviated dates in their programs referring to years with two digits as
opposed to four digits. The end result of this approach means that many computer
applications will fail to correctly identify, manipulate or calculate
date-related values outside of the 1900-1999 date range.

         As the Year 2000 and the threat of enterprise-wide information systems
failure draws closer, many organizations are beginning to assess, remediate and
test date impacts in virtually every line of computer code. Some sources have
estimated the cost of achieving Year 2000 compliance at between $300 billion and
$600 billion. These same sources also estimate that fewer than 50% of all
organizations will achieve Year 2000 compliance before January 1, 2000.

         The technical resources available to address these needs are expected
to become severely constrained over the next years, and the demand and prices
for automated tools and services are expected to increase significantly. In many
cases, organizations lacking internal technical and computing resources will
outsource the process of achieving Year 2000 compliance to service providers
that utilize an integrated suite of automated tools in solution factories.
Information technology budgets are being reallocated from ongoing projects to
meet the needs of the Year 2000 project work, and organizations are actively
exploring opportunities to modernize their systems as part of the process.

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The Company believes the market requires value-added tools which are powerful,
accurate, automated, high-capacity, and state of the art. IAI places UNICAST in
this category of tools.

THE MARKET POTENTIAL FOR YEAR 2000 COMPLIANCE

         Current estimates for the full-cycle cost to achieve Year 2000
compliance vary considerably from $1.75 to $10.00 per line of code, depending
upon the complexity of the code, date intensity, language, database, platform
and operating environment. Until a larger body of organizations have completed
their Year 2000 efforts, all cost estimates will be difficult to verify. What is
relatively certain is that costs should increase as the Year 2000 approaches and
available resources are in greatest demand. Relatively obscure languages (e.g.,
Jovial and TAL) and most fourth generation language environments (e.g., CA-ADS,
CA-IDEAL and CA-Easytrieve) are expected to cost significantly more to
date-correct than the larger legacy environments (e.g., COBOL, PL1, RPG) for
which there exist a significant number of technically qualified software
engineers.

         Many organizations have adopted or will be adopting a general
four-phase methodology under which they are implementing their Year 2000 change
process:

         Phase 1 - Assessment (10% of the full-cycle cost): An in-depth
         assessment is first required to define the size and nature of the
         portfolio and the appropriate alternative remediation strategies. This
         information will also be used to refine estimates of the capital and
         technical resources required as part of the planning phase.

         Phase 2 - Planning (15% of the full-cycle cost): The planning process
         is an essential, ongoing activity which integrates the project
         management activities to ensure project success with an efficient use
         of resources.

         Phase 3 - Remediation (25% of the full-cycle cost): The remediation
         phase encompasses the automated/ manual conversion of software code to
         process with four digit dates. This is the phase which makes the
         fullest use of UNICAST.

         Phase 4 - Testing & Integration (50% of the full-cycle cost): The
         testing and integration phase is the most labor intensive and least
         conducive to automation.

         IAI targets two market segments:

      o  First, the Company has identified the CA-ADS, CA-IDEAL, CA-Easytrieve
         and the related COBOL (IDMS and DATACOM) language environments as its
         primary Year 2000 target market segments for which it will provide
         remediation tools. The estimated market for the Year 2000 remediation
         phase for the Company's target language environments is substantial and
         could exceed 20 billion lines of code. Capturing a small percentage of
         this market could significantly increase the Company's revenues.

         These languages are a subset of a much larger universe of legacy code,
         which includes IBM COBOL and UNISYS COBOL. While UNICAST has the
         ability to remediate these languages as well, the Company sees such
         languages, and especially IBM COBOL, as secondary markets and IAI does
         not intend to devote substantial resources to pursuing opportunities in
         the IBM COBOL market. The Company believes that many companies have
         developed automated or semi-automated tools to remediate IBM COBOL, and
         that such products are likely to be differentiated principally by
         price.

      o  Second, the Company provides professional services to assist
         organizations with the full range of resources to achieve Year 2000
         compliance. IAI is prepared to provide turn-key compliance or
         assistance with any of the stages enumerated above. To this end, IAI
         has established its own "solutions factory."

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OFF-SITE AND IN-HOUSE SOLUTION FACTORIES

         The system and staffing requirements necessary to assess, remedy, and
test software for Year 2000 compliance has led to the development of solutions
factories. A solution factory is a state-of-the-art, large-volume production
environment specifically dedicated to the year 2000 marketplace, and staffed by
experts in conversion technologies, or by technicians trained by experts.

         Two models of this process-driven, centralized factory environment are
quickly evolving: off-site factories and in-house factories. The former provides
fully integrated end-to-end Year 2000 solutions off-site, using staff resources
external to the client organization. For organizations addressing Year 2000
remediation internally, a preferred solution is the in-house factory, which is
designed to be client-specific and carries with it training software and
environment-specific user documentation.

         The Company offers UNICAST as the key component of its solutions
factory to remediate software. IAI has established a solutions factory in
Fairfax, Virginia as an external, outsourced alternative for organizations
requiring Year 2000 services. Referrals to this solutions factory primarily come
from the Company's own sales and marketing organization, and from leads supplied
by Computer Associates International, Inc. ("CA").

THE UNICAST PRODUCT LINE

         UNICAST is a product line designed around a mature, core technology. To
meet the need for automated Year 2000 remediation and software migration
products, IAI plans to introduce new component products to the UNICAST family.
These products will evolve through various stages of development, testing, and
production in IAI's in-house solution factory.

         Through the middle of March 1998, IAI has completed one product and has
several others under development. Through IAI's alliance with CA (see
"Relationship with CA"), the Company has developed and introduced UNICAST/2000
for CA-ADS, (released for commercial use in February 1998). Next in line for
release is UNICAST/2000 for CA-IDMS COBOL (available for use by IAI's authorized
partners in March 1998). Still under development are UNICAST/2000 for
CA-Easytrieve (currently planned for pre-release testing by interested
organizations in late March 1998) and UNICAST/2000 for CA-IDEAL (release date
not yet set), among other products. The Company has also developed UNICAST/2000
for COBOL, which is used by IAI in its own solution factory but is not yet
available commercially.

         UNICAST is a flexible and powerful product line, principally built
around mainframe computing environments, but also available for PC environments
(UNICAST/2000 for COBOL). UNICAST includes an integrated set of advanced tools
that can automate, in many environments, up to 95% of Year 2000 date remediation
or system modernization efforts. UNICAST can convert programming languages, data
management software, job control languages, and user interface programs at the
source code level. It uses several approaches to Year 2000 date remediation,
including date expansion, windowing, and compression. UNICAST is particularly
valuable for environments in which organizations are forced to migrate their
systems to a more contemporary language, database, or platform while they are
remediating their systems environment.

         IAI is also developing a PC version of UNICAST called UNICAST/2000-PC.
This product will be most useful for various types of UNISYS and IBM COBOL
processing environments. UNICAST/2000-PC is intended to integrate impact
assessment and remediation into one, portable product. A date for its release
has not yet been set.

         IAI has designed the UNICAST/2000 family to have the following
features:

      o  translate  from one operating  system to another,  such as from a
         closed  mainframe  environment to an open UNIX environment;

      o  translate from a programming language that no longer meets an
         organization's needs to a more modern language or newer version of a
         current language;

      o  alter a database management system into a more versatile and useful
         system without losing any of the valuable data stored in the database
         system;

      o  alter a teleprocessing monitor environment into a newer, more
         supportable environment; and

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      o  perform any combination of the above options while providing management
         with the flexibility to manage the risk inherent in all conversions.

         Using UNICAST, companies can undertake a varied approach towards Year
2000 compliance coupled with migration, allowing Year 2000 date remediation
without further reengineering. Alternatively, a two step strategy of remediating
Year 2000 impacts can occur followed by a later full translation of the Year
2000-compliant software applications to a new language, database or platform of
choice.

RELATIONSHIP WITH CA

         In March 1997, IAI entered into an international marketing agreement
with CA. Under this agreement, IAI has developed and will support versions of
UNICAST/2000 to remediate CA-ADS, CA-IDMS COBOL, CA-IDEAL and CA-Easytrieve
language environments. CA, in turn, has made UNICAST part of its Discovery 2000
suite of products for Year 2000 compliance. Discovery 2000 includes modules for
impact assessment, project management, configuration management and product
testing.

         By virtue of this agreement, the Company gains the benefits of CA's
dedicated sales force marketing UNICAST/2000 as an integrated part of CA's
Discovery 2000 suite. UNICAST is used exclusively in Discovery 2000 for
remediation of CA-ADS, CA-IDMS COBOL, CA-IDEAL, and CA-Easytrieve. CA and IAI
have no agreement covering the use of UNICAST for remediation of IBM COBOL.

         IAI's relationship with CA has inherent advantages. As a world leader
in mission-critical business software, CA develops, licenses and supports more
than 500 integrated products. These products include enterprise computing and
information management, application development, manufacturing and financial
applications. CA has nearly 10,000 people in 160 offices in 40 countries and
approximate revenue of $4 billion in fiscal year 1997. IAI believes CA can
provide substantial exposure for UNICAST.

