SM&A CORP, S-1/A, 1998-08-28

SM&A CORP
S-1/A, 1998-08-28
MANAGEMENT CONSULTING SERVICES

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 28, 1998

REGISTRATION NO. 333-62163

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------

AMENDMENT NO. 1

FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------

SM&A CORPORATION
(FORMERLY KNOWN AS STEVEN MYERS & ASSOCIATES, INC.)
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)

<TABLE>
<S> <C> <C>
CALIFORNIA 8742 33-0080929
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>

4695 MACARTHUR COURT, EIGHTH FLOOR
NEWPORT BEACH, CALIFORNIA 92660
(949) 975-1550
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

RONALD A. HUNN
CHIEF FINANCIAL OFFICER
SM&A CORPORATION
4695 MACARTHUR COURT, EIGHTH FLOOR
NEWPORT BEACH, CALIFORNIA 92660
(949) 975-1550
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)

COPIES TO:

<TABLE>
<S> <C>
THOMAS J. CRANE, ESQ. KENNETH J. BARONSKY, ESQ.
SCOTT SANTAGATA, ESQ. MILBANK, TWEED, HADLEY & MCCLOY
NATALIE DUNDAS, ESQ. 601 SOUTH FIGUEROA STREET, 30TH FLOOR
RUTAN & TUCKER, LLP LOS ANGELES, CALIFORNIA 90017
611 ANTON BOULEVARD, 14TH FLOOR (213) 892-4000
COSTA MESA, CALIFORNIA 92626
(714) 641-5100
</TABLE>

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [ ]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.

SUBJECT TO COMPLETION, DATED AUGUST 28, 1998

PROSPECTUS
, 1998

5,000,000 SHARES

(LOGO)

When You Must Win...You Need Doers, Not Advisors (SM)

COMMON STOCK

Of the 5,000,000 shares of Common Stock offered hereby, 2,500,000 shares
are being sold by SM&A Corporation ("SM&A" or the "Company"), formerly Steven
Myers & Associates, Inc., and 2,500,000 shares are being sold by the Selling
Shareholders. The Company will not receive any of the proceeds from the sale of
shares by the Selling Shareholders. See "Principal and Selling Shareholders."

The Common Stock is quoted on the Nasdaq National Market under the symbol
"WINS." On August 20, 1998 the last reported sale price of the Common Stock on
the Nasdaq National Market was $26.00 per share. See "Price Range of Common
Stock and Dividend Policy."

SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
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PRICE UNDERWRITING PROCEEDS PROCEEDS TO
TO THE DISCOUNTS AND TO THE THE SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDERS
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<S> <C> <C> <C> <C>
Per Share.................................. $ $ $ $
Total(3)................................... $ $ $ $
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</TABLE>

(1) See "Underwriting" for indemnification arrangements with the Underwriters.

(2) Before deducting expenses estimated at $600,000 to be paid by the Company.
The Company has agreed to pay the expenses of the Selling Shareholders,
other than Underwriting Discounts and Commissions.

(3) The Selling Shareholders have granted to the Underwriters a 30-day option to
purchase up to 750,000 additional shares of Common Stock at the Price to the
Public, less Underwriting Discounts and Commissions, solely to cover
over-allotments, if any. If the Underwriter's over-allotment option is
exercised in full, the total Price to the Public, Underwriting Discounts and
Commissions, Proceeds to the Company and Proceeds to the Selling
Shareholders will be , , and
, respectively. The Company will not receive any of the proceeds
from the sale of the shares of Common Stock by the Selling Shareholders
pursuant to the Underwriters' over-allotment option, if exercised. See
"Underwriting" and "Principal and Selling Shareholders."

The shares of Common Stock are being offered by the several Underwriters,
subject to prior sale, when, as and if delivered to and accepted by the
Underwriters, subject to various prior conditions, including their right to
reject orders in whole or in part. It is expected that delivery of share
certificates will be made in New York, New York, on or about , 1998.

DONALDSON, LUFKIN & JENRETTE
LEHMAN BROTHERS
LEGG MASON WOOD WALKER
INCORPORATED
<PAGE> 3

This Prospectus contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E
of the Securities Exchange Act of 1934, as amended, that involve substantial
risks and uncertainties. When used in this Prospectus, the words "anticipate,"
"believe," "estimate," "expect" and similar expressions as they relate to the
Company of its management are intended to identify such forward-looking
statements. The Company's actual results, performance or achievements could
differ materially from the results expressed in, or implied by, these
forward-looking statements. Factors that could cause or contribute to such
differences include those discussed in "Risk Factors."

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

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING SYNDICATE SHORT COVERING TRANSACTIONS OR THE IMPOSITION OF PENALTY
BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."

IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON
THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE
"UNDERWRITING."

2
<PAGE> 4

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and Financial Statements and Notes thereto appearing elsewhere in
this Prospectus. The Company, formerly known as Steven Myers & Associates, Inc.,
acquired Space Applications Corporation and its subsidiary ("SAC") on May 29,
1998 and Decision-Science Applications, Inc. and its subsidiary ("DSA") on
August 20, 1998, and each is a wholly-owned subsidiary of the Company. For
financial reporting purposes, each of these transactions (collectively, the
"Acquisitions") was accounted for using the purchase method. As used in this
Prospectus, except where the context clearly requires otherwise, references made
to "SM&A" or the "Company" mean SM&A Corporation and its subsidiaries. Unless
otherwise indicated, the information in this Prospectus assumes (i) an offering
price of $26.00 per share and (ii) no exercise of (A) the Underwriters'
over-allotment option, (B) options to purchase 804,500 shares which have been
granted under the Company's 1997 Stock Option Plan, and (C) the nonqualified
options to purchase 175,925 shares of Common Stock issued in connection with the
acquisition of SAC (the "Acquisition Options").

THE COMPANY

SM&A is a leading nationwide provider of proposal management and high-end
contract support services. The Company's proposal management services help its
clients achieve a higher probability of winning government and commercial
contracts while its high-end contract support services enhance its clients'
ability to successfully and efficiently perform such contracts. The Company's
clients include leading firms in the aerospace, defense and communications
industries such as The Boeing Company, Harris Corporation, Hewlett Packard
Company, Hughes Electronics Corporation, ITT Aerospace/Communications, Litton
Industries, Inc., Lockheed Martin Corporation, Loral Space & Communications,
Ltd., Motorola, Inc., MCI Communications Corporation and Raytheon Company.

The Company estimates the annual market for proposal management and
high-end contract support services is approximately $10 billion. The demand for
the Company's comprehensive breadth of services is increasing as consolidation
in the aerospace, communications and defense industries continues. In this
highly competitive environment, major contractors find it is vital to win new
contracts in order to survive, increasing their incentive to employ the
Company's professional proposal management services. In addition, the trend
toward utilizing outsourced expertise has created a significant opportunity for
the Company to expand its mission-critical contract support services in systems
engineering, information technology and program integration.

The Company's proposal management expertise has resulted in a proposal win
rate of 89.3% of all dollars awarded on SM&A engagements since its inception in
1982. The Company's win rate greatly exceeds the results disclosed in the "Best
Practices 2000" survey conducted by a major national accounting firm which
indicated that a majority of the companies surveyed considered a 30% win rate as
positive, as cited in Aviation Week & Space Technology. The Company's win rate
is calculated by dividing the total dollar value of contracts won by the total
dollar value of proposals managed by SM&A from inception to completion
(excluding competitions that were canceled or otherwise not awarded). The
Company has worked on or is currently engaged on 389 major proposals for $148
billion of government and commercial procurements. The Company leverages its
success in winning business for its clients and its involvement in the project
life cycle to extend its services beyond proposal development to contract
support such as systems engineering, information technology, and program
integration. Through internal growth as well as the Acquisitions, SM&A continues
to expand its contract support services. Revenues from contract support services
increased from 3.0% of the Company's revenues for 1994 to 28.8% for the six
months ended June 30, 1998. Revenues from contract support services on a pro
forma basis to reflect the Acquisitions would have been 67.9% of the Company's
revenues for the six months ended June 30, 1998.

scope and depth of the Company's high-end contract support services, adding more
than 400 systems engineering, information technology and program integration
experts to SM&A's workforce and expanding SM&A's domestic presence with offices
in strategic locations near significant market centers.

The Company believes that several factors distinguish it from its
competitors and position it to capitalize on the rapidly growing demand for its
services, such as (i) a proven track record and superior reputation in proposal
management based on an impressive win rate established over the last 15 years;
(ii) an ability to provide a broad array of services to companies seeking to win
and execute government and commercial contracts; (iii) the expertise of SM&A's
professionals, who have an average of more than 20 years of relevant industry
experience; and (iv) long-standing client relationships that often lead to
repeat engagements and additional growth opportunities in complementary lines of
business.

The Company's growth strategy is to expand its position as the largest
proposal management company in the United States and to continue to grow its
expanding contract support services. The key elements of the Company's growth
strategy are to (i) expand its core proposal management business; (ii) leverage
existing relationships to obtain support services contracts upon completion of a
proposal management engagement; (iii) build a complementary array of high-end
contract support services through acquisitions and internal growth; and (iv)
pursue opportunities in the growing market for large commercial programs.

A key component of SM&A's growth strategy involves the identification,
acquisition and integration of complementary businesses. The Company considers a
number of factors in identifying potential acquisition candidates, including:
(i) the caliber of the candidate's professionals and client base; (ii) the
opportunities for SM&A to obtain proposal management and high-end contract
support service engagements; and (iii) the anticipated benefits to the acquired
company from integration with SM&A. After the acquisition, SM&A seeks to
integrate the acquired business by (i) transitioning new personnel to higher
rate projects; (ii) providing new employees with equity incentives in SM&A;
(iii) training new employees on SM&A's proprietary proposal management process
in an effort to increase the win rate of the acquired business; (iv)
restructuring existing contracts for improvements where possible; and (v)
combining operations to increase efficiencies.

Established as a sole proprietorship in 1982, the Company was incorporated
in California in 1985 under the name Steven Myers & Associates, Inc. In August
1998, the Company changed its name to SM&A Corporation. The Company's principal
executive offices are located at 4695 MacArthur Court, Eighth Floor, Newport
Beach, California 92660, and its telephone number is (949) 975-1550.

THE OFFERING

Common Stock offered by the Company............... 2,500,000 shares

Common Stock offered by the Selling
Shareholders...................................... 2,500,000 shares

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Total................................... 5,000,000 shares

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Common Stock to be outstanding after the
offering(1)....................................... 19,034,582 shares

Use of Proceeds to the Company.................... Strategic acquisitions and
other general corporate
purposes. See "Use of
Proceeds."

Nasdaq National Market symbol..................... WINS
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(1) Excludes (i) 1,500,000 shares of Common Stock reserved for issuance under
the 1997 Stock Option Plan, of which 804,500 shares are issuable pursuant to
options currently outstanding under the Plan and (ii) 175,925 shares of
Common Stock subject to the Acquisition Options. Also does not reflect the
possible issuance of additional shares to former shareholders of SAC or
surrender of outstanding shares held by former shareholders of SAC that may
result due to certain price protection provisions relating to the shares of
Common Stock issued in connection with the acquisition of SAC. Assuming the
offering was consummated on August 21, 1998, the former shareholders of SAC
would be required to surrender an aggregate of 26,247 shares of Common Stock
to SM&A for cancellation. See "Shares Eligible For Future Sale."

4
<PAGE> 6

SUMMARY FINANCIAL INFORMATION

<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------------------- ------------------
1993 1994(1) 1995 1996 1997 1997 1998
------- ------- ------- ------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
SM&A HISTORICAL STATEMENT OF OPERATIONS
DATA(2):
Net revenues............................ $10,738 $15,220 $20,777 $25,699 $ 36,962 $15,773 $24,121
Gross profit............................ 3,622 5,771 8,464 11,187 16,433 7,116 10,622
Operating income........................ 830 878 671 438 9,506 4,353 5,985
Earnings (loss) before income taxes..... 817 (823) 678 574 8,964 4,303 7,139
Net earnings (loss)..................... $ 801 $ (811) $ 668 $ 565 $ 8,817 $ 4,275 $ 4,203
======= ======= ======= ======= ======== ======= =======
SM&A PRO FORMA SUPPLEMENTAL DATA(3):
Net earnings............................ $ 4,774 $ 2,245 $ 4,203
======== ======= =======
Net earnings per share, diluted(4)...... $ 0.37 $ 0.17 $ 0.28
======== ======= =======
Diluted weighted average common
shares(4)............................. 12,948 12,948 15,042
======== ======= =======
SM&A AND ACQUISITIONS PRO FORMA CONDENSED
COMBINED STATEMENT OF OPERATIONS
DATA(5):
Net revenues............................ $101,520 $47,559 $53,376
Gross profit............................ 35,912 16,930 19,305
Operating income........................ 9,951 5,383 5,648
Earnings before income taxes............ 9,047 5,029 6,292
Income tax expense...................... 4,357 2,500 2,796
Net earnings............................ $ 4,690 $ 2,529 $ 3,496
======== ======= =======
Net earnings per share, diluted(4)...... $ 0.30 $ 0.16 $ 0.21
======== ======= =======
Diluted weighted average common
shares(4)............................. 15,861 15,861 16,524
======== ======= =======
</TABLE>

<TABLE>
<CAPTION>
AS OF JUNE 30, 1998
----------------------------
PRO FORMA
ACTUAL AS ADJUSTED(6)
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(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $16,217 $63,990
Working capital............................................. 21,723 74,105
Total assets................................................ 45,969 127,696
Long term debt, including current portion................... 545 567
Total shareholders' equity.................................. 37,635 110,536
</TABLE>

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(1) In 1994, the Company wrote off $1.7 million of receivables from California
Kamchatka Company, Inc. ("CKC"), an affiliated entity. See "Certain
Transactions."

(2) In connection with the Company's initial public offering on January 28, 1998
(the "IPO"), the Company converted to a C corporation under the Internal
Revenue Code of 1986, as amended (the "Code"). Prior to conversion, the
Company was an S corporation for federal and certain state income tax
purposes. See "Prior S Corporation Status."

(3) Amounts reflect pro forma adjustments for (a) the additional compensation
for three principal executive officers who are to be paid a maximum of $2.7
million in salaries and bonuses for 1998 under an executive compensation
program consisting of an Executive Employment Agreement and an Executive
Bonus Plan (the "Executive Compensation Program") (the maximum amount is in
excess of historical figures included in selling, general and administrative
expenses for 1997) and (b) provisions for federal and state income taxes as
if the Company had been taxed as a C corporation at an assumed statutory tax
rate of approximately 40%. For additional pro forma statement of operations
data for 1995, 1996, and 1997, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

(4) In January 1997, the Company repurchased 1,995,125 shares of Common Stock
from certain of its existing shareholders for approximately $5.9 million
using borrowings under its then existing bank facility.

5
<PAGE> 7

See "Certain Transactions." In January 1998, the Company sold 2,100,000
shares of Common Stock in the IPO and received proceeds net of underwriting
fees of approximately $23.4 million. Diluted weighted average common shares
includes options outstanding or deemed to be outstanding during the
respective periods.

(5) In addition to the pro forma adjustments discussed in footnote 3 above,
combined pro forma data presented gives effect to the Acquisitions as if
both Acquisitions occurred at the beginning of the respective periods. This
pro forma data reflects adjustments for the Acquisitions including
reclassifications to prior period financial statements in order to conform
to the Company's current period presentation. The unaudited pro forma
financial information does not reflect certain cost savings that management
believes would have been realized had the Acquisitions been consummated at
the beginning of the periods presented. Management believes that such
savings would have been realized primarily through the discontinuance of
certain stock repurchase programs and other special incentives paid to
employees of SAC and DSA in 1997 and 1998 in addition to scheduled salary
and bonus compensation. In addition, management believes that the
Acquisitions would have enabled the Company to achieve additional savings as
a result of certain economies of scale with respect to facility costs and
various selling, general and administrative functions. There can be no
assurance that the Company would have actually realized any such cost
savings had the Acquisitions been consummated at the beginning of the
periods presented or that the Company will realize any such cost savings in
the future.

(6) Adjusted to give effect to the sale by the Company of 2,500,000 shares of
Common Stock offered hereby and the receipt of the estimated net proceeds
therefrom (See "Use of Proceeds.") and to reflect the DSA acquisition as if
both transactions had been completed on June 30, 1998.

6
<PAGE> 8

RISK FACTORS

In addition to the other information in this Prospectus, prospective
investors should carefully consider the following factors in evaluating the
Company and its business before purchasing any shares of the Common Stock
offered hereby.

RISKS OF ACQUISITION STRATEGY

An element of the Company's growth strategy is to expand its operations
through the acquisition of complementary businesses. However, there can be no
assurance that the Company will be able to identify suitable acquisition
candidates or that, if identified, the Company will be able to acquire such
companies on suitable terms. Moreover, other companies which may have greater
resources than SM&A may compete for acquisition candidates, which could result
in an increase in the price of acquisition targets and a decrease in the number
of attractive companies available for acquisition.

There can be no assurance that the anticipated economic, operational and
other benefits of any of the Acquisitions or any future acquisitions will be
realized or that the Company will be able to successfully integrate acquired
businesses in a timely manner without substantial costs, delays or other
operational or financial problems. The difficulties of such integration may
initially be increased by the necessity of integrating personnel with disparate
business backgrounds and corporate cultures. In addition, acquisitions may
involve the expenditure of significant funds. Failure to effectively integrate
the acquired companies may adversely affect the Company's ability to bid
successfully on certain engagements and otherwise grow its business. Client
dissatisfaction or performance problems at a single acquired company could have
an adverse effect on the reputation of the Company as a whole, resulting in
increased difficulty in marketing services or acquiring companies in the future.
In addition, there can be no assurance that the acquired companies will operate
profitably or will not otherwise adversely impact the operating results of the
Company. Acquisitions also involve a number of additional risks, including
diversion of management attention, potential loss of key clients or personnel,
risks associated with unanticipated problems, liabilities or contingencies and
risks of entering markets in which the Company has limited or no direct
expertise. The occurrence of some or all of the events described in these risks
could have a material adverse effect on the Company's business, operating
results and financial condition. See "Business--Growth Strategy."

MANAGEMENT OF GROWTH

The Company is currently experiencing significant growth and intends to
pursue further growth as part of its business strategy. The Company's ability to
manage the growth of its operations will require it to continue to improve its
operational, financial and other internal systems and to attract, develop,
motivate and retain its employees. The Company's rapid growth has presented and
will continue to present numerous operational challenges, such as the
assimilation of financial reporting systems and increased pressure on the
Company's senior management and will increase the demands on the Company's
systems and internal controls. In addition, the Company's success depends in
large part upon its ability to attract, develop, motivate and retain
highly-skilled professionals and administrative employees. The Company's growth
strategy will require an increase in the Company's personnel, particularly
skilled systems engineers and program managers. Qualified professionals are
currently in great demand and there is significant competition for employees
with the requisite skills from other major and boutique consulting firms,
research firms, government contractors, proposal management or business
acquisition departments of major corporations and other professional services
firms. There can be no assurance that the Company will be able to attract and
retain the qualified personnel necessary to pursue its growth strategy. There
can be no assurance that the Company will be able to maintain or increase its
current rate of growth, effectively manage its expanding operations or achieve
planned growth on a timely or profitable basis. To the extent the Company is
unable to manage its growth effectively and efficiently, the Company's business,
financial condition and results of operations could be materially and adversely
affected. See "Business--Growth Strategy."

7
<PAGE> 9

DEPENDENCE ON DEFENSE INDUSTRY

Approximately 78.9% and 71.2% of the Company's revenues were derived from
proposal management services related to government procurement contracts for the
fiscal year ended December 31, 1997 and the six months ended June 30, 1998,
respectively. In addition, a significant portion of the Company's revenues are
derived from contracts or subcontracts with the U.S. Government. For the
foreseeable future, the Company expects that the percentage of its revenues
attributable to such contracts will continue to be substantial. U.S. Government
expenditures for defense products may decline in the future with such reductions
having an effect on the Company's clients, or, indirectly, the Company. A number
of trends may contribute to such a decline, including: (i) large weapon systems
being replaced with smaller, more precise high technology systems, (ii) multiple
procurements for similar weapons being consolidated into joint service
procurements, such as the Joint Strike Fighter, (iii) threat scenarios evolving
away from global conflicts to regional conflicts and (iv) the continuing draw
down of U.S. military forces in response to the end of the Cold War. In the
event expenditures for products of the type manufactured by the Company's
clients are reduced and not offset by other new programs or products, there will
be a reduction in the volume of contracts or subcontracts to be bid upon by the
Company's clients and, as a result, a reduction in the volume of proposals
managed by the Company. Unless offset, such reductions could materially and
adversely affect the Company's business, operating results and financial
condition.

RISKS ASSOCIATED WITH GOVERNMENT CONTRACTING

The Company, both directly and through its government-contractor clients,
is subject to risks associated with compliance with governmental regulations.
The fines and penalties which could result from noncompliance with appropriate
standards and regulations, or a client's suspension or debarment from the
bidding process for future government contracts could have a material adverse
effect on the Company's business, operating results and financial condition. The
Company relies for the continuance and expansion of its business on a facility
security clearance from the U.S. Government, and individual security clearances,
at various levels, for nearly all members of its staff. There can be no
assurance that necessary security clearances will continue to be made available
by the U.S. Government.

In addition, a significant portion of the Company's revenues are derived
from contracts or subcontracts with the U.S. Government. The Company's services
are performed pursuant to the following types of contracts: (i) cost
reimbursable; (ii) time-and-materials; and (iii) fixed-price contracts and
subcontracts. Under fixed-price contracts and time-and-materials contracts, the
Company bears any risk of increased or unexpected costs that may reduce its
profits or cause it to sustain a loss.

The Company's U.S. Government contracts and subcontracts are subject to
termination, reduction or modification as a result of changes in the U.S.
Government's requirements or budgetary restrictions, or at the convenience of
the U.S. Government. Moreover, when the Company participates as a subcontractor,
it is subject to the risk that the primary contractor may fail or become unable
to perform its duties and responsibilities as a prime contractor. If a contract
were to be terminated for convenience, the Company would be reimbursed for its
allowable costs incurred up to the date of termination and would be paid a
proportionate amount of the stipulated profits or fees attributable to the work
actually performed. To date, the U.S. Government has not terminated any
contracts with the Company for convenience.

Contracts with the U.S. Government are generally complex in nature, and
require the Company to comply with numerous U.S. Government regulations
regarding discrimination in the hiring of personnel, fringe benefits for
employees, safety, safeguarding classified information, responsibility for U.S.
Government property, fire prevention, equipment maintenance, record keeping and
accounting, management qualifications, drug free work place and numerous other
matters. The Company has not experienced any material difficulty in complying
with applicable U.S. Government regulations.

Under certain circumstances the U.S. Government can suspend or bar
individuals or firms from obtaining future contracts with the U.S. Government
for specified periods of time. Any such suspension or disbarment of the Company
or its major clients could have a material adverse effect upon the Company. The
books and records of the Company are subject to audit by the Defense Contract
Audit Agency, which can result in
8
<PAGE> 10

adjustments to contract costs and fees. If any costs are improperly allocated to
a contract, such costs are not reimbursable and, if already reimbursed, will be
required to be refunded to the government. Furthermore, if improper or illegal
activities are discovered in the course of any audits or investigations, the
contractor may be subject to various civil and criminal penalties and
administrative sanctions, including termination of contracts, forfeitures of
profits, suspension of payments, fines and suspension or disqualification from
doing business with the government. If the Company becomes subject to penalties
or sanctions, such penalties or sanctions could have a material adverse effect
on the Company's business, financial condition and results of operations.

CLIENT CONCENTRATION

SM&A derives a significant portion of its revenues from a relatively
limited number of clients. For example, revenues from the Company's ten most
significant clients accounted for approximately 81.7%, 90.3%, 98.0%, 92.9% and
91.2% of its total revenues for the six months ended June 30, 1998 and the years
ended December 31, 1997, 1996, 1995 and 1994, respectively. Six clients,
Lockheed Martin Corporation, Litton Industries, Inc., Motorola, Inc., Raytheon
Company, The Boeing Company, and Hughes Electronics Corporation accounted for
approximately 69.6% and 81.5% of total revenues for the six months ended June
30, 1998 and the year ended December 31, 1997, respectively. Lockheed Martin
Corporation is the Company's single largest client, accounting for approximately
18.0%, 22.5% and 22.9% of the Company's total revenues for the six months ended
June 30, 1998 and the years ended December 31, 1997 and 1996, respectively. On a
pro forma basis giving effect to the Acquisitions, various branches and agencies
of the U.S. Government together would have accounted for an aggregate 20.0% of
the Company's revenues for the six months ended June 30, 1998.

Clients typically retain the Company for major proposals as needed on an
engagement basis rather than pursuant to long-term contracts, and a client can
usually terminate an engagement at any time without a significant penalty.
Moreover, there can be no assurance that the Company's existing clients will
continue to engage the Company for additional assignments or do so at the same
revenue levels. The loss of any significant client could materially and
adversely affect the Company's business, financial condition and results of
operations. In addition, the level of the Company's services required by an
individual client may diminish over the life of its relationship with the
Company, and there can be no assurance that the Company will be successful in
establishing relationships with new clients as this occurs. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
"Business--Clients and Representative Engagements."

COMPETITION AND MARKET PENETRATION

The Company has recently entered and seeks to achieve significant growth in
the contract support services market. The market for services in the contract
support industry is competitive, highly fragmented and subject to rapid change.
Such competition is likely to increase in the future. Many of the Company's
competitors have greater personnel, financial, technical and marketing resources
than the Company. Such competitors include many larger management consulting
firms such as McKinsey & Company, Booz Allen & Hamilton, and Science
Applications International Corp., as well as the consulting arms of major
accounting firms. The Company also competes with its clients' in-house
resources. This source of competition may increase as consolidation of the
aerospace and defense industry creates larger organizations. Although the
Company believes that it has the ability to further penetrate the contract
support services market, there can be no assurance that the Company will be
successful in such efforts. In addition, significant further expense for sales
and marketing may be required to promote a major expansion of the Company's
services in such area. If the Company is unsuccessful in its efforts to
penetrate further the market for such services, or if its current

9
<PAGE> 11

89.3% win rate in the proposal management business drops significantly, the
Company's growth prospects could be materially and adversely affected. See
"Business--Market Opportunity."

INTELLECTUAL PROPERTY RIGHTS

The Company relies upon a combination of nondisclosure and other
contractual arrangements and trade secret, patent, copyright and trademark laws
to protect its proprietary rights. There can be no assurance that the steps
taken by the Company to protect its proprietary rights will be adequate to deter
misappropriation of proprietary information or that the Company will be able to
detect unauthorized use and take appropriate steps to enforce its intellectual
property rights.

Although the Company believes that its services do not infringe on the
intellectual property rights of others and that is has all rights necessary to
utilize the intellectual property employed in its business, the Company is
subject to the risk of claims alleging infringement of third-party intellectual
property rights. Any such claims could require the Company to spend significant
sums in litigation, pay damages, develop non-infringing intellectual property or
acquire licenses to the intellectual property which is the subject of asserted
infringement.

DEPENDENCE ON KEY EMPLOYEES

The success of SM&A is highly dependent upon the efforts, abilities,
business generation capabilities and project execution of its executive
officers, in particular those of Steven S. Myers, the Company's Chief Executive
Officer, President and Chairman of the Board, and Kenneth W. Colbaugh, the
Company's Executive Vice President and Chief Operating Officer. In November,
1997, the Company entered into two-year employment agreements with both of these
individuals. The loss of the services of either of these individuals for any
reason could materially and adversely affect the Company's business, operating
results and financial condition, including its ability to secure and complete
engagements. The Company maintains key-man life insurance policies, in the
amount of $2.0 million, on each of Mr. Myers and Mr. Colbaugh. See "Management."

BROAD MANAGEMENT DISCRETION AS TO USE OF PROCEEDS

The net proceeds to be received by the Company in connection with this
offering will be used for general corporate purposes, which may include
strategic acquisitions. Accordingly, management will have broad discretion with
respect to the expenditure of such proceeds. Purchasers of shares of Common
Stock offered hereby will be entrusting their funds to the Company's management,
upon whose judgment they must depend. See "Use of Proceeds."

VARIABILITY IN QUARTERLY RESULTS

The Company may experience significant fluctuations in future quarterly
operating results due to a number of factors, including the size, timing and
duration of client engagements. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

STOCK PRICE VOLATILITY

The Common Stock was first publicly traded on January 29, 1998 after the
Company's initial public offering at $12.00 per share. Between January 29, 1998
and August 20, 1998, the closing sale price has ranged from a low of $10.69 per
share to a high of $28.63 per share. The market price of the Common Stock could
continue to fluctuate substantially due to a variety of factors, including
quarterly fluctuations in results of operations, adverse circumstances affecting
the introduction or market acceptance of new services offered by the Company,
announcements of new services by competitors, the Company's loss of key
employees, changes in the regulatory environment or market conditions affecting
the defense and aerospace industry, changes in earnings estimates by analysts,
changes in accounting principles, sales of Common Stock by existing holders,
loss of key personnel, the announcement and market acceptance of proposed
acquisitions and other factors. The market price for the Company's Common Stock
may also be affected by the Company's ability to meet
10
<PAGE> 12

analysts' expectations, and any failure to meet such expectations, even if
minor, could have a material adverse effect on the market price of the Company's
Common Stock. In addition, the stock market is subject to extreme price and
volume fluctuations. This volatility has had a significant effect on the market
prices of securities issued by many companies for reasons unrelated to the
operating performance of these companies. In the past, following periods of
volatility in the market price of a company's securities, securities class
action litigation has often been instituted against such a company. Any such
litigation instigated against the Company could result in substantial costs and
a diversion of management's attention and resources, which could have a material
adverse effect on the Company's business, operating results and financial
condition. See "Price Range of Common Stock and Dividend Policy."

YEAR 2000 ISSUE

The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of SM&A's
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in major system
failure or miscalculations. The Company has performed a review of its internal
systems to identify and resolve the effect of Year 2000 software issues on the
integrity and reliability of the Company's financial and operational systems.
Based on this review, management believes that the Company's internal systems
are substantially compliant with Year 2000 issues. In addition, the Company is
also communicating with its principal service providers to ensure Year 2000
issues will not have an adverse impact on the Company. Based upon its internal
review and communications with its principal service providers, the Company
believes at this time that the costs of achieving Year 2000 compliance will not
have a material adverse impact on the Company's business, operations or
financial condition. However, if the Company and third parties upon which it
relies are unable to address this issue in a timely manner, it could result in a
material financial risk to the Company. In order to assure that this does not
occur, the Company plans to devote all resources required to resolve any
significant Year 2000 issues in a timely manner.

CONTROL BY PRINCIPAL SHAREHOLDERS

Following the consummation of the offering, Steven S. Myers will
beneficially own approximately 33.8% of the Company's outstanding Common Stock
and will have the ability to control or significantly influence the election of
directors and the results of other matters submitted to a vote of shareholders.
Such concentration of ownership may have the effect of delaying or preventing a
change in control of the Company and may adversely affect the voting or other
rights of other holders of Common Stock. The Board of Directors of the Company
is currently comprised entirely of designees of Mr. Myers. See "Management" and
"Principal and Selling Shareholders."

ANTI-TAKEOVER PROVISIONS

The Board of Directors has the authority to issue up to ten million shares
of preferred stock and to determine the price, rights, preferences, privileges
and restrictions, including voting rights, of those shares without any vote or
action by the shareholders. The rights of the holders of the Common Stock will
be subject to, and may be adversely affected by, the rights of the holders of
any preferred stock that may be issued in the future. The issuance of the
preferred stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
making it more difficult for a third party to acquire a majority of the
outstanding voting stock of the Company. The Company has no present plan to
issue any shares of preferred stock. See "Description of Capital Stock."

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this offering, the Company will have 19,034,582 shares
of Common Stock outstanding. As of August 20, 1998 the Company had outstanding
options to acquire, subject to certain vesting requirements, 804,500 shares of
Common Stock pursuant to the Company's 1997 Stock Option Plan. In connection
with the acquisition of SAC, the Acquisition Options were granted to purchase an
aggregate of 175,925 shares of Common Stock. In addition, due to certain price
protection provisions relating to the shares
11
<PAGE> 13

of Common Stock issued in connection with the acquisition of SAC, the Company
may be required to issue additional shares of Common Stock to former
shareholders of SAC depending upon the market price of the Common Stock at
certain defined "liquidation dates." See "Shares Eligible For Future Sale." The
Company has registered on a registration statement on Form S-8 all 1,500,000
shares of Common Stock underlying the options outstanding or issuable under the
1997 Stock Option Plan. Immediately following the completion of this offering, a
total of 8,150,000 shares of Common Stock will be freely tradable without
restriction. All of the remaining 10,884,582 shares are "restricted securities"
as defined by Rule 144 promulgated under the Securities Act of 1933, as amended
(the "Securities Act"), which, upon expiration of lockup agreements with certain
shareholders of the Company 180 days after the date of this Prospectus, will be
eligible for sale in the public market from time to time in reliance on and
subject to the limitations of Rule 144. In addition, in connection with the
Acquisitions, former shareholders of SAC and DSA received certain registration
rights with respect to the Company's Common Stock exchanged for the equity
interests in their respective companies. The possibility that substantial
amounts of Common Stock may be sold in the public market would likely have a
material adverse effect on prevailing market prices of the Common Stock and
could impair the Company's ability to raise capital through the sale of its
equity securities. See "Shares Eligible for Future Sale."

FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS

This Prospectus contains certain forward-looking statements, including,
among others (i) the anticipated growth in the proposal management and contract
support services markets; (ii) anticipated trends in the Company's financial
condition and results of operations (including expected changes in the Company's
gross margin and general, administrative and selling expenses); (iii) the
ability of the Company to finance its working capital requirements; (iv) the
Company's business strategy for expanding its presence in the proposal
management and contract support services markets; and (v) the Company's ability
to distinguish itself from its current and future competitors. These
forward-looking statements are based largely on the Company's current
expectations and are subject to a number of risks and uncertainties. Actual
results could differ materially from these forward-looking statements. In
addition to the other risks described elsewhere in this "Risk Factors"
discussion, important factors to consider in evaluating such forward-looking
statements include (i) the shortage of reliable market data regarding the
proposal management and contract support services markets; (ii) changes in
external competitive market factors or in the Company's internal budgeting
process which might impact trends in the Company's results of operations; (iii)
unanticipated working capital or other cash requirements; (iv) changes in the
Company's business strategy or an inability to execute its strategy due to
unanticipated changes in the proposal management and contract support services
markets; and (v) various other factors that may prevent the Company from
competing successfully in the marketplace. In light of these risks and
uncertainties, many of which are described in greater detail elsewhere in this
"Risk Factors" discussion, there can be no assurance that the actual results
will not differ materially from such forward-looking statements contained in
this Prospectus.

12
<PAGE> 14

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 2,500,000 shares of
Common Stock offered by the Company hereby, after deducting underwriting
discounts and commissions and other offering expenses (all of the other offering
expenses of the Selling Shareholders are payable by the Company) are estimated
to be approximately $61.0 million. The Company anticipates that the net proceeds
will be used for general corporate purposes, which may include future
acquisitions of complementary businesses. Accordingly, management will have
broad discretion with respect to the expenditure of such proceeds. See "Risk
Factors -- Broad Management Discretion as to Use of Proceeds." The Company has
no agreement, understanding or commitment and is not currently engaged in
negotiations with respect to any future acquisitions. Pending their application
by the Company, the net proceeds of this offering not immediately required for
the purposes described above will be invested principally in U.S. Government
securities, short-term certificates of deposit, money market funds or other
short-term, interest-bearing securities.

RECAPITALIZATION

As of December 31, 1997, the Company had outstanding 202,292 shares of
Series A Common Stock and 812,829 shares of Series B Common Stock. On January
21, 1998, in connection with the initial public offering of its Common Stock,
the Company filed Restated Articles of Incorporation with the California
Secretary of State providing for the conversion of each of its issued and
outstanding shares of Series A Common Stock and Series B Common Stock into
12.7078 shares of Common Stock, or an aggregate of 12,900,000 shares (the
"Recapitalization").

PRIOR S CORPORATION STATUS

From January 1, 1991 until January 28, 1998, the Company had been treated
as an S corporation for purposes of federal and state income taxes. Accordingly,
during that period, the Company was not subject to regular federal income tax,
but it was subject to California income tax at a rate of 1.5% of its taxable
income earned in California, as well as the income tax rates of certain other
states with respect to income earned in those states. Each of the Company's
shareholders was required to include the Company's taxable income in his
individual income for state and federal income tax purposes. The Company's S
corporation status terminated on January 28, 1998, the Company is now taxed as a
C corporation, and is subject to regular federal and state income taxes.

13
<PAGE> 15

PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY

The Company's Common Stock has been traded on the Nasdaq National Market
under the symbol "WINS" since January 29, 1998. The following table sets forth
for the quarters indicated the high and low closing sale prices as reported on
the Nasdaq National Market.

<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
Fiscal 1998:
First Quarter (commencing January 29, 1998)............... 17 3/4 10 11/16
Second Quarter............................................ 21 17 1/4
Third Quarter (through August 20, 1998)................... 28 5/8 19 1/2
</TABLE>

At August 20, 1998, there were approximately 48 holders of the Company's
outstanding shares of Common Stock and the closing sale price of the Common
Stock on the Nasdaq National Market was $26.00 per share.

In 1997, the Company paid S corporation dividends of $1.2 million, $1.9
million, $2.5 million and $4.4 million on April 11, July 1, October 1, and
December 29, respectively. On January 27, 1998, immediately prior to
consummating its initial public offering, the Company declared an S corporation
dividend, in the amount of $710,000, to its then-current shareholders,
representing all undistributed earnings of the Company from January 1, 1998
through January 28, 1998 (the "S Corporation Dividend"). Purchasers of Common
Stock in the Company's initial public offering did not receive any portion of
the S Corporation Dividend. The Company does not anticipate paying cash
dividends on its Common Stock in the foreseeable future. The payment of any
future dividends will be at the discretion of the Company's Board of Directors
and will depend upon, among other things, future earnings, capital requirements,
the general financial condition of the Company and restrictions that may be
contained in the Company's financing agreements.

14
<PAGE> 16

CAPITALIZATION

The following table sets forth the capitalization of the Company as of June
30, 1998, and (i) as adjusted to reflect this offering and the receipt of the
estimated net proceeds therefrom and (ii) pro forma as adjusted to give effect
to the acquisition of DSA and this offering (and the receipt of the estimated
net proceeds therefrom). See "Use of Proceeds."