         The Company estimates that CA-ADS, CA-IDEAL and CA-Easytrieve comprise
approximately 20 billion lines of code which must be made Year 2000 compliant.
In entering into the agreement with CA, the Company's goal is to utilize CA's
marketing force to capture a material part of that market.

         Under IAI's agreement with CA, CA shares in the licensing revenue IAI
generates from remediation of CA products irrespective of the source of
remediation. The Company believes UNICAST facilitates CA's ability to sell other
CA products and upgrades as part of the remediation process; and UNICAST
facilitates CA's ability to retain licensing revenues from these environments
because CA users may be less inclined to migrate to other environments.

IAI PROFESSIONAL SERVICES

         Over the past several years, the Company's professional services
experience has become broad-based, involving many hardware and software
platforms and many government and business classifications. Today, IAI has the
capabilities to customize systems, interface systems, create new systems, and
provide project management skills in most environments. Notwithstanding its
commitment to UNICAST, IAI will also continue to devote resources to non-UNICAST
activities, although UNICAST provides IAI with a unique opportunity to expand
its professional services base.

         Year 2000 engagements offer professional services opportunities beyond
those associated with date remediation. Assessment, planning, and testing must
all be accomplished and integrated with the remediation phase. IAI's technical
staff possesses the requisite experience in legacy languages, databases, and
multiple platforms so as to offer clients the capacity to assume full
responsibility for an entire Year 2000 compliance engagement.

         To undertake the four phases of Year 2000 compliance, IAI has
established its own solutions factory. At this factory, located in Fairfax,
Virginia, the Company is able to remediate code for clients including those
referred to the Company by CA or sold directly by IAI's own sales staff. The
solutions factory also allows IAI to de-bug new products and to observe in
operation the tools the Company has developed. The Company anticipates that
operating an in-house solutions factory should also be a significant contributor
to revenue and profits in 1998.

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         Up to and beyond the Year 2000, IAI's traditional professional services
practices will continue to include:

      o  transition engineering
      o  software development including artificial intelligence and expert
         systems
      o  feasibility and requirements analysis
      o  systems planning analysis and design
      o  data base design and management
      o  project management

         IAI has historically provided or is currently providing consulting
services to a diverse base of enterprises. Through its consulting staff, IAI
expects to maintain proficiency in multiple computer languages, databases,
hardware and software products, and with developing and implementing software
applications in both local area network and mainframe computer systems.

MARKETING AND SALES

         IAI's current strategy has four components, each of which is intended
to help grow the Company's revenue and income base:

      o  Leverage the Company's association with CA to make UNICAST the de-facto
         standard for date remediation for those languages for which IAI has
         optimized the product. Continually educate CA's sales organization to
         understand the efficacy of UNICAST. See "Relationship with CA."

      o  Create versions of UNICAST that address other difficult-to-remediate
         languages such as UNISYS COBOL and work with organizations that service
         users of those languages.

      o  Offer factory services to organizations requiring either date
         remediation or end-to-end Year 2000 compliance. Use those Year 2000
         assignments to establish relationships that will form the basis of
         migration and modernization assignments beyond 2000. See "IAI
         Professional Services," and "Post Year 2000 Strategy."

      o  Capture additional sales by gaining acceptance of UNICAST as a leading
         date-remediation tool for difficult-to-solve Year 2000 compliance
         problems among large systems integrators. The Company believes many
         integrators will seek Year 2000 engagements from their respective
         client bases. Many of the integrators are planning to implement large
         scale external solutions factories so that their current clients and
         new business sources can achieve Year 2000 compliance on an outsourced
         basis. By extending licenses to these integrators, IAI gains direct
         access to their clients and, as with CA, will allow IAI to utilize
         their respective sales and marketing forces. To this end, the Company
         is seeking to form teaming agreements with such systems integrators. At
         present, IAI's partners include CACI International, Inc., ManTech
         Services, Inc., and Pinkerton Computer Consultants, Inc.

         In pursuing this strategy, IAI recognizes that it is focusing its
efforts on specialty languages and environments, rather than on the broadest
user base; that of IBM COBOL. IAI believes that because many competitors in the
Year 2000 arena will concentrate their effort on IBM COBOL, competition is
likely to be greater and margins commensurately lower. IAI believes the narrower
market segments it is pursuing will provide the Company with higher profit
margins than available in the larger market segments.

POST YEAR 2000 STRATEGY

         IAI anticipates that many organizations, after addressing the Year 2000
problem, will be compelled to modernize their legacy code to contemporary
languages and computer platforms. The lack of programming resources to maintain
older languages such as PL1, COBOL, Natural, and TAL and the accelerating
obsolescence of Unisys, Honeywell, and Dec VAX mainframe platforms, will force
these organizations to migrate their systems. In many cases, designing and
developing new application systems is impractical due to the long lead time
required to design, code, and test. IAI believes that automated conversions,
using tools such as UNICAST, offer the fastest, least expensive and least
intrusive solution to migrate older systems to newer platforms and languages.

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         IAI has gained a degree of expertise in the modernization of legacy
systems and utilization of automated tools to accomplish such conversions in a
cost-effective manner. IAI has focused its efforts on developing its UNICAST
conversion tool as a superior method of modernizing obsolete code and migrating
applications to newer platforms. The UNICAST tool has been successfully used as
a conversion tool for over 15 years and can process a comprehensive range of
older programming and data base management languages. Many of the applications
that will be remediated for Year 2000 by UNICAST will have been calibrated
during the process and will be excellent candidates for platform and language
migration. Certain current IAI clients have expressed a desire to migrate after
2000.

         During the next two years IAI will prepare for the post-2000 era by
targeting those clients most likely to require migration. As an example, certain
clients have expressed an interest in migrating to an ORACLE database language
and a UNIX platform from the Unisys mainframe and DMS1100 database language. IAI
has developed a relationship with ORACLE and Hewlett Packard ("HP"), the
companies owning those target environments. This has resulted in these companies
bringing potential clients to IAI and working closely with the IAI staff. One
current client is the U.S. Air Force Standard Materiel Operating System at
Gunter AFB which intends to migrate from UNISYS mainframes to HP's platform.
This agency has over 50 million lines of Unisys COBOL code. Future targets for
UNISYS conversions by IAI could include large financial institutions and
government agencies that have many millions of lines of legacy code on these
platforms.

         Certain organizations estimate that there is a total market of over 50
billion lines of legacy code that potentially can be modernized by conversion or
reengineering between 2000 and 2005. The cost ranges for a conversion project
are estimated at $.50 to $2.00 a line and can be accomplished in months,
depending on complexity. Reengineering costs for the same project can typically
range from $5.00 to $20.00 a line of code and could take years to complete. IAI
believes its UNICAST tool is well-suited for such projects. If such migration
and conversions were to include the use of UNICAST, IAI would rely on the
solutions factories already in place for Year 2000 compliance. As the
modernization process is very similar to that for Year 2000 remediation,
solutions factories training and set-up costs would be minimal.

         The reputation that IAI hopes to gain through its Year 2000 engagements
could serve as the basis for establishing the Company as a proven organization
for conversion. If this strategy is successful, CA will have introduced IAI
products to hundreds of large companies and governmental agencies, and its
factory partners will have employed IAI's products for their clients.

         IAI believes UNICAST has sufficient flexibility to enable the Company
to develop a large number of specialized-use products that facilitate specific
conversion combinations. For instance, conversion from one database language to
another (IMS to DB2) could be developed as a stand-alone tool. Such products
could then be licensed to software development firms for their clients. Upgrades
from one version of COBOL to another (VSE COBOL to CA-COBOL) can also be the
basis for a product.

         Over the next several years, IAI's goal is to position itself as a
company of choice to assist organizations in modernizing their legacy systems
post 2000. The Company believes a significant backlog of modernization work will
accumulate over the next two years as organizations freeze most software
activity to address the Year 2000 issue. Once Year 2000 compliance is achieved,
companies will confront their vulnerability to obsolete code and platforms.

COMPETITION

         The information technology service market is highly competitive. The
Company anticipates a number of competitors for Year 2000 engagements. Some of
these competitors include large accounting firms, systems consulting and
implementation firms, application software firms, service groups, general
management consulting firms and programming companies. Many of these competitors
have significantly greater financial, technical and marketing resources than the
Company and greater name recognition, as well. There can be no assurance that
the Company can compete successfully with its competitors.

         IAI believes that UNICAST software provides advantages to users for
achieving Year 2000 remediation versus competing products. For example, many
product strategies rely on a literal string search assembly tool and a manual
remediation implemented in a PC-based work bench environment. UNICAST, on the
other hand, if used with or without these other strategies, is a mainframe- and
PC-

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based product line that can replace in most situations up to 95% of the
manual remediation process automatically without manual intervention. Most of
the competition resides in the manual remediation sector, including companies
such as Viasoft, Microfocus, Compuware, and Peritus. Certain other companies
purport to substantially automate the process. Most notably they are Alydaar,
Crystal Systems Solutions, and Sapiens International. IAI believes that if the
market discerns distinctions among remediation tool categories, users should
migrate toward more automated solutions.

         The Company believes its relationship with CA provides IAI with a
competitive distinction. UNICAST is the product line that the CA sales channel
is marketing to address the billions of lines of CA-COBOL, CA-ADS, CA-IDEAL and
CA-Easytrieve code that must be remediated. The CA sales channel currently
includes approximately 3,000 people who maintain client relationships and CA
software license agreements in most mainframe computing environment.

RISKS TO THE COMPANY'S BUSINESS

ATTRACTING AND RETAINING QUALIFIED PERSONNEL. The Company's historic business
and the further development, support and marketing of UNICAST involve the
delivery of quality services of a professional nature and are very
labor-intensive. Qualified personnel in the information technology field are in
great demand and are likely to remain a limited resource for the foreseeable
future. There can be no assurance that the Company will be able to continue to
attract and retain a sufficient number of qualified personnel in the future. The
Company's inability to hire sufficient qualified personnel could have a material
adverse effect on the Company's business, financial condition and results of
operations.

MANAGEMENT OF GROWTH. The success of UNICAST software could result in rapid
revenue and employee growth for the Company, thereby placing significant demands
upon the Company's management and other resources. To manage this growth
effectively, the Company will be required to continue to develop and improve its
operational, financial and other internal systems as well as its business
development capabilities. The Company's inability to manage its growth and
engagements effectively could have a material adverse effect on the Company's
business, financial condition and results of operations.

POTENTIAL LIABILITY FOR CLAIMS. The Company is attempting to limit its exposure
to users of UNICAST by not warranting the ability of the product to remedy all
Year 2000 deficiencies inherent in a given system. Nevertheless,
notwithstanding, the lack of any warranties, should UNICAST not perform as
intended, the Company recognizes the potential that claims could be asserted
against it. In addition, the Company will also attempt to limit its exposure for
any consequential damages that any users of UNICAST claim they suffer as a
result of the product not performing as users anticipate. No assurances can be
given that the Company's efforts will be successful to limit or reduce the
extent of its liability if UNICAST fails to achieve the level of remediation
intended from its use.

RELIANCE UPON EXECUTIVE OFFICERS AND KEY EMPLOYEES. The success of the Company
is highly dependent upon the efforts and abilities of its executive officers and
key employees. The loss of the services of any of these executive officers and
key employees for any reason could have a material adverse effect upon the
Company. There can be no assurance that the Company will be able to attract
additional key employees to replace any employees whose employment terminates.

VARIABILITY OF QUARTERLY OPERATING RESULTS. IAI is an emerging growth company in
a rapidly changing market. The Company's revenue and earnings will be dependent
upon the mix of software and professional services revenue, and the extent to
which the Company derives income from sales to third parties of the UNICAST
product by CA and other organizations. Revenue associated with the UNICAST
software product could cause the Company's revenues and earnings to fluctuate in
the future from quarter to quarter based on such factors as the number, size and
scope of projects in which the Company is engaged, the contractual terms and
degree of completion of such engagements, the accuracy of estimates or resources
required to complete ongoing engagements, the level at which UNICAST software is
licensed and utilized by sublicensees and general economic conditions.

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Moreover, IAI's revenues are not distributed evenly across each quarter, and the
Company may not know its final revenues and income until the conclusion of a
quarter. Also, an interruption of IAI's CA relationship could have a significant
impact on future operating results.

NEED FOR ADDITIONAL FINANCING. The Company has raised funding through two
private placements in 1997 and 1998, and believes it has the financial resources
to fund the Company's operating expenses and capital requirements surrounding
UNICAST for most of 1998. Thereafter, the Company's continued operations will
depend upon the availability of cash flow from operations, the Company's ability
to raise additional funds through debt or equity financing, collaborative or
other arrangements with corporate partners or from other sources. There can be
no assurance that additional financing will be available, or if available, that
it will be obtainable on acceptable terms, or if obtained, that such additional
financing will not be dilutive to investors.

PATENTS AND PROPRIETARY RIGHTS

         The Company has made a significant investment in UNICAST/2000. The
Company depends upon a combination of trade secret and copyright laws,
nondisclosure and other contractual provisions and technical measures to protect
its proprietary rights in its methodologies, databases and software. The Company
has not filed any patent applications covering its methodologies and software.
The Company distributes UNICAST under agreements that grant customers
non-exclusive licenses and contain terms and conditions restricting the
disclosure and use of the Company's databases or software and prohibiting the
unauthorized reproduction or transfer of its products. In addition, IAI attempts
to protect the secrecy of its proprietary databases and other trade secrets and
proprietary information through agreements with employees and consultants.

         The Company also seeks to protect the source code of UNICAST as trade
secrets and under copyright law. The Company has copyright registrations for
UNICAST, its user manuals and databases. The copyright protection accorded to
databases, however, is fairly limited. While the arrangement and selection of
data can be protected, the actual data are not, and others are free to create
software performing the same function. The Company believes, however, that the
creation of competing databases would be very time consuming and costly.

DEVELOPMENT COSTS

         IAI has incurred substantial development costs on its UNICAST product
family. This development is conducted at IAI's facility in Fairfax, Virginia. In
fiscal 1997, such expenditures were $4.2 million, $4.1 million of which was
capitalized. The Company expects to begin amortizing its development costs as
versions of UNICAST are released for general availability. There can be no
assurance that the Company will realize the full benefit of these capitalized
development costs, or that there will be sufficient demand for such products to
offset the development costs.

KEY CUSTOMERS

         During fiscal 1996 and 1997, $9.6 million or 85.3%, and $5.5 million or
67.6%, respectively, of IAI's total sales were derived from contracts and
subcontracts involving the U.S. Government and its agencies. Of those amounts,
$6.7 million in 1996 and $1.2 million in 1997 were for work performed for the
U.S. Customs Service. For fiscal 1996 and 1997, U.S. Government sales as a
percentage of each segment of the Company's business were as follows:

                                                 Fiscal 1996    Fiscal 1997
                                                 -----------    -----------
         Products                                    75%           32%
         Professional Services                       86%           76%


                                       8

<PAGE>


INFORMATION ANALYSIS INCORPORATED                     1997 Report on Form 10-KSB
--------------------------------------------------------------------------------

BACKLOG

         As of December 31, 1997, the Company estimated its backlog at
approximately $5.8 million. Of the entire backlog, the Company believes
approximately 95% will be completed by December 31, 1998. This backlog consists
of outstanding contracts and general commitments from current clients. The


Company regularly provides services to certain clients on an as-needed basis
without regard to a specific contract. General commitments represent those
services which the Company anticipates providing to such clients during a
twelve-month period.

EMPLOYEES

         As of December 31, 1997, the Company employed 125 full-time and
part-time individuals. In addition, the Company maintained independent
contractor relationships with 31 individuals for computer services.
Approximately 90% of the Company's professional employees have at least four
years of related experience. For computer related services, the Company believes
that the diverse professional opportunities and interaction among its employees
contribute to maintaining a stable professional staff with limited turnover.

ITEM 2.  PROPERTIES

         Through the end of 1997, the Company's offices were located at 11240
Waples Mill Road, Suite 400, Fairfax, VA. 22030. IAI holds a lease for 18,280
square feet. This lease expires on February 28, 2004.

ITEM 3.  LEGAL PROCEEDINGS

         The Company is not aware of any material legal proceedings against it
at this time.

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

         No matter was submitted during the fourth quarter of fiscal 1997 to a
vote of security holders, either through the solicitation of proxies or
otherwise.

                                     PART II

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

         The Company's Common Stock (symbol: IAIC) was traded on the NASDAQ
Small Cap Market from September 8, 1997 to December 31, 1997; and over the
counter prior to September 8, 1997. The following table sets forth, for the
fiscal periods indicated, the high and low sales prices of the Common Stock, as
reported:

<TABLE>
<CAPTION>
                 Fiscal Year Ended December 31, 1996             Fiscal Year Ended December 31, 1997
             --------------------------------------------    --------------------------------------------
                             Quarter Ended:                                  Quarter Ended:
             3/31/96     6/30/96     9/30/96     12/31/96    3/31/97     6/30/97     9/30/97     12/31/97
             -------     -------     -------     --------    -------     -------     -------     --------
<S><C>
High         $0.44       $0.44       $0.44       $6.78       $25.00      $29.125     $31.875     $23.00
Low          $0.44       $0.44       $0.44       $0.44       $6.125      $13.50      $19.00      $11.25
</TABLE>

         The quotations on which the above data are based prior to September 8,
1997 reflect inter-dealer prices without adjustment for retail markup, markdown
or commission, and may not necessarily represent actual transactions. From
September 8, 1997, the prices reflect the high and low sales prices as reported
by NASDAQ. The above prices have been adjusted to reflect a three for one stock
split declared in January 1997 and a three for one stock split declared in April
1997.

                                       9



<PAGE>


INFORMATION ANALYSIS INCORPORATED                     1997 Report on Form 10-KSB
--------------------------------------------------------------------------------


         As of December 31, 1997, the Company had 104 stockholders of record and
estimates it has in excess of 1,400 beneficial holders. The Company has never
paid a cash dividend on its Common Stock, and intends to follow a policy of
retaining earnings to finance future growth and possible acquisitions.
Accordingly, the Company does not anticipate the payment of cash dividends to
the holders of Common Stock in the foreseeable future. The Company incorporates
by reference the information set forth in its Form 10-QSB for the quarter ended
March 31, 1997 filed on May 5, 1997 as to 857,142 shares of Common Stock sold.