<TABLE>
<CAPTION>
JUNE 30, 1998
-----------------------------------
PRO FORMA
ACTUAL AS ADJUSTED AS ADJUSTED
------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents................................... $16,217 $ 77,192 $ 63,990
======= ======== ========
Long term debt, including current portion................... 545 545 567
Shareholders' equity:
Common Stock, no par value, 50,000,000 shares authorized;
15,819,743 shares issued and outstanding actual;
18,319,743 shares issued and outstanding, as adjusted;
19,034,582 shares issued and outstanding pro forma as
adjusted(1)............................................ 158 183 190
Preferred Stock, no par value, 10,000,00 shares
authorized; no shares issued and outstanding actual; no
shares issued and outstanding, as adjusted; no shares
issued and outstanding pro forma as adjusted........... -- -- --
Additional paid-in-capital................................ 39,953 100,903 112,822
Accumulated deficit....................................... (2,476) (2,476) (2,476)
------- -------- --------
Total shareholders' equity............................. 37,635 98,610 110,536
------- -------- --------
Total capitalization.............................. $38,180 $ 99,155 $111,103
======= ======== ========
</TABLE>

- ------------------------------
(1) Excludes (i) 1,500,000 shares of Common Stock reserved for issuance under
the 1997 Stock Option Plan, of which 804,500 are issuable pursuant to
options currently outstanding under the Plan and (ii) Acquisition Options.
Also does not reflect the possible issuance of additional shares to former
shareholders of SAC or surrender of outstanding shares held by former
shareholders of SAC that may result due to certain price protection
provisions relating to the shares of Common Stock issued in connection with
the acquisition of SAC. Assuming the offering was consummated on August 21,
1998, the former shareholders of SAC would be required to surrender an
aggregate of 26,247 shares of Common Stock to SM&A for cancellation. See
"Shares Eligible For Future Sale."

15
<PAGE> 17

SELECTED FINANCIAL DATA

The statement of operations data for the years ended December 31, 1995,
1996 and 1997 and the balance sheet data as of December 31, 1996 and 1997 have
been derived from the Financial Statements and Notes thereto, which statements
have been audited by KPMG Peat Marwick LLP, independent auditors, and are
included elsewhere in this Prospectus. The balance sheet data as of December 31,
1994 and 1995 and the statements of operations for the year ended December 31,
1994 are derived from the Company's audited financial statements which are not
included herein. The balance sheet data as of December 31, 1993 and the
statement of operations data for the year then ended have been derived from the
Company's unaudited financial statements, which statements are not included
herein and which in the opinion of management, include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair statement
of the results for the interim periods presented. The data for the six months
ended June 30, 1997 and June 30, 1998 have been derived from unaudited Financial
Statements also appearing elsewhere herein and which, in the opinion of
management, include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair statement of the results for the interim
periods presented. The results of operations for the periods ended June 30, 1997
and 1998 are not necessarily indicative of the results to be expected for any
other interim period or for the full year. The following information should be
read in conjunction with the Financial Statements and the Notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------------ -----------------
1993 1994(1) 1995 1996 1997 1997 1998
------- ------- ------- ------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
SM&A HISTORICAL STATEMENT OF OPERATIONS
DATA(2):
Net revenues........................... $10,738 $15,220 $20,777 $25,699 $ 36,962 $15,773 $24,121
Cost of revenues....................... 7,116 9,449 12,313 14,512 20,529 8,657 13,499
------- ------- ------- ------- -------- ------- -------
Gross profit........................... 3,622 5,771 8,464 11,187 16,433 7,116 10,622
Selling, general and administrative
expenses............................. 2,792 4,893 7,793 10,749 6,927 2,763 4,637
------- ------- ------- ------- -------- ------- -------
Operating income....................... 830 878 671 438 9,506 4,353 5,985
Other income (expense)................. (13) (1,701) 7 136 (542) 50 1,154
------- ------- ------- ------- -------- ------- -------
Earnings (loss) before income taxes.... 817 (823) 678 574 8,964 4,303 7,139
Income tax expense (benefit)(3)........ 16 (12) 10 9 147 28 2,936
------- ------- ------- ------- -------- ------- -------
Net earnings (loss).................... $ 801 $ (811) $ 668 $ 565 $ 8,817 $ 4,275 $ 4,203
======= ======= ======= ======= ======== ======= =======
SM&A AND ACQUISITIONS PRO FORMA CONDENSED
COMBINED STATEMENT OF OPERATIONS
DATA(4)(5):
Net revenues.................................................................. $101,520 $47,559 $53,376
Cost of revenues.............................................................. 65,608 30,629 34,071
-------- ------- -------
Gross profit.................................................................. 35,912 16,930 19,305
Selling, general and administrative expenses.................................. 25,961 11,547 13,657
Operating income.............................................................. 9,951 5,383 5,648
Other income (expense)........................................................ (904) (354) 644
-------- ------- -------
Earnings before income taxes.................................................. 9,047 5,029 6,292
Income tax expense............................................................ 4,357 2,500 2,796
Net earnings.................................................................. $ 4,690 $ 2,529 $ 3,496
======== ======= =======
Net earnings per share, diluted(6)............................................ $ 0.30 $ 0.16 $ 0.21
======== ======= =======
Diluted weighted average common shares(6)..................................... 15,861 15,861 16,524
======== ======= =======
</TABLE>

16
<PAGE> 18

<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
--------------------------------------------- JUNE 30,
1993 1994(1) 1995 1996 1997 1998
------ ------- ------ ------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................ $ 189 $ 242 $ 269 $ 1,927 $ 150 $16,217
Working capital...................................... 868 95 794 (279) 101 21,723
Total assets......................................... 2,269 2,320 3,034 11,820 5,331 45,969
Long term debt, including current portion(6)(7)...... 283 541 605 6,250 7,729 545
Total shareholders' equity (deficit)(6).............. 918 114 668 755 (6,328) 37,635
</TABLE>

- ------------------------------
(1) In 1994, the Company wrote off $1.7 million of receivables from CKC, an
affiliated entity that was subsequently dissolved. See "Certain
Transactions."

(2) In connection with the IPO, the Company converted to a C corporation under
the Code. Prior to conversion, the Company was an S corporation for federal
and certain state income tax purposes.

(3) For the five years ended December 31, 1997, amounts represent California and
other state franchise taxes incurred by the Company.

(4) Amounts reflect pro forma adjustments for (a) the additional compensation
for three principal executive officers who are to be paid a maximum of $2.7
million in salaries and bonuses for 1998 under the Executive Compensation
Program (the maximum amount is in excess of historical figures included in
selling, general and administrative expenses for 1997) and (b) provisions
for federal and state income taxes as if the Company had been taxed as a C
corporation at an assumed statutory rate of approximately 40%. For
additional pro forma statement of operations data for 1995, 1996, 1997 and
the six months ended June 30, 1997 and the historical six months ended June
30, 1998, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations."

(5) In addition to the adjustments described in footnote 4 above, combined pro
forma data presented gives effect to the Acquisitions as if both
Acquisitions occurred at the beginning of the respective periods.
Additionally, pro forma data reflect adjustments for the Acquisitions
including reclassifications to prior period financial statements in order to
conform to the current period presentation of the Company. The unaudited pro
forma financial information does not reflect certain cost savings that
management believes would have been realized had the Acquisitions been
consummated at the beginning of the periods presented. Management believes
that such savings would have been realized primarily through the
discontinuance of certain stock repurchase programs and other special
incentives paid to employees of SAC and DSA in 1997 and 1998 in addition to
scheduled salary and bonus compensation. In addition, management believes
that the Acquisitions would have enabled the Company to achieve additional
savings as a result of certain economies of scale with respect to facility
costs and various selling, general and administrative functions. There can
be no assurance that the Company would have actually realized any such cost
savings had the Acquisitions been consummated at the beginning of the
periods presented or that the Company will realize any such cost savings in
the future.

(6) In January 1998, the Company sold 2,100,000 shares of Common Stock in the
IPO for proceeds net of underwriting fees of approximately $23.4 million and
repaid all of the Company's then existing indebtedness of $7.4 million. In
January 1997, the Company repurchased 1,995,125 shares of Common Stock from
certain of its existing shareholders for approximately $5.9 million using
borrowings under its then existing bank facility.

(7) In April 1996, the Company purchased a Hawker 800 aircraft for $5.8 million
and financed the purchase through a bank. In January 1997, the Company sold
the Hawker aircraft to a company which is owned by Steven S. Myers, the
Company's principal shareholder. See Note (4) of the Notes to Financial
Statements.

17
<PAGE> 19

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

The following unaudited pro forma condensed combined financial information
is based upon the historical combined financial statements of SM&A, SAC and DSA
and has been prepared to illustrate the effects of this offering and the
Acquisitions.

The unaudited pro forma condensed combined balance sheet as of June 30,
1998 gives effect to (i) the acquisition of DSA under the purchase method of
accounting and (ii) this offering and the receipt of the estimated net proceeds
therefrom as if such transactions had been completed on June 30, 1998 and
combines the balance sheet of the Company and DSA as of June 30, 1998.

The unaudited pro forma condensed combined statement of operations for the
twelve months ended December 31, 1997 and the six months ended June 30, 1997
were prepared based upon the pro forma results of operations of the Company and
the historical results of operations of SAC and DSA for such periods as if the
Acquisitions had been completed on January 1, 1997. The pro forma results of
operations of the Company also give effect to the following: (i) additional
compensation for three principal executive officers under the Executive
Compensation Program and (ii) provisions for federal and state income taxes as
if the Company had been taxed as a C corporation at an assumed statutory rate of
approximately 40%. The unaudited pro forma condensed combined statement of
operations for the six months ended June 30, 1998 was prepared based upon the
historical results of operations of the Company (which includes the historical
results of SAC from May 18, 1998, the date of acquisition, to June 30, 1998) and
the historical results of operations of SAC for the period January 1, 1998 to
May 18, 1998 and DSA for the six months ended June 30, 1998 as if the
Acquisitions had been completed on January 1, 1998.

Pro forma share and per share amounts reflect a conversion of all
outstanding shares of Series A and Series B common stock of the Company into an
aggregate of 12,900,000 shares of common stock.

The unaudited pro forma condensed combined financial data are a
presentation of historical results with accounting adjustments (consisting of
normal recurring entries), which in the opinion of management, are necessary for
a fair presentation of such information. This financial information has been
provided for comparative purposes only and does not purport to be indicative of
results which would actually have been obtained had the transactions described
above been effected on the date indicated or of results which may be obtained in
the future. The unaudited pro forma financial information does not reflect
certain cost savings that management believes would have been realized had the
Acquisitions been consummated at the beginning of the periods presented.
Management believes that such savings would have been realized primarily through
the discontinuance of certain stock repurchase programs and other special
incentives paid to employees of SAC and DSA in 1997 and 1998 in addition to
scheduled salary and bonus compensation. In addition, management believes that
the Acquisitions would have enabled the Company to achieve additional savings as
a result of certain economies of scale with respect to facility costs and
various selling, general and administrative functions. There can be no assurance
that the Company would have actually realized any such cost savings had the
Acquisitions been consummated at the beginning of the periods presented or that
the Company will realize any such cost savings in the future.

The following unaudited pro forma condensed combined financial statements
and accompanying notes should be read in conjunction with, "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
the consolidated financial statements and notes thereto of SM&A, SAC and DSA and
other historical consolidated financial information included elsewhere in this
Prospectus.

18
<PAGE> 20

SM&A CORPORATION AND SUBSIDIARIES

UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF JUNE 30, 1998

<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
----------------- ------------------------------
SM&A DSA ADJUSTMENTS NOTES COMBINED
------- ------- ----------- ----- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS

Current assets:
Cash and cash equivalents................................ $16,217 $ 3,322 $(14,075) (a) $ 63,990
60,975 (b)
(2,449) (c)
Accounts receivable, net allowance for doubtful
accounts.............................................. 9,636 7,462 -- 17,098
Costs and estimated earnings in excess of billings on
contracts in progress................................. 2,011 1,494 -- 3,505
Inventory................................................ 198 -- -- 198
Advances to employees.................................... -- -- -- --
Prepaid expenses and other current assets................ 756 319 -- 1,075
------- ------- -------- --------
Total current assets............................. 28,818 12,597 44,451 85,866
Property and equipment, net................................ 1,346 1,231 -- 2,577
Other assets............................................... 822 1,989 -- 2,811
Notes receivable, officers................................. 1,124 -- -- 1,124
Costs in excess of net assets of business acquired, net.... 13,859 -- 21,459 (a) 35,318
------- ------- -------- --------
Total assets..................................... $45,969 $15,817 $ 65,910 $127,696
======= ======= ======== ========

LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................... $ 1,065 $ 710 $ -- $ 1,775
Current portion of long-term debt........................ 11 -- -- 11
Accrued salaries, wages, and payroll taxes............... 4,332 3,315 -- 7,647
Accrued bonus............................................ 815 -- -- 815
Income taxes payable..................................... 841 -- -- 841
Other liabilities........................................ 31 391 250 (d) 672
------- ------- -------- --------
Total current liabilities........................ 7,095 4,416 250 11,761
Deferred rents............................................. 52 242 -- 294
Deferred tax liability..................................... 161 3,896 -- 4,057
Other deferreds............................................ 492 -- -- 492
Long-term debt, excluding current portion.................. 534 22 -- 556
------- ------- -------- --------
Total liabilities................................ 8,334 8,576 250 17,160
Shareholders' equity:
Common stock, no par value............................... 158 1 7 (a) 190
(1) (e)
25 (b)
Additional paid-in capital............................... 39,953 -- 14,368 (a) 112,822
60,950 (b)
(2,449) (c)
Retained earnings (accumulated deficit).................. (2,476) 7,240 (7,240) (e) (2,476)
------- ------- -------- --------
Total shareholders' equity....................... 37,635 7,241 65,660 110,536
------- ------- -------- --------
Total liabilities and shareholders' equity....... $45,969 $15,817 $ 65,910 $127,696
======= ======= ======== ========
</TABLE>

See accompanying Notes to Unaudited Pro Forma Combined Balance Sheet.
19
<PAGE> 21

NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF JUNE 30, 1998

The unaudited pro forma combined balance sheet for SM&A as of June 30, 1998
has been prepared to reflect the acquisition of the net assets of DSA under the
purchase method of accounting. The purchase price has been allocated to the net
assets purchased based upon the book value, which approximates the estimated
fair values, on the date of the acquisition. The Company is currently in the
process of valuing the assets acquired. The preliminary allocation of the
purchase price to the net assets acquired follows:

<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Stock consideration............................ $14,375(a)
Cash........................................... 14,075(a)
Acquisition expenses........................... 250(d)
-------
Total consideration.................. 28,700
Less book value of net assets acquired......... 7,241
-------
Estimated goodwill................... $21,459(a)
=======
</TABLE>

- ---------------
(a) To record the acquisition of DSA for an aggregate purchase price of
approximately $28.5 million, subject to adjustment. The purchase price will
be in the form of (a) cash of approximately $14.1 million and (b) 714,839
shares of SM&A common stock, valued as of July 21, 1998 based on an average
market price (20-day trailing price of $20.11). The purchase will result in
$21.5 million in goodwill based on total consideration costs and book value
of DSA assets and liabilities at June 30, 1998. The preliminary allocation
of the purchase price to net assets acquired could change.

(b) To effect the sale by the Company of 2,500,000 shares of Common Stock
offered hereby and the receipt of the estimated net proceeds therefrom. See
"Use of Proceeds."

(d) To reflect $250,000 of estimated liability incurred by SM&A associated with
professional services (legal and accounting) rendered in connection with the
acquisition of DSA.

(e) To eliminate all DSA shareholders' equity balances as of June 30, 1998.

20
<PAGE> 22

SM&A CORPORATION AND SUBSIDIARIES

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997

<TABLE>
<CAPTION>
SM&A SAC/DSA
PRO FORMA SM&A PRO FORMA
SM&A ADJUSTMENTS NOTES PRO FORMA SAC DSA ADJUSTMENTS NOTES COMBINED
------- ----------- ----- --------- ------- ------- ----------- ----- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues..................... $36,962 $ -- $36,962 $26,816 $37,742 $ -- $101,520
Cost of revenues................. 20,529 -- 20,529 18,556 31,457 (4,934) (a) 65,608
------- ------- ------- ------- ------- ------- --------
Gross profit................. 16,433 16,433 8,260 6,285 4,934 35,912
Selling, general and
administrative expenses........ 6,927 1,007 (b) 7,934 7,786 4,173 1,134 (c) 25,961
4,934 (a)
------- ------- ------- ------- ------- ------- --------
Operating income............. 9,506 (1,007) 8,499 474 2,112 (1,134) 9,951
Other (income) expense:
Interest expense............... 505 -- 505 210 10 -- 725
Other (income) expense, net.... 37 -- 37 266 (124) -- 179
------- ------- ------- ------- ------- ------- --------
Earnings (loss) before income
taxes...................... 8,964 (1,007) 7,957 (2) 2,226 (1,134) 9,047
Income tax expense............... 147 3,036 (d) 3,183 259 915 -- 4,357
------- ------- ------- ------- ------- ------- --------
Net earnings (loss).......... $ 8,817 $(4,043) $ 4,774 $ (261) $ 1,311 $(1,134) $ 4,690
======= ======= ======= ======= ======= ======= ========
Earnings per common share:
Basic.......................... $ 0.37 $ 0.30
======= ========
Diluted........................ $ 0.37 $ 0.30
======= ========
Weighted average common shares
used in computing share
amounts:
Basic.......................... 12,948 15,743
------- --------
Diluted........................ 12,948 15,861
------- --------
</TABLE>

See accompanying Notes to Unaudited Pro Forma Condensed Combined Statement of
Operations.
21
<PAGE> 23

SM&A CORPORATION AND SUBSIDIARIES

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997

<TABLE>
<CAPTION>
SM&A SAC/DSA
PRO FORMA SM&A PRO FORMA
SM&A ADJUSTMENTS NOTES PRO FORMA SAC DSA ADJUSTMENTS NOTES COMBINED
------- ----------- ----- --------- ------- ------- ----------- ----- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues..................... $15,773 $ -- $15,773 $12,346 $19,440 $ -- $47,559
Cost of revenues................. 8,657 -- 8,657 8,213 16,102 (2,343) (a) 30,629
------- ------- ------- ------- ------- ------- -------
Gross profit................. 7,116 7,116 4,133 3,338 2,343 16,930
Selling, general and
administrative
expenses....................... 2,763 562 (b) 3,325 3,483 1,829 567 (c) 11,547
2,343 (a)
------- ------- ------- ------- ------- ------- -------
Operating income............. 4,353 (562) 3,791 650 1,509 (567) 5,383
Other (income) expense:
Interest expense............... 248 -- 248 77 4 -- 329
Other (income) expense, net.... (198) -- (198) 303 (80) -- 25
------- ------- ------- ------- ------- ------- -------
Earnings (loss) before income
taxes...................... 4,303 (562) 3,741 270 1,585 (567) 5,029
Income tax expense............... 28 1,468 (d) 1,496 353 651 -- 2,500
------- ------- ------- ------- ------- ------- -------
Net earnings (loss).......... $ 4,275 $(2,030) $ 2,245 $ (83) $ 934 $ (567) $ 2,529
======= ======= ======= ======= ======= ======= =======
Earnings per common share:
Basic........................ $ 0.17 $ 0.16
======= =======
Diluted...................... $ 0.17 $ 0.16
======= =======
Weighted average common shares
used in computing share
amounts:
Basic........................ 12,948 15,743
------- -------
Diluted...................... 12,948 15,861
------- -------
</TABLE>

See accompanying Notes to Unaudited Pro Forma Condensed Combined Statement of
Operations.
22
<PAGE> 24

SM&A CORPORATION AND SUBSIDIARIES

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998

<TABLE>
<CAPTION>
SAC SAC/DSA
JANUARY 1, 1998- PRO FORMA
SM&A MAY 18, 1998 DSA ADJUSTMENTS NOTES COMBINED
------- ---------------- ------- ----------- ----- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Net revenues............................. $24,121 $11,877 $17,378 $ -- $53,376
Cost of revenues......................... 13,499 8,655 14,655 (2,738) (a) 34,071
------- ------- ------- ------- -------
Gross profit........................ 10,622 3,222 2,723 2,738 19,305
Selling, general and administrative
expenses............................... 4,637 3,338 2,377 567 (c) 13,657
2,738 (a)
------- ------- ------- ------- -------
Operating income.................... 5,985 (116) 346 (567) 5,648
Other (income) expense:
Interest expense....................... 66 89 23 -- 178
Other (income) expense, net............ (1,220) 90 (44) 352 (e) (822)
------- ------- ------- ------- -------
Earnings (loss) before income
taxes............................. 7,139 (295) 367 (919) 6,292
Income tax expense (benefit)............. 2,936 (115) 116 (141) (e) 2,796
------- ------- ------- ------- -------
Net earnings (loss)................. $ 4,203 $ (180) $ 251 $ (778) $ 3,496
======= ======= ======= ======= =======
Earnings per common share:
Basic.................................. $ 0.28 $ 0.22
======= =======
Diluted................................ $ 0.28 $ 0.21
======= =======
Weighted average common shares used in
computing share amounts:
Basic.................................. 14,825 16,210
======= =======
Diluted................................ 15,042 16,524
======= =======
</TABLE>

See accompanying Notes to Unaudited Pro Forma Condensed Combined Statement of
Operations.
23
<PAGE> 25

NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED STATEMENT OF OPERATIONS

Pursuant to Statement of Financial Accounting Standards No. 128, basic and
diluted earnings per share have been included. Basic earnings per share is
computed by dividing net income available to common stockholders by the
weighted-average number of common shares outstanding during the period. Shares
issued during the period and shares repurchased during the period are weighted
for the portion of the period that they are outstanding. For the combined pro
forma basic earnings per share figures, it is assumed that 12,900,000 shares of
SM&A common stock were outstanding since January 1, 1997 along with 819,743
shares issued in the SAC acquisition and 714,839 shares issued in the DSA
acquisition. The December 31, 1997 and June 30, 1997 combined pro forma basic
earnings per share figures also give effect to 1,261,000 shares issued in the
Company's IPO to provide the cash paid in the DSA acquisition. The June 30, 1998
combined pro forma basic earnings per share figures also include 2,100,000
shares issued in the Company's IPO, weighted from January 28, 1998 to June 30,
1998. Diluted earnings per share is consistent with that of basic earnings per
share while giving effect to all dilutive potential common shares that were
outstanding during the period. The dilutive effect of outstanding options issued
by the Company has been reflected in diluted earnings per share by application
of the treasury stock method. The Company's December 31, 1997 and June 30, 1997
combined pro forma diluted earnings per share is calculated by arriving at basic
earnings per share and factoring in the dilutive effect of 175,925 SM&A options
granted to SAC employees as if they had been outstanding since January 1, 1997.
The Company's June 30, 1998 combined pro forma diluted earnings per share is
calculated by arriving at basic earnings per share and factoring in the dilutive
effect of 175,925 SM&A options granted to SAC employees as if they had been
outstanding since January 1, 1998 and weighing in the effect of 803,000 SM&A
options granted to SM&A directors and employees and outstanding as of June 30,
1998.

The unaudited pro forma combined statement of operations gives effect to
the following adjustments:

(a) To reclassify certain overhead expenses of DSA, which have historically been
included in cost of sales, to selling, general, and administrative expenses
in order to conform to SM&A's historic presentation of such expenses.

<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
YEAR ENDED ENDED ENDED
DECEMBER 31, 1997 JUNE 30, 1997 JUNE 30, 1998
----------------- ------------- -------------
<S> <C> <C> <C>
Reclassification of overhead expenses...... $4,934,000 $2,343,000 $2,738,000
========== ========== ==========
</TABLE>

(b) To record additional compensation for two principal executive officers of
SM&A which, combined with 1997 wages in the aggregate, total the maximum
salaries and bonuses payable of $2,700,000 under the 1998 Executive
Compensation Program.

<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1997 JUNE 30, 1997
----------------- -------------
<S> <C> <C> <C>
Pro forma additional compensation.......... $1,007,000 $ 562,000
========== ==========
</TABLE>

(c) To record goodwill amortization expense for the acquisitions of SAC and DSA
based on goodwill of $12,575,000 and $21,459,000, respectively, assuming a
30 year estimated useful life.

<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
YEAR ENDED ENDED ENDED
DECEMBER 31, 1997 JUNE 30, 1997 JUNE 30, 1998
----------------- ------------- -------------
<S> <C> <C> <C>
Pro forma amortization expense............. $1,134,000 $ 567,000 $ 567,000
========== ========== ==========
</TABLE>

(d) To adjust the provision for income taxes to reflect federal and state income
taxes for the Company as if it had been taxed as a C corporation rather than
an S corporation. The adjustment reflects a 40% combined federal and state
income tax rate on the pro forma SM&A earnings before income taxes.

<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1997 JUNE 30, 1997
----------------- -------------
<S> <C> <C> <C>
Pro forma income tax expenses.............. $3,036,000 $1,468,000
========== ==========
</TABLE>

(e) To record a reduction in interest income for the $14.1 million in cash to be
paid in connection with the acquisition of DSA.

24
<PAGE> 26

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

OVERVIEW

The Company derives most of its revenues from professional service
activities. The majority of these activities are provided under "time and
expenses" billing arrangements, and revenues are recorded as work is performed.
Net revenues are directly related to the total number of hours billed to clients
and the associated hourly billing rates. The Company has several labor
classifications at various billing rates, depending on the level of expertise
needed by the client, and charges its clients at rates consistent with these
labor classifications. The majority of the billable labor is performed at client
locations. For proposal management engagements, net revenues are also derived
from success fees offered to clients as a pricing option. The Company offers to
discount labor rates from 5% to 15% on proposal management engagements in return
for a success fee which is billed at a multiple of two to three times the
discounted amount. This success fee is billable by the Company when a contract
is won by the client. As a result of the Acquisitions, a greater percentage of
the Company's revenues will be derived from high-end contract support services.
Net revenues from contract support services engagements may include award fees,
which are determined at the completion of the specific contract. Award fees are
negotiated by the Company in the original contract support services bid and are
generally from 10% to 12% of the contract value. Revenues from success fees or
award fees are recognized by the Company only upon the attainment of the
specified incentive criteria or award fee determination. Because of the
Acquisitions, the percentage of the Company's revenues derived from contracts
directly with the U.S. Government have increased. Contracts in which the Company
works directly for the U.S. Government generally must comply with Federal
Acquisition Regulations, which impose certain limits on profitability and audit
requirements. As the Company integrates the Acquisitions, it intends to migrate
toward more commercially-oriented contracts.

Cost of revenues consists primarily of direct labor, incentives, travel and
lodging expenses and other direct costs related to consulting services rendered
by the Company. The Company's direct labor employees are generally paid based
upon total hours billed to the clients. Direct labor employees work
predominately at the client's facilities, and actual travel and lodging expenses
incurred are paid by the client. The number of direct labor employees assigned
to specific projects will vary according to the size, complexity, duration and
demands of the project. Project terminations, completions and scheduling delays
may result in periods when direct labor employees are not fully utilized.
However, lower utilization generally results in minimal downward pressure on
margins because: (i) proposal management employees are paid only a nominal
bi-weekly salary and are compensated primarily on an hourly basis and (ii)
contract support services personnel can be placed on other general operations
support functions, many of which are fully reimbursable by the U.S. Government
as part of the overhead rates approved annually. Cost of revenues also includes
incentive compensation paid to vice presidents of SM&A. Historically, these
incentives have been based on 1.4% of revenues and paid to the respective vice
presidents after amounts billed to clients were collected.

Selling, general and administrative ("SG&A") expenses consist primarily of
executive compensation, administrative labor and incentives, marketing expenses,
bid and proposal ("B&P") and independent research and development ("IR&D")
costs, facility expenses and other general overhead expenses. The B&P costs are
those costs associated with the preparation and submission of proposals for new
projects. The IR&D expenses include costs for the development of new products or
ideas. As an S corporation the Company distributed the majority of its net
income to shareholders each year as bonus compensation. This bonus compensation
was in addition to regular salaries and incentives. From 1991 through 1996,
these amounts were distributed as wages, and were included in SG&A expenses. In
1997, the Company instituted quarterly dividend payments to all shareholders of
record, replacing this bonus compensation. In 1997, the Company distributed the
majority of its net income to shareholders as dividends. This change was made
partially due to the investment by non-employee shareholders to ensure that
dividends would be equitably distributed to both employee and non-employee
shareholders.

25
<PAGE> 27

Historically, executive compensation expenses consisted of salaries,
incentive bonuses and discretionary bonuses paid to the three senior executive
shareholders. Paula K. Myers, one of the senior executive shareholders, resigned
in October 1997. The Company's historical levels of executive compensation were
related primarily to the Company's status as an S Corporation and period to
period increases in executive compensation expense were related primarily to the
Company's period to period earnings growth. Total compensation paid to the three
senior executive shareholders was $4.6 million, $5.2 million and $1.7 million in
1995, 1996 and 1997, respectively. In November 1997, the Company adopted an
Executive Compensation Program, which provides maximum annual compensation in an
aggregate amount of approximately $2.7 million for the two remaining senior
executive shareholders, comprised of base salary and bonus amounts to be awarded
based on the attainment of certain financial performance criteria.

As the Company elected to be taxed as an S corporation until its IPO,
substantially all taxes and benefits from income, losses and tax credits have
flowed through the Company to its shareholders for federal income and state
franchise tax reporting purposes. The Company was also taxed as an S corporation
in California at the appropriate statutory tax rate.

RESULTS OF OPERATIONS

The following table sets forth supplemental pro forma operating results for
all periods indicated except the six months ended June 30, 1998, which are
historical results of operations. Pro forma amounts reflect adjustments for (i)
the elimination of salaries and bonuses paid to the three principal executive
officers (which have historically been included in SG&A expenses) in excess of
or less than $2.7 million ($675,000 per quarter) in the aggregate (which amount
is equal to the maximum salaries and bonuses payable for 1998 under the
Executive Compensation Program), and (ii) provisions for federal and state
income taxes as if the Company had been taxed as a C corporation at an assumed
effective income tax rate of approximately 40%. The pro forma adjustment in
clause (i) above is made to provide a more meaningful comparison of the
Company's SG&A expenses by recasting historical financials to be consistent with
current levels of executive compensation.

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------- -----------------
1995 1996 1997 1997 1998
------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net revenues................................... $20,777 $25,699 $36,962 $15,773 $24,121
Cost of revenues............................... 12,313 14,512 20,529 8,657 13,499
------- ------- ------- ------- -------
Gross profit................................... 8,464 11,187 16,433 7,116 10,622
Selling, general and administrative expenses... 5,851 8,274 7,934 3,325 4,637
Operating income............................... 2,613 2,913 8,499 3,791 5,985
Other income (expense)......................... 7 136 (542) (50) 1,154
------- ------- ------- ------- -------
Earnings before income taxes................... 2,620 3,049 7,957 3,741 7,139
Income tax expense............................. 1,048 1,219 3,183 1,496 2,936
------- ------- ------- ------- -------
Net earnings................................... $ 1,572 $ 1,830 $ 4,774 $ 2,245 $ 4,203
======= ======= ======= ======= =======
</TABLE>

26
<PAGE> 28

The following table sets forth certain supplemental pro forma operating
results as a percentage of net revenues for 1995, 1996 and 1997 and the six
months ended June 30, 1997 and certain historical operating results as a
percentage of net revenues for the six months ended June 30, 1998.

<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------- --------------
1995 1996 1997 1997 1998
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net revenues................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues............................... 59.3 56.5 55.5 54.9 56.0
----- ----- ----- ----- -----
Gross profit................................... 40.7 43.5 44.5 45.1 44.0
Selling, general and administrative expenses... 28.1 32.2 21.5 21.1 19.2
----- ----- ----- ----- -----
Operating income............................... 12.6 11.3 23.0 24.0 24.8
Other income (expense)......................... 0.0 0.5 (1.5) (0.3) 4.8
----- ----- ----- ----- -----
Earnings before income taxes................... 12.6 11.8 21.5 23.7 29.6
Income tax expense............................. 5.0 4.7 8.6 9.5 12.2
----- ----- ----- ----- -----
Net earnings................................... 7.6% 7.1% 12.9% 14.2% 17.4%
===== ===== ===== ===== =====
</TABLE>

SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997

Net revenues. Net revenues for the six months ended June 30, 1998 were
$24.1 million compared to $15.8 million for the six months ended June 30, 1997,
an increase of $8.3 million or 52.5%. Net revenues from proposal management
services were $17.1 million compared to $12.8 million for the comparable six
months of the prior year, an increase of $4.3 million or 33.6%. This increase
was the result of continued strong demand for the Company's proposal management
services from the Company's existing customers together with an increased
customer base. Net revenues from contract support services for the six months
ended June 30, 1998 were $7.0 million compared to $3.0 million for the same
period in 1997, an increase of $4.0 million or 133.3%. The increase in contract
support services revenue was due primarily to the acquisition of SAC in May
1998, which increased the Company's scope of services and customer base, as well
as increased marketing efforts during 1998 to include contract support
agreements with proposal management contracts.

Gross profit. Gross profit increased to $10.6 million for the six months
ended June 30, 1998, up from $7.1 million recorded for the same period in 1997,
an increase of $3.5 million or 49.3%. As a percentage of net revenues, gross
profit was 44.0% for the six months ended June 30, 1998, compared to 45.1% for
the six months ended June 30, 1997. This decrease as a percentage of net
revenues was primarily attributable to success fees earned in the first six
months of 1997 of $277,000, which earn a 100% margin. There were no success fees
earned in the first six months of 1998.

SG&A expenses. SG&A expenses for the six months ended June 30, 1998 were
$4.6 million compared to $3.3 million for the six months ended June 30, 1997, an
increase of $1.3 million, or 39.3%. SAC's SG&A expenses accounted for
approximately $0.9 million of this increase. As a percent of revenues, SG&A
expenses decreased to 19.2% for the six months ended June 30, 1998 compared to
21.1% for the same period in 1997.

Other income (expense). Other income for the six months ended June 30, 1998
was $1.2 million compared to an expense of $50,000 for the six months ended June
30, 1997. This increase in income was primarily attributable to a gain
recognized on the sale of the Commander aircraft at market value, and interest
income of $400,000 earned during the first six months of 1998 on proceeds from
the Company's initial public offering in January of 1998.

Net earnings. Net earnings were $4.2 million for the six months ended June
30, 1998 compared to $2.2 million for the three months ended June 30, 1997, an
increase of $2.0 million or 90.9%.

YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996

Net revenues. Net revenues were $37.0 million for 1997 compared to $25.7
million for 1996, an increase of $11.3 million or 44.0%. Net revenues from
proposal management services were $22.1 million for 1997

27
<PAGE> 29

compared to $14.7 million for the prior year, an increase of $7.4 million or
50.3%. This increase was attributable to an increase in the Company's customer
base and the number of proposals managed as a result of increased marketing
efforts by the Company. Net revenues from proposal development centers were $7.1
million for 1997 compared to $7.5 million for the prior year, a decrease of
$400,000 or 5.3%. This decrease was attributable to a transfer of certain
proposal development centers activities to the proposal management segment by
two major clients, and reduced proposal development centers expenditures by
another major client to focus on contract support for contracts already won. Net
revenues from contract support services were $7.8 million for 1997 compared to
$3.5 million for the prior year, an increase of $4.3 million or 122.9%. This
increase was due primarily to the expanding number of clients utilizing the
Company's contract support services in 1997.

Gross profit. Gross profit was $16.4 million for 1997 compared to $11.2
million for 1996, an increase of $5.2 million or 46.4%. As a percentage of net
revenues, gross profit increased to 44.5% for 1997 from 43.5% for the prior
year. The increase in gross profit as a percentage of net revenues was primarily
attributable to more favorable labor margins realized on average from the new
employees hired by the Company throughout 1997, and reduced travel costs as a
percentage of net revenues.

SG&A expenses. SG&A expenses were $7.9 million for 1997 compared to $8.3
million for 1996, a decrease of $400,000 or 4.8%. This decrease was primarily
attributable to reduced aircraft expenses in 1997 compared to 1996. The Company
purchased a Hawker aircraft in 1996 for use by the Company and to be chartered
to non-affiliated entities. Due to the investment by non-employee shareholders
in 1996 and the limited use by the Company, the aircraft was sold to an
affiliate of the Company's principal shareholder at market value. This sale
resulted in a gain of $137,000. As a percentage of net revenues, SG&A expenses
decreased to 21.5% for 1997, from 32.2% for the prior year.

Operating income. Operating income was $8.5 million for 1997 compared to
$2.9 million for 1996, an increase of $5.6 million or 193.1%. As a percentage of
net revenues, operating income increased to 23.0% for 1997 from 11.3% the prior
year. The increase in operating income as a percentage of net revenues was due
primarily to increased revenues and the stabilization of fixed operating costs
in 1997.

Other income (expense). Other expense was $542,000 for 1997 compared to
income of $136,000 for 1996. This difference was primarily due to revenues
recognized in 1996 from aircraft charter services from the Company's Hawker
aircraft. As the Hawker aircraft was sold in January 1997, there were no such
revenues recognized in 1997.

Net earnings. Net earnings were $4.8 million for 1997 compared to $1.8
million for 1996, an increase of $3.0 million or 166.7%.

YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995

Net revenues. Net revenues were $25.7 million for 1996 compared to $20.8
million for 1995, an increase of $4.9 million or 23.6%. Net revenues from
proposal management services for 1996 were $14.7 million compared to $13.6
million for the prior year, an increase of $1.1 million or 8.1%. This increase
was attributable to the addition of several major proposals in 1996. Net
revenues from proposal development centers were $7.5 million for 1996 compared
to $4.2 million for the prior year, an increase of $3.3 million or 78.6%. This
increase was attributable to an increase in marketing efforts by the Company to
develop additional proposal development centers at customer sites. Net revenues
from contract support services for 1996 were $3.5 million compared to $3.0
million for the prior year, an increase of $500,000 or 16.7%.

Gross profit. Gross profit was $11.2 million for 1996 compared to $8.5
million for 1995, an increase of $2.7 million or 31.8%. As a percentage of net
revenues, gross profit increased to 43.5% for 1996 from 40.7% for the prior
year. The increase as a percentage of net revenues was primarily attributable to
additional success fees earned in 1996 of $873,000, compared to success fees
earned for the prior year of $348,000. Success fees carry a 100% margin.

SG&A expenses. SG&A expenses were $8.3 million for 1996 compared to $5.9
million for 1995, an increase of $2.4 million, or 40.7%. The increase was
primarily attributable to an increase in senior management staff to position the
Company for continued growth, expenses associated with the Hawker

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<PAGE> 30

aircraft, an increase in advertising expenses and increased expenses related to
additional employer sponsored benefit plans implemented in 1996. The Company
purchased the Hawker aircraft in 1996 for use by the Company and to be chartered
to non-affiliated entities. Due to the investment by non-employee shareholders
in 1996 and the limited use by the Company, the aircraft was sold to an
affiliate of the Company's principal shareholder at market value. This sale
resulted in a gain of $137,000. As a percentage of net revenues, SG&A expenses
increased to 32.2% for 1996, from 28.2% for the prior year.

Other income (expense). Other income was $136,000 for 1996 compared to
income of $7,000 for 1995. This increase in income was primarily due to revenues
recognized in 1996 from aircraft charter services from a Hawker aircraft
purchased by the Company in April 1996, and subsequently sold in January 1997.

Net earnings. Net earnings were $1.8 million for 1996 compared to $1.6
million for 1995, an increase of $200,000 or 12.5%.

QUARTERLY RESULTS

The following table sets forth supplemental pro forma and historical
unaudited selected quarterly financial information. This information has been
derived from unaudited financial statements which, in the opinion of management,
include all adjustments (consisting of normal recurring entries) necessary for a
fair presentation of such information. Results of operations for any one or more
quarters are not necessarily indicative of results for an entire year or the
results to be expected for any future period.