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

Overview

         Fiscal 1997 was a transition year for the Company. IAI re-oriented its
research and development ("R&D"), sales, and marketing organizations to
capitalize on its UNICAST tool for Year 2000 remediation. The Company's changes
included the following:

  o  A substantial increase in product development costs, most of which were
     capitalized, to develop the first of a family of Year 2000 remediation
     products tailored to the needs of the Computer Associates ("CA") product
     line.


  o  The re-direction of IAI's sales and marketing efforts to support Year 2000
     markets, with substantial increases in spending for such activities.

  o  A maintenance approach to the Company's traditional software migration and
     modernization professional services activities; with the expectation that
     the demand for such expertise will rise as organizations achieve Year 2000
     compliance.

  o  The de-emphasis of other product and service activities which may have
     produced revenues in prior years.

  o  A private placement of shares to fund increases in spending for Year 2000
     activities.

         The effect of the re-orientation was to change IAI's focus from
primarily professional services to an organization offering a balance of
services and products. That change began to be manifested in the fourth quarter
of 1997. Management expects it to be even more evident in 1998.

         IAI was not profitable in 1997. The Company's investment in sales,
marketing, administrative, and R&D infrastructure exceeded the gross profits
from professional services revenues and product sales. However, the Company
believes provided revenues increase, the Company can achieve sustained
profitability in 1998 and beyond.

         The following risk factors apply to the Company's business in 1998 and
beyond. These risk factors should be read in conjunction with the risk factors
in Item 1 of this Form 10-KSB.

  o  IAI's revenue stream is largely dependent upon the actions of third
     parties. As a small company, IAI cannot call on each of the tens of
     thousands of organizations with Year 2000 remediation needs. Instead, IAI
     has formed alliances, most notably with CA to sell IAI's products and
     services. The Company's internal sales and marketing organization does make
     sales calls and does generate revenue; but devotes the bulk of its
     resources to leveraging the activities of third-party sales organizations.

  o  IAI is in an extremely competitive market. The Year 2000 remediation
     market has attracted a very large number of participants. Some of these
     companies are quite large and have substantial sales, marketing, and R&D
     resources. Most are small and are seeking to establish a place in the
     industry. Certain companies market their solutions very aggressively; and
     make claims for remediation speed, accuracy, or price that may have the
     result of causing organizations to hesitate to commit to a given course of
     action.

  o  IAI's revenues may be difficult to predict. Because the Year 2000 market
     has little prior history, the sales cycle length is not presently known.
     Moreover, IAI offers both products and services. Customers that choose IAI
     may elect to buy the Company's products, which would generate one level of
     revenue recognizable in one time period; or utilize IAI's solutions
     factory, which would generate a different level of revenue recognizable
     over a different time period.

                                       10

<PAGE>


INFORMATION ANALYSIS INCORPORATED                     1997 Report on Form 10-KSB
--------------------------------------------------------------------------------

From time to time, the Company may make or may have made certain forward-looking
statements, including statements made in Management's Discussion and Analysis,
in other parts of this Form 10-KSB, or in other filings made with the Securities
and Exchange Commission. These statements are based on certain assumptions and
involve risks and uncertainties. Actual future results may vary materially from
those discussed herein. Statements herein that are not historical facts are
forward-looking statements that are subject to the safe harbor created by the
Private Securities Litigation Reform of 1995. IAI does not undertake any
obligation to publicly release the result of any revision which may
be made to any forward-looking statements after the date of such statements or
to reflect the occurrence of anticipated or unanticipated events.

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, selected information
from the Company's Consolidated Statements of Operations, expressed as a
percentage of revenue:

                                                        Years Ended
                                           -------------------------------------
                                           December 31, 1996   December 31, 1997

Revenue                                           100.0%              100.0%
Cost of Goods Sold                                 79.6%               70.6%
Gross Profit                                       20.4%               29.4%
Operating Expenses
    Selling, general and administrative            19.8%               46.9%
    Research and development                        2.4%                2.3%
Earnings (loss) from operations                    (1.9%)             (19.8%)
Other income (expense)                             (0.2%)               1.4%
Earnings (loss) before income taxes                (2.1%)             (18.4%)
Provision (benefit) for income taxes               (0.7%)               0.9%
Net earnings (loss)                                (1.4%)             (19.3%)

1997 COMPARED TO 1996

Revenue. Fiscal 1997 revenue declined $3.1 million, or 28.0% principally as a
result of lower professional services revenue, which fell from $10.8 million to
$6.5 million. The reason for this decline was the gradual cessation of work on a
contract for the U.S. Customs Service (USCS), which represented $1.2 million of
revenue in 1997 and $6.7 million in 1996; coupled with a de-emphasis of non-Year
2000 professional services activities (see "Overview" above). Revenue
attributable to Year 2000 work rose to $1.4 million in 1997 from no revenue in
1996 (the Company's UNICAST product was released for factory use in the fourth
quarter of 1997). Product revenue from UNICAST was $.9 million in 1997, and
represented 11.0% of 1997 revenues.

Gross Profit. Gross profit was $2.4 million in fiscal 1997 versus $2.3 million
in 1996, and rose to 29.4% of revenue in 1997, from 20.4% of revenue in 1996.
This improvement was attributable to a higher percentage of software sales,
which provided a gross profit margin of 60%, in 1997. Gross profit margins in
professional services were 22.2% in fiscal 1997 versus 19.7% in 1996.

Selling, General and Administrative (SG&A). Fiscal 1997 SG&A expense rose to
$3.8 million, or 46.9% of revenue, from $2.2 million, or 19.8% of revenue in
1996, an increase of 70.3%. The increase reflected the building of a sales and
marketing infrastructure to support the Company's transition to Year 2000
products and services, and support for the UNICAST product line.

Research and Development (R&D). The Company had minimal R&D expense in 1997 and
1996. However, expenditures for development of the UNICAST product line were
$4.2 million in fiscal 1997 and $0.2 million in 1996. Those amounts were
capitalized in both years.

Other income (expense). The company reported other income of $0.1 million in
fiscal 1997 versus expense of $23,000 in 1996. The source of the income was
interest on funds on deposit in commercial banks.

                                       11

<PAGE>


INFORMATION ANALYSIS INCORPORATED                     1997 Report on Form 10-KSB
--------------------------------------------------------------------------------

Benefit (provision) for Income Taxes. The Company reported a provision for
income taxes of $0.1 million in fiscal 1997 versus an income tax benefit of $0.1
million in 1996. The 1997 provision reflected the Company's decision to
recognize a valuation allowance to the full extent of its net deferred tax
assets.

                                       12

<PAGE>


LIQUIDITY AND CAPITAL RESOURCES

         As part of the Company's transition to capitalize on Year 2000
opportunities through its UNICAST tool and related changes in the provision of
professional services, IAI raised $5.0 million from a private placement during
fiscal 1997. This private placement, coupled with net borrowing of $0.6 million
from the Company's bank and receipt of $0.4 million from exercise of options,
financed $4.2 million of software development and the acquisition of $0.8
million of fixed assets.

         During fiscal 1997, net cash used by operating activities was $0.9
million, primarily due to a net loss of $1.6 million. Decreases in accounts
receivable were offset by decreases in accounts payable. The decrease in
receivables and payables reflected the Company's reduced level of business.

         Following the close of the fiscal year, the Company completed a second
private placement which produced net proceeds of $5.6 million. The Company
believes its Year 2000 business and overall revenues should grow significantly
in 1998. However, this expansion will likely result in higher operating
expenses, and the timing of receipt of payments to the Company cannot be
predicted with certainty. Moreover, the Company will continue to invest in the
development of other versions of its UNICAST product family. While the proceeds
of the private placement provide IAI with a cash buffer, the Company cannot be
certain that there will not be a need for additional cash resources at some
point in fiscal 1998. Accordingly, the Company may from time to time consider
additional equity offerings to finance business expansion.

INFLATION

         For the past three years, inflation has not had a significant impact on
the Company's operations.

ITEM 7.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         See Consolidated Financial Statements included herein beginning on page
F-1.

ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

         Incorporated by reference from Form 8-K filed with the Securities and
Exchange Commission on November 4, 1997.

                                    PART III

ITEM 9.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         This information is incorporated by reference from the Company's 1998
Proxy Statement for the 1998 Annual Meeting of Shareholders under the caption,
"Directors and Executive Officers of the Registrant."

ITEM 10.  EXECUTIVE COMPENSATION

         This information is incorporated by reference from the Company's 1998
Proxy Statement for the 1998 Annual Meeting of Shareholders under the caption,
"Executive Compensation."

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGERS

         This information is incorporated by reference from the Company's 1998
Proxy Statement for the 1998 Annual Meeting of Shareholders under the caption,
"Security Ownership of Certain Beneficial Owners and Managers."

                                       13

<PAGE>


INFORMATION ANALYSIS INCORPORATED                     1997 Report on Form 10-KSB
--------------------------------------------------------------------------------

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         This information is incorporated by reference from the Company's 1998
Proxy Statement for the 1998 Annual Meeting of Shareholders under the caption,
"Certain Relationships and Related Transactions."