<TABLE>
<CAPTION>
PRO FORMA HISTORICAL
---------------------------------------------------------------------------- -------------------
JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1996 1996 1996 1997 1997 1997 1997 1998 1998
-------- --------- -------- -------- -------- --------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues................. $7,824 $4,092 $6,237 $7,229 $8,544 $10,866 $10,323 $10,659 $13,462
Cost of revenues............. 4,544 2,433 3,113 3,865 4,792 6,181 5,691 5,988 7,511
------ ------ ------ ------ ------ ------- ------- ------- -------
Gross profit................. 3,280 1,659 3,124 3,364 3,752 4,685 4,632 4,671 5,951
Selling, general and
administrative expenses.... 2,207 1,720 2,850 1,507 1,818 2,476 2,133 1,746 2,891
------ ------ ------ ------ ------ ------- ------- ------- -------
Operating income (loss)...... 1,073 (61) 274 1,857 1,934 2,209 2,499 2,925 3,060
Other income (expense):
Interest expense........... 109 149 145 124 124 130 127 70 (4)
Miscellaneous income
(expense)................ 149 188 195 174 24 31 (266) 139 1,081
------ ------ ------ ------ ------ ------- ------- ------- -------
Earnings (loss) before income
taxes...................... 1,113 (22) 324 1,907 1,834 2,110 2,106 2,994 4,145
Income tax expense
(benefit).................. 445 (9) 129 762 734 844 843 1,245 1,691
------ ------ ------ ------ ------ ------- ------- ------- -------
Net earnings (loss).......... $ 668 $ (13) $ 195 $1,145 $1,100 $ 1,266 $ 1,263 $ 1,749 $ 2,454
====== ====== ====== ====== ====== ======= ======= ======= =======
</TABLE>

The Company, prior to 1997, experienced some seasonality, with third
quarter earnings dropping slightly as clients reduced their bid and proposal
activity in anticipation of the release of the federal budget in October. The
impact of seasonality during the third quarter of 1997 was mitigated by the
Company's increase of non-seasonal contract support services revenue and the
increase in the number of proposal development centers ("PDCs") operated at
clients' sites. A PDC operates pursuant to an annual contract that generates
revenues throughout the course of the year as opposed to project specific
engagements for other proposal management or contract support services.

LIQUIDITY AND CAPITAL RESOURCES

The Company's primary source of liquidity has been cash flow from
operations and the timely collection of its accounts receivable. For the six
months ended June 30, 1998, the Company generated cash flows from operating
activities of $2.2 million, compared with $957,000 for the same period of the
prior year. This increase was mainly due to increased net revenues and improved
operating margins in the current period.

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<PAGE> 31

Net cash provided by investing activities was $766,000 for the six months
ended June 30, 1998, compared to a use of $864,000 for the same period of the
prior year. The Company's primary source of funds from investing activities
during six months ended June 30, 1998 was the January repayment to the Company
of the Steven and Paula Myers promissory note dated December 1996 for $679,000,
representing full payment of the original $632,000 note plus all accrued
interest.

Net cash provided by financing activities was $13.1 million in the six
months ended June 30, 1998, compared to a use of $1.8 million for the same
period of the prior year. Financing activities provided funds of $22.5 million
to the Company as a result of the IPO in the six months ended June 30, 1998. The
primary uses of cash for the six months ended June 30, 1998 were for the
repayment of $7.1 million of outstanding bank debt of the Company existing at
the time of the IPO, payment of $1.0 million for expenses directly related to
the IPO and repayment of $1.6 million of SAC bank indebtedness existing at the
time of the acquisition of SAC.

The Company believes that the funds generated by operations will continue
to provide adequate cash to fund its anticipated operating cash needs and
together with the proceeds of this offering will provide adequate cash for other
general corporate purposes, which may include future acquisitions of
complementary businesses, for at least the next twelve months. The Company has a
$4.0 million revolving line of credit facility with a bank. The interest rate on
the revolving line of credit agreement is the daily prime rate. At June 30,
1998, the Company had $3.5 million available under the credit facility. The
outstanding balance under the $4.0 million revolving line of credit will be
repaid and that facility will be terminated upon securing the new credit
facility. The Company has signed a financing proposal with a bank for a $25.0
million revolving credit facility to be secured by a first priority security
interest in substantially all of the assets of the Company.

INFLATION

The Company does not believe that inflation had a significant impact on the
Company's results of operations for the periods presented. On an ongoing basis,
the Company attempts to minimize any effects of inflation on its operating
results by controlling operating costs and, whenever possible, seeking to insure
that billing rates reflect increases in costs due to inflation.

YEAR 2000

The Company has performed a review of its internal systems to identify and
resolve the effect of Year 2000 software issued on the integrity and reliability
of the Company's financial and operational systems. Based on this review,
management believes that its internal systems are substantially compliant with
Year 2000 issues. In addition, the Company is also communicating with its
principal service providers and vendors to ensure Year 2000 issues will not have
an adverse impact on the Company. Based upon its internal revenue and
communications with its principal service providers and vendors to date, the
Company believes at this time that the costs of achieving Year 2000 compliance
will not have a material adverse impact on the Company's business, operations or
financial condition. However, if the Company and third parties upon which it
relies are unable to address this issue in a timely manner, it could result in a
material financial risk to the Company. In order to assure that this does not
occur, the Company plans to devote all resources required to resolve any
significant Year 2000 issues in a timely manner.

RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS

In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes
standards for the reporting and display of comprehensive income and its
components (revenues, expenses, gains and losses) in a full set of general-
purpose financial statements. SFAS 130 requires all items that are required to
be recognized under accounting standards as components of comprehensive income
to be reported in a financial statement that is displayed with the same
prominence as other financial statements. SFAS 130 does not require a specific
format for that financial statement but requires that an enterprise display an
amount representing total comprehensive income for the period covered by that
financial statement. SFAS 130 requires an enterprise to (a) classify items of

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<PAGE> 32

other comprehensive income by their nature in a financial statement and (b)
display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section of a
statement of financial position. SFAS 130 is effective for fiscal years
beginning after December 15, 1997. The adoption of SFAS 130 has not had an
impact on the Company's combined financial position or results of operations.

In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"). SFAS 131 establishes standards for public business enterprises to
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. This statement supersedes FASB Statement
No. 14, "Financial Reporting for Segments of a Business Enterprise," but retains
the requirement to report information about major customers. It amends FASB
Statement No. 94, "Consolidation of All Majority-Owned Subsidiaries," to remove
the special disclosure requirements for previously unconsolidated subsidiaries.
SFAS 131 requires, among other items, that a public business enterprise report a
measure of segment profit or loss, certain specific revenue and expense items,
and segment assets, information about the revenues derived from the enterprise's
products or services, and major customers. SFAS 131 also requires that the
enterprise report descriptive information about the way that the operating
segments were determined and the products and services provided by the operating
segments. SFAS 131 is effective for financial statements for periods beginning
after December 15, 1997. In the initial year of application, comparative
information for earlier years is to be restated. SFAS 131 need not be applied to
interim financial statements in the initial year of its application, but
comparative information for interim periods in the initial year of application
is to be reported in financial statements for interim periods in the second year
of application. Management has not determined whether the adoption of SFAS 131
will have a material impact on the Company's segment reporting.

In October 1997, the American Institute of Certified Public Accountants
("AICPA") released Statement of Position 97-2, "Software Revenue Recognition"
("SOP 97-2"). Among other things, SOP 97-2 eliminates the distinction between
significant and insignificant vendor obligations promulgated by SOP 91-1 and
requires each element of a software arrangement to meet certain criteria in
order to recognize revenue allocated to that element. Additionally, SOP 97-2
requires that total fees under an arrangement be allocated to each element in
the arrangement based upon vendor specific objective evidence, as defined.

As a result of certain issues raised in applying SOP 97-2, in March 1998,
the AICPA issued a Statement of Position ("SOP") which will delay for one year
the effective date of certain provisions of SOP 97-2 with respect to what
constitutes vendor-specific objective evidence of fair value of the delivered
software element in certain multiple-element arrangements that include service
elements entered into by entities that never sell the software elements
separately. The Company does not anticipate that the adoption of SOP 97-2 and
the subsequent SOP will have a material effect on the Company's results of
operations. However, the ultimate resolution of the implementation issues
referred to above could change the Company's expectation.

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 is effective for all fiscal
quarters or fiscal years beginning after June 15, 1999. SFAS 133 establishes
accounting and reporting standards for derivative instruments embedded in other
contracts and for hedging activities. Application of SFAS 133 is not expected to
have a material impact on the Company's consolidated financial position or
results of operations.

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<PAGE> 33

BUSINESS

INTRODUCTION

In 1998, SM&A acquired two high-end engineering and information technology
consulting firms: Space Applications Corporation and Decision-Science
Applications, Inc. SAC, founded in 1969, provides systems engineering,
scientific research, program management support and military support services to
military and civilian space programs worldwide, the intelligence community and
the defense sector. DSA, founded in 1977, provides systems engineering,
information systems development, scientific research and program management
support to the U.S. Government, principally the Department of Defense. These
acquisitions have significantly increased the scope and depth of the Company's
high-end contract support services, adding more than 400 systems engineering,
information technology and program integration experts and expanding SM&A's
domestic presence with offices in strategic locations near significant market
centers.

MARKET OPPORTUNITY

The Company believes that the competitive procurement process for both
government and commercial projects presents significant market opportunities for
proposal management and contract support services. Companies competing for large
government and commercial contracts often seek the assistance of an outside firm
of experts that can manage the proposal process and maximize the company's
prospects of winning the business. After a company wins a government or
commercial contract, it often requires contract support services including
high-level systems engineering and program integration in order to fulfill the
contract. Outside firms who have assisted in the preparation of the proposal are
uniquely qualified to provide such contract support services. Both of these
areas represent a significant and growing market opportunity.

The Company estimates the annual market for proposal management and
high-end contract support services is approximately $10 billion. In 1998, the
Department of Defense has estimated that it alone will award contracts totalling
approximately $80 billion for thousands of military and civilian projects.
Competitions for procurement of parts and subassemblies conducted by private
industry represent another significant portion of the market.

The Company believes that the market for proposal management and high-end
contract support services will continue to grow due to a number of factors:

- Corporate Outsourcing. There has been a trend among large corporations to
increase efficiencies in the procurement and performance of government
and commercial projects of all sizes. As a result, major companies are
"outsourcing" more services, instead of maintaining and expanding
internal

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<PAGE> 34

groups. Through outsourcing, companies receive the trained expertise
needed without incurring the overhead expenses associated with an
in-house team.

- Government Outsourcing. In response to a reduced federal budget and
demands for efficiencies in government operations, many projects that
were once performed in-house by the U.S. Government are now being
outsourced to private industry. The increase in the number of these
projects creates a corresponding opportunity to provide proposal
management and contract support services in connection with such
projects.

- Increase in Commercial Projects. U.S. industry is making major
investments to exploit new markets in commercial data and
telecommunications systems. For example, both Teledesic(SM) and Boeing's
Ellipso(TM) program are building multi-billion dollar satellite
commercial communication networks. This dramatic increase in programs
requiring expertise in proposal management, systems engineering and
program integration has created a growing market for the Company's
services.

- Increasing Importance of Proposal Management Services. The Company
believes that various factors in the aerospace, communications and
defense industries are contributing to an increased need to win projects.
Recent consolidation activity in these industries has resulted in fewer,
larger firms as well as an increased disparity between the resources of
such larger firms and the remaining "smaller" firms. The large
consolidated firms are more motivated to win programs to support their
operations and the smaller firms have an even greater need to access the
resources necessary to compete with larger firms for programs. The U.S.
Government has also conducted a number of "winner-take-all" competitions
in which the government chose a single winner from two large aerospace
suppliers that had traditionally jointly supplied a product. The winner
may receive a multi-billion dollar contract while the loser may be
required to shut down an existing production facility and re-assign or
lay off several thousand workers. Consequently, proposal management
services are becoming increasingly important to competitors of all sizes.

STRENGTHS AND DIFFERENTIATION

The Company believes that the following business strengths and
differentiating characteristics position it to capitalize on the significant
market opportunities presented by the changing environment of competitive
procurements and contract support services for both government and commercial
programs.

Proposal Management Expertise

The Company's proposal management expertise has resulted in a proposal win
rate of 89.3% of all dollars awarded on SM&A engagements since its inception in
1982. The Company's win rate greatly exceeds the results revealed by a recent
survey which indicated that a majority of the companies surveyed considered a
30% win rate as positive. Another recent survey ranked Lockheed Martin
Corporation as the aerospace and defense industries' most competitive company in
1996 with a 63% win rate. As a partner in this success, SM&A managed three of
the largest programs highlighted in Lockheed Martin Corporation's 1996 annual
report: VentureStar X-33 (the new space shuttle), Space Based Infra-red Sensor
System (SBIRS) and Joint Strike Fighter (JSF). In addition, the Company managed
Boeing's winning proposal for the National Missile Defense Program which
contract was awarded in May 1998. SM&A has recently begun employing its proposal
management expertise to obtain contract support engagements for its
subsidiaries. For example, SM&A recently assisted SAC in winning a National
Security Agency program. The Company's win rate is the result of the creation of
a successful, proprietary proposal management process and the implementation of
that process by SM&A's team of trained proposal management specialists. SM&A's
track record provides it with an advantage over its competitors in the
increasingly competitive contract procurement market where winning is critical
to the client's survival and growth.

Broad Array of Services

SM&A provides a full range of services to companies seeking to win and
execute large mission-critical government and commercial contracts. SM&A is
capable of providing both proposal management and
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<PAGE> 35

contract support services to its clients. With approximately 175 highly
qualified proposal management professionals, SM&A is the largest proposal
management firm in the U.S. In 1998, the Company significantly increased the
scope and depth of its expertise in contract support services and now has more
than 450 highly qualified information technology, engineering and scientific
professionals with extensive industry experience working on a variety of
programs. The Company addresses the needs of its clients in various aspects of
proposal management, systems engineering, software engineering and development,
and program integration. The Company's size provides it with the capability to
increase staffing or augment particular expertise on a project to respond to a
client's needs and immediately adjust the staffing when such needs change. In
addition, the Company's early involvement as a program manager provides
opportunities to leverage a successful proposal management assignment and obtain
related support services contracts.

Skills of SM&A's Personnel

The Company's employees are highly qualified and experienced professionals.
The typical SM&A employee has more than 20 years of applicable experience and a
majority possess advanced degrees in science or engineering fields. SM&A's
professionals also participate in continual education and training to be fully
conversant with the latest trends in the contract procurement process, including
electronic proposal preparation and submittal. Given the practical expertise of
the Company's professionals, the SM&A team is not only highly skilled in the
proposal management process, but well versed in the cultural nuances of the
procurement being pursued, whether government or commercial.

SM&A has the ability to staff a winning proposal team with leadership
personnel who are able to provide the contract support services needed to
transition a winning proposal into a successful program. The skills and breadth
of the Company's professionals mean that SM&A has enough highly skilled people
to both manage proposals and provide effective contract support services. This
is a competitive advantage for SM&A as it provides clients with high confidence
that once the program is won, the critical SM&A skills will remain available to
the client's program management team. These skills include top level systems
engineering (understanding the customer's requirements and converting them into
affordable products) and comprehensive program planning (organizing the work of
perhaps thousands of persons over many years to deliver products on time and
within budget).

Established Client Relationships

SM&A has forged a superior reputation among its clients in the proposal
management business. A majority of SM&A's revenue each year is generated through
repeat business from existing clients. Business relationships with the Company's
clients span various levels within client organizations, ranging from corporate
board members, chief executive officers and other senior management, to
operational managers. Clients have come to rely upon SM&A not only for its
impressive track record but also the quality of the services provided by
experienced professionals, the versatility of the Company in responding to
clients' needs, and the accessibility of the Company's senior executive
management. The Company's reputation and relationships with its clients have
enabled the Company not only to acquire repeat proposal development business but
to expand its services to include post-proposal contract support and other
high-end contract support engagements.

GROWTH STRATEGY

The Company's strategy is to expand its position as the largest proposal
management company and to continue to grow its expanding contract support
services. The key elements of the Company's growth strategy are to:

- Leverage Existing Relationships to Obtain Support Services
Contracts. SM&A's involvement in the proposal development phase of a
project provides opportunities to leverage a successful proposal
management assignment and obtain support services contracts to perform
systems engineering, management support and specialized services for such
projects. The Company is ideally positioned as a result of its early
involvement in the planning process to extend its role beyond the
proposal

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<PAGE> 36

management stage into contract support assignments after the project is
won. Through its in-depth involvement in the project from its inception,
the Company offers knowledge-base continuity and close familiarity with
the proposal, the project and the client team. This approach has avoided
the traditional problem of a loss of focus and momentum by the client
after the proposal has been won. The Company's early efforts with this
strategy have resulted in 26 support service contracts won in the last 18
months. Conversely, the relationships arising out of the Company's
high-end contract support services have provided the Company with
additional opportunities for proposal management assignments.

- Build a Complementary Array of High-End Contract Support Services. The
Company intends to broaden its range of services through acquisitions and
internal growth to increase its opportunities to secure contract support
engagements. The Company's acquisition strategy includes efforts to
identify candidates with talented and highly skilled employees, quality
clients, opportunities to generate proposal management and high-end
contract support service engagements, and the potential to benefit from
integration with SM&A. Once acquired, the Company believes it will be
able to integrate the acquired business by (i) providing new employees
with equity incentives in SM&A; (ii) transitioning new personnel to
higher rate engagements developed through the Company's proposal
management expertise; (iii) training new employees on SM&A's proprietary
proposal management process in an effort to increase the win rate of the
acquired business; (iv) restructuring existing contracts for improvements
where possible; and (v) combining operations to reduce SG&A expenses. To
date the Company has completed two acquisitions. The Acquisitions have
added a significant number of professionals experienced in systems
engineering and analysis as well as software development. The Company
believes that the highly fragmented nature of the marketplace will
provide opportunities to pursue strategic acquisitions of management
consulting and systems engineering firms.

- Expand Core Proposal Management Business. The Company believes that it is
well-positioned to benefit from the increase in demand for proposal
management services due to increasing industry consolidation and
"winner-take-all" programs which drive the growing importance of winning
each new contract. To achieve these "must win" contracts, SM&A believes
that companies will be motivated to increase their use of the Company's
services. SM&A's 89.3% win rate and breadth of impressive staff
professionals facilitate the Company's acquisition of this "must win"
business.

- Pursue Opportunities in the Growing Market for Large Commercial
Programs. The Company's process, expertise and experience are well suited
to the growing sector of large commercial programs. These programs often
require both proposal management and contract support services. The
Company's proven methodology typically increases the probability of
winning and reduces the proposal costs of such commercial projects. In
addition, the Company's expertise is directly applicable to providing
systems engineering and program management support to such programs.
Examples include the Company's work for Boeing on the next-generation
expendable space booster and for Motorola on a telecommunications system.

SERVICES

Proposal Management

Proposal management involves assisting clients with the procurement of
government and commercial programs. The Company manages both large proposals
(more than $100 million) and smaller proposals (less than $100 million). In the
case of smaller proposals, the Company may manage a number of such proposals
over a period time through a PDC located at the client's site. For large
proposals, the Company is engaged on a project specific basis. The process
whereby SM&A manages a large proposal can be divided into three phases:
organization and strategy, proposal preparation, and post submittal.

Organization and Strategy. Once hired to manage a large proposal, SM&A
assembles a team of proposal specialists at the client's site--typically
deploying a proposal manager, volume leaders for each of the major proposal
volumes, specialists well versed in the new management processes required by the
government, and

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<PAGE> 37

production specialists expert in the new forms of electronic proposals often
required by a government acquisition agency. Each SM&A team manages a client
team, typically 50 to 200 engineers and managers, providing full time, hands-on
execution of the SM&A process from strategy formulation, through all phases of
proposal preparation and review, to the post-submittal answers to the
government's questions. The proposal process typically requires three to twelve
months of intensive activity at the client's site. The SM&A team assists the
client in the creation of a win strategy that leads to selection of
sub-contractors, an investment plan, a technical baseline, and a program
implementation plan. SM&A personnel, drawing on their strong technical and
program management experience, ensure that the distinctive technical, cost and
management advantages of the client's proposal are clearly described and easy to
evaluate.

Proposal Preparation. The SM&A team manages a process that starts with
analysis of the government's request for proposal and results in the creation of
a series of proposal documents, each following a proprietary SM&A template
developed over the past 15 years by SM&A. These templates guide the team in
developing the key "facts" that will win, which typically consist of the most
cost-effective technical solution to meet the government's needs and a low-risk
program plan that will deliver the product on time and within budget. Following
SM&A's page-by-page quality review, the proposal is submitted, and if required,
an oral presentation is made. SM&A creates the materials (charts, videos,
models) for the oral presentations, which are becoming more common. SM&A also
trains the presenters to clearly convey the needed information and to stick
rigorously to the presentation plan and schedule.

Post Submittal. After the proposal is submitted, the proposal team's
interaction with the U.S. Government is a critical part of the SM&A winning
process. Many teams submit their proposals and then key personnel are reassigned
on other projects. Conversely, in an SM&A-managed proposal, the core competence
is maintained to answer formal questions from the government, and prepare the
Best and Final Offer. Another area of SM&A action during the government's
proposal evaluation period is working with the client's team in preparation for
winning the award. Many proposals include a very aggressive start-up phase that
requires the delivery of significant products within the first 30 to 60 days
after the contract award. SM&A provides management support, program planners and
schedulers and systems engineers to assist the client's team to meet early
post-award commitments.

Proposal Development Centers. Another innovative SM&A response to its
clients' changing needs is the creation of Proposal Development Centers. In
contrast to the work done for large proposals in which a dedicated team is
specifically created for the proposal, PDCs are established for clients who
expect to produce a number of smaller proposals over a given period of time. The
Company believes installation of a PDC at a client site allows the Company to
realize a recurring annual income stream. Each PDC has an SM&A team permanently
located at a client's facility, managing the resources needed to produce 10 to
50 proposals per year. The number of SM&A employees located at a PDC ranges from
three to ten. As of June 30, 1998, SM&A was managing six PDCs at clients' sites.
Firms lacking the resources to have a dedicated PDC can employ the PDC
maintained at SM&A headquarters to provide an instantly available turnkey
proposal creation resource.

High-End Contract Support Services

Whether the contract support services are performed in connection with a
proposal won by SM&A or to support an independent project, the Company has
focused on three areas: (i) systems engineering, (ii) information technology,
and (iii) program integration.

Systems Engineering. The Company's systems engineering work helps its
clients to fully define the work that must be done to meet the program's
objectives. The first step is to formally define the top level program
objectives including mission requirements, annual and total budget, and the
schedule for each major program milestone and then to communicate them to each
engineering and management department. The systems engineers perform trade
studies and analyses to objectively evaluate the cost, schedule, risk and likely
performance of alternative solutions. The systems engineers then manage the top
level program requirements data base. As the program evolves from design through
development, test and production phases, they

36
<PAGE> 38

constantly evaluate the work of the program's design and test groups to be
certain that these top level requirements are being met.

Information Technology. The Company's information technology business is
focused on consulting, software development, systems integration and outsourcing
services. The business includes both federal government and commercial services
and commercial software. These efforts include commercial off-the-shelf
solutions to hardware/software needs and development of custom database
applications. A few specific activities are: (i) developing Windows-based
software for certain Hewlett Packard equipment; (ii) helping clients transfer
applications from the UNIX platform to the Microsoft Windows NT platform; (iii)
developing information systems to support long distance telecommunications
providers, including MCI Communications Corporation and Qwest Communications
International, Inc.; (iv) developing a software system for second tier telephone
companies to sort billing charges; (v) providing "Thin Client" solutions (the
Company is rated a Platinum solution provider by Citrix Systems, Inc.); and (vi)
creating software for simulation and training.

Program Integration. Concurrent with systems engineering are the Company's
program integration functions. This work is done to ensure that the program has
been meticulously planned and that the program team follows the plan. In many
aerospace procurements, the government insists that (i) the program plan be
submitted with the proposal, (ii) it become a binding contractual document upon
award, and (iii) there be significant financial incentives for meeting plan
milestones on time and financial penalties in case of failure to adhere to the
plan. The SM&A program integration effort is therefore critical to the financial
success of the client. The work has an initial phase in which the program to be
accomplished is defined in detail. This includes the detailed description of all
tasks to be done by all of the participants over the lifetime of the program
(usually involving work by thousands of individuals in many companies across the
nation), the scheduling of these tasks, the sizing of each task (how many person
hours and how much equipment is needed) and the definition of the
inter-relationship among the tasks (what task depends on what other task). This
information is maintained by the program integration team in an electronic
format easily accessible to the management team. After the definition work is
completed, the program integration staff focuses on the execution of the
program, in which the status of each task is constantly evaluated (and reported
to management, including the government project office), the likely attainment
of future milestones is predicted, and the program risks are constantly
reevaluated to allow proactive management decisions to mitigate risk.

The Company's recent acquisitions of SAC and DSA have added more than 400
systems engineering, information technology and program integration specialists
to SM&A's workforce, which has substantially expanded the Company's contract
support service capabilities.

CLIENTS

The Company provides its proposal management and contract support services
to numerous Fortune 100 clients including, among others, The Boeing Company
(including former McDonnell Douglas and Rockwell International Corporation),
Harris Corporation, Hewlett Packard Company, Hughes Electronics Corporation, ITT
Aerospace/Communications, Litton Industries, Inc., Lockheed Martin Corporation,
Loral Space & Communications, Ltd., MCI Communications Corporation, Motorola,
Inc. and Raytheon Company. The Company also provides contract support services
to the U.S. Air Force, U.S. Navy, U.S. Army, NASA and other government agencies.

Lockheed Martin Corporation, Litton Industries, Inc., Motorola, Inc.,
Raytheon Company, The Boeing Company and Hughes Electronics Corporation
accounted for approximately 22.5%, 14.6%, 12.9%, 10.9%, 10.3%, and 10.3%,
respectively, of the Company's revenue in 1997 and 18.0%, 8.7%, 11.9%, 14.6%,
10.7% and 5.7%, respectively of the Company's revenues for the six months ended
June 30, 1998. On a pro forma basis giving effect to the Acquisitions, various
branches and agencies of the U.S. Government together would have accounted for
an aggregate 20.0% of the Company's revenues for the six months ended June 30,
1998. These revenues are a result of various engagements by several business
units of these companies. Although such business units are affiliated with the
parent entities, the Company's experience has indicated that the particular
engagements are subject to the discretion of each individual business unit.

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<PAGE> 39

BACKLOG

The Company's backlog represents an estimate of the remaining future
revenues from existing signed contracts and letters of intent concerning
contracts that have been awarded but in some cases not yet signed. The backlog
estimates include revenues expected under the current terms of executed
contracts and revenues from contracts in which the scope and duration of the
services required are not definite but estimable.

At June 30, 1998 the Company's backlog was approximately $116.8 million, of
which $51.0 million is scheduled for 1998. The Company's engagements are
terminable at will and no assurance can be given that the Company will receive
any of the fees associated with the backlog described above.

SALES AND MARKETING

The Company markets its services directly to senior executives of major
corporations. The Company employs a variety of business development and
marketing techniques to communicate directly with current and prospective
clients, including making on-site presentations, attending industry seminars
featuring presentations by SM&A personnel, and authoring articles and other
publications about the industry and the Company's methodologies and processes.

A significant portion of new business arises from prior client engagements.
Clients frequently expand the scope of engagements during delivery to add
complementary activities. Also, the Company's on-site presence affords it the
opportunity to become aware of, and to help define, additional project
opportunities as they are identified by the client. The strong client
relationships arising out of many engagements facilitates the Company's ability
to market additional capabilities to its clients in the future. In addition, the
SM&A senior management team is actively involved in meeting with companies that
have not yet engaged SM&A and newly appointed senior managers in current SM&A
clients who might not be thoroughly knowledgeable of SM&A's previous assistance
to the client.

In the past four years, SM&A has also increased its marketing efforts
through participation in major industrial trade shows and paid advertising. SM&A
regularly runs full page ads in the national trade journals such as Aviation
Week, Space News and Defense News.

COMPETITION

Proposal Management

The market for proposal management services in the procurement of
government and commercial contracts for aerospace and defense is a niche market
with a number of competitors. The Company is the largest provider of such
services and principally competes with numerous smaller proposal management
companies in this highly specialized industry. The Company also competes with
some of its client's internal proposal development resources. A number of SM&A's
clients maintain internal business acquisition teams that are designed to handle
the procurement of government contracts, although the number of such in-house
departments has been decreasing in recent years.

The Company believes that the principal competitive factors in the market
for proposal management include reputation, the level of experience and skill of
staff professionals, industry expertise, quality of service, responsiveness, and
procurement success rate. The need to provide efficient and cost-effective
service is of even greater importance in PDCs where the cost of proposal
development is likely to be a larger percentage of the contract amount than with
a large program.

High-End Contract Support Services

The contract support services market is highly competitive and includes a
large number of highly capable contract support services firms in the United
States. For this reason, the focus of SM&A has been on providing contract
support services for programs which it has won together with its clients. This
significantly enhances the competitive position of the Company because the
contract support to be provided by SM&A is often included in the proposal that
was won. Upon the win, SM&A is awarded its contract and work begins thereafter.
Should there be additional opportunities for SM&A to contribute to the team, the
client often adds scope (and funds) to the SM&A contract. This permits the
growth of the SM&A role over the lifetime of the program--which often lasts many
years.

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<PAGE> 40

In the case of contract support services for projects in which the Company
did not provide proposal management services, the market is highly fragmented
and competitive. Many of the Company's competitors are larger and have greater
resources than the Company. See "Risk Factors--"Competition and Market
Penetration." The Company, however, has found increasing opportunities to work
with clients who have previously retained SM&A. The Company believes that the
principal competitive factors in the contract support services market include
program knowledge, rapidly deployable skilled personnel, responsiveness,
reputation and price.

EMPLOYEES

As of August 21, 1998, the Company had approximately 640 employees.
Approximately 90% are proposal and engineering professionals and 10% are
administrative personnel. The Company believes that its success depends
significantly upon attracting, retaining and motivating talented, innovative and
experienced professionals. For this reason, SM&A is comprised of highly
experienced program managers, engineers, skilled technicians, and computer
programmers, tested in some of the largest and most complex military, commercial
and government programs of the past 30 years. The typical SM&A employee has more
than 20 years of applicable experience and a majority of them possess advanced
degrees in science or engineering fields.

The Company has instituted a training and recruitment program to help
ensure retention of high quality personnel and to enable it to respond to
expanding customer needs. The performance of each SM&A employee is being
constantly evaluated both by the SM&A team with whom the employee is working and
by the client who has engaged SM&A. All clients know that SM&A executives are
always on call to discuss any and all personnel issues. SM&A has maintained the
highest standards of performance to ensure client satisfaction. The Company also
attracts and motivates its professional and administrative staff by offering
competitive packages of base and incentive compensation and benefits. An
indication of the effectiveness of the recruitment, hiring and training process
to pick the best people and to maintain their skills over the long term is that
the 89.3% win rate for SM&A-managed proposals is being accomplished by a
professional staff that is rapidly growing with only a 2.8% annual employee
turnover rate from January 1, 1995 through June 30, 1998 (exclusive of the
turnover rates experienced by SAC and DSA prior to the Acquisitions).

The Company's employees are not represented by any labor union and the
Company has never experienced a work stoppage. The Company believes that its
relations with its employees are good.

FACILITIES

The Company occupies its principal executive offices adjacent to the Orange
County (John Wayne) International Airport in Newport Beach, California. The
Company has approximately 19,500 square feet of total office space, divided into
approximately 3,900 square feet for the Company's executive management, 5,800
square feet for administration, 7,800 square feet for the in-house PDC, and
2,000 square feet is available for growth.

The Company's other primary offices include an approximately 20,000 square
foot facility in Vienna, Virginia, an approximately 59,000 square feet in
Arlington, Virginia, and an approximately 27,800 square foot facility in
Colorado Springs, Colorado. The leases for the Vienna and Arlington offices
expire on December 31, 1998 and the Company has signed a letter of intent to
lease an approximately 96,000 square foot facility in Merrifield, Virginia for
the purpose of replacing those offices. The Company maintains 16 additional
offices, each consisting of 12,000 square feet or less, throughout the United
States in Albuquerque, New Mexico, Arlington, Virginia, Colorado Springs,
Colorado, Denver, Colorado, Linthicum, Maryland, Largo, Maryland, Santa Ana,
California, Sierra Vista, Arizona, Rome, New York, San Antonio, Texas, Costa
Mesa, California, Las Vegas, Nevada and Phoenix, Arizona.

The Company leases all of its facilities, several of which maintain a top
secret clearance rating.

LEGAL PROCEEDINGS

The Company is involved in routine litigation incidental to the conduct of
its business. There are currently no material pending litigation proceedings to
which the Company is a party or to which any of its property is subject.

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<PAGE> 41

MANAGEMENT

DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES

The names, ages and positions held by the directors, executive officers and
certain key employees of the Company as of August 20, 1998 are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
<S> <C> <C>
Steven S. Myers........................... 52 President, Chief Executive Officer,
Chairman of the Board and Director
Kenneth W. Colbaugh....................... 45 Executive Vice President, Chief Operating
Officer and Director
Ronald A. Hunn............................ 50 Senior Vice President, Chief Financial
Officer and Secretary
Thomas F. Heinsheimer..................... 59 Senior Vice President, Chief Scientist
James F. Madewell......................... 65 Vice President, Mergers and Acquisitions
Ajaykumar K. Patel........................ 37 Vice President, Operations
Robert E. Casner.......................... 48 Vice President, Business Development
Thomas J. Amrhein......................... 58 President and General Manager of SAC
Guy A. Ackerson........................... 56 Chief Technical Officer of DSA
J. Christopher Lewis(1)(2)................ 42 Director
James R. Mellor(1)(2)..................... 68 Director
Malcolm R. Currie......................... 71 Director
</TABLE>

- ------------------------------
(1) Member of the Audit Committee.

(2) Member of the Compensation Committee.

All directors hold office until the next annual meeting of shareholders or
the election and qualification of their successors. Officers are elected
annually by the Board of Directors and serve at the discretion of the Board.

Steven S. Myers founded the Company in 1982 and has been the President,
Chief Executive Officer and Chairman of the Board of the Company since its
incorporation in 1985. Prior to forming SM&A, Mr. Myers was Vice President of
Marketing for Loral Data Systems and held several other key management positions
with Ball Aerospace Systems Division, Fairchild Space and Electronics Company,
and Watkins-Johnson Company. Mr. Myers holds a B.S. in mathematics from Stanford
University.

Kenneth W. Colbaugh, a director of the Company, has served in such capacity
and has been an Executive Vice President and Chief Operating Officer of the
Company since January 1990. Mr. Colbaugh previously held numerous management
positions with Lockheed Corporation, including Director of Program Management on
the Advanced Solid Rocket Motor Program. Mr. Colbaugh is a graduate of the
Lockheed Management Institute and Lockheed Advanced Management Institute. Mr.
Colbaugh holds a B.S. in business from San Jose State University.

Ronald A. Hunn has served as Chief Financial Officer of the Company since
September 1995, and since August 1997 has served as Secretary of the Company.
Mr. Hunn served as Vice President from September 1995 until July 1998 when he
became Senior Vice President of the Company. Mr. Hunn joined the Company in
April 1992 as its Controller and Chief Accounting Officer. Mr. Hunn's
professional career includes twenty four years of experience in all aspects of
accounting, information systems and financial management. From 1987 to 1991, Mr.
Hunn held a number of management positions with Xidex Magnetics, a producer of
rigid and flexible disc media, most recently as the Vice President and Corporate
Controller. Xidex was an independent public company until the August 1988
acquisition by Anacomp, Inc. From 1984 until 1987, Mr. Hunn served as the
Controller of Xebec Corporation, a publicly traded manufacturer of disc drive
controllers and memory storage subsystems. Mr. Hunn holds a B.A. in financial
accounting from National University.

Thomas F. Heinsheimer, Ph.D. has served as the Company's Senior Vice
President and Chief Scientist since joining the Company in 1989. Dr. Heinsheimer
began his career on Project Mercury at General

40
<PAGE> 42

Dynamics in 1960 and then at the Massachusetts Institute of Technology
Instrumentation Laboratory on Project Apollo. He has worked with Israel Aircraft
Industries, the French Space Administration and the Soviet (now Russian) Academy
of Sciences on a number of international scientific programs. He was a
participant in the planning and implementation of the Defense Support Program
while at the Aerospace Corporation, and served as Vice President for Space
Systems at Titan Systems Inc. He has designed, built and piloted experimental
balloon systems for scientific research that hold over 20 national and world
ballooning records. Dr. Heinsheimer holds a B.S.E.E. from the Massachusetts
Institute of Technology and a Ph.D. in atmospheric physics from the University
of Paris. He is a seven-term Councilman and former Mayor of Rolling Hills,
California.

James F. Madewell has served as the Company's Vice President--Mergers and
Acquisitions since July 1998. Mr. Madewell joined the Company in August 1997 as
its Vice President--Business Development. Mr. Madewell retired from Lockheed
Martin Corporation in July 1997 where he had served as Vice President--Business
Development for the Lockheed Martin Corporation Aeronautics Sector since 1995.
Prior to that, Mr. Madewell was appointed Vice President--Group Business
Strategy for Lockheed Aeronautical Systems Group in August, 1994. From 1992
until 1994, he held the position of Vice President and director of Advanced
Programs at the Lockheed Space Operations Company. He is a graduate of the
Lockheed Executive Institute and the Rockwell Executive Institute. Mr. Madewell
is a Registered Professional Engineer. Mr. Madewell holds a B.S.M.E. from the
University of Houston and an M.S. in engineering from the University of Alabama.

Ajaykumar K. Patel has served as the Company's Vice President--Operations
since July 1997. Mr. Patel joined the Company in January 1994 as Director of
Marketing for the Department of Energy and Environmental Services. Mr. Patel's
professional career includes over fifteen years of experience in systems
engineering, business development, finance and company operations in the
aerospace, environmental and software industries. Prior to joining the Company,
Mr. Patel served as Vice President and Director of Business Development for
Weiss Associates, an environmental engineering firm from January 1993 until
January 1994. Mr. Patel holds an M.B.A. in finance and strategic planning from
the University of Southern California and a B.S. in physics from The Johns
Hopkins University.

Robert E. Casner, Vice President-Business Development, joined the Company
in July 1998. Mr. Casner's professional career spans over 20 years in domestic
and international aerospace business, program management and proposal
development. From 1981 to 1998, Mr. Casner held various positions at Pratt &
Whitney Space Propulsion including Director, Business Development and Director
of the Russia/US Venture for the RD-180 Engine. Mr. Casner holds a B.S. in
chemistry from George Washington University.