ITEM 13.  EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K

         (a)   (1)  Financial Statements:

                    Report of Independent Auditors                           F-1

                    Consolidated Balance Sheets                              F-3

                    Consolidated Statements of Operations                    F-4

                    Consolidated Statements of Stockholders' Equity          F-5

                    Consolidated Statements of Cash Flow                     F-6

                    Notes to Consolidated Financial Statements               F-7

         (a)   (2)  Exhibits:

                       See Exhibit Index on page 15.

         (b) Reports on Form 8-K:

         The Company filed a Form 8-K on November 4, 1997 related to a change in
its accountants from Rubino & McGeehin, Chartered, to Ernst & Young, LLP.

                                       14

<PAGE>



INFORMATION ANALYSIS INCORPORATED                     1997 Report on Form 10-KSB
--------------------------------------------------------------------------------


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.

                                               INFORMATION ANALYSIS INCORPORATED

                                      By:  _____________________________________
                                               Sandor Rosenberg, President
                                                        March 30, 1998

Pursuant to the requirements of the Securities 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.

Signature                        Title                            Date

 /s/ Sandor Rosenberg            Chairman of the Board            March 30, 1998
___________________________      and President
Sandor Rosenberg

 /s/ Brendan J. Dawson           Director                         March 30, 1998
___________________________
Brendan J. Dawson

 /s/ Charles A. May, Jr.         Director                         March 30, 1998
___________________________
Charles A. May

 /s/ Bonnie K. Wachtel           Director                         March 30, 1998
___________________________
Bonnie K. Wachtel

 /s/ James D. Wester             Director                         March 30, 1998
___________________________
James D. Wester

 /s/ Richard S. DeRose           Treasurer                        March 30, 1998
___________________________
Richard S. DeRose

                                       15

<PAGE>



REPORT OF INDEPENDENT AUDITORS

The Board of Directors
Information Analysis Incorporated

We have audited the accompanying consolidated balance sheet of Information
Analysis Incorporated and subsidiaries as of December 31, 1997 and the related
consolidated statement of operations, stockholders' equity, and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Information
Analysis Incorporated and subsidiaries at December 31, 1997, and the
consolidated results of their operations and their cash flows for the year then
ended in conformity with generally accepted accounting principles.

                                                           /s/ Ernst & Young LLP
                                                           _____________________

Vienna, Virginia
March 3, 1998

                                      F-1

<PAGE>



INDEPENDENT AUDITORS' REPORT

The Board of Directors
Information Analysis Incorporated

We have audited the accompanying consolidated balance sheet of Information
Analysis Incorporated and subsidiaries as of December 31, 1996, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for the year then ended. 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 audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures used and significant estimates made by management,
as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Information Analysis Incorporated and subsidiaries as of December 31, 1996, and
their consolidated results of operations and cash flows for the year then
ended in conformity with generally accepted accounting principles.

                                                    Rubino & McGeehin, Chartered


March 7, 1997
Bethesda, Maryland

                                      F-2

<PAGE>

               INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
                                                                                As Of               As Of
                                                                              12/31/97             12/31/96
                                                                              --------             --------
<S><C>
                                ASSETS
Current assets:
     Cash and cash equivalents                                                  $  363,753           $  323,886
     Accounts receivable, net of allowance of $437,821
          in 1997 and $274,880 in 1996                                           3,128,179            1,614,093
     Employee advances                                                              73,513               34,323
     Refundable income taxes                                                        33,119              201,554
     Deferred income taxes                                                               -               98,662
     Prepaid expenses                                                               53,592              104,554
     Other receivables                                                              29,167              132,686
                                                                                ----------           ----------
          Total current assets                                                   3,681,323            2,509,758
Fixed assets, net of accumulated depreciation and amortization
    of $1,419,579 in 1997 and $1,200,412 in 1996                                   780,442              246,385
Equipment under capital leases, net of accumulated
    amortization of $80,156 in 1997 and $56,053 in 1996                             49,845               49,768
Capitalized software, net of accumulated amortization
    of $20,294 in 1997 and $5,074 in 1996                                        4,431,372              181,890
Goodwill                                                                            12,450               70,554
Other receivables                                                                   41,656               27,885
Other assets                                                                        19,450               34,980
                                                                                ----------           ----------
                     Total assets                                               $9,016,538           $3,121,220
                                                                                ==========           ==========
                  LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
     Accounts payable                                                           $1,122,282           $  413,942
     Accrued payroll                                                               660,060              262,754
     Other accrued liabilities                                                     518,402               59,748
     Revolving line of credit                                                      599,600                    -
     Current portion of long-term debt                                             103,624              120,300
     Current maturities of capital lease obligations                                22,960               18,229
                                                                                ----------           ----------
         Total current liabilities                                               3,026,928              874,973
Long-term debt                                                                           -               90,380
Capital lease obligations,  net of current portion                                  12,421               41,334
Deferred income taxes                                                                    -               27,020
                                                                                ----------           ----------
         Total liabilities                                                       3,039,349            1,033,707
Common stock, par value $0.01, 15,000,000 shares authorized;
     7,498,430 shares issued, 5,993,819 and 4,589,991
     outstanding at December 31,1997 and 1996 respectively                          74,984               60,946
Additional paid in capital                                                       6,517,655            1,085,066
Retained earnings                                                                  238,863            1,795,814
Less treasury stock; 1,504,611 shares at cost                                     (854,313)            (854,313)
                                                                                ----------           ----------
         Total stockholders' equity                                              5,977,189            2,087,513
                                                                                ----------           ----------
Total liabilities and stockholders' equity                                      $9,016,538           $3,121,220
                                                                                ==========           ==========
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements

                                      F-3

<PAGE>




               INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
                                                                         For the Years Ended December 31,
                                                                         --------------------------------
                                                                          1997                         1996
<S><C>
Sales
         Professional fees                                            $ 6,535,804                   $10,803,341
         Software sales                                                 1,544,745                       415,504
                                                                      -----------                   -----------
              Total sales                                               8,080,549                    11,218,845

Cost of sales
         Cost of professional fees                                      5,087,718                     8,675,377
         Cost of software sales                                           619,343                       260,245
                                                                      -----------                   -----------
              Total cost of sales                                       5,707,061                     8,935,622
                                                                      -----------                   -----------
Gross profit                                                            2,373,488                     2,283,223

Selling, general and administrative expenses                            3,791,051                     2,225,818
Research and development                                                  182,149                       270,773
                                                                      -----------                   -----------

Loss from operations                                                   (1,599,712)                     (213,368)

Other income (expense)                                                    116,489                       (22,928)
                                                                      -----------                   -----------
Loss before provision for income taxes                                 (1,483,223)                     (236,296)

Provision (benefit)  for income taxes                                      73,728                       (76,622)
                                                                      -----------                   -----------

Net loss                                                              ($1,556,951)                    ($159,674)
                                                                      ============                    ==========

Loss per common share                                                      ($0.28)                       ($0.04)

Weighted average common shares outstanding                              5,649,668                     4,214,034
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements

                                      F-4

<PAGE>




               INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
                                        Shares of
                                         Common                   Additional
                                          Stock        Common       Paid in     Retained      Treasury
                                       Outstanding      Stock       Capital     Earnings        Stock         Total
                                     -------------- ------------ ------------ ------------ --------------- ------------
<S><C>
Balances, December 31, 1995              5,591,088      $55,911     $722,520  $ 1,955,488      ($801,063)  $ 1,932,856
      Exercise of stock options and        447,264        4,473      205,604                                   210,077
      warrants
      Tax benefit of stock option                                    132,504                                   132,504
      compensation
      Stock issued for ISSC                 56,250          562       24,438                                    25,000
      acquisition
      Purchase of treasury stock                                                                 (53,250)      (53,250)
      Net loss                                                                   (159,674)                    (159,674)
                                     -------------- ------------ ------------ ------------ --------------- ------------

Balances, December 31, 1996              6,094,602       60,946    1,085,066    1,795,814       (854,313)    2,087,513
      Exercise of stock options and        484,238        4,842      414,037                                   418,879
      warrants
      Stock issued for private             857,142        8,571    4,991,424                                 4,999,995
      placement
      Stock issued for ISSC                 62,448          625       27,128                                    27,753
      acquisition
      Net loss                                                                 (1,556,951)                  (1,556,951)
                                     -------------- ------------ ------------ ------------ --------------- ------------

Balances, December 31, 1997              7,498,430      $74,984   $6,517,655  $   238,863      ($854,313)  $ 5,977,189
                                     ============== ============ ============ ============ =============== ============
</TABLE>

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

                                      F-5

<PAGE>




               INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                                                                 For the Years Ended December 31,
                                                                                 --------------------------------
                                                                                    1997                1996
                                                                                 ------------        ------------
<S><C>
Net loss                                                                          $(1,556,951)       $ (159,674)