Thomas J. Amrhein joined the Company in January 1995 and held the position
of Associate from January 1995 to January 1996 and Vice President from January
1996 to June 1998. After the acquisition of SAC, Mr. Amrhein was appointed
President and General Manager of SAC in June 1998. He has been responsible for
the Company's proposal management operations at various sites including Lockheed
Martin (Sunnyvale, California) and Boeing (Downey, California). Prior to joining
the Company, Mr. Amrhein served as Director of Business Development and Program
Manager at Lockheed Martin Electronics and Missiles from March 1990 until
January 1995.

Guy A. Ackerson is a co-founder of DSA and served as its Vice President
until 1984. Mr. Ackerson was appointed President of DSA in 1984 and Chief
Executive Officer in 1991 and held those positions until August 1998. Upon the
Company's acquisition of DSA in August, 1998, Mr. Ackerson was appointed as
DSA's Chief Technical Officer. Mr. Ackerson holds a Ph.D. in electrical
engineering from Purdue University.

J. Christopher Lewis was elected a director of the Company in September
1996. Since 1982, Mr. Lewis has been a general partner of Riordan, Lewis &
Haden, a Los Angeles based partnership which invests in management buy-out and
venture capital transactions. Mr. Lewis also serves as a director of California
Beach Restaurants, Inc., Tetra Tech, Inc., PIA Merchandising Services, Inc.,
Data Processing Resources Corporation and several private companies. Mr. Lewis
holds a B.A. in accounting and finance and an M.B.A. in finance from the
University of Southern California.

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<PAGE> 43

James R. Mellor was appointed a director of the Company in December 1997.
Mr. Mellor retired from the office of Chairman and Chief Executive Officer of
General Dynamics in May 1997; he continues to serve on the General Dynamics
Board of Directors and as a consultant to the Company. Mr. Mellor was elected
Chairman of General Dynamics in May 1994. He had served as President and Chief
Executive Officer since May 1993, and as President and Chief Operating Officer
since January 1991. He is presently on the Board of Directors of Aeromovel USA
Inc., Bergen Brunswig Corporation, Computer Sciences Corporation, General
Dynamics Corporation, IDT, Pinkerton Inc., Scripps Research Institute, U.S.
Surgical Corporation, and USEC, Inc. He is a member of the National Advisory
Committee of the University of Michigan, and is currently a Member of the United
States-Egypt President's Council, as well as several other professional and
social organizations. Mr. Mellor holds a B.S. in electrical engineering and in
mathematics and an M.S. from the University of Michigan.

Malcolm R. Currie was appointed a director of the Company in December 1997.
Mr. Currie serves as Chief Executive Officer of Currie Technologies, Inc. Mr.
Currie served as Chairman and Chief Executive Officer of Hughes Aircraft Company
from March 1988 until his retirement in July 1992. From January 1976 until March
1988, Mr. Currie served as President and Chief Executive Officer of Delco
Electronics. From 1973 until 1977 Mr. Currie served as Under Secretary of
Defense for Research and Engineering. He presently serves on the boards of
directors of Unocal Corporation, Investment Company of America, LSI Logic
Corporation, Regal One and Moltech Corp., and as Chairman of the Board of
Trustees of the University of Southern California. Mr. Currie holds a B.A. in
physics and a Ph.D. in engineering physics from the University of California at
Berkeley.

DIRECTOR COMPENSATION

The Company's nonemployee directors receive $1,000 for each board or
committee meeting attended and are reimbursed for out-of-pocket expenses
incurred in connection with attendance at board and committee meetings. In
January 1998, Mr. Currie, Mr. Mellor and Mr. Lewis were granted options to
purchase 30,000, 30,000 and 21,000 shares of Common Stock, respectively, at an
exercise price of $12 per share (the fair market value of the Company's Common
Stock on the date such options were granted).

BOARD COMMITTEES; COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Board of Directors has established an Audit Committee and a
Compensation Committee.

The Audit Committee, which consists of Messrs. Lewis and Mellor, reviews
the adequacy of internal controls and the results and scope of the audit and
other services provided by the Company's independent auditors. The Audit
Committee will meet periodically with management and the Company's independent
auditors.

The Compensation Committee, which consists of Messrs. Lewis and Mellor,
establishes salaries and other forms of compensation for officers and other
employees of the Company and will administer the Company's option plans. During
the years ended December 31, 1996 and 1997, the Company's Board of Directors
established levels of compensation for certain of the Company's executive
officers without the involvement of the Compensation Committee, as the
Compensation Committee had not yet been formed during those periods. Mr. Myers,
the Company's President, Chief Executive Officer, and Chairman of the Board,
Kenneth W. Colbaugh, the Company's Executive Vice President, Chief Operating
Officer and a director of the Company and Paula K. Myers, then serving as a Vice
President, Secretary and a director of the Company, participated in the
deliberations regarding executive compensation for 1996 and 1997. Mr. Myers, Mr.
Colbaugh and Mr. Lewis, a director of the Company, participated in the
deliberations regarding executive compensation for 1998.

In June, 1998 the Company sold its Turbo Commander Aircraft to Summit
Aviation, Inc. ("Summit"), a company wholly owned by Steven S. Myers, for
$880,000 represented by a note secured by a first priority security interest on
the aircraft. The note bears interest at the prime rate and is due and payable
in full no later than June 25, 1999. The terms of such sale were considered by
the Company's Board of Directors to be as favorable as would have been obtained
from an unaffiliated third party.

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<PAGE> 44

In November 1997, the Company entered into Indemnification Agreements with
all of its directors and executive officers, including Mr. Myers and Mr.
Colbaugh, providing for indemnification rights in certain circumstances. See
"Management--Indemnification of Officers and Directors." In November 1997, the
Company entered into Executive Employment Agreements with Mr. Myers and Mr.
Colbaugh. See "Management--Employment Agreements."

The terms of the Company's bank facility provide for the maintenance of
certain financial covenants. The Company obtained a waiver from the bank from
compliance with certain of the covenants, the principal covenant being the
Company's tangible net worth requirement at December 31, 1997. The waiver was
conditioned upon the Company completing an initial public offering. If the
Company did not complete an initial public offering, the Company's principal
shareholder had agreed to provide an amount to the Company, in the form of
subordinated debt, to enable the Company to comply with the covenants.

In October 1997, Paula K. Myers resigned from all her positions with the
Company, including those as a director and Secretary. Mrs. Myers was paid
compensation from the Company totalling $550,000, $150,000 and $81,000,
respectively, during the Company's fiscal years ended December 31, 1995, 1996
and 1997.

In January 1997, the Company sold its Hawker 800 aircraft (the "Aircraft")
to Summit, a company wholly owned by Steven S. Myers, for a sales price of $5.6
million. Concurrent with the sale, Summit assumed $5.6 million of the Company's
long-term notes payable bearing interest rates of 7.30% and 10.07% per annum,
and Summit paid the Company $5,000 in cash. The Aircraft was purchased by the
Company in April 1996 for $5.8 million. The sales price of the Aircraft was
based on a determination of its fair market value by an independent source and
approved by the Company's Board of Directors. The Company charters the Aircraft
from time to time as required in connection with Company business through an
independent air service chartering company. During the period from the
Aircraft's purchase by Summit through December 31, 1997, the Company incurred
$444,000 in charter fees for the Aircraft. The terms of use and charter rates
paid by the Company concerning the Aircraft are established by the air service
chartering company and are considered by the Company to be competitive with
charter rates and on terms as favorable as those from unaffiliated third parties
for similar aircraft.

In September 1997, the Company made a short term advance of $700,000 to
Steven S. Myers to cover a tax liability which Mr. Myers was required to pay.
Mr. Myers repaid the advance in full on October 1, 1997 plus interest accrued at
7.30% per annum. In December 1996, Steven S. Myers borrowed $632,000 from the
Company under the terms of a promissory note (the "Myers Note"). The Myers Note
provided for interest at the rate of 7.30% per annum and all amounts thereunder
were paid in January 1998.

In December 1996, the Company borrowed $667,000 from Steven and Paula Myers
under the terms of a promissory note (the "Company Note"). The Company Note
provided for interest at the rate of 7.30% per annum and all amounts thereunder
were due and payable on January 31, 1998. In January 1997, in connection with
the sale of the Aircraft to Summit, all obligations under the Company Note were
assumed by Summit.

In May 1995, Steven and Paula Myers guaranteed the Company's obligations
under a promissory note in the original principal amount of $560,000, which was
incurred to finance the acquisition of the Company's Rockwell Commander
Aircraft. The note provided for interest at an annual rate of 10.74% and was
secured by the aircraft. The note was paid in full in February 1998.

During 1994, the Company wrote off $1.7 million of receivables from CKC, an
affiliate of the Company. This write-off represented the Company's termination
of its affiliation with CKC and the amount written off represented all amounts
previously due from CKC. This amount consists of rent, labor charges and
unsecured advances to CKC. Steven S. Myers, the Company's President, Chief
Executive Officer and Chairman of the Board was a controlling shareholder,
director and officer, and Paula K. Myers and Kenneth W. Colbaugh were each
directors and shareholders of both CKC and the Company during the transactions
and periods described above.

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<PAGE> 45

In January 1993, Kenneth W. Colbaugh purchased Common Stock from the
Company as part of the Company's employee equity ownership program. In
connection with the purchase of shares by Mr. Colbaugh, he became indebted to
the Company under the terms of a Note Secured by Stock Pledge Agreement in the
original principal amount of $316,000 (the "Colbaugh Note"). The Colbaugh Note
provided for interest at a rate of 7.30% per annum, periodic payments out of
Company income distributions to Mr. Colbaugh, and that all amounts due
thereunder were due and payable in January 2003. In January 1997, Mr. Colbaugh
paid in full all amounts owing under the Colbaugh Note.

In September 1996, J. Christopher Lewis, a director of the Company and a
member of the Compensation Committee, and certain affiliates, purchased an
aggregate of 1,702,444 shares of the Company's Common Stock from other
shareholders of the Company for an aggregate purchase price of $5.0 million, or
$2.94 per share. Mr. Lewis was not affiliated with the Company at the time of
the purchase and the price was determined in an arms length negotiation.
Following the consummation of the stock acquisition, Mr. Lewis became a director
of the Company. Mr. Lewis is the sole trustee of a trust which holds shares in
the Company. See "Certain Transactions."

The Company has agreed to pay the expenses of the Selling Shareholders in
connection with the offering, other than Underwriting Discounts and Commissions.

EXECUTIVE COMPENSATION

The following table sets forth certain summary information concerning
compensation paid or accrued for services rendered to the Company in all
capacities during the year ended December 31, 1997 to the Company's Chief
Executive Officer and to each of the three other most highly compensated
executive officers whose total salary and bonus for 1997 exceeded $100,000 (the
"Named Executive Officers").

<TABLE>
<CAPTION>
ANNUAL COMPENSATION(1)
FISCAL ----------------------
YEAR SALARY BONUS
------ --------- ---------
<S> <C> <C> <C>
Steven S. Myers............................................. 1997 $559,000 $ --
President and Chief Executive Officer
Kenneth W. Colbaugh......................................... 1997 360,000 692,551
Executive Vice President and Chief Operating Officer
Thomas F. Heinsheimer....................................... 1997 120,000 339,747
Senior Vice President
Ronald A. Hunn.............................................. 1997 160,000 53,861
Vice President, Chief Financial Officer and Secretary
Paula K. Myers(2)........................................... 1997 81,000 --
</TABLE>

- ------------------------------
(1) Excludes perquisites and other personal benefits that, in the aggregate, do
not exceed the lesser of either $50,000 or 10% of the total annual salary
and bonus reported for the Named Executive Officer.

(2) Paula K. Myers resigned from her positions as Senior Vice President and
Secretary of the Company in October 1997. Ronald A. Hunn was appointed
Secretary of the Company upon the resignation of Paula K. Myers.

STOCK OPTIONS

The Company did not grant stock options or stock appreciation rights during
the year ended December 31, 1997. As of August 20, 1998, the Company had
outstanding options to purchase 804,500 shares of Common Stock granted to
certain employees and directors during 1998 pursuant to the Company's 1997 Stock
Option Plan. In May 1998, the Company granted the Acquisition Options to
purchase an aggregate of 175,925 shares of Common Stock in connection with the
acquisition of SAC. See "Shares Eligible for Future Sale--Stock Options."

1997 STOCK OPTION PLAN

The Company's 1997 Stock Option Plan (the "1997 Stock Option Plan") is
administered by the Compensation Committee of the Board of Directors, which has
the discretion and authority, consistent with the provisions of the 1997 Stock
Option Plan, to determine which eligible participants will receive options, the

44
<PAGE> 46

time when options will be granted, the terms of options granted and the number
of shares which will be subject to options.

The Company's 1997 Stock Option Plan provides for the granting of
"incentive stock options," within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended ("Incentive Stock Options") and nonstatutory
options. Under the 1997 Stock Option Plan, options covering an aggregate of
1,500,000 shares of the Company's Common Stock may be granted, in each case to
directors, employees and consultants of the Company, except that Incentive Stock
Options may not be granted to nonemployee directors or nonemployee consultants.
The exercise price of Incentive Stock Options must not be less than the fair
market value of a share of Common Stock on the date the option is granted (110%
with respect to optionees who own at least 10% of the outstanding Common Stock).
The Company's Compensation Committee has the authority to determine the time or
times at which options granted under the 1997 Stock Option Plan become
exercisable, provided that options expire no later than ten years from the date
of grant. Options are nontransferable, other than by will and the laws of
descent and distribution, and generally may be exercised only by an employee
while employed by the Company or within 90 days after termination of employment
(one year for termination resulting from death or disability). The 1997 Stock
Option Plan terminates in October 2007. As of August 20, 1998, there were
804,500 options to purchase shares of Common Stock outstanding under the 1997
Stock Option Plan.

BONUS PLAN

In November 1997, the Company's Board of Directors adopted an annual
executive bonus plan (the "Executive Bonus Plan") under which participating
executive officers of the Company are eligible to receive bonus payments. The
Executive Bonus Plan is administered by the Company's Compensation Committee.
The Board of Directors currently has the discretion to designate eligible
participants under the Executive Bonus Plan and initially designated Mr. Myers
and Mr. Colbaugh as eligible participants.

Bonus awards are determined based on a consideration of the achievement of
certain performance targets by the Company as well as the individual performance
of each participant. At the beginning of each fiscal year, performance targets
are established based on measures of operating income, earnings per share and/or
other factors considered relevant by the Compensation Committee (calculated
without regard to awards to be paid under the Executive Bonus Plan). Under the
current terms of the Executive Bonus Plan, the maximum annual bonus payable to
Mr. Myers and Mr. Colbaugh are $900,000 and $450,000, respectively.

EMPLOYMENT AGREEMENTS

In November 1997, the Company entered into an employment agreement with
each of (i) Steven S. Myers, President, the Chief Executive Officer and Chairman
of the Board of the Company, and (ii) Kenneth W. Colbaugh, the Executive Vice
President, Chief Operating Officer and a director of the Company. Each
employment agreement provides for a two year term, participation in the
Company's Executive Bonus Plan, and a severance benefit payment equal to twice
the annual salary upon a termination of the employee by the Company without
"cause." The annual salary of Mr. Myers and Mr. Colbaugh under their respective
employment agreements is $900,000 and $450,000, respectively.

INDEMNIFICATION OF DIRECTORS AND OFFICERS

The Company's Articles of Incorporation provide that the liability of the
Company's directors for monetary damages shall be eliminated to the fullest
extent permissible under California law. This is intended to eliminate the
personal liability of a director for monetary damages in an action brought by or
in the right of the Company for breach of a director's duties to the Company or
its shareholders except for liability: (i) for acts or omissions that involve
intentional misconduct or a knowing and culpable violation of law; (ii) for acts
or omissions that a director believes to be contrary to the best interests of
the Company or its shareholders or that involve the absence of good faith on the
part of the director; (iii) for any transaction for which a director derived an
improper personal benefit; (iv) for acts or omission that show a reckless
disregard for the director's duty to the Company or its shareholders in
circumstances in which the director was aware, or should have been aware, in the
ordinary course of performing a director's duties, of a risk of serious injury
to the Company or its shareholders; (v) for acts or omissions that constitute an
unexcused pattern of inattention that amounts

45
<PAGE> 47

to an abdication of the director's duty to the Company or its shareholders; (vi)
with respect to certain transactions, or the approval of transactions in which a
director has a material financial interest; and (vii) expressly imposed by
statute, for approval of certain improper distributions to shareholders or
certain loans or guarantees.

The Articles also provide that the Company is authorized to provide
indemnification to its agents (as defined in Section 317 of the California
Corporations Code), through the Company's Bylaws or through agreements with such
agents or both, for breach of duty to the Company and its shareholders, in
excess of the indemnification to agents or both, for breach of duty to the
Company and its shareholders, in excess of the indemnification otherwise
permitted by Section 317 of the California Corporations Code, subject to the
limits on such excess indemnification set forth in Section 204 of the California
Corporations Code.

The Bylaws of the Company provide for indemnification of the Company's
officers, directors, employees, and other agents to the extent and under the
circumstances permitted by California law. The Bylaws further provide that no
indemnification shall be made in the case of a derivative suit in respect to any
claim as to which such person has been adjudged to be liable to the corporation,
except with court approval, nor shall indemnification be made for amounts paid
in settling or otherwise disposing of a threatened or pending action, with or
without court approval, or for expenses incurred in defending a threatened or
pending action which is settled or otherwise disposed of without court approval.
Indemnification under the Bylaws is mandatory in the case of an agent of the
Company (present or past) who is successful on the merits in defense of a suit
against him or her in such capacity. In all other cases where indemnification is
permitted by the Bylaws, a determination to indemnify such person must be made
by a majority of a quorum of disinterested directors, a majority of
disinterested shareholders, or the court in which the suit is pending.

The Company has entered into agreements to indemnify its directors and
executive officers in addition to the indemnification provided for in the
Articles of Incorporation and Bylaws. Among other things, these agreements
provide that the Company will indemnify, subject to certain requirements, each
of the Company's directors and executive officers for certain expenses
(including attorneys' fees), judgments, fines and settlement amounts incurred by
such person in any action or proceeding, including any action by or in the right
of the Company, on account of services by such person as a director or officer
of the Company, or as a director or officer of any other company or enterprise
to which the person provides services at the request of the Company.

CERTAIN TRANSACTIONS

In June 1998, the Company sold its Turbo Commander aircraft to Summit
Aviation, Inc. ("Summit"), a company wholly owned by Steven S. Myers, for
$880,000 represented by a note secured by a first priority security interest on
the aircraft. The note bears interest at the prime rate and is due and payable
in full no later than June 25, 1999. The terms of such sale were considered by
the Company's Board of Directors to be as favorable as would have been obtained
from an unaffiliated third party.

In November 1997, the Company entered into Indemnification Agreements with
all of its directors and executive officers providing for indemnification rights
in certain circumstances. See "Management--
Indemnification of Officers and Directors."

In November 1997, the Company entered into Executive Employment Agreements
with (i) Mr. Steven S. Myers, the President, Chief Executive Officer and
Chairman of the Board of the Company, and (ii) Mr. Kenneth W. Colbaugh, the
Executive Vice President, Chief Operating Officer and a director of the Company.
The Executive Employment Agreements were approved by the Company's Board of
Directors. See "Management--Employment Agreements."

46
<PAGE> 48

Paula K. Myers, the wife of Steven S. Myers, has served in various
executive capacities to the Company since its founding, recently serving as a
director, Vice President and Secretary of the Company. In October 1997, Mrs.
Myers resigned from all her positions with the Company, including those as a
director and Secretary. Mrs. Myers was paid compensation from the Company
totalling $550,000, $150,000 and $81,000, respectively, during the Company's
fiscal years ended December 31, 1995, 1996 and 1997.

In January 1997, the Company repurchased 1,995,125 shares of its Common
Stock representing 13.4% of its then outstanding Common Stock from the following
officers of the Company: Steven S. Myers, Kenneth W. Colbaugh, Thomas F.
Heinsheimer, Charles A. Cullian, and John W. Montgomery, for an aggregate
purchase price of $5.9 million, or $2.94 per share. The purchase price was
determined based on the price paid by outside investors in a recent purchase of
Common Stock from certain shareholders of the Company.

In January 1997, the Company sold its Hawker 800 aircraft (the "Aircraft")
to Summit, a company wholly owned by Steven S. Myers, for a sales price of $5.6
million. Concurrent with the sale, Summit assumed $5.6 million of the Company's
long-term notes payable bearing interest rate of 7.30% and 10.07% per annum, and
Summit paid the Company $5,000 in cash. The Aircraft was purchased by the
Company in April 1996 for $5.8 million. The sales price of the Aircraft was
based on a determination of its fair market value by the Company's Board of
Directors. The Company charters the Aircraft from time to time as required in
connection with Company business through an independent air service chartering
company. During the period from the Aircraft's purchase by Summit through
December 31, 1997, the Company incurred $444,000 in charter fees for the
Aircraft. The terms of use and charter rates paid by the Company concerning the
Aircraft are established by the air service chartering company and are
considered by the Company to be competitive with charter rates and on terms as
favorable as those from unaffiliated third parties for similar aircraft.

In September 1997, the Company made a short term advance of $700,000 to
Steven S. Myers to cover a tax liability which Mr. Myers was required to pay.
Mr. Myers repaid the advance in full on October 1, 1997 plus interest accrued at
7.3% per annum. In December 1996, Steven S. Myers borrowed $632,000 from the
Company under the terms of a promissory note (the "Myers Note"). The Myers Note
provided for interest at the rate of 7.30% per annum and all amounts thereunder
were paid in January 1998.

47
<PAGE> 49

each directors and shareholders of both CKC and the Company during the
transactions and periods described above.

The Company has agreed to pay the expenses of the Selling Shareholders in
connection with the offering, other than Underwriting Discounts and Commissions.

48
<PAGE> 50

PRINCIPAL AND SELLING SHAREHOLDERS

The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of August 21, 1998 and as
adjusted to reflect the sale of Common Stock Offered hereby, by (i) each person
known by the Company to beneficially own more than 5% of the outstanding shares
of Common Stock, (ii) each of the Company's directors, (iii) each of the Named
Executive Officers, (iv) each Selling Shareholder and (v) all directors and
executive officers of the Company as a group. Except as otherwise indicated, the
Company believes that the beneficial owners of the Common Stock listed below,
based on information furnished by such owners, have sole investment and voting
power with respect to such shares, subject to community property laws where
applicable.

<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
OFFERING NUMBER OF OFFERING(2)
NAME OF BENEFICIAL OWNER -------------------- SHARES BEING -------------------
OR IDENTITY OF GROUP(1) NUMBER PERCENT OFFERED NUMBER PERCENT
------------------------ ---------- ------- ------------ --------- -------
<S> <C> <C> <C> <C> <C>
Steven S. Myers and Paula K. Myers,
Trustees of the Steven Myers and Paula
Mathis Revocable Trust, dated June 24,
1992(3)...................................... 8,044,162 48.7% 1,608,832 6,435,330 33.8%
Kenneth W. Colbaugh and Robin E.
Colbaugh, Trustees of the K. and
R. Colbaugh Revocable Trust, dated
September 1, 1994(3)......................... 1,005,486 6.1 201,097 804,389 4.2
Ronald and Linda Hunn Trust dated
February 26, 1990(3)......................... 118,852 * 23,770 95,082 *
J. Christopher Lewis(3)(4)................... 1,702,443 10.2 340,489 1,361,954 7.2
RLH SM&A(3)(4)............................... 1,702,443 10.2 340,489 1,361,954 7.2
John W. Montgomery and Dian Y.
Montgomery, Trustee of the J. and
D. Montgomery Revocable Trust, dated
June 24, 1997(3)............................. 123,607 * 24,721 98,886 *
Thomas F. Heinsheimer, Trustee of the
Heinsheimer Living Trust dated July 17,
1968(3)...................................... 211,887 * 42,377 169,510 *
Charles A. Cullian(3)........................ 123,607 * 24,721 98,886 *
Ajaykumar K. Patel and Elizabeth Ann
Stillman(3).................................. 56,283 * 5,628 45,027 *
Thomas J. Amrhein(3)......................... 56,283 * 6,283 50,000 *
Wallace Thomas Bucher, Jr. and Patricia Ann
Bucher, Trustees, W.T. and P.A. Bucher
Revocable Trust dated March 7 1997(3)........ 56,283 * 11,256 45,027 *
Charles E. Payne and Janet H. Payne,
Trustees, Payne Family Trust(3)............ 56,283 * 11,256 45,027 *
Richard E. Collart and Margaret S. Collart,
Trustees, Collart Family Living Trust dated
December 24 1986(3)........................ 56,283 * 11,256 45,027 *
Kenneth W. Wisehart and Holly Ann
Wisehart(3).................................. 56,283 * 11,256 45,027 *
Jodine L. Bergen............................. 2,433 * 552 1,881 *
4460 14th Ave, S.E.
Bellevue, WA 93006
Debra D. Berry............................... 2,433 * 552 1,881 *
16582 Fountain Lane
Huntington Beach, CA 92647
Phillip Bruce................................ 6,083 * 1,381 4,702 *
15277 Presilla Drive
Jamul, CA 91935
</TABLE>

49
<PAGE> 51

<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
OFFERING NUMBER OF OFFERING(2)
NAME OF BENEFICIAL OWNER -------------------- SHARES BEING -------------------
OR IDENTITY OF GROUP(1) NUMBER PERCENT OFFERED NUMBER PERCENT
------------------------ ---------- ------- ------------ --------- -------
<S> <C> <C> <C> <C> <C>
Peter John Dokellis.......................... 1,825 * 414 1,411 *
2625 Brogans Bluff
Colorado Springs, CO 80919
Stanley Hee.................................. 195,005 1.2 44,278 150,727 *
Trustee, Hee Family Trust
25774 Piuma Road
Calabasas, CA 91302
Carl F. Kaun................................. 7,299 * 1,657 5,642 *
10179 Case Place
Cupertino, CA 95014
John W. Harms................................ 7,299 * 1,657 5,642 *
1089 Stone Brook Lane
Costa Mesa, CA 92627
Robert W. Krueger and Marjorie E. Krueger.... 11,788 * 2,677 9,111 *
1016 Moraga Drive
Los Angeles, CA 90049
Amos Lu...................................... 12,165 * 2,762 9,403 *
783 Stephanie Court
Great Falls, VA 22066-2839
Amos Lu...................................... 12,165 * 2,762 9,403 *
Trustee, Amos Lu Small Fund Living Trust
783 Stephanie Court
Great Falls, VA 22066-2839
Alred E. Lyle................................ 19,464 * 4,419 15,045 *
11511 Gilbert Street
Garden Grove, CA 92641
Robert C. Miller............................. 25,547 * 5,801 19,746 *
10449 Calumet Grove Drive
Fairfax, VA 22032-3807
Irene S. Murphy.............................. 243 * 55 188 *
15606 Flatbush
Norwalk, CA 90650
Patricia D. Nelson........................... 2,433 * 552 1,881 *
3648 Pennsylvania Place
Claremont, CA 91711
Roger H. Skinner............................. 327,239 2.0 74,305 252,934 1.3
9251 Rubio Avenue
North Hill, CA 91343
Janice C. Stringfellow....................... 243 * 55 188 *
10317 Yellow Pine Drive
Vienna, VA 22180
Thelma G. Welter............................. 24,330 * 5,524 18,806 *
Trustee, Thelma G. Welter Living Trust
923 Promentary Drive West
Newport Beach, CA 92660
Guy A. Ackerson(5)........................... 102,966 * 15,000 87,966 *
Robin M. Pettit(5)........................... 5,768 * 425 5,343 *
Joseph G. Smith(5)........................... 7,131 * 1,500 5,631 *
Sean M. Kelly(5)............................. 3,876 * 800 3,076 *
Paul E. Scesney(5)........................... 14,668 * 3,330 11,338 *
David H. Kellogg(5).......................... 29,069 * 6,600 22,469 *
All directors and executive officers
as a group (8 persons)....................... 11,139,113 67.4 2,222,848 8,916,265 46.8
</TABLE>

50
<PAGE> 52

- ------------------------------
* Less than 1%

(1) Mr. Myers is the President, Chief Executive Officer, and Chairman of the
Board of the Company; Mr. Colbaugh is the Executive Vice President, Chief
Operating Officer and a director of the Company; Mr. Hunn is the Senior Vice
President, Chief Financial Officer and Secretary of the Company; Mr. Lewis
is a director of the Company; Messrs. Montgomery, Heinsheimer, Patel and
Cullian are Vice Presidents of the Company; and Mr. Amrhein is the President
and General Manager of SAC. Mr. Hee is the former Senior Vice President,
Secretary and member of the Board of Directors of SAC; Mr. Skinner is the
former President, Chief Executive Officer and Chairman of the Board of
Directors of SAC; Dr. Lu is a Vice President of SAC.

(2) Does not reflect the possible issuance of additional shares to former
shareholders of SAC or surrender of outstanding shares held by former
shareholders of SAC that may result due to certain price protection
provisions relating to the shares of Common Stock issued in connection with
the acquisition of SAC. Assuming the offering was consummated on August 21,
1998, the former shareholders of SAC would be required to surrender an
aggregate of 26,247 shares of Common Stock to SM&A for cancellation. See
"Shares Eligible for Future Sale."

(3) Address is c/o SM&A Corporation, 4695 MacArthur Court, Eighth Floor, Newport
Beach, California 92660.

(4) Includes shares owned by Mr. Lewis, a director of the Company and shares
over which Mr. Lewis has voting and investment power as a general partner of
RLH SM&A, a general partnership.

(5) Address is c/o Decision-Science Applications, Inc., 1110 North Glebe Road,
Suite 400, Arlington, Virginia.

DESCRIPTION OF CAPITAL STOCK

The authorized capital stock of the Company consists of 50,000,000 shares
of Common Stock, no par value, and 10,000,000 shares of Preferred Stock, no par
value. The following description of the Company's capital stock is qualified in
all respects by reference to the Company's Amended and Restated Articles of
Incorporation ("Articles of Incorporation"), which is an exhibit to the
Registration Statement incorporating this Prospectus.

COMMON STOCK

The holders of outstanding shares of Common Stock are entitled to receive
dividends out of assets legally available therefor at such times and in such
amounts as the Board of Directors may, from time to time, determine, subject to
any preferences which may be granted to the holders of Preferred Stock. Holders
of Common Stock are entitled to one vote per share on all matters on which the
holders of Common Stock are entitled to vote and may not cumulate their votes.
The Common Stock is not entitled to preemptive rights and is not subject to
redemption or conversion. Upon liquidation, dissolution or winding-up of the
Company, the assets (if any) legally available for distribution to shareholders
are distributable ratably among the holders of the Common Stock after payment of
all debts and liabilities of the Company and the liquidation preference of any
outstanding class or series of Preferred Stock. All outstanding shares of Common
Stock are, and the shares of Common Stock to be issued pursuant to this offering
will be, when issued and delivered, validly issued, fully paid and
nonassessable. The rights, preferences and privileges of holders of Common Stock
are subject to any series of Preferred Stock that the Company may issue in the
future.

PREFERRED STOCK

Preferred Stock may be issued from time to time in one or more series, and
the Board of Directors, without action by the holders of the Common Stock, may
fix or alter the voting rights, redemption provisions (including sinking fund
provisions), dividend rights, dividend rates, liquidation preferences,
conversion rights and any other rights, preferences, privileges and restrictions
of any wholly unissued series of Preferred Stock. The Board of Directors,
without shareholder approval, can issue shares of Preferred Stock with rights
that could adversely affect the rights of the holders of Common Stock. No shares
of Preferred Stock presently are outstanding, and the Company has no present
plans to issue any such shares. The issuance of shares of

51
<PAGE> 53

Preferred Stock could adversely affect the voting power of holder of Common
Stock and could have the effect of delaying, deferring or preventing a change in
control of the Company or other corporate action.

TRANSFER AGENT AND REGISTRAR

The stock transfer agent and registrar for the Common Stock is U.S. Stock
Transfer Corporation, Glendale, California.

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of the offering, the Company will have 19,034,582 shares of
Common Stock outstanding. Of these shares, 8,150,000 shares (including the
5,000,000 shares sold pursuant to this offering) will be freely tradeable
without restriction or further registration under the Securities Act, unless
held by an "affiliate" of the Company within the meaning of Rule 144 adopted
under the Securities Act. Any such affiliate would be subject to the resale
limitations of Rule 144.

The remaining shares of outstanding Common Stock are "restricted
securities" (the "Restricted Shares") within the meaning of Rule 144 under the
Securities Act and may not be sold in the absence of a registration under the
Securities Act unless an exemption from registration is available, including an
exemption contained in Rule 144. In general, under Rule 144 as currently in
effect, any person (or persons whose shares are aggregated for purposes of Rule
144) who has beneficially owned restricted securities, as that term is defined
in Rule 144, for at least one year (including, in the case of a nonaffiliate
holder, any period of ownership of preceding nonaffiliate holders) is entitled
to sell, within any three-month period, a number of shares that does not exceed
the greater of (i) 1% of the then outstanding shares of Common Stock of the
Company, or (ii) the average weekly trading volume in Common Stock during the
four calendar weeks preceding such sale, provided that certain public
information about the Company, as required by Rule 144, is then available and
the seller complies with the manner of sale and notification requirements of the
rule. A person who is not an affiliate and has not been an affiliate within
three months prior to the sale and has, together with any previous owners who
were not affiliates, beneficially owned restricted securities for at least two
years is entitled to sell such shares under Rule 144(k) without regard to any of
the volume limitations described above. None of the Restricted Shares are
presently eligible for sale upon compliance with Rule 144(k).

In connection with the acquisition of SAC, the Company agreed to certain
price protection provisions with respect to the Common Stock issued in that
transaction, which may result in an increase or decrease in the number of
outstanding shares of Common Stock. The price protection provisions are
applicable each time the former SAC shareholders are permitted to sell their
shares of Common Stock (a "Liquidation Event") during the 12 month period
following the Acquisition. Upon the occurrence of a Liquidation Event, if the
market value (as determined in accordance with the SAC acquisition agreement) of
the Common Stock is more than $4 below the price at which such stock was issued,
the Company is required to issue additional shares of Common Stock with a value
sufficient to cover the amount below the $4 floor. Conversely, if such market
value of the Common Stock is more than $4 above the price at which such stock
was issued, the former SAC shareholders must surrender to the Company shares of
their Common Stock with a value sufficient to cover the amount in excess of the
$4 ceiling.

REGISTRATION RIGHTS AGREEMENTS

In connection with the Acquisitions, each of the former shareholders of SAC
and DSA received certain registration rights pursuant to the terms of two
registration rights agreements (the "Registration Rights Agreements"). The
Registration Rights Agreements provide for two types of registration rights
designed to allow the SAC and DSA shareholders to register and thus sell their
shares of SM&A Common Stock acquired in their respective Acquisitions. Should
SM&A determine to register shares of SM&A Common Stock solely for cash (other
than certain excluded registrations) within two years following the Effective
Date, it will afford the SAC and DSA shareholders the right to include in the
registration their respective shares of SM&A Common Stock. SAC and DSA
shareholders electing to have their shares of SM&A Common Stock included

52
<PAGE> 54

in such registration have agreed to pay all underwriter and broker fees and
commissions incident to such sale. SM&A may exclude shares of SM&A Common Stock
from such registration in certain circumstances, such as where there is a
determination of the underwriter of such offering that the amount of shares
sought to be included in the offering is not compatible with the success of the
offering. Should the underwriter limit the number of shares sought to be
included in the offering, the number of shares sought to be registered by each
SAC and DSA shareholder electing to participate in the offering will be reduced
pro-rata.

In addition, beginning February 1, 1999, each group of SAC and DSA
shareholders, respectively (by vote of the holders of 35% of the outstanding
shares of SM&A Common Stock received in the Merger then outstanding, or without
regard to percentage, if the aggregate offering would exceed $2 million), may
demand on two occasions that SM&A register their respective shares for sale on
Form S-3 (provided that at that time SM&A is able to file a registration
statement on that form); SAC and DSA shareholders who elect to participate in
such registration will be able to sell their respective shares of SM&A Common
Stock on the open market for a period of one year following the effective date
of such registration. Such demand registrations are subject to a number of
limitations as set forth in the Registration Rights Agreements.

In certain circumstances, the SAC and DSA shareholders may elect to include
the SM&A Common Stock deposited in escrow in any such registration. Proceeds of
the sale of such shares will be deposited in escrow and will be subject to
forfeiture to the same extent as if such shares of SM&A Common Stock had not
been sold.

Beginning two years after the Effective Date, holders of shares of SM&A
Common Stock issued pursuant to each of the Acquisitions may be able to sell
such shares in the open market under Rule 144. At that time, the respective
rights of the SAC and DSA shareholders to participate in or demand registration
of their shares of SM&A Common Stock will cease.

STOCK OPTIONS

As of August 20, 1998, the Company had outstanding options to purchase,
subject to certain vesting requirements, 804,500 shares of the Company's Common
Stock granted pursuant to the 1997 Stock Option Plan. The Company has registered
on a Registration Statement on Form S-8 all 1,500,000 shares of Common Stock
underlying the options that are outstanding or issuable pursuant to the 1997
Stock Option Plan. In connection with the acquisition of SAC, the Company
converted certain existing SAC nonqualified common stock options into the
Acquisition Options. A total of 175,925 Acquisition Options were granted in
connection with the acquisition of SAC. As a condition to the acquisition of
SAC, holders of Acquisition Options agreed not to exercise the Acquisition
Options until May 29, 1999, provided, however, if the employment of any SAC
employee optionholder should terminate prior to May 29, 1999, such terminated
employee shall have until June 29, 1999 to exercise any vested options in favor
of such employee as of the date of such termination.

No predictions can be made of the effect, if any, that future sales of
shares of Common Stock, and grants of options to acquire shares of Common Stock,
or the availability of shares for future sale, will have on the market price of
the Common Stock prevailing from time to time. Sales of substantial amounts of
Common Stock in the public market, or the perception that such sales could
occur, could adversely affect the prevailing market prices of the Common Stock.
See "Principal and Selling Shareholders," "Description of Capital Stock" and
"Underwriting."

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<PAGE> 55

UNDERWRITING

Subject to certain terms and conditions of an Underwriting Agreement dated
, 1998 (the "Underwriting Agreement"), the underwriters
named below (the "Underwriters"), who are represented by Donaldson, Lufkin &
Jenrette Securities Corporation ("DLJ"), Lehman Brothers Inc. and Legg Mason
Wood Walker Incorporated (the "Representatives"), have agreed severally to
purchase from the Company and the Selling Shareholders, and the Company and the
Selling Shareholders have agreed severally to sell to each of the Underwriters,
an aggregate of 5,000,000 shares of Common Stock at the public offering price
per share less the underwriting discounts and commissions set forth on the cover
of this Prospectus. The number of shares of Common Stock that each Underwriter
has agreed to purchase is set forth opposite its name below:

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation.........
Lehman Brothers Inc.........................................
Legg Mason Wood Walker, Incorporated........................

----------
Total............................................. 5,000,000
==========
</TABLE>

The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase and accept delivery of the shares of Common Stock
offered hereby are subject to approval by their counsel of certain legal matters
and to certain other conditions. The Underwriters are obligated to purchase and
accept delivery of all shares of Common Stock offered hereby (other than those
covered by the over-allotment option described below) if any are purchased.

The Underwriters propose to initially offer the shares of Common Stock in
part directly to the public at the price to the public set forth on the cover
page of this Prospectus and in part to certain dealers (including the
Underwriters) at such price less a concession not in excess of $ per share.
The Underwriters may allow, and such dealers may re-allow to certain other
dealers, a concession not in excess of $ per share. After this offering, the
offering price and other selling terms may be changed by the Underwriters.

Certain Selling Shareholders have granted to the Underwriters an option,
exercisable not later than 30 calendar days after the date of the Underwriting
Agreement, to purchase from time to time, in whole or in part, up to an
aggregate of 750,000 additional shares of Common Stock at the public offering
price set forth on the cover page of this Prospectus, less the underwriting
discounts and commissions. The Underwriters may exercise such options solely to
cover over-allotments, if any, made in connection with this offering. To the
extent that the Underwriters exercise such option, each Underwriter will become
obligated, subject to certain conditions, to purchase its pro rata portion of
such additional shares based on such Underwriter's percentage underwriting
commitment as indicated in the preceding table.

The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain civil liabilities, including liabilities under the
Securities Act, or to contribute to payments that the Underwriters may be
required to make in respect thereof.

The Company and each of the Selling Shareholders and the executive officers
and directors of the Company has agreed, subject to certain exceptions, not to:
(i) offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase or otherwise transfer or dispose of, directly or indirectly,
any shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock; or (ii) enter into any swap or other arrangement
that transfers all or a portion of the economic consequences associated with the
ownership

54
<PAGE> 56

of any Common Stock (regardless of whether any of the transactions described in
clause (i) or (ii) is to be settled by the delivery of Common Stock, or such
other securities, in cash or otherwise) for a period of 180 days after the date
of this Prospectus without the prior written consent of DLJ. In addition, during
such period, the Company has also agreed, subject to certain exceptions, not to
file any registration statement with respect to, and each of its executive
officers, directors and certain stockholders of the Company (including the
Selling Shareholders) has agreed, subject to certain exceptions, not to make any
demand for, or exercise any right with respect to, the registration of any
shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock without DLJ's prior written consent. See "Shares
Eligible for Future Sale -- Registration Rights Agreements."

Other than in the United States, no action has been taken by the Company,
the Selling Shareholders or the Underwriters that would permit a public offering
of the shares of Common Stock offered hereby in any jurisdiction where action
for that purpose is required. The shares of Common Stock offered hereby may not
be offered or sold, directly or indirectly, nor may this Prospectus or any other
offering material or advertisements in connection with the offer and sale of any
such shares of Common Stock be distributed or published in any jurisdiction,
except under circumstances that will result in compliance with the applicable
rules and regulations of such jurisdiction. Persons into whose possession this
Prospectus comes are advised to inform themselves about and to observe any
restrictions relating to the offering of the Common Stock and the distribution
of this Prospectus. This Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any shares of Common Stock offered hereby in any
jurisdiction in which such an offer or a solicitation is unlawful.

In the event the Common Stock does not constitute an excepted security
under the provisions of Regulation M promulgated by the Commission, the
Underwriters and dealers may engage in passive market making transactions in
accordance with Rule 103. In general, a passive market maker may not bid for or
purchase shares of Common Stock at a price that exceeds the highest independent
bid. In addition, the net daily purchases made by any passive market maker
generally may not exceed 30% of its average daily trading volume in the Common
Stock during a specified two-month prior period, or 200 shares, whichever is
greater. A passive market maker must identify passive market making bids as such
on the Nasdaq electronic later-dealer reporting system. Passive market making
may stabilize or maintain the market price of the Common Stock above independent
market levels. Underwriters and dealers are not required to engage in passive
market making and may end passive market making activities at any time.

In connection with this offering, certain Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Common Stock. Specifically, the Underwriters may over-allot this offering,
creating a syndicate short position. In addition, the Underwriters may bid for
and purchase shares of Common Stock in the open market to cover syndicate short
positions or to stabilize the price of the Common Stock. These activities may
stabilize or maintain the market price of the Common Stock above independent
market levels. The Underwriters are not required to engage in these activities
and may end any of these activities at any time.

The Company's common stock is listed for quotation on the Nasdaq National
Market under the symbol "WINS."

55
<PAGE> 57

LEGAL MATTERS

The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Rutan & Tucker, Costa Mesa, California. Certain matters
will be passed upon for the Underwriters by Milbank, Tweed, Hadley & McCloy, Los
Angeles, California.

EXPERTS

The financial statements of the Company as of December 31, 1996 and 1997,
and for each of the years in the three-year period ended December 31, 1997, have
been included herein and in the Registration Statement, in reliance upon the
report of KPMG Peat Marwick LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.

The consolidated financial statements of DSA as of January 31, 1998 and
1997, and for each of the three years in the period ended January 31, 1998
included in this Prospectus have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing herein, and have been
so included in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.

The consolidated financial statements of SAC as of June 27, 1997 and June
28, 1996, and for each of the three years in the period ended June 27, 1997,
appearing in this Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission,
Washington, D.C. 20549, a Registration Statement on Form S-1 under the
Securities Act, and the rules and regulations promulgated thereunder, with
respect to the Common Stock offered hereby. This Prospectus, which constitutes a
part of the Registration Statement, does not contain all of the information set
forth in the Registration Statement and the exhibits and schedules thereto.
While all material elements of the contracts and documents referenced in this
Prospectus are contained herein, statements contained in this Prospectus as to
the contents of any contract or other document referred to are not necessarily
complete, and in each instance reference is made to the full text of such
contract or other document which is filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. For further information with respect to the Company and the Common
Stock offered hereby, reference is made to such Registration Statement and the
exhibits and schedules thereto. The Registration Statement, including the
exhibits and schedules thereto, may be inspected without charge at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's regional offices located at 7
World Trade Center, 13th Floor, New York, New York 10048 and at Citicorp Center,
50 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
documents may be obtained from the Commission at its principal office in
Washington, D.C. upon the payment of the charges prescribed by the Commission.

The Commission maintains a Web site that contains reports, proxy and
information statements and other information regarding issuers that file
electronically with the Commission. The Commission's address on the World Wide
Web is http://www.sec.gov.

The Company intends to distribute to its shareholders annual reports
containing financial statements audited by the Company's independent accountants
and quarterly reports for the first three quarters of each fiscal year
containing unaudited interim financial information.

56
<PAGE> 58

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FINANCIAL STATEMENTS OF SM&A
Independent Auditors' Report................................ F-2
Balance Sheets--December 31, 1996 and 1997.................. F-3
Statements of Earnings--Years ended December 31, 1995, 1996
and 1997.................................................. F-4
Statements of Shareholders' Equity--Years ended December 31,
1995, 1996 and 1997....................................... F-5
Statements of Cash Flows--Years ended December 31, 1995,
1996 and 1997............................................. F-6
Notes to Financial Statements............................... F-7
Consolidated Balance Sheet--June 30, 1998 (unaudited)....... F-12
Consolidated Statements of Operations--six months ended June
30, 1997 and 1998 (unaudited)............................. F-13
Consolidated Statements of Cash Flows--six months ended June
30, 1997 and 1998 (unaudited)............................. F-14
Notes to Consolidated Financial Statements (unaudited)...... F-16
FINANCIAL STATEMENTS OF SAC
Report of Independent Auditors.............................. F-19
Consolidated Balance Sheets--June 27, 1997 and June 28,
1996...................................................... F-20
Consolidated Statements of Operations--Years ended June 27,
1997, June 28, 1996 and June 30, 1995..................... F-21
Consolidated Statements of Shareholders' Equity--Years ended
June 27, 1997, June 28, 1996, and June 30, 1995........... F-22
Consolidated Statements of Cash Flows--Years ended June 27,
1997, June 28, 1996 and June 30, 1995..................... F-23
Notes to Consolidated Financial Statements.................. F-24
Unaudited Consolidated Balance Sheet--April 3, 1998......... F-32
Unaudited Consolidated Statements of Operations--nine months
ended April 3, 1998 and March 28, 1997.................... F-33
Unaudited Consolidated Statements of Cash Flows--nine months
ended April 3, 1998 and March 28, 1997.................... F-34
Notes to Unaudited Consolidated Financial Statements........ F-35
FINANCIAL STATEMENTS OF DSA
Independent Auditors' Report................................ F-36
Consolidated Balance Sheets--January 31, 1998 and 1997...... F-37
Consolidated Statements of Earnings--Years ended January 31,
1998, 1997 and 1996....................................... F-38
Consolidated Statements of Stockholders' Equity--Years ended
January 31, 1998, 1997 and 1996........................... F-39
Consolidated Statements of Cash Flows--Years ended January
31, 1998, 1997 and 1996................................... F-40
Notes to Consolidated Financial Statements.................. F-41
Unaudited Consolidated Balance Sheet--July 31, 1998......... F-47
Unaudited Consolidated Statements of Operations--six months
ended July 31, 1998 and 1997.............................. F-48
Unaudited Consolidated Statements of Cash Flows--six months
ended July 31, 1998 and 1997.............................. F-49
Notes to Unaudited Consolidated Financial Statements........ F-50
</TABLE>

F-1
<PAGE> 59

INDEPENDENT AUDITORS' REPORT

The Board of Directors
Steven Myers & Associates, Inc.:

We have audited the accompanying balance sheets of Steven Myers &
Associates, Inc. as of December 31, 1996 and 1997 and the related statements of
earnings, shareholders' equity and cash flows for each of the years in the
three-year period ended December 31, 1997. 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 audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Steven Myers & Associates,
Inc. as of December 31, 1996 and 1997 and the results of its operations and its
cash flows for each of the years in the three-year period ended December 31,
1997 in conformity with generally accepted accounting principles.

KPMG Peat Marwick LLP

Orange County, California
January 9, 1998, except for the
common stock conversion
discussed in Note 5
as to which the date is
January 21, 1998

F-2
<PAGE> 60

STEVEN MYERS & ASSOCIATES, INC.

BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1997
--------- ---------
(IN THOUSANDS,
EXCEPT SHARE AMOUNTS)
<S> <C> <C>
ASSETS (Note 4)
Current assets:
Cash...................................................... $ 1,927 $ 150
Accounts receivable, net of allowance of $27 and $0 at
December 31, 1996 and 1997, respectively............... 3,637 4,245
Other accounts receivable................................. 186 8
Prepaid expenses and other current assets................. 45 414
------- -------
Total current assets.............................. 5,795 4,817
Property and equipment, net (notes 3 and 4)................. 5,869 378
Other assets................................................ 156 136
------- -------
Total assets...................................... $11,820 $ 5,331
======= =======

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 367 $ 333
Current portion of long-term debt (note 4)................ 1,259 786
Accrued salaries, wages and payroll taxes................. 3,839 2,574
Accrued bonus............................................. 474 736
Other liabilities......................................... 135 287
------- -------
Total current liabilities......................... 6,074 4,716
Long-term debt, excluding current portion (note 4).......... 4,991 6,943
------- -------
Total liabilities................................. 11,065 11,659
Shareholders' equity (deficit) (note 5):
Common stock, no par value. Authorized 50,000,000 shares
of common stock; issued and outstanding 14,895,000 and
12,900,000, at December 31, 1996 and 1997,
respectively........................................... 5 5
Additional paid-in capital................................ 316 316
Stock subscription note receivable (note 2)............... (51) --
Due from shareholder (note 2)............................. (632) (679)
Retained earnings (accumulated deficit)................... 1,117 (5,970)
------- -------
Total shareholders' equity (deficit).............. 755 (6,328)
Commitments (notes 4 and 7)
------- -------
Total liabilities and shareholders' equity........ $11,820 $ 5,331
======= =======
</TABLE>

See accompanying notes to financial statements.

F-3
<PAGE> 61

STEVEN MYERS & ASSOCIATES, INC.

STATEMENTS OF EARNINGS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1995 1996 1997
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Net revenues................................................ $20,777 $25,699 $36,962
Cost of revenues............................................ 12,313 14,512 20,529
------- ------- -------
Gross profit........................................... 8,464 11,187 16,433
Selling, general and administrative expenses (note 9)....... 7,793 10,749 6,927
------- ------- -------
Operating income....................................... 671 438 9,506
Other expense (income):
Interest expense.......................................... 62 420 505
Other (income) expense, net............................... (69) (556) 37
------- ------- -------
Earnings before income taxes........................... 678 574 8,964
Income tax expense (note 6)................................. 10 9 147
------- ------- -------
Net earnings........................................... $ 668 $ 565 $ 8,817
======= ======= =======
</TABLE>

See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1996 1997
------------ ------------
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE DATA)
<S> <C> <C>
PRO FORMA SUPPLEMENTAL DATA (UNAUDITED):
Historical earnings before income taxes..................... $ 574 $ 8,964
Pro forma adjustment to selling, general and administrative
expenses.................................................. 2,475 (1,007)
---------- ----------
Pro forma earnings before income taxes...................... 3,049 7,957
Pro forma income tax expense................................ 1,219 3,183
---------- ----------
Pro forma net earnings................................. $ 1,830 $ 4,774
========== ==========
Pro forma earnings per share........................... $ 0.12 $ 0.37
========== ==========
Weighted average common shares used in the calculation
of pro forma supplemental net income per share........ 14,893,000 12,948,000
========== ==========
</TABLE>

The pro forma adjustments include the elimination of salaries and bonuses
paid to three principal executive officers (which have historically been
included in selling, general, and administrative expenses) in excess of $2.7
million in the aggregate (the maximum salaries and bonuses payable for 1998
under the Executive Compensation Program) and adjustments for Federal and state
income taxes as if the Company had been taxed as a C corporation rather than an
S corporation.

Pro forma share and per share amounts reflect a conversion of all
outstanding shares of Series A and Series B common stock of the Company into an
aggregate of 12.9 million shares of common stock to be effected upon the
consummation of the initial public offering.

Supplemental net income per share has been computed by dividing
supplemental net income by the weighted average number of shares of common stock
outstanding during the period. Supplemental net income per share information is
calculated under Statement of Financial Accounting Standard No. 128, "Earnings
per Share."

F-4
<PAGE> 62

STEVEN MYERS & ASSOCIATES, INC.

STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
COMMON STOCK
(NOTE 5) STOCK RETAINED TOTAL
-------------------- ADDITIONAL SUBSCRIPTION DUE EARNINGS SHAREHOLDERS'
SHARES PAID-IN NOTE FROM (ACCUMULATED EQUITY
OUTSTANDING AMOUNT CAPITAL RECEIVABLE SHAREHOLDER DEFICIT) (DEFICIT)
----------- ------ ---------- ------------ ----------- ------------ -------------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1994, as previously
reported............... 1,172,000 $5 $316 $(303) $ -- $ 96 $ 114
Exchange of shares....... 14,895,000 -- -- -- -- -- --
Net earnings............. -- -- -- -- -- 668 668
Collection of stock
subscription
receivable............. -- -- -- 89 -- -- 89
Tax-free distribution.... -- -- -- 9 -- (212) (203)
---------- -- ---- ----- ----- -------- --------
Balance at December 31,
1995................... 14,895,000 5 316 (205) -- 552 668
Net earnings............. -- -- -- -- -- 565 565
Note due from shareholder
(note 2)............... -- -- -- -- (632) -- (632)
Collection of stock
subscription
receivable............. -- -- -- 154 -- -- 154
---------- -- ---- ----- ----- -------- --------
Balance at December 31,
1996................... 14,895,000 5 316 (51) (632) 1,117 755
Net earnings............. -- -- -- -- -- 8,817 8,817
Collection of stock
subscription
receivable............. -- -- -- 51 -- -- 51
Note due from shareholder
(note 2)............... -- -- -- -- (47) -- (47)
Dividends declared (note
9)..................... -- -- -- -- -- (10,041) (10,041)
Repurchase and retirement
of common stock........ (1,995,000) -- -- -- -- (5,863) (5,863)
---------- -- ---- ----- ----- -------- --------
Balance at December 31,
1997................... 12,900,000 $5 $316 $ -- $(679) $ (5,970) $ (6,328)
========== == ==== ===== ===== ======== ========
</TABLE>

See accompanying notes to financial statements.

F-5
<PAGE> 63

STEVEN MYERS & ASSOCIATES, INC.

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1995 1996 1997
----- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings.............................................. $ 668 $ 565 $ 8,817
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Provision for doubtful accounts...................... -- 27 (27)
Depreciation and amortization........................ 175 448 139
Gain on sale of fixed asset.......................... -- -- (137)
Changes in assets and liabilities:
Accounts receivable............................... (713) (1,377) (581)
Other accounts receivables........................ (2) (183) 178
Prepaid expenses and other current assets......... (18) (20) (369)
Other assets...................................... (3) (133) 20
Accounts payable.................................. (34) 300 (34)
Accrued salaries, wages and payroll taxes......... 408 2,487 (1,265)
Accrued bonus..................................... 14 132 262
Other liabilities................................. (292) 135 152
----- ------- --------
Net cash provided by operating activities......... 203 2,381 7,155
----- ------- --------
Cash flows from investing activities:
Net purchases of property and equipment................... (325) (5,890) (146)
Proceeds from sale of fixed assets........................ -- -- 6
Due to (from) shareholder................................. 200 (632) (47)
----- ------- --------
Net cash used in investing activities............. (125) (6,522) (187)
----- ------- --------
Cash flows from financing activities:
Increase in long-term debt................................ 63 5,645 7,108
Distribution to shareholders.............................. (212) -- (10,041)
Repurchase of common stock................................ -- -- (5,863)
Decrease in stock subscription note receivable............ 98 154 51
----- ------- --------
Net cash provided by (used in) financing
activities...................................... (51) 5,799 (8,745)
----- ------- --------
Net increase (decrease) in cash................... 27 1,658 (1,777)
Cash at beginning of period................................. 242 269 1,927
----- ------- --------
Cash at end of period....................................... $ 269 $ 1,927 $ 150
===== ======= ========
Supplemental disclosures:
Cash paid during the year for:
Interest............................................. $ 64 $ 421 $ 505
Income taxes......................................... $ 1 $ -- $ 100
===== ======= ========
</TABLE>

Supplemental schedule of noncash investing activity:

In 1997, the Company sold the Hawker Jet to an affiliated company for
$5,635. Terms of payment included $5 cash and transfer of the related long-term
notes payable of $5,630 (note 4).

See accompanying notes to financial statements.

F-6
<PAGE> 64

STEVEN MYERS & ASSOCIATES, INC.

NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997

(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business

Steven Myers & Associates, Inc. (the Company) was incorporated in
California on January 25, 1985. The Company's primary business is providing
proposal management and contract support services.

Property and Equipment

Property and equipment is stated at cost. Depreciation is calculated using
the double declining and straight-line method over the estimated useful lives of
the assets. Estimated useful lives range from five to ten years.

Revenue Recognition

The Company derives most of its revenue from professional service
activities. The majority of these activities are provided under "time and
expenses" billing arrangements, and revenues are recorded as work is performed.
Revenues are directly related to the total number of hours billed to clients and
the associated hourly billing rates. Revenues are also derived from success fees
offered to clients as a pricing option, and recorded as revenue only upon the
attainment of the specified incentive criteria. This success fee is billable by
the Company when a contract is won by the client.

Income Taxes

The Company has elected to be taxed as an S corporation under the
provisions of the Internal Revenue Code and similar statutes in the state of
California. Accordingly, the Company's taxable income is treated as if it were
distributed to the shareholders, who are responsible for payment of taxes
thereon. Additionally, in accordance with state laws regarding S corporations,
the Company is subject to a 1.5% California franchise tax. Deferred taxes are
provided on items for which there are temporary differences in recording such
items for financial and income tax reporting purposes.

Fair Value of Financial Instruments

The carrying value of cash, accounts receivable, other accounts
receivables, accounts payable and other accrued liabilities are measured at cost
which approximates their fair value.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

Supplemental Net Income per Share

Historical net income per common share is not presented because it is not
meaningful.

(2) STOCK SUBSCRIPTION NOTE RECEIVABLE AND DUE FROM SHAREHOLDER

In 1993, the Company entered into a stock subscription agreement with an
officer of the Company for common stock valued at $316,000. Included in the
accompanying balance sheet is a stock subscription

F-7
<PAGE> 65
STEVEN MYERS & ASSOCIATES, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997

receivable balance of $51,000 at December 31, 1996. The stock subscription
receivable balance was paid in full during 1997.

Included in shareholders' equity at December 31, 1996 and 1997 are amounts
due from an officer and principal shareholder of the Company totaling $632,000
and $679,000, respectively. The incremental increase of $47,000 represents
interest accrued at a rate of 7.3%. This balance is to be paid by February 1,
1998 by offsetting dividends to the shareholder against the receivable.

(3) PROPERTY AND EQUIPMENT

A summary of property and equipment follows:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Aircraft and automobile.......................... $ 6,746 $ 958
Furniture and equipment.......................... 385 511
Leasehold improvements........................... -- 19
------- -------
7,131 1,488
Less accumulated depreciation.................... (1,262) (1,110)
------- -------
$ 5,869 $ 378
======= =======
</TABLE>

(4) DEBT

In 1995, the Company refinanced an aircraft loan for the corporate aircraft
(Turbo Commander). The new agreement provided for a long-term note in the
principal amount of $560,000, of which there was a remaining principal balance
of $536,000 and $517,000 at December 31, 1996 and 1997, respectively. The note
bears annual interest at a fixed rate of 10.74% and is payable monthly, expiring
in June 2010. The note is secured by the aircraft.

In April 1996, the Company purchased a Hawker 800 jet for $5,788,000 and
financed the purchase through a bank. The financing arrangement consisted of a
note in the amount of $4,962,000 bearing interest at 10.07%, payable annually,
with the full principle balance due and payable in April 2001. The note is
secured by the Hawker jet. In January 1997, the Company sold the Hawker jet to a
company which is owned by an officer and principal shareholder.

The Company also financed the acquisition of an automobile and certain
office equipment through capital leases. These leases bear interest at 7.25% and
15.71%, respectively, and are payable monthly. Future minimum lease payments
under these capital lease agreements as of December 31, 1997 are as follows:

<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Year ending December 31:
1998................................................. $ 32
1999................................................. 31
2000................................................. 10
----
73
Less amount representing interest.................... (10)
----
Present value of minimum lease payments.............. 63
Less current portion................................. (26)
----
$ 37
====
</TABLE>

F-8
<PAGE> 66
STEVEN MYERS & ASSOCIATES, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997

On January 2, 1997, the Company entered into a credit agreement with a bank
under which it may borrow up to $8,000,000. The agreement, as amended on July
21, 1997, has two parts: a $4,000,000 revolving line of credit is available with
a sub-limit of $2,000,000 to finance a portion of the repurchase of the
Company's stock and a $4,000,000 term loan which is also available to finance
the repurchase of Company stock. Bank debt at December 31, 1997 consisted of
$3,659,000 and $3,490,000 outstanding under the revolving line of credit and the
term loan, respectively, which amounts were used by the Company for general
corporate purposes and to fund the purchase of Company stock from various
shareholders. The revolving line of credit bears interest at the Bank's prime
rate of 8.5% at December 31, 1997 and is due January 2, 1999. The term loan
expires in 2001, is payable in graduated quarterly installments ranging from
$170,000 to $230,000, and bears interest at LIBOR plus 2.50%. The term loan
interest rate was 8.66% at December 31, 1997. The loans are secured by
substantially all of the Company's assets.

A summary of debt is provided as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1997
------- ------
(IN THOUSANDS)
<S> <C> <C>
Bank debt......................................... $ -- $7,149
Aircraft loans.................................... 5,498 517
Shareholder note payable.......................... 667 --
Capital leases.................................... 85 63
------- ------
6,250 7,729
Less current portion of long-term debt............ (1,259) (786)
------- ------
$ 4,991 $6,943
======= ======
</TABLE>

Included in short-term debt at December 31, 1996 was a $667,000 note due to
an officer and principal shareholder of the Company. The note, which bore
interest at 7.30% per annum, pertained to an advancement for working capital
purposes and was assumed by Summit Aviation Inc. (SAI) as part of the Hawker
sales transaction.

The terms of the bank agreement provide for the maintenance of financial
covenants. The Company has obtained a waiver from the bank from compliance with
certain of the covenants, the principal covenant being the Company's tangible
net worth requirement of $(4,450,000) at December 31, 1997. The waiver is
conditioned upon the Company completing an Initial Public Offering. If the
Company does not complete an Initial Public Offering, the Company's principal
shareholder has agreed to provide an amount to the Company, in the form of
subordinated debt, to enable the Company to comply with the covenants.

On January 9, 1997, the Company sold its Hawker jet to SAI, a company owned
by one of the shareholders, for a purchase price of approximately $5,635,000.
Concurrent with the sale, the Company transferred $5,630,000 of long-term notes
payable to SAI bearing interest at rates of 7.30% and 10.07% per annum,
respectively, and SAI paid the Company $5,000 in cash. The sale was finalized
and recorded in the second quarter of 1997 and resulted in a gain of $137,000.

(5) COMMON STOCK

In November 1994, the Board of Directors approved the recapitalization of
the Company through the amendment of the Articles of Incorporation. The
amendment authorized all outstanding common shares to be exchanged for a new
series of common stock designated as Series A. In total, up to 1,000,000 shares
of Series A common stock were authorized. Additionally, the issuance of up to
2,000,000 shares of a new Series B common stock were authorized. The Series A
and Series B common stock are identical in all respects

F-9
<PAGE> 67
STEVEN MYERS & ASSOCIATES, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997

and have equal rights and privileges, except that Series B common stock has no
voting rights. The amendment had no effect on the ownership structure of the
Company.

On January 21, 1998, the Company amended its articles of incorporation to
authorize the issuance of up to 50,000,000 shares of common stock and up to
10,000,000 shares of preferred stock. On that same date, the Company converted
each issued and outstanding share of Series A and B common stock into 12.7078
shares of common stock, or an aggregate of 12,900,000 Shares outstanding as of
December 31, 1997. The financial statements have been revised to reflect this
conversion.

(6) INCOME TAXES

For all periods presented, the Company has provided for income taxes at the
appropriate California statutory state income tax rate imposed on S
Corporations.

The provision for income tax expense (benefit) consists of the following:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1995 1996 1997
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
State.................................... $10 $9 $147
=== == ====
</TABLE>

The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," (SFAS 109). Under
SFAS 109, deferred tax assets and liabilities are established for temporary
differences at tax rates expected to be in effect when such assets or
liabilities are realized or settled. Net deferred tax assets are considered
immaterial and do not have a significant impact on the financial results of the
Company.

(7) COMMITMENTS

Leases

In June 1997, the Company entered into a ten year lease agreement for a new
office facility, at which time the lease agreement on the old facility was
terminated for a penalty of $28,000. Additionally, the Company has entered into
various lease agreements for office equipment. Future minimum lease payments
under noncancelable operating leases as of December 31, 1997 are as follows:

<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Year ending December 31:
1998................................................. $ 435
1999................................................. 451
2000................................................. 468
2001................................................. 487
2002................................................. 492
Thereafter........................................... 2,478
------
$4,811
======
</TABLE>

Rent expense totaled $177,000, $184,000 and $392,000 for years ended
December 31, 1995, 1996 and 1997, respectively.

F-10
<PAGE> 68
STEVEN MYERS & ASSOCIATES, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997

(8) CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS

Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of trade receivables. The
majority of the Company's receivables are from large companies in the aerospace
and defense industries. The Company controls credit risk through credit
approvals and monitoring procedures. Credit losses have historically been
minimal.

Revenue from major customers is summarized as follows:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Customer:
A........................................ 23% 19% 10%
B........................................ 27 23 22
C........................................ -- 10 10
D........................................ -- -- --
E........................................ 10 18 13
F........................................ 10 -- --
G........................................ -- -- 11
H........................................ -- -- 15
</TABLE>

(9) COMPENSATION TO THREE SENIOR EXECUTIVE SHAREHOLDERS

Included in selling, general and administrative expense is total
compensation paid to three senior executive shareholders in the amount of
$4,642,000, $5,175,000 and $1,693,000 for the years ended December 31, 1995,
1996 and 1997, respectively.

In fiscal 1997, the Company changed the manner of distributions to
shareholders. Dividends in the amount of $10,041,000 were declared and paid
during fiscal 1997.

(10) EMPLOYEE BENEFIT PLAN AND STOCK OPTION PLAN

The Steven Myers & Associates 401(k) Plan and Trust is a defined
contribution plan. The Plan includes a tax-deferred 401(k) provision. The Plan
covers all employees of the Company. Contributions are made to the Plan by
participants only.

The Company adopted the 1997 Stock Option Plan in December 1997. The 1997
Stock Option Plan, which is administered by the Compensation Committee of the
Board of Directors, provides for the granting of options to purchase an
aggregate of 1,500,000 shares of the Company's common stock to directors,
employees, and consultants of the Company. Upon consummation of the Offering,
the Company intends to grant to certain employees and directors of the Company
options to purchase of 790,000 shares of common stock. The exercise price per
share will be equal to the initial public offering price.

F-11
<PAGE> 69

SM&A CORPORATION AND SUBSIDIARIES
(FORMERLY KNOWN AS STEVEN MYERS & ASSOCIATES, INC.)

CONSOLIDATED BALANCE SHEET
(UNAUDITED)

<TABLE>
<CAPTION>
JUNE 30, 1998
--------------
(IN THOUSANDS)
<S> <C>
ASSETS
Current Assets:
Cash & cash equivalents................................ $16,217
Accounts receivable, net of allowance for doubtful
accounts.............................................. 9,636
Costs and estimated earnings in excess of billings on
contracts in progress, net of allowance............... 2,011
Inventory.............................................. 198
Advances to employees..................................... --
Other accounts receivable.............................. 72
Prepaid expenses and other current assets.............. 684
-------
Total current assets.............................. 28,818
Goodwill, net............................................... 13,859
Notes receivable, officers.................................. 1,124
Property and equipment, net................................. 1,346
Other assets................................................ 822
-------
Total assets...................................... $45,969
=======

LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable.................................... $ 1,065
Current portion of long-term debt......................... 11
Accrued salaries, wages, and payroll taxes................ 4,332
Accrued bonuses........................................... 815
Income taxes payable...................................... 841
Other liabilities......................................... 31
-------
Total current liabilities......................... 7,095
Deferred rents.............................................. 52
Deferred tax liability...................................... 161
Other deferreds............................................. 492
Long-term debt, excluding current portion................... 534
-------
Total liabilities................................. 8,334
Shareholders' equity:
Common stock, no par value................................ 158
Additional paid in capital................................ 39,953
Retained earnings......................................... (2,476)
-------
Total shareholders' equity........................ 37,635
-------
Total liabilities and shareholders' equity........ $45,969
=======
</TABLE>

See accompanying notes to consolidated financial statements.

F-12
<PAGE> 70

SM&A CORPORATION AND SUBSIDIARIES
(FORMERLY KNOWN AS STEVEN MYERS & ASSOCIATES, INC.)

CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
------------------------------
JUNE 30, 1997 JUNE 30, 1998
------------- -------------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
Net Revenues................................................ $15,773 $24,121
Cost of Revenues............................................ 8,657 13,499
------- -------
Gross Profit.............................................. 7,116 10,622
Selling, general and administrative expenses................ 2,763 4,637
------- -------
Operating income.......................................... 4,353 5,985
Other (income) expense:
Interest expense.......................................... 248 66
Other income, net......................................... (198) (1,220)
------- -------
Earnings before income taxes.............................. 4,303 7,139
Income tax expense.......................................... 28 2,936
------- -------
Net earnings.............................................. $ 4,275 $ 4,203
=======
Earnings per common share:
Basic..................................................... $ 0.28
=======
Diluted................................................... $ 0.28
=======
Weighted average common shares used computing per share
amounts:
Basic..................................................... 14,825
=======
Diluted................................................... 15,042
=======
Pro forma supplemental data (unaudited):
Earnings before income taxes, as reported................. $ 4,303 $ 7,139
Pro forma adjustment to selling, general and
administrative expenses................................ 562 --
------- -------
Pro forma earnings before income tax expense.............. 3,741 7,139
Pro forma income tax expense.............................. 1,496 2,936
------- -------
Pro forma net earnings.................................... $ 2,245 $ 4,203
======= =======
Pro forma earnings per common share:
Basic..................................................... $ 0.17 $ 0.28
======= =======
Diluted................................................... $ 0.17 $ 0.28
======= =======
Weighted average common shares used in computing pro forma
pro forma per share amounts:
Basic..................................................... 12,948 14,825
======= =======
Diluted................................................... 12,948 15,042
======= =======
</TABLE>

The pro forma adjustments to the historical SM&A financial statements
include additional salaries for the three principal executive officers who are
to be paid a maximum $2.7 million in salaries and bonuses under the 1998
Executive Compensation Program. The maximum amount is in excess of historical
figures included in selling, general, and administrative expenses for 1997.
Federal and state income taxes were also adjusted to reflect a 40% C corporation
tax rate rather than the historically used S corporation tax rate.

Pro forma share and per share amounts reflect a conversion of all
outstanding shares of Series A and Series B common stock of the Company into an
aggregate of 12.9 million shares of common stock effected upon the consummation
of the initial public offering.

Supplemental earnings per share has been computed by dividing supplemental
net income by the weighted average number of shares of common stock outstanding
during the period. Supplemental net income per share information is calculated
under Statement of Financial Accounting Standard No. 128 "Earnings per Share."

Historic earnings per share for 1997 is not presented because it is not
meaningful.

See accompanying notes to consolidated financial statements.

F-13
<PAGE> 71

SM&A CORPORATION AND SUBSIDIARIES
(FORMERLY KNOWN AS STEVEN MYERS & ASSOCIATES, INC.)

CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
-----------------------------
JUNE 30, 1997 JUNE 30, 1998
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net Earnings.............................................. $ 4,275 $ 4,203
Adjustments to reconcile net earnings to net cash provided
by
operating activities:
Provision for doubtful accounts...................... -- 2
Depreciation and amortization........................ 62 140
Gain on sale of fixed assets......................... (137) (821)
Changes in assets and liabilities:
Accounts receivable............................... (1,287) (553)
Prepaid expenses and other current assets......... (391) (439)
Other assets...................................... (10) 83
Accounts payable.................................. (266) (1,178)
Accrued salaries, wages, and payroll taxes........ (1,432) 280
Accrued bonuses................................... 190 79
Income taxes payable.............................. -- 789
Deferred tax liability............................ -- 161
Other deferreds................................... -- (40)
Other liabilities................................. (47) (463)
-------- -------
Net cash provided by operating activities....... 957 2,243
Cash flows from investing activities:
Cash acquired in the SAC acquisition...................... -- 223
Net purchases of property and equipment................... (102) (136)
Net proceeds from sale of property and equipment.......... 6 --
Repayment from stockholder................................ (768) 679
-------- -------
Net cash (used in) provided by investing
activities................................... (864) 766
Cash flows from financing activities:
Proceeds from issuance of common stock.................... 51 22,474
Advances (repayments) of long-term debt................... 5,271 (8,706)
Distributions to shareholders............................. (1,230) (710)
Common stock repurchase................................... (5,863) --
-------- -------
Net cash (used in) provided by financing
activities................................... (1,771) 13,058
Net (decrease) increase in cash.............. (1,678) 16,067
-------- -------
Cash at beginning of period................................. 1,927 150
Cash at end of period....................................... $ 249 $16,217
======== =======
Supplemental disclosure:
Cash paid during the period for:
Interest..................................... $ 159 $ 149
======== =======
Income taxes................................. $ 28 $ 1,967
======== =======
</TABLE>

See accompanying notes to consolidated financial statements.

F-14
<PAGE> 72

Supplemental schedule of noncash investing activity:

In May 1998, the Company acquired Space Applications Corporation in a
stock-for-stock reverse triangular merger. The acquisition was accounted for as
a purchase. The table below gives summary to the effect of the purchase as
follows:

<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Tangible assets acquired at fair value................. $10,537
Costs in excess of net assets acquired................. 12,575
Liabilities assumed at fair value...................... (5,755)
-------
Total consideration costs.................... 17,357
Less cash acquired......................... (223)
-------
Total acquisition costs, net cash acquired... $17,134
=======
</TABLE>

In June 1998, the Company sold the Turbo Commander aircraft to an affiliate
of the Company's principal shareholder for $880,000. Terms of payment included a
note receivable for the total sales price of $880,000.

In January 1997, the Company sold the Hawker Jet to an affiliated company
for $5,635,000. Terms of payment included $5,000 cash and transfer of the
original long-term notes payable of $5,630,000.

F-15
<PAGE> 73

SM&A CORPORATION AND SUBSIDIARIES
(FORMERLY KNOWN AS STEVEN MYERS & ASSOCIATES, INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(UNAUDITED)

NOTE 1. BASIS OF PRESENTATION

The accompanying unaudited interim consolidated financial statements of
Steven Myers & Associates, Inc. (the "Company") have been prepared pursuant to
the rules of the Securities and Exchange Commission for quarterly Reports on
Form 10-Q and do not include all of the information and note disclosures
required by generally accepted accounting principles. The information furnished
herein includes all adjustments, consisting of normal recurring adjustments,
which are, in the opinion of management, necessary for a fair presentation of
results for these interim periods.

The results of operations for the six months ended June 30, 1998 are not
necessarily indicative of the results to be expected for the entire fiscal year
ending December 31, 1998.

The consolidated financial statements include the accounts of the Company
and its subsidiaries. As discussed in Note 5, during the three months ended June
30, 1998, the Company acquired Space Applications Corporation ("SAC"). This
transaction was accounted for as a purchase and, accordingly, the consolidated
financial statements include the financial results of SAC from the effective
date of this event. SAC provides systems engineering, scientific research,
program management support, and military operations support services to the
nation's military and civilian space programs, the national intelligence
community, and the national defense sector.

In addition, these financial statements should be read in conjunction with
the Company's audited financial statements and notes thereto for the year ended
December 31, 1997. Supplementary information which includes the historical
pro-forma financial statements of the Company prior to its initial public
offering is included in Form S-1 filed by the Company with the Securities and
Exchange Commission on January 28, 1998 as amended (the "S-1"). Due to the
Company converting from an S corporation to a C corporation, the information
found in the S-1 filing includes pro forma operating results. These pro formas
reflect an adjustment of salaries and bonuses paid to three principal executive
officers (which have historically been included in selling, general, and
administrative expenses) in excess or less than $2.7 million ($675,000 per
quarter) in the aggregate (the maximum salaries and bonuses payable for 1998
under the Company's Executive Compensation Program) and adjustments for Federal
and state income taxes as if the Company had been taxed as a C corporation
rather than an S corporation during such period.

Certain reclassifications have been made to the 1997 financial statements
to conform to the 1998 presentation.

NOTE 2. INITIAL PUBLIC OFFERING

The Company completed an initial public offering ("IPO") of Common Stock
during January 1998. Of the 3,150,000 shares of Common Stock sold in the IPO,
1,050,000 were sold by existing shareholders and 2,100,000 were sold by the
Company, generating $23,436,000 in proceeds to the Company, net of underwriting
discounts and commissions of $1,764,000.

The Company made cash payments of S corporation distributions (the "S
Corporation Dividend") to shareholders totaling $710,000 which were accrued
January 28, 1998 and paid February 5, 1998. The S Corporation Dividend
represented the undistributed earnings of the Company taxed or taxable to the
shareholders through the date of the IPO. Cash provided from the operating
activities of the Company prior to the IPO was used to fund the dividend
payment.