Adjustments to reconcile net loss to
net cash provided by operating activities:
      Depreciation                                                                    219,167           135,728
      Amortization                                                                     98,260            51,233
      Amortization of capitalized software                                             15,220             5,074
      Tax benefit of stock option compensation                                              -           132,504
      Gain/loss on sale of fixed assets and investments                                     -              (231)
      Changes in operating assets and liabilities
          Accounts receivable                                                      (1,772,895)        2,170,776
          Other receivables and prepaid expenses                                      375,859          (180,483)
          Accounts payable and accrued expenses                                     1,568,253          (975,852)
          Deferred income taxes                                                        71,642                 -
          Refundable income taxes                                                     168,435          (175,614)
                                                                                  -----------        -----------
Net cash (used) provided  by operating activities                                    (813,010)        1,003,461
                                                                                  -----------        -----------
Cash flows from investing activities
      Purchase of ISSC, net of cash received                                                -           (47,422)
      Acquisition of furniture and equipment                                         (798,531)          (91,471)
      Increase in capitalized software                                             (4,259,628)         (186,964)
                                                                                  -----------        -----------
         Net cash used in investing activities                                     (5,058,159)         (325,857)
                                                                                  -----------        -----------
Cash flows from financing activities
      Net borrowing (payments) under bank revolving line of credit                    599,600          (550,000)
      Repayment of long term debt                                                     (83,256)                -
      Principal payments on capital leases                                            (24,182)          (17,561)
      Repurchase of common stock                                                            -           (53,250)
      Proceeds from private placement of Common Stock                               4,999,995                 -
      Proceeds from exercise of stock options and warrants                            418,879           210,077
                                                                                  -----------        -----------
         Net cash provided (used)  by financing activities                          5,911,036          (410,734)
                                                                                  -----------        -----------
Net increase in cash and cash equivalents                                              39,867           266,870

Cash and cash equivalents at beginning of the period                                  323,886            57,016

                                                                                  -----------        -----------
Cash and cash equivalents at end of the period                                    $   363,753        $  323,886
                                                                                  ===========        ===========
Supplemental cash flow Information
      Interest paid                                                                    $8,012           $35,644
</TABLE>

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

                                      F-6

<PAGE>



1.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

OPERATIONS

Information Analysis, Incorporated ("the Company") was incorporated under the
corporate laws of the Commonwealth of Virginia in 1979 to develop and market
computer applications software systems, programming services, and related
software products and automation systems. In 1996, the Company acquired the
rights to a software tool called UNICAST, Universal Computer Aided Software
Translator. The Company has been developing a family of products based upon
UNICAST's ability to fix the problem other software programs have in recognizing
and correctly handling years subsequent to 1999.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries, International Software System Corporation (ISSC),
Allied Health & Information Systems, Inc. (AHISI) and DHD Systems, Inc. Upon
consolidation, all material intercompany accounts, transactions and profits are
eliminated. ISSC was acquired in 1996. Goodwill, resulting from the Company's
acquisition of ISSC is being amortized over a two-year period, which is the
expected term of ISSC's contracts.

ACCOUNTING ESTIMATES

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect certain reported amounts and disclosures.  Accordingly, actual results
could differ from these estimates.

REVENUE RECOGNITION

The Company provides services under various pricing arrangements. Revenue from
"cost-plus-fixed-fee" contracts is recognized on the basis of reimbursable
contract costs incurred during the period, plus a percentage of the fixed fee.
Revenue from "firm-fixed-price" contracts is recognized on the
percentage-of-completion method. Under this method, individual contract revenues
are recorded based on the percentage relationship that contract costs incurred
bear to management's estimate of total contract costs. Losses, if any, are
accrued when their occurrence becomes known and the amount of the loss is
reasonably determined. Revenue from "time and material" contracts is recognized
on the basis of hours utilized, plus other reimbursable contract costs incurred
during the period.

Revenue from software sales are recognized upon delivery, when collection of the
receivable is probable. Maintenance revenue is recognized ratably over the
maintenance period.

RECENTLY ISSUED ACCOUNTING STANDARDS

In October 1997, the AICPA issued SOP 97-2, "Software Revenue Recognition",
which changes the requirements for revenue recognition effective for
transactions that the Company will enter into beginning January 1, 1998. The
implementation of SOP 97-2 is not expected to have a material effect on the
financial statements of the Company.

In June 1997, the FASB issued Statement No. 131, "Disclosures about Segments of
an Enterprise and Related Information" which is effective for fiscal years
beginning after December 15, 1997. The Statement changes the way public
companies report segment information in annual financial statements and also
requires those companies to report selected segment information in interim
financial statements to shareholders. The Statement also establishes standards
for related disclosures about products and services, geographic areas, and major
customers. The Company will adopt Statement No. 131 in 1998 resulting in
additional segment disclosures as required by the Statement. The application of
the new rules will not have an impact on the Company's financial position or
results from operations.

In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income" which is effective for fiscal years beginning after December 15, 1997.
The Statement establishes standards for

                                      F-7

<PAGE>


reporting and display of comprehensive income and its components in financial
statements. The Company will adopt Statement No. 130 in the first quarter of
1998 and will provide the financial statement disclosures as required by the
Statement. The application of the new rules will not have an impact on the
Company's financial position or results from operations.

GOVERNMENT CONTRACTS

Company sales to departments or agencies of the United States Government are
subject to audit by the Defense Contract Audit Agency (DCAA), which could result
in the renegotiation of amounts previously billed. Audits by DCAA were performed
for 1995 and 1996 for one of IAI's subsidiaries. No amounts were changed as a
result of the audit. Management believes that the results of such audits will
not have a material adverse effect on the Company's financial position or
results of operations.

CASH AND CASH EQUIVALENTS

For the purposes of the statement of cash flows, the Company considers all
highly liquid investments with maturities of ninety days or less at the time of
purchase to be cash equivalents. Deposits are maintained with a federally
insured bank. Balances at times exceed insured limits, but management does not
consider this to be a significant concentration of credit risk.

FIXED ASSETS

Fixed assets are stated at cost and are depreciated using the straight-line
method over the estimated useful lives of the assets. Leasehold improvements are
amortized over the term of the lease or the estimated life of the improvement,
whichever is shorter. Maintenance and minor repairs are charged to operations as
incurred. Gains and losses on dispositions are recorded in current operations.

ADVERTISING

All costs related to advertising the Company's products are expensed in the
period incurred.

SOFTWARE DEVELOPMENT COSTS

The Company has capitalized costs related to the development of the UNICAST
software product. In accordance with Statement of Financial Accounting Standards
No. 86, capitalization of costs begins when technological feasibility has been
established and ends when the product is available for general release to
customers. Amortization is computed and recognized for the product when
available for general release to customers based on the greater of a) the ratio
that current gross revenues for the product bear to the total of current and
anticipated future gross revenues for that product or, b) the straight-line
method over the remaining economic life of the product. Capitalized costs and
amortization periods are management's estimates and may have to be modified due
to inherent technological changes in software development. Realization of these
capitalized costs are dependent on the acceptance of the Company's products by
the marketplace and the Company's ability to generate sufficient revenues from
those products relative to the costs incurred.

STOCK-BASED COMPENSATION

The Company records compensation expense for all stock-based compensation plans
using the instrinsic value method prescribed by APB Opinion No. 25, Accounting
for Stock Issued to Employees. The Company's annual financial statements
supplementally disclose the required pro forma information as if the fair value
method had been adopted.

EARNINGS PER SHARE

In February 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings per Share. Statement 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share exclude any dilutive
effects of options, warrants and convertible securities. Diluted earnings per
share is very similar to the previously reported fully dilutive earnings per
share. All earnings per share amounts for all periods have been presented, and
where appropriate, restated to conform to the Statement 128 requirements (see
Note 11).

                                      F-8

<PAGE>


INCOME TAXES

Under Financial Accounting Standards Board Statement No. 109, "Accounting for
Income Taxes," the liability method is used in accounting for income taxes.
Under this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities,
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.

FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS

The Company's financial instruments include trade receivables and other
receivables, accounts payables and notes payable. Management believes the
carrying value of financial instruments approximates their fair market value,
unless disclosed otherwise in the accompanying notes.

RECLASSIFICATION

Certain accounts in the prior year financial statements have been reclassified
for comparitive purposes to conform with the presentation in the current year
financial statements.

2.    ACQUISITION

          On June 5, 1996, the Company completed an acquisition of the
outstanding common stock of International Software Services, Inc. (the
predecessor to ISSC) for $370,289, of which $108,333 in cash and $25,000 in
stock was paid at closing, $83,256 in cash and $27,753 in stock was paid in 1997
and $81,298 of which is payable by June 1998 to the former owner. The Company
anticipates issuing 45,776 shares in 1998 as part of the final payment. The
remaining $44,646 has been offset against expenses incurred by the Company
on behalf of ISSC. The business acquisition was accounted for as a purchase. The
operations of ISSC since the date of the acquisition are included in the
Consolidated Statement of Operations of the Company. The cost of the acquisition
exceeded the fair value of the net assets acquired by $99,605. The excess is
being amortized as goodwill on a straight-line basis over a two year period
which is the expected term of ISSC's contracts.

3.    RECEIVABLES

Accounts receivable at December 31 consist of the following:

                                                         1997            1996
                                                         ----            ----
Billed-Federal Government                             $  415,038      $  972,842

Billed-commercial                                      2,131,917         495,751
                                                      ----------      ----------
      Total Billed                                     2,546,955       1,468,593
Unbilled                                                 581,224         145,500
                                                      ----------      ----------
Total Accounts Receivable                             $3,128,179      $1,614,093

          Unbilled receivables are for services provided through the balance
sheet date which are expected to be billed and collected within one year.