F-16
<PAGE> 74
SM&A CORPORATION AND SUBSIDIARIES
(FORMERLY KNOWN AS STEVEN MYERS & ASSOCIATES, INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
(UNAUDITED)

NOTE 3. INCOME TAX PROVISION AND PRO FORMA FINANCIAL DATA

Prior to the IPO, the Company and its shareholders elected to be treated as
an S corporation under the Internal Revenue Code of 1986, as amended (the
"Code"). Under the provisions of the Code, the Company's shareholders included
their pro rata share of the Company's income on their personal tax returns.
Accordingly, the Company was not subject to federal and most state income taxes.

Historical pro forma figures and pro forma net income per share figures are
presented as if the Company had been taxed as a C corporation for the periods
presented. The pro forma tax provision has been calculated assuming a 40%
combined effective tax rate.

In January 1998, the Company still operated as an S corporation; thus, the
consolidated income statement presentation for the six months ended June 30,
1998, includes only appropriate federal and state income taxes for the period in
which the Company had been a C corporation. Upon termination of the S
corporation status on January 28, 1998, the Company recorded a tax expense
resulting from the establishment of net deferred tax liabilities of
approximately $510,000, which was based upon temporary book to tax differences
existing at the date of termination of the Company's S corporation status.

NOTE 4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NET EARNINGS PER SHARE

Basic net earnings per common share is computed based on weighted average
common shares outstanding during the period. Diluted net earnings per common
share is computed based on weighted average common shares and common equivalent
shares (stock options) outstanding during the period. The Company currently has
15,819,743 shares of common stock outstanding. As of December 31, 1997, there
were 12,900,000 shares of common stock outstanding.

Pursuant to Statement of Financial Accounting Standards No. 128, basic and
diluted earnings per share have been included. Basic earnings per share is
computed by dividing income available to common shareholders by the
weighted-average number of common shares outstanding during the period. Shares
issued during the period and shares repurchased during the period are weighted
for the portion of the period that they were outstanding. Diluted earnings per
share is consistent with that of basic earnings per share while giving effect to
all dilutive potential common shares that were outstanding during the period.
The Company's diluted earnings per share is calculated by arriving at basic
earnings per share and factoring in the dilutive effect of the 790,000 options
issued in January 1998 under the Company's 1997 Stock Option Plan (using the
treasury stock method and the average common stock price per share), plus the
175,925 options granted to SAC employees and associates in May 1998, at a 20-day
trailing price per share from the issuance date. The dilutive effect of the
options was insignificant. Basic earnings per common share is equal to diluted
earnings per common share.

NOTE 5. BUSINESS COMBINATION

On May 29, 1998, the Company issued 819,743 shares of common stock valued
at approximately $14,700,000, and stock options with a fair value of $2.6
million for substantially all the outstanding common stock of SAC. This
transaction was accounted for as a purchase and, accordingly, the consolidated
financial statements include the financial results of SAC from May 18, 1998, the
date the definitive agreement was approved by all relevant parties, and the date
of the private placement memorandum for SAC.

F-17
<PAGE> 75
SM&A CORPORATION AND SUBSIDIARIES
(FORMERLY KNOWN AS STEVEN MYERS & ASSOCIATES, INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
(UNAUDITED)

The Company recorded goodwill of approximately $12,575,000 as a result of
the SAC purchase. The Company incurred significant costs and expenses in
connection with this acquisition, including legal and accounting, and other
various expenses. Eligible costs will be capitalized as part of goodwill in
accordance with generally accepted accounting principles (GAAP). The assets
acquired, including the costs in excess of net assets acquired, and liabilities
assumed in the acquisition of SAC are as follows:

<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Assets acquired at fair value............................... $10,537
Costs in excess of net assets acquired...................... 12,575
Liabilities assumed at fair value........................... (5,755)
-------
Total acquisition costs........................... $17,357
=======
</TABLE>

On August 20, 1998, the Company, through an Agreement and Plan of Merger
and Reorganization ("Merger Agreement"), acquired Decision-Science Applications,
Inc. ("DSA") for approximately $28 million in a stock for stock and cash
exchange merger. The merger is comprised of approximately $14 million in stock
and $14 million in cash. DSA is a technical services corporation specializing in
information systems, software development, electrical engineering,
telecommunications and physics.

F-18
<PAGE> 76

REPORT OF INDEPENDENT AUDITORS

Board of Directors
Space Applications Corporation

We have audited the accompanying consolidated balance sheets of Space
Applications Corporation and Subsidiary as of June 27, 1997 and June 28, 1996,
and the related consolidated statements of operations, shareholders' equity and
cash flows for each of the three years in the period ended June 27, 1997. 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 audits.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Space
Applications Corporation and Subsidiary at June 27, 1997 and June 28, 1996, and
the results of their operations and their cash flows for each of the three years
in the period ended June 27, 1997, in conformity with generally accepted
accounting principles.

ERNST & YOUNG LLP

Washington, D.C.
October 3, 1997

F-19
<PAGE> 77

SPACE APPLICATIONS CORPORATION AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS
ASSETS

<TABLE>
<CAPTION>
JUNE 27, JUNE 28,
1997 1996
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 354,879 $ 1,208,426
Receivables:
Trade.................................................. 3,330,940 3,744,479
Other.................................................. 30,206 59,409
----------- -----------
3,361,146 3,803,888
Costs and estimated earnings in excess of billings on
contracts in progress.................................. 2,839,541 2,274,950
Refundable income taxes................................... 179,121 160,168
Prepaid expenses.......................................... 441,616 452,406
Deferred income taxes..................................... 61,000 287,000
----------- -----------
Total current assets.............................. 7,237,303 8,186,838
Property and equipment:
Equipment................................................. 2,443,568 4,049,249
Leasehold improvements.................................... 1,212,042 1,158,902
Furniture and fixtures.................................... 376,542 406,390
Transportation equipment.................................. 20,527 20,527
----------- -----------
4,052,679 5,635,068
Less accumulated depreciation and amortization............ 2,900,941 4,445,234
----------- -----------
1,151,738 1,189,834
Contract rights............................................. 1,657,182 --
Note receivable from related party.......................... 235,155 210,788
Note receivable............................................. 167,237 --
Investments and advances -- Savant Corporation.............. 142,182 676,867
Deposits.................................................... 258,105 104,500
Deferred income taxes....................................... 158,000 157,000
Other assets................................................ 328,933 27,270
----------- -----------
Total assets...................................... $11,335,835 $10,553,097
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Line of credit............................................ $ 1,100,000 $ --
Term note payable -- current.............................. 333,334 --
Accounts payable.......................................... 1,299,149 1,260,280
Accrued expenses.......................................... 1,496,907 1,943,521
Notes payable -- Savant Corporation....................... -- 441,276
Deferred acquisition payments............................. 185,627 --
Deferred rent -- current.................................. 597,670 607,936
Income taxes payable...................................... -- 88,941
----------- -----------
Total current liabilities......................... 5,012,687 4,341,954
Term note payable -- long-term.............................. 666,666 --
Deferred rent............................................... -- 597,670
Deferred acquisition payments............................... 287,500 --
Deferred supplemental retirement............................ 208,494 --
----------- -----------
6,175,347 4,939,624
Shareholders' equity:
Common stock, $1 per share par value:
Authorized shares -- 1,000,000
Issued and outstanding shares -- 342,549 in 1997 and
350,881 in 1996....................................... 342,549 350,881
Additional paid-in capital................................ 534,123 353,083
Retained earnings......................................... 4,283,816 4,909,509
----------- -----------
5,160,488 5,613,473
----------- -----------
Total liabilities and shareholders' equity........ $11,335,835 $10,553,097
=========== ===========
</TABLE>

See accompanying notes.

F-20
<PAGE> 78

SPACE APPLICATIONS CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------------
JUNE 27, JUNE 28, JUNE 30,
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Contract revenue.................................... $25,582,679 $28,635,607 $27,251,278
Costs and expenses:
Costs of revenue:
Direct costs................................... 14,248,081 15,622,059 14,712,394
Overhead....................................... 8,357,574 8,666,240 8,491,171
----------- ----------- -----------
22,605,655 24,288,299 23,203,565
General and administrative........................ 1,830,459 2,005,204 4,210,347
Bid and proposal, and research and development.... 697,245 614,929 806,008
Equity in losses of Savant Corporation............ 638,834 61,166 --
Interest expense and other (income) loss, net..... 42,421 (20,323) 1,598
----------- ----------- -----------
25,814,614 26,949,275 28,221,518
----------- ----------- -----------
Income (loss) before income taxes................... (231,935) 1,686,332 (970,240)
Income tax expense (benefit)........................ 156,814 615,780 (418,257)
----------- ----------- -----------
Net income (loss)................................... $ (388,749) $ 1,070,552 $ (551,983)
=========== =========== ===========
Net income (loss) per common share:
Basic............................................. $ (1.11) $ 3.08 $ (1.44)
Diluted........................................... $ (1.11) $ 2.56 $ (1.44)
Weighted average common shares used in computing per
share amounts:
Basic............................................. 349,613 347,831 382,131
Diluted........................................... 349,613 417,481 382,131
</TABLE>

See accompanying notes.

F-21
<PAGE> 79

SPACE APPLICATIONS CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
--------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at June 24, 1994................. $ 419,481 $ 165,931 $ 5,710,919 $ 6,296,331
Net loss for 1995...................... -- -- (551,983) (551,983)
Shares issued under stock option
plans............................... 27,175 116,137 -- 143,312
Tax benefit from exercise of stock
options............................. -- 82,000 -- 82,000
Purchase and retirement of common
stock............................... (101,875) (159,406) (1,235,799) (1,497,080)
--------- --------- ----------- -----------
Balance at June 30, 1995................. 344,781 204,662 3,923,137 4,472,580
Net income for 1996.................... -- -- 1,070,552 1,070,552
Shares issued.......................... 5,000 59,850 -- 64,850
Shares issued under stock option
plans............................... 9,100 98,151 -- 107,251
Tax benefit from exercise of stock
options............................. -- 2,000 -- 2,000
Purchase and retirement of common
stock............................... (8,000) (11,580) (84,180) (103,760)
--------- --------- ----------- -----------
Balance at June 28, 1996................. 350,881 353,083 4,909,509 5,613,473
Net loss for 1997...................... -- -- (388,749) (388,749)
Shares issued.......................... 13,608 212,332 -- 225,940
Shares issued under stock option
plans............................... 4,500 64,755 -- 69,255
Tax benefit from exercise of stock
options............................. -- 2,500 -- 2,500
Purchase and retirement of common
stock............................... (26,440) (98,547) (236,944) (361,931)
--------- --------- ----------- -----------
Balance at June 27, 1997................. $ 342,549 $ 534,123 $ 4,283,816 $ 5,160,488
========= ========= =========== ===========
</TABLE>

See accompanying notes.

F-22
<PAGE> 80

SPACE APPLICATIONS CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------------
JUNE 27, JUNE 28, JUNE 30,
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)................................. $ (388,749) $ 1,070,552 $ (551,983)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization................... 392,641 356,499 606,775
Deferred income taxes........................... 225,000 360,000 (604,948)
Deferred rent................................... (389,936) (759,401) 1,296,237
Loss on disposal of equipment................... 64,457 36,874 --
Minority interest in losses of subsidiary....... -- 16,000 --
Equity in losses of Savant Corporation.......... 638,834 61,166 --
Changes in operating assets and liabilities:
Receivables.................................. 442,742 (883,559) (408,211)
Costs and estimated earnings in excess of
billings on contracts in progress.......... (764,591) (222,715) (176,446)
Prepaid expenses and other assets............ (433,461) 80,443 (439,413)
Accounts payable............................. 38,869 668,663 20,833
Other liabilities............................ (257,378) 481,044 (470,830)
----------- ----------- -----------
Net cash (used in) provided by operating
activities...................................... (431,572) 1,265,566 (727,986)
----------- ----------- -----------
INVESTING ACTIVITIES
Purchase of property and equipment................ (419,002) (731,528) (364,763)
Proceeds from sale of property and equipment...... -- 20,000 --
Payments for assets acquired -- Applied
Research........................................ (1,306,722) -- --
Cash paid to fund annuity......................... (28,500) -- --
Investment and advances -- Savant Corporation..... (89,359) (298,033) --
----------- ----------- -----------
Net cash used in investing activities............. (1,843,583) (1,009,561) (364,763)
----------- ----------- -----------
FINANCING ACTIVITIES
Borrowings on line of credit...................... 5,550,000 -- --
Repayments of line of credit...................... (4,450,000) -- --
Proceeds from issuance of term note............... 1,000,000 -- --
Principal payments on notes payable............... (440,000) (10,919) (10,711)
Sale of minority interest in subsidiary........... -- (16,000) --
Purchase and retirement of common stock........... (286,292) (103,760) (1,497,080)
Proceeds from sale of common stock................ 47,900 174,101 225,312
----------- ----------- -----------
Net cash provided by financing activities......... 1,421,608 43,422 (1,282,479)
----------- ----------- -----------
Increase (decrease) in cash and cash
equivalents..................................... (853,547) 299,427 (2,375,228)
Cash and cash equivalents at beginning of year.... 1,208,426 908,999 3,284,227
----------- ----------- -----------
Cash and cash equivalents at end of year.......... $ 354,879 $ 1,208,426 $ 908,999
=========== =========== ===========
</TABLE>

See accompanying notes.

F-23
<PAGE> 81

SPACE APPLICATIONS CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 27, 1997

1. SIGNIFICANT ACCOUNTING POLICIES

Significant accounting policies followed by Space Applications Corporation
and Subsidiary (the Company), as summarized below, are in conformity with
generally accepted accounting principles.

PRINCIPLES OF CONSOLIDATION AND USE OF ESTIMATES

The consolidated financial statements include the accounts of Space
Applications Corporation and its subsidiary, Staminet, Inc., which operate in
principally one business segment in the information technology industry. Space
Applications Corporation develops computer software and provides high technology
services primarily on a contractual basis for the United States Government and
the aerospace industry. Staminet, Inc. is a computer systems integrator and
Internet provider, specializing in local and wide area network design,
implementation and services for commercial and government customers. During the
year ended June 28, 1996, a minority equity interest representing approximately
11% of the outstanding stock of Staminet, Inc. was purchased by employees of
Staminet, Inc. The proceeds from the sale of the minority interest of $16,000
were fully offset by the allocable share of the losses of Staminet, Inc. in the
year ended June 28, 1996.

The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions, in particular estimates of anticipated contract costs and
revenues utilized in the earnings recognition process, that affect the reported
amounts in the financial statements and accompanying notes. Actual results could
differ from those estimates.

ACCOUNTING PERIOD

The Company operates its accounting cycle on a 52-53 week year. The last
Friday in the month of June is the Company's fiscal year end.

CASH EQUIVALENTS

Cash equivalents consist of investments that are readily convertible into
cash and generally have maturities of 90 days or less when purchased.

PROPERTY AND EQUIPMENT

Property and equipment is recorded at cost. Depreciation of equipment is
computed using the straight-line method over the estimated useful lives of the
assets which range from five to seven years. Amortization of leasehold
improvements is computed using the straight-line method over the term of the
leases.

DEFERRED RENT

Deferred rent expense arises from the recognition of rent expense on the
straight-line method over the term of the lease. At June 27, 1997 and June 28,
1996, deferred rent also includes a loss accrual balance of approximately
$278,000 and $800,000, respectively, representing the anticipated shortfall of
sublease income as compared to future leasing costs of a vacant facility. In
1997, the loss accrual balance was reduced by approximately $203,000 due to the
execution of a sublease on part of the vacant facility.

INCOME RECOGNITION AND CONTRACTS IN PROGRESS

The Company generally recognizes income on contracts using the percentage
of completion method. Accrued income is based on the percentage of estimated
total income that costs incurred to date bear to estimated total costs after
giving effect to the most recent estimates of cost and estimated contract price
at completion. Some contracts contain incentive provisions based upon
performance in relation to established

F-24
<PAGE> 82
SPACE APPLICATIONS CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 27, 1997

1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
targets to which applicable recognition has been given in the contract revenue
estimates. Since many contracts extend over a long period of time, revisions in
cost and price estimates during the progress of work have the effect of
adjusting earnings in the current period applicable to performance in prior
periods. When the contract estimate indicates a loss, provision is made for the
total anticipated loss. In accordance with these practices, contracts in
progress are stated at cost plus estimated profit, but not in excess of
realizable value.

Revenues on certain contracts obtained on a time and material basis are
accounted for as work is performed. Generally, the Company is required to meet
certain contractual milestones prior to having the right to bill the customer.
Certain customers require retention of a portion of the contract price or fee
until final settlement of overhead rates and close-out of the contract. Such
retainages are normally collected within one year.

EARNINGS PER SHARE

The Company's earnings per share calculations are based upon the weighted
average of shares of common stock outstanding. The dilutive effect of stock
options are excluded for purposes of calculating basic earnings per share as
such shares are deemed to be held by the Company. In addition, in periods where
the basic earnings per share is less than $0.00, the Company does not include
any effects of the options to acquire Common stock as the inclusion of such
securities would be anti-dilutive.

2. INVESTMENT IN SAVANT CORPORATION

In June 1996, the Company acquired for cash and notes payable, totaling
$700,000, a 45% interest in the outstanding common stock of Savant Corporation
(Savant), a software development company. This investment is accounted for under
the equity method. During fiscal 1997, Savant issued shares of preferred stock
which diluted the Company's ownership percentage to 36.82%. As of June 27, 1997,
the Company had recognized equity in losses of Savant of $700,000, an amount
equal to the equity investment. Notes payable to Savant of $440,000 were payable
monthly through September 1996, and were fully paid in the year ended June 27,
1997.

The initial investment agreement included an administrative services
agreement with Savant, whereby the Company provided Savant with certain
administrative and management services. The payment of up to $150,000 of these
costs could be deferred by Savant. Any deferred amounts earned interest at an
annual rate of 20% from the date of invoice until paid in full. Charges to
Savant under the administrative services agreement were based on the Company's
cost. The administrative services agreement was terminated effective January 31,
1997. Savant issued a promissory note of $142,182 to the Company, dated June 30,
1997, for the deferred amounts and accrued interest through June 30, 1997. The
note principal and interest at 20% per annum are due and payable on January 31,
2000.

At June 27, 1997 the Company was the guarantor of approximately $41,500 of
payments due under Savant's capital leases payable monthly through June 1999.

3. BANK CREDIT FACILITY

The Company has a loan agreement with a bank that includes a $3,500,000
line of credit and a $1,000,000 term note. The $3,500,000 line of credit expires
on November 30, 1997. Available borrowings under the line of credit are subject
to a borrowing base determined as a percentage of eligible accounts receivable.
The line of credit has an interest rate, at the Company's option, of LIBOR plus
1.75% per annum or prime which was 7.47% at June 27, 1997. At June 27, 1997,
$1,100,000 was outstanding under the line of credit.

F-25
<PAGE> 83
SPACE APPLICATIONS CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 27, 1997

3. BANK CREDIT FACILITY (CONTINUED)
In June 1997, the Company borrowed $1,000,000 under a term loan to finance
the purchase of the majority of the assets of Applied Research of Maryland, Inc.
See Note 10. Principal payments for the term loan of $27,778 are payable monthly
through June 2000, along with monthly payments of interest at the Prime Rate
plus .5 percent which was 9% at June 27, 1997.

The Company is required to meet various financial ratios and covenants
under the loan agreement, the most restrictive of which requires the Company to
maintain a minimum tangible net worth. As of June 27, 1997 the Company failed to
meet certain covenants of the loan agreement. However, the Company has obtained
waivers for the respective covenant requirements from the lender.

Interest paid for fiscal 1997 and 1996 was approximately $81,000 and
$13,000, respectively.

4. LEASES

The Company leases office facilities and certain equipment under
non-cancelable operating leases. As of June 27, 1997, future minimum lease
payments under non-cancelable operating leases with initial terms of one year or
more are as follows:

<TABLE>
<CAPTION>
FISCAL YEAR ENDING OPERATING LEASES
------------------ ----------------
<S> <C>
1998.......................................... $1,734,984
1999.......................................... 318,703
2000.......................................... 227,438
2001.......................................... 193,671
2002.......................................... 17,604
----------
Total minimum lease payments........ $2,492,400
==========
</TABLE>

Rental expense for fiscal 1997 and 1996 was approximately $1,160,000 and
$1,843,000, respectively. Future minimum sublease income from a non-cancelable
operating sublease, which extends to June 1998, is approximately $74,000. Future
payments of $597,670 under non-cancelable operating leases are included on the
balance sheet as deferred rent at June 27, 1997.

5. SHAREHOLDERS' EQUITY

In February 1997 the Company issued 11,608 shares of common stock with a
valuation of $200,000 to the Space Applications Corporation 401(k) and Profit
Sharing Plan as part of the fiscal 1996 profit sharing contribution. On March 2,
1997, the Company acquired 1,500 shares of stock from a former employee in
exchange for a promissory note of $25,845 to be repaid in three equal annual
principal payments plus simple interest.

During fiscal 1997, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation." SFAS No. 123 allows companies to continue to measure
compensation cost for stock-based employee compensation plans using the
intrinsic value method of accounting as prescribed in Accounting Principles
Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations. The Company has elected to continue its APB Opinion No.
25 accounting treatment for stock-based compensation, and has adopted the
provisions of SFAS No. 123 requiring disclosure of the pro forma effect on net
income (loss) as if compensation expense had been recognized based upon the
estimated fair value at the date of grant for options awarded. The effect of
applying SFAS No. 123 on the net loss as reported is not representative of the
effects on reported net income (loss) for future years due to the vesting period
of the stock options and the fair value of additional sock options in future
years. Had compensation expense been

F-26
<PAGE> 84
SPACE APPLICATIONS CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 27, 1997

5. SHAREHOLDERS' EQUITY (CONTINUED)
determined in accordance with the methodology of SFAS No. 123, the Company's net
(loss) income in 1997 and 1996 would have been approximately ($423,000) and
$1,036,000, respectively. The fair value of options granted during 1997 and 1996
are estimated as $3.45 and $3.34 per share, respectively, on the date of grant
using the minimum value option pricing model with the following assumptions:
dividend 0%, risk free interest rate of 6.00% for 1997 and 1996, and an expected
life of five years.

The Company has a qualified incentive stock option plan (ISOP) and a
non-qualified stock option plan (NQSOP). The ISOP provides that options be
granted to certain officers and key employees at prices equal to estimated fair
value at the date of grant. There were no ISOP options granted during fiscal
1997. The NQSOP options granted in fiscal 1997 were granted at a price
determined by an independent valuation conducted as of June 28, 1996. The NQSOP
options in fiscal 1996 were granted at a price equal to the book value per share
at June 30, 1995. Options granted are for ten years and become exercisable at
varying times. The Company has reserved 200,000 shares under the ISOP and NQSOP
plans.

Share information with respect to the options is as follows:

<TABLE>
<CAPTION>
ISOP NQSOP
------- -------
<S> <C> <C>
Outstanding at June 25, 1994:............................ 30,800 86,500
Exercised.............................................. (3,300) (23,875)
Canceled............................................... (19,000) (21,000)
------- -------
Outstanding at June 30, 1995:............................ 8,500 41,625
Granted................................................ -- 142,000
Exercised.............................................. (2,000) (7,100)
Canceled............................................... (2,000) (41,725)
------- -------
Outstanding at June 28, 1996:............................ 4,500 134,800
Granted................................................ -- 10,000
Exercised.............................................. (3,000) (1,500)
Canceled............................................... (1,500) (7,000)
------- -------
Outstanding at June 27, 1997............................. -- 136,300
======= =======
</TABLE>

Weighted average exercise prices of the options are as follows:

<TABLE>
<CAPTION>
ISOP NQSOP
------ ------
<S> <C> <C>
Outstanding at June 30, 1995:.............................. $13.29 $10.05
Granted.................................................. -- 12.97
Exercised................................................ 10.15 12.25
Canceled................................................. 12.39 11.49
------ ------
Outstanding at June 28, 1996:.............................. 15.09 12.57
Granted.................................................. -- 17.23
Exercised................................................ 16.60 12.97
Canceled................................................. 12.08 11.05
------ ------
Outstanding at June 27, 1997............................... $ -- $12.98
====== ======
</TABLE>

F-27
<PAGE> 85
SPACE APPLICATIONS CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 27, 1997

5. SHAREHOLDERS' EQUITY (CONTINUED)
The following table summarizes information about stock options outstanding
at June 27, 1997:

NQSOP OPTIONS OUTSTANDING

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
- ---------------------------------------- OPTIONS EXERCISABLE
WEIGHTED ----------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
OUTSTANDING LIFE (IN YEARS) PRICE EXERCISABLE PRICE
- ----------- --------------- -------- ----------- --------
<S> <C> <C> <C> <C>
5,800.... 3 $ 8.31 5,800 $ 8.31
8,000.... 5 11.23 8,000 11.23
112,500.. 8 12.97 43,300 12.97
10,000... 10 17.23 -- --
------- -- ------ ------ ------
136,300.. 8 $12.98 57,100 $12.25
======= == ====== ====== ======
</TABLE>

In September 1997, in connection with the resignation of an officer of the
Company, the Company paid approximately $420,000 to repurchase 7,000 shares of
common stock, to cancel options on 80,000 shares of common stock and to provide
a severance benefit.

The following table sets forth the computation of basic and dilutive
earnings per share:

<TABLE>
<CAPTION>
YEAR ENDED
JUNE 27, JUNE 28, JUNE 30,
1997 1996 1995
--------- ---------- ---------
<S> <C> <C> <C>
NUMERATOR:
Net (loss) income (no reconciling items for basic or
diluted earnings per share calculations)........... $(388,749) $1,070,552 $(551,983)
========= ========== =========
DENOMINATOR:
Denominator for weighted average basic earnings per
share.............................................. 349,613 347,831 382,131
EFFECT OF DILUTIVE SECURITIES:
Employee stock options................................ -- 69,650 --
--------- ---------- ---------
Denominator for diluted earnings per share adjusted
weighted average shares and assumed conversions....... 349,613 417,481 382,131
========= ========== =========
Basic earnings per share................................ $ (1.11) $ 3.08 $ (1.44)
--------- ---------- ---------
Diluted earnings per share.............................. $ (1.11) $ 2.56 $ (1.44)
--------- ---------- ---------
</TABLE>

6. 401(K) AND PROFIT SHARING PLAN

The Company has a discretionary profit sharing plan under which it
contributes up to a maximum of 15% of the salaries paid to eligible employees of
the Company. In addition, the plan also has a 401(k) feature under which all
employees of the Company other than casual status employees may contribute up to
15% of their salary with the Company matching 50% of employee contributions (up
to a maximum of 3% of each eligible employee's salary). Total expense under the
plan for fiscal 1997, 1996 and 1995 was approximately $315,000, $667,000 and
$444,000, respectively.

F-28
<PAGE> 86
SPACE APPLICATIONS CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 27, 1997

7. INCOME TAXES

Deferred income taxes reflect the net deferred tax asset arising from tax
effects of temporary differences between the carrying amounts of assets and
liabilities for financial statement purposes and the amounts used for income tax
purposes. A valuation allowance of approximately $273,000 was established in the
year ended June 27, 1997 for the equity in losses of Savant Corporation. No
valuation allowance was deemed necessary for other deferred tax assets as a
result of management's evaluation of the likelihood that all of the deferred tax
assets will be realized.

Significant components of the Company's deferred tax assets and liabilities
are as follows:

<TABLE>
<CAPTION>
JUNE 27, JUNE 28, JUNE 30,
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Deferred tax assets:
Accrued expenses not currently deductible for tax
purposes...................................... $353,411 $424,354 $746,479
Project reserves................................. 120,013 207,053 187,670
Equity in losses of Savant Corporation........... 273,000 -- --
Depreciation..................................... 24,168 11,980 9,918
-------- -------- --------
Total deferred tax assets.......................... 770,592 643,387 944,067
Valuation allowance.............................. (273,000) -- --
-------- -------- --------
497,592 643,387 944,067
-------- -------- --------
Deferred tax liabilities:
Unbilled receivables............................. 157,613 -- --
Prepaid expenses................................. 20,477 44,387 40,205
Other............................................ 100,502 155,000 99,862
-------- -------- --------
Total deferred tax liabilities..................... 278,592 199,387 140,067
-------- -------- --------
Net deferred tax assets............................ $219,000 $444,000 $804,000
======== ======== ========
</TABLE>

Significant components of the provision (benefit) for income taxes are as
follows:

<TABLE>
<CAPTION>
JUNE 27, JUNE 28, JUNE 30,
1997 1996 1995
-------- -------- ---------
<S> <C> <C> <C>
Current:
Federal......................................... $(42,713) $212,128 $ 152,000
State........................................... (25,473) 43,652 34,691
-------- -------- ---------
Total current..................................... (68,186) 255,780 186,691
Deferred:
Federal......................................... 182,000 286,000 (527,948)
State........................................... 43,000 74,000 (77,000)
-------- -------- ---------
Total deferred.................................... 225,000 360,000 (604,948)
-------- -------- ---------
$156,814 $615,780 $(418,257)
======== ======== =========
</TABLE>

The Company made income tax payments of approximately $327,000, $254,000
and $428,000 during fiscal 1997, 1996 and 1995, respectively.

F-29
<PAGE> 87
SPACE APPLICATIONS CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 27, 1997

7. INCOME TAXES (CONTINUED)
Income tax expense for each of the three years ending June 27, 1997, June
28, 1996 and June 30, 1995 varies from the amount which would have been computed
using statutory rates as follows:

<TABLE>
<CAPTION>
JUNE 27, JUNE 28, JUNE 30,
1997 1996 1995
-------- -------- ---------
<S> <C> <C> <C>
Tax computed at the federal statutory rate........ $(79,000) $573,000 $(330,000)
State income taxes, net of Federal income tax
benefit or charge............................... (12,000) 84,000 (49,000)
Valuation allowance on equity in losses in Savant
Corporation..................................... 273,000 -- --
Permanent differences and other................... (25,186) (41,220) (39,257)
-------- -------- ---------
Income tax (benefit)/expense...................... $156,814 $615,780 $(418,257)
======== ======== =========
</TABLE>

8. RESEARCH AND DEVELOPMENT

The Company incurred research and development costs of approximately
$103,000, $57,000 and $82,000 for fiscal 1997, 1996 and 1995, respectively.

9. RELATED PARTY TRANSACTIONS

The Company has a note receivable dated January 15, 1996 from an officer of
the Company in the amount of $200,000 with accrued interest of approximately
$35,000 and $11,000 at June 27, 1997 and June 28, 1996, respectively. The note
bears interest at the prime rate with principal and accrued interest payable on
or before January 15, 2001.

10. APPLIED RESEARCH ACQUISITION

On June 19, 1997, the Company purchased certain assets of Applied Research
of Maryland, Inc. ("ARM"), including the rights to contracts, unbilled accounts
receivable relating to contracts, and property and equipment for $1,750,000. The
majority of ARM employees were hired by the Company effective June 16, 1997 and
are included in the results from operations as of that date. The purchase price
consisted of $1,172,400 of cash at closing and $577,600 of assumed liabilities
and deferred payments payable through three years after the closing date. The
Company also incurred $134,322 of legal fees and other due diligence expenses
related to the purchase. The Company financed $1,000,000 of the cash due at
closing through a 36 month bank term note.

The transaction was accounted for using the purchase method of accounting.
The purchase price, including transaction expenses, of $1,884,322 was allocated
to purchased assets as follows:

<TABLE>
<S> <C>
Unbilled accounts receivable..................... $ 200,000
Property and equipment........................... 27,141
Contracts rights................................. 1,657,181
----------
$1,884,322
==========
</TABLE>

Contract rights will be amortized to expense over five years based on the
profits expected to be realized from the contracts.

F-30
<PAGE> 88
SPACE APPLICATIONS CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 27, 1997

Pro forma unaudited consolidated operating results of the Company for the
years ended June 27, 1997 and June 28, 1996, respectively, assuming the
acquisition had been made at the beginning of each of the respective years are
summarized below:

<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Pro forma Revenue.......................................... $31,500,000 $34,600,000
Pro forma Net Income (Loss)................................ (464,000) 995,000
Pro forma Income (Loss) per common share................... $ (1.33) $ 2.86
Pro forma Income (Loss) per common share assuming
dilution................................................. $ (1.33) $ 2.38
</TABLE>

These pro forma results have been prepared for comparative purposes only
and include adjustments such as additional amortization expense as a result of
contract rights and increased interest expense related to debt used to finance
the acquisition. They do not purport to be indicative of the results of
operations which actually would have resulted had the combination been in effect
at the beginning of the periods presented, or of the future results of
operations of the Company.

F-31
<PAGE> 89

SPACE APPLICATIONS CORPORATION AND SUBSIDIARY

UNAUDITED CONSOLIDATED BALANCE SHEET

ASSETS

<TABLE>
<CAPTION>
APRIL 3, 1998
----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
Current Assets:
Cash...................................................... $ 300
Accounts receivable....................................... 4,963
Costs and estimated earnings in excess of billings on
contracts in progress, net allowance................... 1,955
Inventory................................................. 75
Prepaid expenses and other current assets................. 477
-------
Total current assets................................... 7,770
Property and equipment, net................................. 1,106
Other assets................................................ 2,177
Notes receivable, officers.................................. 244
-------
Total assets........................................... $11,297
=======

LIABILITIES
Current Liabilities:
Trade accounts payable.................................... $ 1,635
Current portion of long-term debt......................... 1,683
Accrued salaries, wages, and payroll taxes................ 1,478
Accrued bonuses........................................... 176
Other liabilities......................................... 206
-------
Total current liabilities.............................. 5,178
Deferred rents.............................................. 188
Other deferreds............................................. 472
Long-term debt, excluding current portion................... 417
-------
Total liabilities...................................... 6,255
Shareholders' equity:
Common stock, no par value................................ 337
Additional paid in capital................................ 590
Retained earnings......................................... 4,115
-------
Total shareholders' equity............................. 5,042
-------
Total liabilities and shareholders' equity............. $11,297
=======
</TABLE>

See accompanying notes to unaudited consolidated financial statements

F-32
<PAGE> 90

SPACE APPLICATIONS CORPORATION AND SUBSIDIARY

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
NINE MONTHS ENDED
-------------------------------
APRIL 3, 1998 MARCH 28, 1997
------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Net revenues................................................ $22,912 $19,417
Cost of revenues............................................ 16,181 13,581
------- -------
Gross profit........................................... 6,731 5,836
Selling, general and administrative expenses................ 6,614 5,892
------- -------
Operating income (loss)................................ 117 (56)
Other (income) expense:
Interest expense.......................................... 174 40
Other (income) expense, net............................... (13) 187
------- -------
Loss before income taxes............................... (44) (283)
Income tax expense (benefit)................................ (17) (113)
------- -------
Net loss............................................... $ (27) $ (170)
======= =======
</TABLE>

See accompanying notes to unaudited consolidated financial statements.

F-33
<PAGE> 91

SPACE APPLICATIONS CORPORATION AND SUBSIDIARY

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
NINE MONTHS ENDED
------------------------------
APRIL 3, 1998 MARCH 28, 1997
------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net (loss)................................................ $ (27) $ (170)
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities:
Provision for costs and estimated earnings in excess of
current billings...................................... 11 15
Depreciation and amortization.......................... 609 335
Changes in assets and liabilities:
Trade accounts receivable.............................. (1,632) (296)
Cost and estimated earnings in excess of current
billings.............................................. 873 (19)
Prepaid expenses and other current assets.............. 160 (195)
Deferred rent.......................................... (410) (479)
Accounts payable and other current liabilities......... 513 (1,252)
------- -------
Net cash provided by (used in) operating
activities...................................... 97 (2,061)
------- -------
Cash flows from investing activities:
Net purchases of property and equipment................... (262) (383)
Net change in notes receivable from related party......... (9) 7
Net change in other noncurrent assets..................... 234 124
------- -------
Net cash used in investing activities............. (37) (252)
------- -------
Cash flows from financing activities:
Borrowings on line of credit.............................. 250 1,700
Repayment of term note.................................... (250) --
Net change in other liabilities........................... (23) (441)
Net proceeds from issuance of common stock................ 75 226
Exercise of stock options................................. -- 70
Purchase and retirement of common stock................... (167) (350)
------- -------
Net cash (used in) provided by financing
activities...................................... (115) 1,205
------- -------
Net decrease in cash.............................. (55) (1,108)
------- -------
Cash and cash equivalents at beginning of period............ 355 1,208
Cash and cash equivalents at end of period.................. $ 300 $ 100
======= =======
</TABLE>

See accompanying notes to unaudited consolidated financial statements

F-34
<PAGE> 92

SPACE APPLICATIONS CORPORATION AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED APRIL 3, 1998 AND MARCH 28, 1997

1. BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements of Space
Applications Corporation (SAC) and subsidiaries have been prepared in accordance
with generally accepted accounting principles ("GAAP") for the interim financial
reporting. Accordingly, they do not include all of the information and footnote
disclosures necessary for complete financial statements in conformity with GAAP.
These unaudited consolidated financial statements should be read in conjunction
with the audited consolidated financial statements included in this current
report.

In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments considered necessary for a fair
presentation of the financial condition as of April 3, 1998, the results of
operations for the nine months ended March 31, 1998 and 1997, the statement of
cash flows for the nine months ended April 3, 1998 and March 28, 1997 and the
statements of shareholders' equity for the nine months ended April 3, 1998 and
March 28, 1997. Certain reclassifications to prior period financial statements
have been made in order to conform to the current period presentation.

2. SUBSEQUENT EVENTS

On May 18, 1998, SAC completed a purchase agreement with Steven Myers and
Associates, Inc.(SM&A) whereby all shares of the common stock of SAC were
exchanged for $14.7 million in common shares of SM&A.

F-35
<PAGE> 93

INDEPENDENT AUDITORS' REPORT

To the Board of Directors of
Decision-Science Applications, Inc.:

We have audited the accompanying consolidated balance sheets of
Decision-Science Applications, Inc. and subsidiary as of January 31, 1998 and
1997, and the related consolidated statements of earnings, stockholders' equity,
and cash flows for each of the three years in the period ended January 31, 1998.
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 audits.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Decision-Science Applications, Inc. and subsidiary as of January 31, 1998 and
1997, and the results of their operations and their cash flows for each of the
three years in the period ended January 31, 1998, in conformity with generally
accepted accounting principles.

DELOITTE & TOUCHE LLP
Washington, DC
April 13, 1998

F-36
<PAGE> 94

DECISION-SCIENCE APPLICATIONS, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS
JANUARY 31, 1998 AND 1997

ASSETS

<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 30,831 $ 698,321
Accounts receivable....................................... 12,687,706 10,174,220
Prepaid expenses and other assets......................... 276,821 236,490
Refundable income taxes................................... 697,000 --
----------- -----------
Total current assets.............................. 13,692,358 11,109,031
----------- -----------
PROPERTY AND EQUIPMENT:
Furniture and equipment................................... 4,067,829 3,437,679
Leasehold improvements.................................... 506,656 429,603
----------- -----------
4,574,485 3,867,282
Less accumulated depreciation and amortization............ (3,366,054) (2,743,567)
----------- -----------
1,208,431 1,123,715
----------- -----------
OTHER ASSETS:
Capitalized software development costs -- net of
accumulated amortization -- $732,067 and $494,294,
respectively........................................... 1,486,527 1,107,241
DEFERRED TAXES ON INCOME.................................... 250,700 --
----------- -----------
$16,638,016 $13,339,987
=========== ===========

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable to bank...................................... $ 1,795,000 $ --
Accounts payable and accrued expenses..................... 939,709 565,807
Accrued salaries, benefits, and amounts withheld.......... 2,771,725 2,955,129
Unearned revenue.......................................... 144,799 237,362
Income taxes payable...................................... -- 524,000
Deferred taxes on income.................................. 4,088,000 2,559,500
----------- -----------
Total current liabilities......................... 9,739,233 6,841,798
----------- -----------
LONG-TERM NOTES PAYABLE..................................... 20,739 19,162
ACCRUED RENT................................................ 374,879 523,006
DEFERRED TAXES ON INCOME.................................... -- 322,000
STOCKHOLDERS' EQUITY:
Common Stock, par value $.01 per share; authorized,
1,000,000 shares; issued, 115,900 shares............... 1,159 1,159
Retained earnings......................................... 6,568,185 6,160,061
----------- -----------
6,569,344 6,161,220
Less shares of Common Stock in treasury, at cost -- 8,076
shares -- 1998; 29,467 shares -- 1997.................. (66,179) (527,199)
----------- -----------
6,503,165 5,634,021
----------- -----------
$16,638,016 $13,339,987
=========== ===========
</TABLE>

See notes to consolidated financial statements.

F-37
<PAGE> 95

DECISION-SCIENCE APPLICATIONS, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED JANUARY 31, 1998, 1997, AND 1996

<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
CONTRACT REVENUES................................... $36,888,310 $30,670,236 $24,203,744
----------- ----------- -----------
COSTS AND EXPENSES:
Cost of contract services......................... 31,263,866 25,241,811 19,938,474
General and administrative........................ 2,732,497 2,320,676 1,663,409
Other expenses.................................... 1,988,284 1,045,209 671,231
----------- ----------- -----------
35,984,647 28,607,696 22,273,114
----------- ----------- -----------
903,663 2,062,540 1,930,630
INTEREST AND OTHER INCOME........................... 112,630 163,962 86,423
INTEREST EXPENSE.................................... (11,026) (29,986) (28,515)
----------- ----------- -----------
EARNINGS BEFORE TAXES ON INCOME..................... 1,005,267 2,196,516 1,988,538
TAXES ON INCOME..................................... 391,000 900,500 724,200
----------- ----------- -----------
NET EARNINGS........................................ $ 614,267 $ 1,296,016 $ 1,264,338
=========== =========== ===========
</TABLE>

See notes to consolidated financial statements.

F-38
<PAGE> 96

DECISION-SCIENCE APPLICATIONS, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JANUARY 31, 1998, 1997, AND 1996

<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK
---------------- RETAINED -------------------
SHARES AMOUNT EARNINGS SHARES AMOUNT TOTAL
------- ------ ---------- ------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, FEBRUARY 1, 1995.......... 115,900 $1,159 $3,656,082 39,509 $(659,843) $2,997,398
Net earnings..................... -- -- 1,264,338 -- -- 1,264,338
Stock option plan activity....... -- -- (86,476) (7,232) 175,299 88,823
Repurchase of common stock....... -- -- -- 7,161 (197,580) (197,580)
Tax benefit from exercise of
stock options................. -- -- 44,400 -- -- 44,400
------- ------ ---------- ------- --------- ----------
BALANCE, JANUARY 31, 1996.......... 115,900 1,159 4,878,344 39,438 (682,124) 4,197,379
Net earnings..................... -- -- 1,296,016 -- -- 1,296,016
Stock option plan activity....... -- -- (126,899) (15,257) 372,893 245,994
Repurchase of common stock....... -- -- -- 5,286 (217,968) (217,968)
Tax benefit from exercise of
stock options................. -- -- 112,600 -- -- 112,600
------- ------ ---------- ------- --------- ----------
BALANCE, JANUARY 31, 1997.......... 115,900 1,159 6,160,061 29,467 (527,199) 5,634,021
Net earnings..................... -- -- 614,267 -- -- 614,267
Stock option plan activity....... -- -- (206,143) (26,363) 686,005 479,862
Repurchase of common stock....... -- -- -- 4,972 (224,985) (224,985)
------- ------ ---------- ------- --------- ----------
BALANCE, JANUARY 31, 1998.......... 115,900 $1,159 $6,568,185 8,076 $ (66,179) $6,503,165
======= ====== ========== ======= ========= ==========
</TABLE>

See notes to consolidated financial statements.

F-39
<PAGE> 97

DECISION-SCIENCE APPLICATIONS, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JANUARY 31, 1998, 1997, AND 1996

<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Reconciliation of net earnings to net cash (used in)
provided by operating activities:
Net earnings.......................................... $ 614,267 $ 1,296,016 $ 1,264,338
Depreciation and amortization......................... 860,260 605,940 723,695
Write-off of investment in joint venture.............. 270,000 -- --
Interest added to principal of notes payable.......... 1,577 1,535 1,543
Deferred taxes on income.............................. 955,900 373,325 683,594
Accrued rent.......................................... (148,127) (316,284) (299,281)
Decrease (increase) in:
Accounts receivable................................ (2,513,486) 102,703 (1,608,119)
Prepaid expenses and other assets.................. (40,331) (143,981) 30,442
Refundable income taxes............................ (697,000) 149,000 384,000
Increase (decrease) in:
Accounts payable and accrued expenses.............. 373,802 175,530 (386,321)
Accrued salaries, benefits, and amounts withheld... (183,404) 1,103,574 156,145
Unearned revenue................................... (92,563) 157,955 (13,712)
Income taxes payable............................... (524,000) 524,000 --
----------- ----------- -----------
Net cash (used in) provided by operating
activities.................................. (1,123,105) 4,029,313 936,324
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment.................... (707,203) (485,125) (441,644)
Capitalized software development costs................ (617,059) (583,212) (437,909)
Investment in joint venture........................... (270,000) -- --
----------- ----------- -----------
Net cash used in investing activities......... (1,594,262) (1,068,337) (879,553)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under line-of-credit agreement............. 1,795,000 -- 2,300,000
Repayments under line-of-credit agreement............. -- (2,300,000) (2,250,000)
Repayments of long-term notes payable................. -- (1,805) --
Stock option plan activity............................ 479,862 245,994 88,823
Repurchase of common stock............................ (224,985) (217,968) (197,580)
----------- ----------- -----------
Net cash provided by (used in) financing
activities.................................. 2,049,877 (2,273,779) (58,757)
----------- ----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS.... (667,490) 687,197 (1,986)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR............ 698,321 11,124 13,110
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR.................. $ 30,831 $ 698,321 $ 11,124
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE:
Cash paid during the year for interest................ $ 9,449 $ 33,739 $ 28,515
=========== =========== ===========
Cash paid during the year for taxes................... $ 656,141 $ 1,688 $ --
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
Reduction in current tax liability resulting from tax
benefit from exercise of stock options............. $ -- $ 112,600 $ 44,400
=========== =========== ===========
</TABLE>

See notes to consolidated financial statements.

F-40
<PAGE> 98

DECISION-SCIENCE APPLICATIONS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 1998, 1997, AND 1996

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business -- Decision-Science Applications, Inc. (the
Company) is a privately owned technical services corporation. DSA's key areas of
expertise are in information systems, software development, electrical
engineering, telecommunications and physics.

Basis of Consolidation -- The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiary, DSA Systems, Inc. All
significant intercompany accounts and transactions have been eliminated in
consolidation.

Contract Revenues -- Substantially all the Company's services are performed
for the United States Government under various cost reimbursable and fixed-price
contracts. For financial reporting purposes, the Company records revenue from
fixed-price contracts on the percentage-of-completion method and from cost-
reimbursable contracts, including cost-plus-fixed-fee contracts, on the basis of
reimbursable costs plus a pro rata portion of the fee. Contract costs for
services supplied to the U.S. Government, including indirect expenses, are
subject to audit by the Government's representatives. All contract revenues are
recorded in amounts that are expected to be realized upon final settlement.
Government audits have been completed through fiscal year 1997.

Software Revenues -- The Company has a Master Development and Distribution
Agreement for the licensing of several software products to a manufacturer of
test instruments. The Company receives royalties from the instrument
manufacturer as software product units are sold and distributed. The Company
recognizes royalty revenue as payments are received from the instrument
manufacturer.

Unbilled Receivables -- Unbilled receivables include certain costs and a
portion of the fee or expected profit which is billable upon completion of the
contracts or the completion of certain tasks under terms of the contracts.

Depreciation and Amortization -- The cost of furniture and equipment is
depreciated from the date of installation using accelerated and straight-line
methods over the estimated useful lives of the various classes of property,
which range from five to eight years.

The cost of leasehold improvements is amortized on the straight-line method
based on the shorter of the estimated useful lives of the improvements or
remaining lease period.

Capitalized Software Development Costs -- The Company capitalizes certain
product related software development costs after technological feasibility has
been reached. These costs are amortized on the greater of the straight-line
method over the product's remaining estimated economic life or the ratio of the
product's current gross revenues to the total of the product's current and
anticipated future gross revenues. Amortization costs for the years ended
January 31, 1998, 1997, and 1996, were approximately $238,000, $104,000, and
$180,000, respectively.

Income Taxes -- Income taxes are accounted for using Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes," which
utilizes the asset and liability method of accounting for income taxes. Under
the asset and liability method, deferred income taxes are recognized for the
future tax consequences of temporary differences by applying enacted statutory
tax rates applicable to future years to differences between the financial
statement carrying amounts and the tax basis of existing assets and liabilities.

Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amount of revenues and expenses during
the reporting period. Actual results could differ from those estimates.

F-41
<PAGE> 99
DECISION-SCIENCE APPLICATIONS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1998, 1997, AND 1996

Cash and Cash Equivalents -- For purposes of the statements of cash flows,
the Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.

Stock Option Plan -- The Company accounts for its stock-based compensation
plan under APB Opinion No. 25. In 1997, the Company adopted the disclosures
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation."

Reclassifications -- Certain reclassifications have been made to prior-year
balances to conform to the current-year presentation.

2. INVESTMENT IN JOINT VENTURE

On January 1, 1996, the Company entered into an agreement which established
SMD Software LLC, a limited liability company (LLC), with SpaceLabs Medical,
Inc. The Company contributed internally developed software for a 45% interest.
The book value of the contributed software was $0.00. During fiscal year 1998,
the Company made an additional capital contribution of $270,000 to the joint
venture. This additional investment was subsequently written down to $0.00
because of the uncertainty of future earnings from the joint venture and the
realizability of this investment. Therefore, no investment has been recorded in
the financial statements of the Company as of and for the years ended January
31, 1997 and 1998. The investment is accounted for under the equity method.
Profits or losses are allocated based upon the respective ownership interest of
each partner.

The Company recorded approximately $700,000 and $1,000,000 of revenues from
sales to SMD Software LLC, during the years ended January 31, 1998 and 1997,
respectively.

3. ACCOUNTS RECEIVABLE

At January 31, accounts receivable consisted of the following:

<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Billed.................................... $11,607,341 $ 9,486,590
Unbilled.................................. 1,080,365 687,630
----------- -----------
$12,687,706 $10,174,220
=========== ===========
</TABLE>

4. NOTE PAYABLE TO BANK

Effective June 30, 1997, the Company renewed a line of credit with a bank
to provide for borrowings up to $2,750,000 at 1/2 of 1% over the bank's prime
rate, secured by all accounts receivable of the Company. Borrowings at January
31, 1998, amounted to $1,795,000. The agreement requires the Company to maintain
certain working capital and other financial ratios. The agreement, unless
renewed, expires on June 30, 1999.

F-42
<PAGE> 100
DECISION-SCIENCE APPLICATIONS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1998, 1997, AND 1996

5. LONG-TERM NOTES PAYABLE

At January 31, notes payable consisted of the following:

<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Notes payable to employees and employees' families: the
notes bear interest at prime less 1/2 of 1%; the
balance includes principal and accumulated interest and
is payable eighteen months after written request from
the holders of the notes and is subordinated to any
Company bank indebtedness; at the Company's discretion,
payments may be made prior to the due date............. $20,739 $19,162
======= =======
</TABLE>

6. TAXES ON INCOME

The provision for taxes on income includes the following for the years
ended January 31:

<TABLE>
<CAPTION>
1998 1997 1996
--------- -------- --------
<S> <C> <C> <C>
Current:
Federal................................. $(271,000) $495,200 $ 36,000
State................................... (116,000) 116,800 5,200
--------- -------- --------
(387,000) 612,000 41,200
--------- -------- --------
Deferred:
Federal................................. 623,000 167,300 605,000
State................................... 155,000 121,200 78,000
--------- -------- --------
778,000 288,500 683,000
--------- -------- --------
$ 391,000 $900,500 $724,200
========= ======== ========
</TABLE>

Deferred Income Taxes -- The principal components of the deferred portion
of the provision for income taxes for the years ended January 31, 1998, 1997 and
1996 are as follows:

<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- --------
<S> <C> <C> <C>
Accrual to cash conversion............... $ 814,000 $ 351,000 $827,000
Capitalized software..................... 133,000 (168,000) (90,000)
Net operating loss....................... (227,000) -- (79,000)
Other.................................... (97,000) (15,700) (53,000)
State income taxes....................... 155,000 121,200 78,000
--------- --------- --------
$ 778,000 $ 288,500 $683,000
========= ========= ========
</TABLE>

The approximate tax effect of each type of temporary difference that gave
rise to the Company's deferred tax liability at January 31, 1998 and 1997, is as
follows:

<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Current:
Accrual to cash conversion...................... $(3,009,000) $(2,208,000)
Capitalized software............................ (521,000) --
State taxes..................................... (558,000) (403,000)
Other........................................... -- 52,000
----------- -----------
Current deferred tax liability.................... $(4,088,000) $(2,559,000)
=========== ===========
</TABLE>

F-43
<PAGE> 101
DECISION-SCIENCE APPLICATIONS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1998, 1997, AND 1996

<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Noncurrent:
Alternative minimum tax credit.................. $ 227,000 $ --
Capitalized software............................ -- (388,000)
Fixed asset basis difference.................... 23,700 86,000
Other........................................... -- (20,000)
----------- -----------
Noncurrent deferred tax asset (liability)......... $ 250,700 $ (322,000)
=========== ===========
</TABLE>

Effective and Statutory Rate Reconciliation - The differences between the
effective rate in the provision for income taxes and the statutory rate for
federal income taxes for the years ended January 31, 1998, 1997 and 1996 are as
follows:

<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Statutory federal income tax rate.......... 35% 35% 35%
======== ======== ========
Provision computed at federal statutory
rate..................................... $352,000 $769,000 $696,000
State income taxes, net of federal
benefit.................................. 39,000 86,000 43,000
Other...................................... -- 45,500 (14,800)
-------- -------- --------
$391,000 $900,500 $724,200
======== ======== ========
</TABLE>

7. EMPLOYEE BENEFIT PLANS

The Company maintains a profit-sharing retirement plan and trust, which is
qualified as to form under Sections 40l(a) and 401(k) of the Internal Revenue
Code. It is Company policy to contribute annually an amount equal to a certain
percentage of qualified employees' salaries. Employees may elect to make
voluntary contributions on either a pretax or after-tax basis, or both, subject
to certain plan and statutory limitations. The Company's contributions for the
years ended January 31, 1998, 1997, and 1996, were $1,187,800, $1,211,744, and
$1,027,475, respectively.

The Company has an Employee Stock Ownership Plan, which is qualified under
Section 401(a) of the Internal Revenue Code. All permanent employees with two
years' service are eligible for the plan. Only the Company may contribute to the
plan. All contributions are discretionary and may be paid in cash or in shares
of Company stock. Contributions will be allocated to eligible participants based
on the ratio that each such eligible participant's compensation for the plan
year bears to the total compensation of all such eligible participants for the
plan year. The Company made no contributions during the years ended January 31,
1998, 1997, and 1996.

8. STOCKHOLDERS' EQUITY

In accordance with the terms of a stock purchase agreement, the Company has
an option to repurchase outstanding shares should certain events, as defined in
the agreement, occur. The repurchase price is the book value of stock as of the
end of the month in which such events occur.

The Company has a stock option plan which allows for the granting of
incentive options to Company officers and employees to purchase shares of common
stock at an option price set by the Board of Directors to approximate fair
market value on the date of the grant. All options granted expire five years
from the date of grant. A total of 750,000 shares of common stock has been
reserved for this plan.

F-44
<PAGE> 102
DECISION-SCIENCE APPLICATIONS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1998, 1997, AND 1996

Stock option activity for the years ended January 31, 1998, 1997, and 1996,
is as follows:

<TABLE>
<CAPTION>
END OF YEAR
---------------------------
WEIGHTED WEIGHTED
OPTIONS AVERAGE OPTIONS AVERAGE
OUTSTANDING OPTION PRICE EXERCISABLE OPTION PRICE
----------- ---------------- ----------- ------------
<S> <C> <C> <C> <C>
Outstanding at February 1, 1995........ 132,134 $19.07
Granted.............................. 63,220 $27.96
Exercised............................ (7,232) $12.28
Canceled............................. (14,959) $16.82
-------
Outstanding at January 31, 1996........ 173,163 $23.79 154,794 $21.77
======= ======
Granted.............................. 38,490 $36.78
Exercised............................ (15,257) $24.44
Canceled............................. (16,720) $25.78
Forfeited............................ (2,526) $25.78
-------
Outstanding at January 31, 1997........ 177,150 $26.34 114,285 $23.24
======= ======
Granted.............................. 12,655 $44.32
Exercised............................ (26,363) $26.02
Canceled............................. (57,663) $21.09
Forfeited............................ (2,859) $17.20
-------
Outstanding at January 31, 1998........ 102,920 $31.84 67,093 $29.27
======= ======= ======
Option Price Range..................... $21.46 to $44.32
</TABLE>

In 1997, the Company adopted the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." The Company has elected to continue
to account for its stock-based compensation plan under APB Opinion No. 25. For
SFAS No. 123 purposes, the fair value of each option has been estimated as of
the date of grant using the minimum value method with a risk-free interest rate
of 6% and an expected life of approximately five years. Using these assumptions,
the fair value of the stock options is approximately $139,000, $437,000, and
$350,000 for the years ended January 31, 1998, 1997, and 1996, respectively,
which would be amortized over the vesting period of the options. Had
compensation expense been determined consistent with SFAS No. 123, utilizing the
assumptions detailed above, the Company's net earnings for the years ended
January 31, 1998, 1997, and 1996, would be reduced to the following pro forma
amounts:

<TABLE>
<S> <C>
1998
Net income:
As reported............................................ $ 614,267
Pro forma.............................................. 590,693

1997
Net income:
As reported............................................ $1,296,016
Pro forma.............................................. 1,227,884

1996
Net income:
As reported............................................ $1,264,338
Pro forma.............................................. 1,236,358
</TABLE>

The resulting pro forma compensation expense may not be representative of
that expected in future years.

F-45
<PAGE> 103
DECISION-SCIENCE APPLICATIONS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1998, 1997, AND 1996

9. COMMITMENTS

Lease Obligations -- The Company leases office space in Virginia, Texas,
Colorado, and New York. The lease of the New York facility expires in 2001. The
lease of the San Antonio facility expires in 2003. The lease of the Colorado
facility expires in 2000. The lease of the Virginia facility provides for a rent
abatement arrangement during the first two years of the lease term that expires
in 1999. The Company is accounting for the cost of these leases by recognizing
rent expense on a straight-line basis over the lease term. The leases contain an
escalation clause related to increases in the Consumer Price Index and provides
options for both extension and expansion. During the year the Company acquired
additional spaces in Virginia and Texas Offices, which did not affect the lease
expiration periods. The following is a composite schedule, by year, of minimum
rental payments as of January 31, 1998:

<TABLE>
<CAPTION>
YEAR ENDING
JANUARY 31, AMOUNT
----------- ----------
<S> <C>
1999................................................... $2,082,000
2000................................................... 273,000
2001................................................... 194,000
2002................................................... 160,000
2003................................................... 13,000
----------
Total minimum lease payments........................... $2,722,000
==========
</TABLE>

Rental expense for the years ended January 31, 1998, 1997, and 1996, was
$1,915,241, $1,708,531, and $1,614,624, respectively. Rental of a portion of the
Company's leased space in Virginia resulted in revenue of $64,100, $58,759, and
$13,035, for the years ended January 31, 1998, 1997, and 1996, respectively.

F-46
<PAGE> 104

DECISION-SCIENCE APPLICATIONS, INC. AND SUBSIDIARY

UNAUDITED CONSOLIDATED BALANCE SHEET

ASSETS

<TABLE>
<CAPTION>
JULY 31, 1998
-------------
<S> <C>
Current Assets:
Cash and cash equivalents................................. $ 2,845,647
Accounts receivable....................................... 10,391,378
Prepaid expenses and other current assets................. 305,879
-----------
Total current assets................................... $13,542,904
-----------
Property and Equipment:
Furniture and equipment................................... 4,313,653
Leasehold improvements.................................... 559,665
-----------
4,873,318
Less accumulated depreciation and amortization............ (3,684,454)
-----------
Net furniture, equipment and leaseholds................ 1,188,864
-----------
Other Assets:
Capitalized software development costs.................... 1,670,208
Equity in joint venture................................... 66,272
Deferred taxes on income.................................. 250,700
-----------
Total assets........................................... $16,718,948
===========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
Accounts payable.......................................... $ 1,024,540
Accrued expenses.......................................... 3,532,580
Unearned revenue.......................................... 375,967
Deferred taxes on income.................................. 4,061,356
-----------
Total current liabilities.............................. 8,994,443
Notes payable, excluding current portion.................... 21,633
Accrued rent................................................ 214,646
-----------
Total liabilities...................................... 9,230,722
-----------
Stockholders Equity:
Common stock.............................................. 1,159
Retained earnings......................................... 7,576,133
Less shares of Common Stock in treasury at cost........... (89,066)
-----------
Total stockholders' equity............................. 7,488,226
-----------
Total liabilities and stockholders' equity............. $16,718,948
===========
</TABLE>

F-47
<PAGE> 105

DECISION-SCIENCE APPLICATIONS, INC. AND SUBSIDIARY

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
------------------------------
JULY 31, 1998 JULY 31, 1997
------------- -------------
<S> <C> <C>
Contract revenues........................................... $16,995,428 $17,587,526

Costs and expenses:
Costs and contract services............................... 13,762,995 14,725,647
General and administrative................................ 1,561,249 1,345,784
Other expenses............................................ 17,553 60,594
----------- -----------
Total costs and expenses of revenues................... 15,341,797 16,132,025
----------- -----------
1,653,631 1,455,501
Interest and other income................................... 51,327 70,873
Interest expense............................................ 22,450 4,300
----------- -----------
Earnings before income taxes................................ 1,682,508 1,522,074
Taxes on income............................................. 673,000 623,600
----------- -----------
Net earnings................................................ $ 1,009,508 $ 898,474
=========== ===========
</TABLE>

F-48
<PAGE> 106

DECISION-SCIENCE APPLICATIONS, INC. AND SUBSIDIARY

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
------------------------------
JULY 31, 1998 JULY 31, 1997
------------- -------------
<S> <C> <C>
Cash flows from operations:
Net earnings.............................................. $ 1,009,508 $ 898,474
Depreciation and amortization............................. 520,354 354,364
Accrued rent.............................................. (160,233) (14,019)
Interest added to notes payable........................... 894 1,853
Deferred taxes on income.................................. 673,000 623,600

Decrease (increase) in:
Accounts receivable.................................... 2,296,328 (1,685,248)
Prepaid expenses....................................... (29,058) 61,057
Accounts payable....................................... 84,861 786,731
Accrued expenses....................................... 760,855 (138,952)
Unearned revenue....................................... 231,168 --
Income taxes payable................................... (2,675) (634,249)
----------- -----------
Net cash provided by operations...................... 5,385,002 253,611

Cash flows from investing activities:
Purchase of property and equipment........................ (298,833) (422,936)
Increase capitalized software............................. (385,635) (338,083)
Investment in joint venture............................... (66,272) --
----------- -----------
Net cash used in investing activities................ (750,740) (761,019)

Cash flows from financing activities:
Borrowings under line-of-credit agreement................. 500,000 --
Repayments under line-of-credit agreement................. (2,295,000) --
Stock option plan activity................................ 13,968 67,865
Repurchase of common stock................................ (38,414) --
----------- -----------
Net cash (used in) provided by financing
activities.......................................... (1,819,446) 67,865
Net increase (decrease) in cash and cash equivalents........ 2,814,816 (439,543)
Cash and cash equivalents, beginning of period.............. 30,831 698,321
----------- -----------
Cash and cash equivalents, end of period.................... $ 2,845,647 $ 258,778
=========== ===========
</TABLE>

F-49
<PAGE> 107

DECISION-SCIENCE APPLICATIONS, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JULY 31, 1998 AND 1997

NOTE 1. BASIS OF PRESENTATION

The accompanying unaudited interim consolidated financial statements of
Decision-Science Applications, Inc. ("DSA") have been prepared on a basis
consistent with the rules of the Securities and Exchange Commission for Reports
on Form 10-Q and do not include all of the information and note disclosures
required by generally accepted accounting principles. The information furnished
herein includes all adjustments, consisting of normal recurring adjustments,
which are, in the opinion of management, necessary for a fair presentation of
results for these interim periods.

The results of operations for the six months ended July 31, 1998 are not
necessarily indicative of the results to be expected for the entire fiscal year.

In addition, these financial statements should be read in conjunction with
the DSA's audited financial statements and notes thereto for the year ended
January 31, 1998.

NOTE 2. BUSINESS COMBINATION

On August 20, 1998, DSA was acquired by SM&A Corporation for approximately
$28 million in a stock-for-stock and cash exchange merger. The transaction was
accounted for using the purchase method of accounting. The preliminary
allocation of the purchase price to the net assets acquired follows, and results
could change.

<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Stock consideration paid.................................... $14,375
Cash paid................................................... 14,075
Acquisition expenses........................................ 250
-------
Total consideration............................... 28,700
Less book value of net assets acquired...................... 7,241
-------
Estimated goodwill................................ $21,459
=======
</TABLE>

The purchase price included 714,839 shares of common stock of SM&A
Corporation, valued as of July 21, 1998 based on an average market price (20-day
trading price of $20.11).

F-50
<PAGE> 108

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

NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY OF THE SELLING
SHAREHOLDERS OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE SHARES BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH
THE PERSON MAKING THE OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL CREATE ANY
IMPLICATION THAT INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO ITS DATE.
------------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary...................... 3
Risk Factors............................ 7
Use of Proceeds......................... 13
Recapitalization........................ 13
Prior S Corporation Status.............. 13
Price Range of Common Stock and Dividend
Policy................................ 14
Capitalization.......................... 15
Selected Financial Data................. 16
Unaudited Pro Forma Condensed Combined
Financial Information................. 18
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 25
Business................................ 32
Management.............................. 40
Certain Transactions.................... 46
Principal and Selling Shareholders...... 49
Description of Capital Stock............ 51
Shares Eligible For Future Sale......... 52
Underwriting............................ 54
Legal Matters........................... 56
Experts................................. 56
Additional Information.................. 56
Index to Financial Statements........... F-1
</TABLE>

------------------------------------------------------
------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
5,000,000 SHARES

LOGO

When You Must Win...You Need Doers, Not Advisors (SM)

COMMON STOCK
------------------------

PROSPECTUS
------------------------
DONALDSON, LUFKIN & JENRETTE

LEHMAN BROTHERS

LEGG MASON WOOD WALKER
INCORPORATED

, 1998

- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 109

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table itemizes the estimated expenses incurred in connection
with the offering described in this Registration Statement.

<TABLE>
<S> <C>
Registration fee............................................ $45,303
NASD filing fee............................................. 15,450
Printing and engraving expenses............................. *
Nasdaq fee.................................................. 17,500
Blue sky qualification fees and expenses.................... *
Legal fees and expenses..................................... *
Accountants' fees and expenses.............................. *
Transfer agent and registrar fees........................... *
Miscellaneous............................................... *
-------
Total............................................. $ *
=======
</TABLE>

- ------------------------------
* To be supplied by amendment

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

The Underwriting Agreement (Exhibit 1.1 hereto) provides for
indemnification by the Underwriters of the Registrant and its officers and
directors, and by the Registrant of the Underwriters for certain liabilities
arising under the Securities Act or otherwise.

II-1
<PAGE> 110

indemnification be made for amounts paid in settling or otherwise disposing of a
threatened or pending action, with or without court approval, or for expenses
incurred in defending a threatened or pending action which is settled or
otherwise disposed of without court approval. Indemnification under the Bylaws
is mandatory in the case of an agent of the Company (present or past) who is
successful on the merits in defense of a suit against him or her in such
capacity. In all other cases where indemnification is permitted by the Bylaws, a
determination to indemnify such person must be made by a majority of a quorum of
disinterested directors, a majority of disinterested shareholders, or the court
in which the suit is pending.

The inclusion of the above provisions in the Articles of Incorporation and
Bylaws and the existence of the indemnification agreements may have the effect
of reducing the likelihood of derivative litigation against directors and may
discourage or deter shareholders or management from bringing a lawsuit against
directors for breach of their duty of care, even though such an action, if
successful, might otherwise have benefitted the Registrant and its shareholders.
At present, there is no litigation or proceeding pending involving a director of
the Registrant as to which indemnification is being sought, nor is the
Registrant aware of any threatened litigation that may result in claims for
indemnification by any director.

The Registrant's Articles of Incorporation provide that the Registrant may
indemnify its directors and officers to the fullest extent permitted by
California law, including circumstances in which indemnification is otherwise
discretionary under California law.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

On May 29, 1998, the Registrant acquired Space Applications Corporation
("SAC") in a stock-for-stock reverse triangular merger. In connection with such
acquisition and in exchange for all of the issued and outstanding SAC common
stock and options, the Registrant issued an aggregate of 819,743 shares of its
common stock and 175,925 options to purchase its common stock to the
shareholders and option holders of SAC, respectively, consisting mainly of SAC
employees, executives and directors. The exchange involved 35 or fewer persons
not established to the reasonable satisfaction of the Registrant as "accredited
investors" under Rule 501(a) of the Securities Act of 1933, as amended (the
"Act"), and was consummated in reliance upon Section 4(2) of the Act, and the
rules and regulations thereunder. Pursuant to Rule 506(b), all investors were
either accredited investors, reasonably believed by the Registrant to have such
knowledge and experience in financial and business matters that such investor
was capable of evaluating the merits and risks of the investment, or retained a
purchaser representative not affiliated with the Registrant in connection with
the transaction.

On August 20, 1998, the Registrant acquired Decision-Science Applications,
Inc. ("DSA") in a stock-for-stock and cash forward triangular merger. In
connection with such acquisition and in exchange for all of the issued and
outstanding DSA common stock, the Registrant issued an aggregate of 714,839
shares of its common stock and $14,035,419 cash to the shareholders of DSA,
consisting mainly of DSA employees, executives and directors. The exchange
involved 35 or fewer persons not established to the reasonable satisfaction of
the Registrant as "accredited investors" under Rule 501(a) of the Securities Act
of 1933, as amended (the "Act"), and was consummated in reliance upon Section
4(2) of the Act, and the rules and regulations thereunder. Pursuant to Rule
506(b), all investors were either accredited investors, reasonably believed by
the Registrant to have such knowledge and experience in financial and business
matters that such investor was capable of evaluating the merits and risks of the
investment, or retained a purchaser representative not affiliated with the
Registrant in connection with the transaction.

II-2
<PAGE> 111

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) EXHIBITS.

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.*
2.1 Agreement and Plan of Reorganization and Merger dated May
18, 1998, by and among the Registrant, Space Applications
Corporation, SAC Acquisition, Inc. and the individual
shareholders named therein (filed on June 4, 1998 as Exhibit
2 to the Registrant's Current Report on Form 8-K and
incorporated herein by reference).
2.2 Agreement and Plan of Reorganization and Merger dated May
18, 1998, by and among the Registrant, Decision-Science
Applications, Inc., DSA Acquisition, Inc., and the
individual shareholders named therein (filed on August 21,
1998 as Exhibit 2.1 to the Registrant's Current Report on
Form 8-K and incorporated herein by reference).
3.1 Articles of Incorporation, as amended and restated (filed on
January 27, 1998 as Exhibit 3.1 to the Registrant's
Registration Statement on Form S-1 (Registration No.
333-4075) and incorporated herein by reference).
3.2 Bylaws of the Registrant, as amended and restated (filed on
January 5, 1998 as Exhibit 3.2 to the Registrant's
Registration Statement on Form S-1 (Registration No.
333-4075) and incorporated herein by reference).
3.3 Certificate of Ownership as filed with the California
Secretary of State on August 6, 1998 (filed on August 19,
1998 as Exhibit 3.1 to the Registrant's Current Report on
Form 8-K and incorporated herein by reference).
4.1 Specimen stock certificate.*
5.1 Opinion of Rutan & Tucker, LLP.+
10.1 1997 Stock Option Plan, and related form of Stock Option
Agreement (filed on January 5, 1998 as Exhibit 10.1 to the
Registrant's Registration Statement on Form S-1
(Registration No. 333-4075) and incorporated herein by
reference).
10.2 Form of Indemnification Agreement (filed on November 21,
1997 as Exhibit 10.2 to the Registrant's Registration
Statement on Form S-1 (Registration No. 333-4075) and
incorporated herein by reference).
10.3 Office Facilities Lease (filed on November 21, 1997 as
Exhibit 10.3 to the Registrant's Registration Statement on
Form S-1 (Registration No. 333-4075) and incorporated herein
by reference).
10.4 Hawker Aircraft Sale Agreement (filed on November 21, 1997
as Exhibit 10.4 to the Registrant's Registration Statement
on Form S-1 (Registration No. 333-4075) and incorporated
herein by reference).
10.5 Employment Agreement with Steven S. Myers (filed on November
21, 1997 as Exhibit 10.5 to the Registrant's Registration
Statement on Form S-1 (Registration No. 333-4075) and
incorporated herein by reference).
10.6 Employment Agreement with Kenneth W. Colbaugh (filed on
November 21, 1997 as Exhibit 10.6 to the Registrant's
Registration Statement on Form S-1 (Registration No.
333-4075) and incorporated herein by reference).
10.7 Security and Loan Agreement dated January 2, 1997 between
Imperial Bank and the Registrant, First Amendment and
Addendum thereto and related Note and Addendum thereto and
LIBOR Addendum to Note (filed on November 21, 1997 as
Exhibit 10.7 to the Registrant's Registration Statement on
Form S-1 (Registration No. 333-4075) and incorporated herein
by reference).
</TABLE>

II-3
<PAGE> 112

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.8 Commercial Note dated May 30, 1995 between NationsBank, N.A.
and the Registrant and related Aircraft Security
Agreement--Chattel Mortgage, Security Agreement and
Unconditional Guaranty of Payment (filed on November 21,
1997 as Exhibit 10.8 to the Registrant's Registration
Statement on Form S-1 (Registration No. 333-4075) and
incorporated herein by reference).
10.9 Steven S. Myers Promissory Note (filed on November 21, 1997
as Exhibit 10.9 to the Registrant's Registration Statement
on Form S-1 (Registration No. 333-4075) and incorporated
herein by reference).
10.10 Company Note (filed on November 21, 1997 as Exhibit 10.10 to
the Registrant's Registration Statement on Form S-1
(Registration No. 333-4075) and incorporated herein by
reference).
10.11 Executive Bonus Plan (filed on January 5, 1998 as Exhibit
10.11 to the Registrant's Registration Statement on Form S-1
(Registration No. 333-4075) and incorporated herein by
reference).
10.12 Securities Purchase Agreement dated September 25, 1996
(filed on January 5, 1998 as Exhibit 10.12 to the
Registrant's Registration Statement on Form S-1
(Registration No. 333-4075) and incorporated herein by
reference).
10.13 Investor Rights Agreement dated September 25, 1996 (filed on
January 5, 1998 as Exhibit 10.13 to the Registrant's
Registration Statement on Form S-1 (Registration No.
333-4075) and incorporated herein by reference).
10.14 Security and Loan Agreement and Addendum, Exhibit
"A"--Waiver to Certain Provisions between Imperial Bank and
the Registrant (filed on January 16, 1998 as Exhibit 10.14
to the Registrant's Registration Statement on Form S-1
(Registration No. 333-4075) and incorporated herein by
reference).
10.15 Registration Rights Agreement dated May 29, 1998 by and
among the Registrant and certain shareholders of Space
Applications Corporation identified therein.+
10.16 Employment Agreement dated May 29, 1998 by and between Space
Applications Corporation and Roger Skinner.+
10.17 Employment Agreement dated May 29, 1998 by and between Space
Applications Corporation and Stanley Hee.+
10.18 Escrow Agreement dated May 29, 1998 by and among the
Registrant, Space Applications Corporation, Stanley Y.H.
Hee, First American Trust Company and certain shareholders
identified therein.+
10.19 Registration Rights Agreement dated August 20, 1998 by among
Registrant and certain shareholders of Decision-Science
Applications, Inc. set forth therein (filed on August 21,
1998 as Exhibit 10.1 to the Registrant's Current Report on
Form 8-K and incorporated herein by reference).
10.20 Employment Agreement dated August 20, 1998 by and between
Decision-Science Applications, Inc. and Guy A. Ackerson
(filed on August 21, 1998 as Exhibit 10.2 to the
Registrant's Current Report on Form 8-K and incorporated
herein by reference).
10.21 Employment Agreement dated August 20, 1998 by and between
Decision-Science Applications, Inc. and Gary L. Lucas (filed
on August 21, 1998 as Exhibit 10.3 to the Registrant's
Current Report on Form 8-K and incorporated herein by
reference).
10.22 Employment Agreement dated August 20, 1998 by and between
Decision-Science Applications, Inc. and Dana R. Raucher
(filed on August 21, 1998 as Exhibit 10.4 to the
Registrant's Current Report on Form 8-K and incorporated
herein by reference).
10.23 Escrow Agreement dated August 20, 1998 by and among
Registrant, Decision-Science Applications, Inc., First
American Trust Company and certain shareholders identified
therein (filed on August 21, 1998 as Exhibit 10.5 to the
Registrant's Current Report on Form 8-K and incorporated
herein by reference).
</TABLE>

II-4
<PAGE> 113

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.24 Note dated June 25, 1998 for sale of Turbo Commander
aircraft.+
21 Subsidiaries of the Registrant.+
23.1 Consent of KPMG Peat Marwick LLP.*
23.2 Consent of Ernst & Young LLP.*
23.3 Consent of Deloitte & Touche LLP.*
23.4 Consent of Rutan & Tucker, LLP (included in the opinion
filed herewith as Exhibit 5.1).
24 Power of Attorney.+
27 Financial Data Schedule.+
</TABLE>

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

+ Previously filed.

(b) FINANCIAL STATEMENT SCHEDULES.