                                      F-9

<PAGE>



4.    FIXED ASSETS

A summary of fixed assets and equipment at December 31, 1997, is as follows:
<TABLE>
<CAPTION>

                                                                             1997                  1996
                                                                         -----------          -----------
<S><C>
Furniture and Equipment                                                  $   247,511          $   182,695
Leasehold Improvements and Other                                             209,749               77,679
Computer Equipment and Software                                            1,742,761            1,186,423
                                                                         -----------          -----------
                                                                           2,200,021            1,446,797
Less: Accumulated depreciation and amortization                           (1,419,579)          (1,200,412)
                                                                         -----------          -----------
Total                                                                    $   780,442          $   246,385
</TABLE>

Depreciation for the year ending December 31, 1997 and 1996 was $258,490 and
$126,291, respectively.

5.       REVOLVING LINE OF CREDIT

At December 31, 1997, the Company had a revolving line of credit with a bank
providing for demand or short-term borrowings up to $1,500,000. This line
expires on June 25, 1998. Draws against this line are limited by varying
percentages of the Company's accounts receivable balances depending on the
source of the receivables and their age. The bank is granted a security interest
in certain assets if there are borrowings under the line of credit. Interest on
outstanding amounts is payable monthly at the bank's prime rate (8.75% at
December 31, 1997). The lender has a first priority security interest in the
Company's receivables and a direct assignment of its U.S. Government contracts.
The revolving line of credit, among other covenants, requires the Company to
comply with certain financial ratios, with which the Company was in compliance
at December 31, 1997. At December 31, 1997, there was an outstanding balance of
$599,600 on the line.

6.     COMMITMENTS AND CONTINGENCIES

CAPITAL LEASES

The future minimum lease payments under capital leases for equipment and the
present value of the minimum lease payments are as follows:

Year ended December 31
1998                                                                 $ 25,319
1999                                                                   13,083
                                                                     --------
Total Minimum Lease Payments                                           38,402
Less amount representing interest                                      (3,021)
                                                                     --------
Total obligation representing principal                                35,381
Less current portions of capital lease obligations                    (22,960)
                                                                     --------
Long-term portion of capital lease obligations                       $ 12,421
                                                                     ========

                                      F-10

<PAGE>



OPERATING LEASES

Rent expense was $341,071 and $236,466 for the years ended December 31, 1997 and
1996, respectively. The future minimum rental payments to be made under
noncancelable operating leases, principally for facilities, are as follows:

Year ending December 31
1998                                                                $  535,028
1999                                                                   545,707
2000                                                                   553,948
2001                                                                   526,049
2002                                                                   504,846
2003 through 2004                                                      606,514
                                                                    ----------
Total Minimum Rent Payments                                         $3,272,092
                                                                    ==========
The above minimum lease payments reflect the base rent under the lease
agreements. However, these base rents shall be adjusted each year to relect
increases in the consumer price index and the Company's proportionate share of
real estate tax increases on the leased property. The leases are secured by
irrevocable letters of credit for $26,982. As of December 31, 1997, none of the
letters of credit has been used. The aggregate future minimum rentals to be
received under noncancelable subleases as of December 31, 1997, is $321,011, of
which $117,771 is payable in 1998, $121,052 is payable in 1999 and $82,188 is
payable in 2000. The lease expires August 31, 2000.

ROYALTIES

In August 1996, the Company entered into an agreement to purchase the software
product UNICAST. As part of the agreement, royalties of 10% of the UNICAST
licensing fees collected by the Company will be paid to the seller. The
aggregate amount of the royalties pursuant to this agreement will not exceed
$1,000,000. No royalties were paid in 1997 or 1996.

In September, 1996, the Company entered into an agreement whereby, in
consideration of an expense sharing arrangement, the Company will pay royalties
of 20% of the UNICAST licensing fees collected by the Company.  The royalties
will not exceed $245,831.  No royalties were paid in 1997 or 1996.

In March 1997, the Company entered into an agreement with Computer Associates
International, Inc. (CA). As part of the agreement, royalties are paid to CA
based upon sales of the UNICAST licensing fees collected by the Company. No
royalties were paid in 1997.

7.     INCOME TAXES

The provision for income taxes consists of the following:

Year ended December 31                              1997                 1996
Current (benefit) expense
     Federal                                        $     -            $(67,021)
     State                                                -             (14,846)
                                                    -------            --------
                                                          -             (81,867)
Deferred expense (benefit)
     Federal                                        $65,967            $  4,294
     State                                            7,761                 951
                                                    -------            --------
                                                     73,728               5,245
                                                    -------            --------
Expense (Benefit) for income taxes                  $73,728            $(76,622)
                                                    =======            ========

                                      F-11

<PAGE>


The tax effect of significant temporary differences representing deferred tax
assets and deferred tax liabilities are as follows at December 31:


                                                        1997             1996
                                                        ----             ----
Deferred Tax Assets
Net Operating Loss Carryforward                     $ 1,342,732        $ 76,373
Accrued Vacation                                         82,528          36,871
Allowance for Bad Debts                                 130,927          61,792
Deferred Revenue                                         41,801               -
Other                                                       988               -
                                                    -----------        --------
  Subtotal                                            1,598,976         175,036
Valuation Allowance                                  (1,531,566)        (76,374)
                                                    -----------        --------
      Subtotal                                           67,410          98,662

Deferred Tax Liabilities
Intangibles                                         $   (14,210)       $      -
Fixed Assets                                            (53,200)        (27,020)
                                                    -----------        --------
      Subtotal                                          (67,410)        (27,020)
                                                    -----------        --------
Total                                               $         -        $ 71,642
                                                    ===========        ========

The provision for income taxes is at an effective rate different from the
federal statutory rate due principally to the following:
<TABLE>
<CAPTION>


Year ended December 31                                                            1997              1996
                                                                                   ----              ----
<S><C>
Loss Before Taxes                                                              $(1,483,223)       $(236,296)
Income Taxes (benefit) on above amount at federal statutory rate                  (504,296)         (80,341)
State income taxes net of federal benefit                                          (59,329)         (10,870)
Tax Benefit offset by valuation allowance                                          604,702                -
Effect of graduated tax brackets, change in estimates,
     and other non deductible items                                                 32,651           14,589
                                                                               -----------        ----------
Provision (benefit) for income taxes                                           $    73,728        $  (76,622)
                                                                               ===========        ==========
</TABLE>

In 1997, the Company recognized a valuation allowance to the full extent of its
net deferred tax assets since the likelihood of realization of the benefit
cannot be determined.

The Company has net operating loss carryforwards of approximately $3.5 million
which expire, if unused, in the years 2011 and 2012. The tax benefits of
approximately $2.3 million of net operating losses related to stock options will
be credited to equity when it is determined a valuation allowance is no longer
necessary.

8.     MAJOR CUSTOMERS

                                      F-12

<PAGE>


Traditionally, IAI's clients have spanned a wide range of enterprises in the
private sector along with government agencies. In 1997, governmental clients
included the U.S. Army and the U.S. Customs Service ("USCS"). The total revenue
derived from and through USCS constituted 15.2% of the Company's 1997 revenues
versus 59.8% in 1996. The Company's contracts with the U.S Army accounted for
16.5% of the Company's 1997 revenues and 14.4% of the Company's 1996 revenues.
The Company's software sales to a single commercial software company accounted
for 11% of the 1997 revenues.


9.     STOCK OPTIONS AND WARRANTS

The Company has an incentive stock option plan, which became effective June 25,
1996. The plan provides for the granting of stock options to certain employees
and directors. The maximum number of shares for which options may be granted
under the plans is 2,575,000. Options expire no later than ten years from the
date of grant or when employment ceases, whichever comes first, and vest over
periods determined by the board of directors. The exercise price of each option
equals the quoted market price of the Company's stock on the date of grant.

The stock option plan is accounted for under Accounting Principles Board (APB)
Opinion No. 25. Accordingly, no compensation has been recognized for the plan.
Had compensation cost for the plans been determined based on the estimated fair
value of the options at the grant date consistent with the method of Statement
of Financial Accounting Standards (SFAS) No. 123, the Company's net income and
earnings would have been:

--------------------------------------------------------------------------------
                                                   1997                  1996
                                                   ----                  ----

Net Loss                 As Reported           $(1,556,951)           $(159,674)
                         Pro Forma             $(2,181,032)           $(424,000)
Loss per share           As Reported           $     (0.28)           $   (0.04)
                         Pro Forma             $     (0.39)           $   (0.10)
--------------------------------------------------------------------------------

The fair value of the options granted in 1997 is estimated on the date of the
grant using the Black-Scholes options-pricing model assuming the following: no
dividend yield, risk-free interest rate of 5.5%, expected volatility of 65.5
percent, and an expected term of the options of two years. The effects on 1997
and 1996 pro forma net income and earnings per share of expensing the estimated
fair value of stock options are not necessarily representative of the effects on
reported net income for future years due to such things as the vesting period of
the stock options and the potential for issuance of additional stock options in
future years. The weighted average fair value and per option granted in 1997 and
1996 was $4.67 and $0.20.

The following table summarizes information about stock options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
                                    Options Outstanding                              Options Exercisable
                     -----------------------------------------------------       ----------------------------
Range of                               Weighted        Weighted Average                           Weighted
Exercise             Number of         Average       Remaining Contractual       Number of        Average
Prices                 Options      Exercise Price           Life                  Options     Exercise Price
                     ---------      --------------   ---------------------       ---------     --------------
<S><C>
Less than $2.00      1,287,450          $  0.49            8.6 years             837,450          $  0.51
> $2.00                568,100          $ 14.48            9.5 years             146,000          $ 15.39
                     ---------                                                   -------
Total                1,855,550          $  4.76            8.9 years             983,450          $  2.72
</TABLE>

Unexercisable options are as follows: 450,000 at $.444 per share, 48,750 options
at $9.33 per share, 15,000 options at $14.00 per share, 300,350 options at
$14.50 per share, 55,000 options at $16.00 per share and 3,000 options at $25.75
per share. Transactions involving the plan were as follows:

                                      F-13

<PAGE>


<TABLE>
<CAPTION>
                                                                   December 31

                                                      1997                             1996
                                                      ----                             ----
                                                            Weighted                         Weighted
                                                             Average                          Average
                                              Shares          Price            Shares          Price
-----------------------------------------------------------------------------------------------------
<S><C>
Outstanding, beginning of year              1,751,688       $   0.52            340,452        $ 0.53
Granted                                       579,100          14.44          1,939,500          0.50
Exercised                                    (475,238)          0.88           (357,264)         0.46
Canceled                                            -                          (171,000)         0.53
-----------------------------------------------------------------------------------------------------
Outstanding, end of year                    1,855,550       $   4.76          1,751,688        $ 0.52
-----------------------------------------------------------------------------------------------------
</TABLE>

On November 14, 1997 the board of directors authorized the Company to reprice
328,100 employee stock options at a price range of $17.68 to $28.88 to $14.50
per share, which was the fair market value of the common stock at the close on
that date. On November 21, 1997 the board of directors authorized the Company to
reprice 105,000 stock options to executive officers at a price of $25.75 per
share to a price of $16.00 per share, which was not less than the current
closing price of the Company's common stock as of November 20, 1997.

The board of directors has also granted warrants to directors and employees. No
warrants were issued to directors or employees in 1997. In connection with its
March 1997 private placement, the Company issued 85,713 warrants exercisable at
$6.42 a share to an investment banking entity. The total warrants exercised were
9,000 in 1997 and 10,000 in 1996. Warrants expired were 5,000 in 1996. As of
December 31, 1997, outstanding warrants are 193,713, which expire in 5 years.
The purchase price for shares issued upon exercise of these warrants range from
$5.00 to $7.50 per share. These warrants are exercisable immediately.

10.     RETIREMENT PLANS

The Company adopted a Cash or Deferred Arrangement Agreement (CODA) which
satisfies the requirements of section 401(k) of the Internal Revenue Code, on
January 1, 1988. This defined contribution retirement plan covers substantially
all employees. Each participant can elect to have up to 15% of their salary
reduced and contributed to the plan. The Company is required to make a matching
contribution of 25% of the first 6% of this salary reduction. The Company can
also make additional contributions at its discretion. Amounts expensed under the
plan for the years ended December 31, 1997 and 1996 were $49,938 and $47,029,
respectively.

11.       COMPUTATION OF EARNINGS (LOSS) PER SHARE

<TABLE>
<CAPTION>
                                                          For the Years Ended December 31,
                                                          --------------------------------
                                                               1997              1996
<S><C>
Numerator for basic and diluted earnings
(loss) per share

Earnings
  Net income (loss)                                        $(1,556,951)         (159,674)

Denominator
    Denominator for basic earnings per
      Share-weighted average shares                          5,649,668         4,214,034

    Effect of dilutive securities:
      Stock options                                                 --                --

    Dilutive potential common shares                                --                --

</TABLE>
                                      F-14
<PAGE>

<TABLE>
<CAPTION>
                                                          For the Years Ended December 31,
                                                          --------------------------------
                                                               1997              1996
<S><C>
Denominator for diluted earnings per
   share-adjusted weighted average
   shares and assumed conversions                             5,649,668         4,214,034

Basic earnings (loss) per share                              $    (0.28)       $    (0.04)

Diluted earnings (loss) per share                            $    (0.28)       $    (0.04)

</TABLE>

Options to purchase 1,855,550 shares of common stock at a weighted average per
share price of $4.76 and 1,751,688 shares of common stock at a weighted average
per share price of $0.52 were outstanding during 1997 and 1996, respectively,
but were not included in the computation of diluted earnings per share as the
effect would be antidilutive.

12. SUBSEQUENT EVENTS

PRIVATE PLACEMENT MEMORANDUM

In January, 1998, the Company completed a private placement memorandum which
raised $5,996,705 in exchange for 545,155 shares of the Company's common stock.
In connection with the private placement, the Company issued 12,886 shares of
common stock and paid $350,020 to investment banking entities.

                                      F-15


<PAGE>




                                  EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT     DESCRIPTION                                            LOCATION
NO.
<S><C>
3.1         Amended and Restated Articles of Incorporation         Incorporated by reference from the
            effective March 18, 1997                               Registrant's Form 10-KSB/A for the
                                                                   fiscal year ending December 31,
                                                                   1996 and filed on July 3, 1997

3.2         Articles of Amendment to the Articles of               Filed with this Form 10-KSB
            Incorporation

3.3         Amended By-Laws of the Company                         Incorporated by reference from the
                                                                   Registrant's Form S-18 dated
                                                                   November 20, 1986
                                                                   (Commission File No. 33-9390).

4.1         Copy of Stock Certificate                              Filed with this Form 10-KSB

10.1        Office Lease for 18,280 square feet at 11240           Incorporated by reference from the
            Waples Mill Road, Fairfax, Virginia 22030.             Registrant's Form 10-KSB/A for the
                                                                   fiscal year ending December 31,
                                                                   1996 and filed on July 3, 1997

10.2        Company's 401(k) Profit Sharing Plan through           Incorporated by reference from the
            Aetna Life Insurance and Annuity Company.              Registrant's Form 10-KSB/A for the
                                                                   fiscal year ending December 31,
                                                                   1996 and filed on July 3, 1997

10.3        1986 Stock Option Plan                                 Incorporated by reference from the
                                                                   Registrant's Form S-8 and filed on
                                                                   December 20, 1988
10.4        1996 Stock Option Plan                                 Incorporated by reference from the
                                                                   Registrant's Form S-8 filed on June 25,
                                                                   1996
10.5        Line of Credit Agreement with First Virginia Bank      Incorporated by reference the
                                                                   Registrant's Form 10-KSB for the fiscal
                                                                   year ending December 31, 1995 and filed
                                                                   April 15, 1996 (Commission File No.
                                                                   33-9390).

10.7        Warrant Agreement between James D. Wester, a           Incorporated by reference from the
            director, and the Company dated February 24,           Registrant's Form 10-KSB/A for the
            1993                                                   fiscal year ending December 31,
                                                                   1996 and filed on July 3, 1997

10.8        Software Purchase Agreement between Kenneth            Incorporated by reference from the
            K. Parsons and the Company for the purchase of         Registrant's Form 10-KSB/A for the
            CAST software.                                         fiscal year ending December 31,
                                                                   1996 and filed on July 3, 1997

10.9        Royalty Agreement between James D. Wester              Incorporated by reference from the
            and the Company in exchange for development            Registrant's Form 10-KSB/A for the
            expense advances.                                      fiscal year ending December 31,
                                                                   1996 and filed on July 3, 1997

10.10       Common Stock Purchase Agreement dated June 5, 1996,    Incorporated by reference from the
            5, 1996, reference from the between the Company and    Registrant's Form 8-K filed on July
            Stephen E. Petruzzo for the purchase of International  16, 1996.
</TABLE>

                                       16

<PAGE>



<TABLE>
<CAPTION>
<S><C>
10.11       Registration Rights Agreement dated February           Incorporated by reference from the
            27, 1997 between the Company and certain               Registrant's Form 10-KSB/A for the
            purchases of Common Stock.                             fiscal year ending December 31,
            December 31, 1996 and                                  1996 and filed on July 3, 1997

10.12       Software License Agreement dated March 24,             Incorporated by reference from the
            1997 between the Company and Computer                  Registrant's Form 10-QSB/A for the
            Associates, International, Inc.,                       Quarter ended March 31, 1997 and
                                                                   filed on July 18, 1997.

10.13       Employment contract for Brendan J. Dawson              Incorporated by reference from the
                                                                   Registrant's Form 10-QSB for the
                                                                   Quarter ended September 30, 1997
                                                                   and filed on November 10, 1997.

21.1        List of Subsidiaries.                                  Filed with this Form 10-KSB

23.1        Consent of independent auditors, Ernst &               Filed with this Form 10-KSB
            Young LLP.

23.2        Consent of independent auditors, Rubino &              Filed with this Form 10-KSB
            McGeehin

27.1        Financial Data Schedule.                               Filed with this Form 10-KSB

</TABLE>

                                       17