Schedule VIII--Valuation and Qualifying Accounts

All other schedules are omitted because they are not required, are not
applicable, or the information is included in the financial statements or the
notes thereto.

ITEM 17. UNDERTAKINGS

The Registrant hereby undertakes to provide the Underwriters at the closing
specified in the Underwriting Agreement certificates in such denominations and
registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.

The Registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of Prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in
the form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1)
or (4) or 497(h) under the Securities Act shall be deemed to be part of
this Registration Statement as of the time it was declared effective.

(2) For purposes of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of Prospectus
shall be deemed to be a new Registration Statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described in Item 14 hereof, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act, and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.

II-5
<PAGE> 114

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Newport Beach, State of
California, on August 27, 1998.

SM&A CORPORATION

By: /s/ STEVEN S. MYERS
------------------------------------
Steven S. Myers,
Chairman of the Board, President
and Chief Executive Officer

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.

<TABLE>
<CAPTION>
NAME TITLE DATE
<C> <S> <C>
/s/ STEVEN S. MYERS Chairman of the Board, August 27, 1998
- ----------------------------------------------------- President and Chief Executive
Steven S. Myers Officer (Principal Executive
Officer)

* Director, Executive Vice August 27, 1998
- ----------------------------------------------------- President and Chief Operating
Kenneth W. Colbaugh Officer

* Director August 27, 1998
- -----------------------------------------------------
J. Christopher Lewis

* Senior Vice President, August 27, 1998
- ----------------------------------------------------- Chief Financial Officer and
Ronald A. Hunn Secretary (Principal Financial
Officer and Principal
Accounting Officer)

* Director August 27, 1998
- -----------------------------------------------------
James R. Mellor

* Director August 27, 1998
- -----------------------------------------------------
Malcolm R. Currie
</TABLE>

*By: /s/ STEVEN S. MYERS

-------------------------------
Power of attorney

II-6
<PAGE> 115

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.*
2.1 Agreement and Plan of Reorganization and Merger dated May
18, 1998, by and among the Registrant, Space Applications
Corporation SAC Acquisition, Inc. and the individual
shareholders named therein (filed on June 4, 1998 as Exhibit
2 to the Registrant's Current Report on Form 8-K and
incorporated herein by reference).
2.2 Agreement and Plan of Reorganization and Merger dated May
18, 1998, by and among the Registrant, Decision-Science
Applications, Inc., DSA Acquisition, Inc. and the individual
shareholders named therein (filed on August 21, 1998 as
Exhibit 2.1 to the Registrant's Current Report on Form 8-K
and incorporated herein by reference).
3.1 Articles of Incorporation, as amended and restated (filed on
January 27, 1998 as Exhibit 3.1 to the Registrant's
Registration Statement on Form S-1 (Registration No.
333-4075) and incorporated herein by reference).
3.2 Bylaws of the Registrant, as amended and restated (filed on
January 5, 1998 as Exhibit 3.2 to the Registrant's
Registration Statement on Form S-1 (Registration No.
333-4075) and incorporated herein by reference).
3.3 Certificate of Ownership as filed with the California
Secretary of State on August 6, 1998 (filed on August 19,
1998 as Exhibit 3.1 to the Registrant's Current Report on
Form 8-K and incorporated herein by reference).
4.1 Specimen stock certificate.*
5.1 Opinion of Rutan & Tucker, LLP.+
10.1 1997 Stock Option Plan, and related form of Stock Option
Agreement (filed on January 5, 1998 as Exhibit 10.1 to the
Registrant's Registration Statement on Form S-1
(Registration No. 333-4075) and incorporated herein by
reference).
10.2 Form of Indemnification Agreement (filed on November 21,
1997 as Exhibit 10.2 to the Registrant's Registration
Statement on Form S-1 (Registration No. 333-4075) and
incorporated herein by reference).
10.3 Office Facilities Lease (filed on November 21, 1997 as
Exhibit 10.3 to the Registrant's Registration Statement on
Form S-1 (Registration No. 333-4075) and incorporated herein
by reference).
10.4 Hawker Aircraft Sale Agreement (filed on November 21, 1997
as Exhibit 10.4 to the Registrant's Registration Statement
on Form S-1 (Registration No. 333-4075) and incorporated
herein by reference).
10.5 Employment Agreement with Steven S. Myers (filed on November
21, 1997 as Exhibit 10.5 to the Registrant's Registration
Statement on Form S-1 (Registration No. 333-4075) and
incorporated herein by reference).
10.6 Employment Agreement with Kenneth W. Colbaugh (filed on
November 21, 1997 as Exhibit 10.6 to the Registrant's
Registration Statement on Form S-1 (Registration No.
333-4075) and incorporated herein by reference).
10.7 Security and Loan Agreement dated January 2, 1997 between
Imperial Bank and the Registrant, First Amendment and
Addendum thereto and related Note and Addendum thereto and
LIBOR Addendum to Note (filed on November 21, 1997 as
Exhibit 10.7 to the Registrant's Registration Statement on
Form S-1 (Registration No. 333-4075) and incorporated herein
by reference).
</TABLE>

<PAGE> 116

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
10.8 Commercial Note dated May 30, 1995 between NationsBank, N.A.
and the Registrant and related Aircraft Security
Agreement--Chattel Mortgage, Security Agreement and
Unconditional Guaranty of Payment (filed on November 21,
1997 as Exhibit 10.8 to the Registrant's Registration
Statement on Form S-1 (Registration No. 333-4075) and
incorporated herein by reference).
10.9 Steven S. Myers Promissory Note (filed on November 21, 1997
as Exhibit 10.9 to the Registrant's Registration Statement
on Form S-1 (Registration No. 333-4075) and incorporated
herein by reference).
10.10 Company Note (filed on November 21, 1997 as Exhibit 10.10 to
the Registrant's Registration Statement on Form S-1
(Registration No. 333-4075) and incorporated herein by
reference).
10.11 Executive Bonus Plan (filed on January 5, 1998 as Exhibit
10.11 to the Registrant's Registration Statement on Form S-1
(Registration No. 333-4075) and incorporated herein by
reference).
10.12 Securities Purchase Agreement dated September 25, 1996
(filed on January 5, 1998 as Exhibit 10.12 to the
Registrant's Registration Statement on Form S-1
(Registration No. 333-4075) and incorporated herein by
reference).
10.13 Investor Rights Agreement dated September 25, 1996 (filed on
January 5, 1998 as Exhibit 10.13 to the Registrant's
Registration Statement on Form S-1 (Registration No.
333-4075) and incorporated herein by reference).
10.14 Security and Loan Agreement and Addendum, Exhibit
"A"--Waiver to Certain Provisions between Imperial Bank and
the Registrant (filed on January 16, 1998 as Exhibit 10.14
to the Registrant's Registration Statement on Form S-1
(Registration No. 333-4075) and incorporated herein by
reference).
10.15 Registration Rights Agreement dated May 29, 1998 by and
among the Registrant and certain shareholders of Space
Applications Corporation identified therein.+
10.16 Employment Agreement dated May 29, 1998 by and between Space
Applications Corporation and Roger Skinner.+
10.17 Employment Agreement dated May 29, 1998 by and between Space
Applications Corporation and Stanley Hee.+
10.18 Escrow Agreement dated May 29, 1998 by and among the
Registrant, Space Applications Corporation, Stanley Y.H.
Hee, First American Trust Company and certain shareholders
identified therein.+
10.19 Registration Rights Agreement dated August 20, 1998 by among
Registrant and certain shareholders Decision-Science,
Applications, Inc. set forth therein (filed on August 21,
1998 as Exhibit 10.1 to the Registrant's Current Report on
Form 8-K and incorporated herein by reference).
10.20 Employment Agreement dated August 20, 1998 by and between
Decision-Science Applications, Inc. and Guy A. Ackerson
(filed on August 21, 1998 as Exhibit 10.2 to the
Registrant's Current Report on Form 8-K and incorporated
herein by reference).
10.21 Employment Agreement dated August 20, 1998 by and between
Decision-Science Applications, Inc. and Gary L. Lucas (filed
on August 21, 1998 as Exhibit 10.3 to the Registrant's
Current Report on Form 8-K and incorporated herein by
reference).
10.22 Employment Agreement dated August 20, 1998 by and between
Decision-Science Applications, Inc. and Dana R. Raucher
(filed on August 21, 1998 as Exhibit 10.4 to the
Registrant's Current Report on Form 8-K and incorporated
herein by reference).
10.23 Escrow Agreement dated August 20, 1998 by and among
Registrant, Decision-Science Applications, Inc., First
American Trust Company and certain shareholders identified
therein (filed on August 21, 1998 as Exhibit 10.5 to the
Registrant's Current Report on Form 8-K and incorporated
herein by reference).
</TABLE>

<PAGE> 117

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
10.24 Note dated June 25, 1998 for sale of Turbo Commander
aircraft.+
21 Subsidiaries of the Registrant.+
23.1 Consent of KPMG Peat Marwick LLP.*
23.2 Consent of Ernst & Young LLP.*
23.3 Consent of Deloitte & Touche LLP.*
23.4 Consent of Rutan & Tucker, LLP (included in the opinion
filed herewith as Exhibit 5.1).
24 Power of Attorney.+
27 Financial Data Schedule.+
</TABLE>

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

+ Previously filed.

<PAGE> 1
EXHIBIT 1.1

5,000,000 Shares

SM&A CORPORATION

Common Stock

UNDERWRITING AGREEMENT
----------------------

_________, 1998

DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
LEHMAN BROTHERS INC.
LEGG MASON WOOD WALKER, INC.
As representatives of the several Underwriters
named in Schedule I hereto
c/o Donaldson, Lufkin & Jenrette Securities Corporation
277 Park Avenue
New York, New York 10172

Dear Sirs:

SM&A CORPORATION, a California corporation (the "COMPANY"), proposes to
issue and sell to the several underwriters named in Schedule I hereto (the
"UNDERWRITERS"), and certain shareholders of the Company named in Schedule II
hereto (the "SELLING SHAREHOLDERS") severally propose to sell to the several
Underwriters, an aggregate of 5,000,000 shares of the Common Stock, no par value
of the Company (the "FIRM SHARES"), of which 2,500,000 shares are to be issued
and sold by the Company and 2,500,000 shares are to be sold by the Selling
Shareholders, each Selling Shareholder selling the amount set forth opposite
such Selling Shareholder's name in Schedule II hereto. The Selling Shareholders
also propose sell to the several Underwriters not more than an additional
aggregate of 750,000 shares of its Common Stock, no par value (the "ADDITIONAL
SHARES"), if requested by the Underwriters as provided in Section 2 hereof. The
Firm Shares and the Additional Shares are hereinafter referred to collectively
as the "SHARES." The shares of common stock of the Company to be outstanding
after giving effect to the sales contemplated hereby are hereinafter referred to
as the "COMMON STOCK." The Company and the Selling Shareholders are hereinafter
sometimes referred to collectively as the "SELLERS".

SECTION 1. Registration Statement And Prospectus. The Company has
prepared and filed with the Securities and Exchange Commission (the
"COMMISSION") in accordance with the provisions of the Securities Act of 1933,
as amended, and the rules and regulations of the Commission thereunder
(collectively, the "ACT"), a registration statement on Form S-1, including a
prospectus, relating to the Shares. The registration statement, as amended

<PAGE> 2

at the time it became effective, including the information (if any) deemed to be
part of the registration statement at the time of effectiveness pursuant to Rule
430A under the Act, is hereinafter referred to as the "REGISTRATION STATEMENT;"
and the prospectus in the form first used to confirm sales of Shares is
hereinafter referred to as the "PROSPECTUS" (including, in the case of all
references to the Registration Statement or the Prospectus, documents
incorporated therein by reference). If the Company has filed or is required
pursuant to the terms hereof to file a registration statement pursuant to Rule
462(b) under the Act registering additional shares of Common Stock (a "RULE
462(B) REGISTRATION STATEMENT"), then, unless otherwise specified, any reference
herein to the term "Registration Statement" shall be deemed to include such Rule
462(b) Registration Statement.

SECTION 2. Agreements to Sell and Purchase and Lock-Up Agreements. On
the basis of the representations and warranties contained in this Agreement, and
subject to its terms and conditions, (i) the Company agrees to issue and sell
2,500,000 Firm Shares, (ii) each Selling Shareholder agrees, severally and not
jointly, to sell the number of Firm Shares set forth opposite such Selling
Shareholder's name in Schedule II hereto and (iii) each Underwriter agrees,
severally and not jointly, to purchase from each Seller at a price per Share of
$_______ (the "PURCHASE PRICE") the number of Firm Shares (subject to such
adjustments to eliminate fractional shares as you may determine) that bears the
same proportion to the total number of Firm Shares to be sold by such Seller as
the number of Firm Shares set forth opposite the name of such Underwriter in
Schedule I hereto bears to the total number of Firm Shares.

On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, the Selling Shareholders
agree, severally and not jointly, to sell up to the number of Additional Shares
set forth opposite such Selling Shareholder's name in Schedule II hereto and the
Underwriters shall have the right to purchase, severally and not jointly, up to
an aggregate of 750,000 Additional Shares from the Selling Shareholders at the
Purchase Price. Additional Shares may be purchased solely for the purpose of
covering over-allotments made in connection with the offering of the Firm
Shares. The Underwriters may exercise their right to purchase Additional Shares
in whole or in part from time to time by giving written notice thereof to the
Company within 30 days after the date of this Agreement. You shall give any such
notice on behalf of the Underwriters and such notice shall specify the aggregate
number of Additional Shares to be purchased pursuant to such exercise and the
date for payment and delivery thereof, which date shall be a business day (i) no
earlier than two business days after such notice has been given (and, in any
event, no earlier than the Closing Date (as hereinafter defined)) and (ii) no
later than ten business days after such notice has been given. If any Additional
Shares are to be purchased, each Underwriter, severally and not jointly, agrees
to purchase from the Selling Shareholders the number of Additional Shares
(subject to such adjustments to eliminate fractional shares as you may
determine) which bears the same proportion to the total number of Additional
Shares to be purchased from the Selling Shareholders as the number of Firm
Shares set forth opposite the name of such Underwriter in Schedule I bears to
the total number of Firm Shares.

<PAGE> 3

Each Seller hereby agrees not to (i) offer, pledge, sell, contract to
sell, sell any option or contract to purchase, purchase any option or contract
to sell, grant any option, right or warrant to purchase, or otherwise transfer
or dispose of, directly or indirectly, any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock or
(ii) enter into any swap or other arrangement that transfers all or a portion of
the economic consequences associated with the ownership of any Common Stock
(regardless of whether any of the transactions described in clause (i) or (ii)
is to be settled by the delivery of Common Stock, or such other securities, in
cash or otherwise), except to the Underwriters pursuant to this Agreement, for a
period of 180 days after the date of the Prospectus without the prior written
consent of Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ").
Notwithstanding the foregoing, during such period (i) the Company may grant
stock options pursuant to the Company's 1997 Stock Option Plan and (ii) the
Company may issue shares of Common Stock upon the exercise of an option or
warrant or the conversion of a security outstanding on the date hereof. The
Company also agrees not to file any registration statement (other than (i) a
registration statement on Form S-8 with respect to shares of Common Stock
issuable pursuant to options granted or assumed pursuant to the Acquisitions (as
defined in the Prospectus and (ii) a registration statement on Form S-3 (which
registration statement may not be filed prior to February 1, 1999) with respect
to shares of Common Stock issued pursuant to the Acquisitions (as defined in the
Prospectus)) with respect to any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock for a period of
180 days after the date of the Prospectus without the prior written consent of
DLJ. In addition, each Selling Shareholder agrees that, for a period of 180 days
after the date of the Prospectus without the prior written consent of DLJ, it
will not make any demand for, or exercise any right with respect to, the
registration of any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock. The Company shall, prior to or
concurrently with the execution of this Agreement, deliver an agreement executed
by (i) each Selling Shareholder, (ii) each of the directors and officers of the
Company who is not a Selling Shareholder and (iii) each shareholder listed on
Annex I hereto to the effect that such person will not, during the period
commencing on the date such person signs such agreement and ending 180 days
after the date of the Prospectus, without the prior written consent of DLJ, (A)
engage in any of the transactions described in the first sentence of this
paragraph or (B) make any demand for, or exercise any right with respect to, the
registration of any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock.

SECTION 3. Terms of Public Offering. The Sellers are advised by you that
the Underwriters propose (i) to make a public offering of their respective
portions of the Shares as soon after the execution and delivery of this
Agreement as in your judgment is advisable and (ii) initially to offer the
Shares upon the terms set forth in the Prospectus.

SECTION 4. Delivery and Payment. Delivery to the Underwriters of and
payment for the Firm Shares shall be made at 9:00 A.M., New York City time, on
_________, 1998 (the "CLOSING DATE") at such place as you shall designate. The
Closing Date and the location of delivery of and payment for the Firm Shares may
be varied by agreement between you and the Company.

<PAGE> 4

Delivery to the Underwriters of and payment for any Additional Shares to
be purchased by the Underwriters shall be made at such place as you shall
designate at 9:00 A.M., New York City time, on the date specified in the
applicable exercise notice given by you pursuant to Section 2 (an "OPTION
CLOSING DATE"). Any such Option Closing Date and the location of delivery of and
payment for such Additional Shares may be varied by agreement between you and
the Company.

The Company authorizes DLJ to register the Shares in the name of Cede &
Co., a nominee of the Depositary Trust Company ("DTC") or such other name as DLJ
shall determine prior to the Closing Date or an Option Closing Date, as the case
may be. On the Closing Date or the applicable Option Closing Date, as the case
may be, with any transfer tax thereon duly paid by the Sellers against payment
to the Sellers by the several Underwriters of the Purchase Price for the Shares
in same day funds, the Company will cause DTC to credit the Shares to the
account of Donaldson, Lufkin & Jenrette Securities Corporation at DTC for the
benefit of the several Underwriters. The Shares shall be made available to the
Initial Purchaser for inspection not later than 9:30 a.m., New York City time,
on the business day immediately preceding the Closing Date.

SECTION 5. Agreements of the Company. The Company agrees with you:

(a) To advise you promptly and, if requested by you, to confirm such
advice in writing, (i) of any request by the Commission for amendments to the
Registration Statement or amendments or supplements to the Prospectus or for
additional information, (ii) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or of the suspension
of qualification of the Shares for offering or sale in any jurisdiction, or the
initiation of any proceeding for such purposes, (iii) when any amendment to the
Registration Statement becomes effective, (iv) if the Company is required to
file a Rule 462(b) Registration Statement after the effectiveness of this
Agreement, when the Rule 462(b) Registration Statement has become effective and
(v) of the happening of any event during the period referred to in Section 5(d)
below which makes any statement of a material fact made in the Registration
Statement or the Prospectus untrue or which requires any additions to or changes
in the Registration Statement or the Prospectus in order to make the statements
therein not misleading. If at any time the Commission shall issue any stop order
suspending the effectiveness of the Registration Statement, the Company will use
its best efforts to obtain the withdrawal or lifting of such order at the
earliest possible time.

(b) To furnish to you four (4) signed copies of the Registration
Statement as first filed with the Commission and of each amendment to it,
including all exhibits and documents incorporated therein by reference, and to
furnish to you and each Underwriter

<PAGE> 5

designated by you such number of conformed copies of the Registration Statement
as so filed and of each amendment to it, without exhibits, as you may reasonably
request.

(c) To prepare the Prospectus, the form and substance of which shall be
satisfactory to you, and to file the Prospectus in such form with the Commission
within the applicable period specified in Rule 424(b) under the Act; during the
period specified in Section 5(d) below, not to file any further amendment to the
Registration Statement and not to make any amendment or supplement to the
Prospectus of which you shall not previously have been advised or to which you
shall reasonably object after being so advised; and, during such period, to
prepare and file with the Commission, promptly upon your reasonable request, any
amendment to the Registration Statement or amendment or supplement to the
Prospectus which may be necessary or advisable in connection with the
distribution of the Shares by you, and to use its best efforts to cause any such
amendment to the Registration Statement to become promptly effective.

(d) Prior to 10:00 A.M., New York City time, on the first business day
after the date of this Agreement and from time to time thereafter for such
period as in the opinion of counsel for the Underwriters a prospectus is
required by law to be delivered in connection with sales by an Underwriter or a
dealer, to furnish in New York City to each Underwriter and any dealer as many
copies of the Prospectus (and of any amendment or supplement to the Prospectus)
as such Underwriter or dealer may reasonably request.

(e) If during the period specified in Section 5(d), any event shall
occur or condition shall exist as a result of which, in the opinion of counsel
for the Underwriters, it becomes necessary to amend or supplement the Prospectus
in order to make the statements therein, in the light of the circumstances when
the Prospectus is delivered to a purchaser, not misleading, or if, in the
opinion of counsel for the Underwriters, it is necessary to amend or supplement
the Prospectus to comply with applicable law, forthwith to prepare and file with
the Commission an appropriate amendment or supplement to the Prospectus so that
the statements in the Prospectus, as so amended or supplemented, will not in the
light of the circumstances when it is so delivered, be misleading, or so that
the Prospectus will comply with applicable law, and to furnish to each
Underwriter and to any dealer as many copies thereof as such Underwriter or
dealer may reasonably request.

(f) Prior to any public offering of the Shares, to cooperate with you
and counsel for the Underwriters in connection with the registration or
qualification of the Shares for offer and sale by the several Underwriters and
by dealers under the state securities or Blue Sky laws of such jurisdictions as
you may request, to continue such registration or qualification in effect so
long as required for distribution of the Shares and to file such consents to
service of process or other documents as may be necessary in order to effect
such registration or qualification; provided, however, that the Company shall
not be required in connection therewith to qualify as a foreign corporation in
any jurisdiction in which it is not now so qualified or to take any action that
would subject it to general consent to service of process or taxation other than
as

<PAGE> 6

to matters and transactions relating to the Prospectus, the Registration
Statement, any preliminary prospectus or the offering or sale of the Shares, in
any jurisdiction in which it is not now so subject.

(g) During the period of three years after the date of this Agreement,
to furnish to you as soon as available copies of all reports or other
communications furnished to the record holders of Common Stock or furnished to
or filed with the Commission or any national securities exchange on which any
class of securities of the Company is listed and such other publicly available
information concerning the Company and its subsidiaries as you may reasonably
request.

(h) Whether or not the transactions contemplated in this Agreement are
consummated or this Agreement is terminated, to pay or cause to be paid all
expenses incident to the performance of the Sellers' obligations under this
Agreement, including: (i) the fees, disbursements and expenses of the Company's
counsel, the Company's accountants and any Selling Shareholder's counsel (in
addition to the Company's counsel) in connection with the registration and
delivery of the Shares under the Act and all other fees and expenses (other than
the fees and expenses of counsel to the Underwriters) in connection with the
preparation, printing, filing and distribution of the Registration Statement
(including financial statements and exhibits), any preliminary prospectus, the
Prospectus and all amendments and supplements to any of the foregoing, including
the mailing and delivering of copies thereof to the Underwriters and dealers in
the quantities specified herein during the period delivery of a prospectus is
required by Rule 174 under the Act, (ii) all costs and expenses related to the
transfer and delivery of the Shares to the Underwriters, including any transfer
or other taxes payable thereon, (iii) all costs of printing or producing this
Agreement (other than the fees and expenses of counsel to the Underwriters) and
any other agreements or documents in connection with the offering, purchase,
sale or delivery of the Shares, (iv) all expenses in connection with the
registration or qualification of the Shares for offer and sale under the
securities or Blue Sky laws of the several states and all costs of printing or
producing any Preliminary and Supplemental Blue Sky Memoranda in connection
therewith (including the filing fees and fees and disbursements of counsel for
the Underwriters in connection with such registration or qualification and
memoranda relating thereto), (v) the filing fees and disbursements of counsel
for the Underwriters in connection with the review and clearance of the offering
of the Shares by the National Association of Securities Dealers, Inc., (vi) all
fees and expenses in incident to the listing of the Shares on the Nasdaq
National Market, (vii) the cost of printing certificates representing the
Shares, (viii) the costs and charges of any transfer agent, registrar and/or
depositary, and (ix) all other costs and expenses incident to the performance of
the obligations of the Company and the Selling Shareholders hereunder for which
provision is not otherwise made in this Section. The provisions of this Section
shall not supersede or otherwise affect any agreement that the Company and the
Selling Shareholders may otherwise have for allocation of such expenses among
themselves.

<PAGE> 7

(i) To use its best efforts to (i) list for quotation the Shares on the
Nasdaq National Market and (ii) maintain the listing of the Shares on the Nasdaq
National Market for a period of three years after the date of this Agreement.

(j) To use its best efforts to do and perform all things required or
necessary to be done and performed under this Agreement by the Company prior to
the Closing Date or any Option Closing Date, as the case may be, and to satisfy
all conditions precedent to the delivery of the Shares.

(k) If the Registration Statement at the time of the effectiveness of
this Agreement does not cover all of the Shares, to file a Rule 462(b)
Registration Statement with the Commission registering the Shares not so covered
in compliance with Rule 462(b) by 10:00 P.M., New York City time, on the date of
this Agreement and to pay to the Commission the filing fee for such Rule 462(b)
Registration Statement at the time of the filing thereof or to give irrevocable
instructions for the payment of such fee pursuant to Rule 111(b) under the Act.

SECTION 6. Representations and Warranties of the Company. The Company
represents and warrants to each Underwriter that:

(a) The Registration Statement has become effective (other than any Rule
462(b) Registration Statement to be filed by the Company after the effectiveness
of this Agreement); any Rule 462(b) Registration Statement filed after the
effectiveness of this Agreement will become effective no later than 10:00 P.M.,
New York City time, on the date of this Agreement; and no stop order suspending
the effectiveness of the Registration Statement is in effect, and no proceedings
for such purpose are pending before or threatened by the Commission.

(b) (i) The Registration Statement (other than any Rule 462(b)
Registration Statement to be filed by the Company after the effectiveness of
this Agreement), when it became effective, did not contain and, as amended, if
applicable, will not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, (ii) the Registration Statement (other than
any Rule 462(b) Registration Statement to be filed by the Company after the
effectiveness of this Agreement) and the Prospectus comply and, as amended or
supplemented, if applicable, will comply in all material respects with the Act,
(iii) each document filed or to be filed by the Company pursuant to the
Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT") was timely
filed or will be timely filed by the Company and complied or will comply when so
filed in all material respects with the requirements of the Exchange Act, (iv)
if the Company is required to file a Rule 462(b) Registration Statement after
the effectiveness of this Agreement, such Rule 462(b) Registration Statement and
any amendments thereto, when they become effective (A) will not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not misleading and
(B) will comply in all material respects with the Act and (v) the Prospectus
does not contain and, as amended or

<PAGE> 8

supplemented, if applicable, will not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements therein,
in the light of the circumstances under which they were made, not misleading,
except that the representations and warranties set forth in this paragraph do
not apply to statements or omissions in the Registration Statement or the
Prospectus based upon information relating to any Underwriter furnished to the
Company in writing by such Underwriter through you expressly for use therein.

(c) Each preliminary prospectus filed as part of the registration
statement as originally filed or as part of any amendment thereto, or filed
pursuant to Rule 424 under the Act, complied when so filed in all material
respects with the Act, and did not contain an untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein, in the light of the circumstances under which
they were made, not misleading, except that the representations and warranties
set forth in this paragraph do not apply to statements or omissions in any
preliminary prospectus based upon information relating to any Underwriter
furnished to the Company in writing by such Underwriter through you expressly
for use therein.

(d) Each of the Company and its subsidiaries has been duly incorporated,
is validly existing as a corporation in good standing under the laws of its
jurisdiction of incorporation and has the corporate power and authority to carry
on its business as described in the Prospectus and to own, lease and operate its
properties, and each is duly qualified and is in good standing as a foreign
corporation authorized to do business in each jurisdiction in which the nature
of its business or its ownership or leasing of property requires such
qualification, except where the failure to be so qualified would not have a
material adverse effect on the business, prospects, financial condition or
results of operations of the Company and its subsidiaries, taken as a whole.

(e) There are no outstanding subscriptions, rights, warrants, options,
calls, convertible securities, commitments of sale or liens granted or issued by
the Company or any of its subsidiaries relating to or entitling any person to
purchase or otherwise to acquire any shares of the capital stock of the Company
or any of its subsidiaries, except as otherwise disclosed in the Registration
Statement.

(f) All the outstanding shares of capital stock of the Company
(including the Shares to be sold by the Selling Shareholders) have been duly
authorized and validly issued and are fully paid, non-assessable and not subject
to any preemptive or similar rights; and the Shares to be issued and sold by the
Company have been duly authorized and, when issued and delivered to the
Underwriters against payment therefor as provided by this Agreement, will be
validly issued, fully paid and non-assessable, and the issuance of such Shares
will not be subject to any preemptive or similar rights. All of the outstanding
shares of capital stock of each of the Company's subsidiaries have been duly
authorized and validly issued and are fully paid and non-assessable and are
owned by the Company free and clear of any security interest, claim, lien,
encumbrance or adverse interest of any nature. The Common Stock is registered
under the

<PAGE> 9

Exchange Act and is eligible for quotation on the Nasdaq National Market and the
Shares are approved for quotation on the Nasdaq National Market upon notice of
issuance and the Company knows of no reason or set of facts which could
adversely affect such approval.

(g) The authorized capital stock of the Company conforms to the
description thereof contained in the Prospectus.

(h) Neither the Company nor any of its subsidiaries is in violation of
its respective charter or by-laws or in default in the performance of any
obligation, agreement, covenant or condition contained in any indenture, loan
agreement, mortgage, lease or other agreement or instrument that is material to
the Company and its subsidiaries, taken as a whole, to which the Company or any
of its subsidiaries is a party or by which the Company or any of its
subsidiaries or any of their respective property is bound.

(i) The execution, delivery and performance of this Agreement by the
Company, the compliance by the Company with all the provisions hereof and the
consummation of the transactions contemplated hereby and as described in the
Prospectus will not (i) require any consent, approval, authorization or other
order of, or qualification with, any court or governmental body or agency
(except such as may be required under applicable federal, state or foreign
securities laws), (ii) conflict with or constitute a breach of any of the terms
or provisions of, or a default under, the charter or by-laws of the Company or
any of its subsidiaries or any indenture, loan agreement, mortgage, lease or
other agreement or instrument that is material to the Company and its
subsidiaries, taken as a whole, to which the Company or any of its subsidiaries
is a party or by which the Company or any of its subsidiaries or their
respective property is bound, (iii) violate or conflict with any applicable law
or any rule, regulation, judgment, order or decree of any court or any
governmental body or agency having jurisdiction over the Company or any of its
subsidiaries, or any of their respective property or (iv) result in the
suspension, termination or revocation of any Authorization (as defined below) of
the Company or any of its subsidiaries or any other impairment of the rights of
the holder of any such Authorization.

(j) There are no legal or governmental proceedings pending or, to the
best of the Company's knowledge after due inquiry, threatened to which the
Company or any of its subsidiaries is or could be a party or to which any of
their respective property is or could be subject that are required to be
described in the Registration Statement or the Prospectus and are not so
described; nor are there any statutes, regulations, contracts or other documents
that are required to be described in the Registration Statement or the
Prospectus or to be filed as exhibits to the Registration Statement that are not
so described or filed as required.

(k) Neither the Company nor any of its subsidiaries has violated any
foreign, federal, state or local law or regulation relating to the protection of
human health and safety, the environment or hazardous or toxic substances or
wastes, pollutants or contaminants ("ENVIRONMENTAL LAWS") or any provisions of
the Employee Retirement Income Security Act of

<PAGE> 10

1974, as amended, or the rules and regulations promulgated thereunder, except
for such violations which, singly or in the aggregate, would not have a material
adverse effect on the business, prospects, financial condition or results of
operation of the Company and its subsidiaries, taken as a whole.

(l) Each of the Company and its subsidiaries has such permits, licenses,
consents, exemptions, franchises, authorizations and other approvals (each, an
"AUTHORIZATION") of, and has made all filings with and notices to, all
governmental or regulatory authorities and self-regulatory organizations and all
courts and other tribunals, including, without limitation, under any applicable
Environmental Laws, as are necessary to own, lease, license and operate its
respective properties and to conduct its business, except where the failure to
have any such Authorization or to make any such filing or notice would not,
singly or in the aggregate, have a material adverse effect on the business,
prospects, financial condition or results of operations of the Company and its
subsidiaries, taken as a whole. Each such Authorization is valid and in full
force and effect and each of the Company and its subsidiaries is in compliance
with all the terms and conditions thereof and with the rules and regulations of
the authorities and governing bodies having jurisdiction with respect thereto;
and no event has occurred (including, without limitation, the receipt of any
notice from any authority or governing body) which allows or, after notice or
lapse of time or both, would allow, revocation, suspension or termination of any
such Authorization or results or, after notice or lapse of time or both, would
result in any other impairment of the rights of the holder of any such
Authorization; and such Authorizations contain no restrictions that are
burdensome to the Company or any of its subsidiaries; except where such failure
to be valid and in full force and effect or to be in compliance, the occurrence
of any such event or the presence of any such restriction would not, singly or
in the aggregate, have a material adverse effect on the business, prospects,
financial condition or results of operations of the Company and its
subsidiaries, taken as a whole.

(m) There are no costs or liabilities associated with Environmental Laws
(including, without limitation, any capital or operating expenditures required
for clean-up, closure of properties or compliance with Environmental Laws or any
Authorization, any related constraints on operating activities and any potential
liabilities to third parties) which would, singly or in the aggregate, have a
material adverse effect on the business, prospects, financial condition or
results of operations of the Company and its subsidiaries, taken as a whole.

(n) This Agreement has been duly authorized, executed and delivered by
the Company.

(o) KPMG Peat Marwick LLP are independent public accountants with
respect to the Company and its subsidiaries.

(p) The consolidated financial statements included in the Registration
Statement and the Prospectus (and any amendment or supplement thereto), together
with related schedules and notes, present fairly the consolidated financial
position, results of operations and

<PAGE> 11

changes in financial position of the Company and its subsidiaries on the basis
stated therein at the respective dates or for the respective periods to which
they apply; such statements and related schedules and notes have been prepared
in accordance with generally accepted accounting principles consistently applied
throughout the periods involved, except as disclosed therein; the supporting
schedules, if any, included in the Registration Statement present fairly in
accordance with generally accepted accounting principles the information
required to be stated therein; and the other financial and statistical
information and data set forth in the Registration Statement and the Prospectus
(and any amendment or supplement thereto) are, in all material respects,
accurately presented and prepared on a basis consistent with such financial
statements and the books and records of the Company and its subsidiaries.

(q) The unaudited pro forma consolidated financial statements of the
Company and the related notes thereto set forth in the Registration Statement
and the Prospectus (and any supplement or amendment thereto) have been prepared
on a basis consistent with the historical financial statements of the Company
and its subsidiaries, give effect to the assumptions used in the preparation
thereof on a reasonable basis and in good faith and present fairly the
historical and proposed transactions contemplated by the Registration Statement
and the Prospectus. Such unaudited pro forma financial statements have been
prepared in accordance with the applicable requirements of Rule 11-02 of
Regulation S-X promulgated by the Commission. The other pro forma financial and
statistical information and data set forth in the Registration Statement and
Prospectus (and any supplement or amendment thereto) are, in all material
respects, accurately presented and prepared on a basis consistent with the pro
forma consolidated financial statements.

(r) The Company and its subsidiaries maintain a system of internal
accounting controls sufficient to provide reasonable assurance that (i)
transactions are executed in accordance with management's general or specific
authorizations; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain asset accountability; (iii) access to
assets is permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.

(s) All material tax returns required to be filed by the Company and its
subsidiaries in any jurisdiction have been filed, other than those filings being
contested in good faith, and all material taxes, including withholding taxes,
penalties and interest, assessments, fees and other charges due pursuant to such
returns or pursuant to any assessment received by the Company have been paid,
other than those being contested in good faith and for which adequate reserves
have been provided.

(t) The Company is not and, after giving effect to the offering and sale
of the Shares and the application of the proceeds thereof as described in the
Prospectus, will not be, an "investment company" as such term is defined in the
Investment Company Act of 1940, as amended.

<PAGE> 12

(u) There are no contracts, agreements or understandings between the
Company or any of its subsidiaries and any person granting such person the right
to require the Company to file a registration statement under the Act with
respect to any securities of the Company or to require the Company to include
such securities with the Shares registered pursuant to the Registration
Statement.

(v) Since the respective dates as of which information is given in the
Prospectus other than as set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of this Agreement), (i)
there has not occurred any material adverse change or any development involving
a prospective material adverse change in the condition, financial or otherwise,
or the earnings, business, backlog, management or operations of the Company and
its subsidiaries, taken as a whole, (ii) there has not been any material adverse
change or any development involving a prospective material adverse change in the
capital stock or in the long-term debt of the Company or any of its subsidiaries
and (iii) neither the Company nor any of its subsidiaries has incurred any
material liability or obligation, direct or contingent.

(w) No relationship, direct or indirect, exists between or among the
Company on the one hand, and the directors, officers, shareholders, customers or
suppliers of the Company on the other hand, which is required by the Act to be
described in the Registration Statement or the Prospectus which is not so
described.

(x) The Company owns or possesses, or can acquire on reasonable terms,
all patents, patent rights, licenses, inventions, copyrights, know-how
(including trade secrets and other unpatented and/or unpatentable proprietary or
confidential information, systems or procedures), trademarks, service marks and
trade names ("intellectual property") currently employed by it in connection
with the business now operated by it except where the failure to own or possess
or otherwise be able to acquire such intellectual property would not, singly or
in the aggregate, have a material adverse effect on the business, prospects,
financial condition or results of operation of the Company; and the Company has
not received any notice of infringement of or conflict with asserted rights of
others with respect to any of such intellectual property which, singly or in the
aggregate, if the subject of an unfavorable decision, ruling or finding, would
have a material adverse effect on the business, prospects, financial condition
or results of operations of the Company.

(y) Effective as of January 1, 1991, the Company validly elected S
Corporation Status (as defined in Section 1361 of the Internal Revenue Code of
1986, as amended) for federal and certain state income tax purposes and validly
continued to qualify as an S corporation in each such jurisdiction since such
date until January 28, 1998.

<PAGE> 13

(z) The Company has complied with all provisions of Section 517.075,
Florida Statutes (Chapter 92-198, Laws of Florida).

(aa) Each certificate signed by any officer of the Company and delivered
to the Underwriters or counsel for the Underwriters shall be deemed to be a
representation and warranty by the Company to the Underwriters as to the matters
covered thereby.

SECTION 7. Representations and Warranties of the Selling Shareholders.
Each Selling Shareholder represents and warrants to each Underwriter that:

(a) Such Selling Shareholder is the lawful owner of the Shares to be
sold by such Selling Shareholder pursuant to this Agreement and has, and on the
Closing Date will have, good and clear title to such Shares, free of all
restrictions on transfer, liens, encumbrances, security interests, equities and
claims whatsoever.

(b) The Shares to be sold by such Selling Shareholder have been duly
authorized and are validly issued, fully paid and non-assessable.

(c) Such Selling Shareholder has, and on the Closing Date will have,
full legal right, power and authority, and all authorization and approval
required by law, to enter into this Agreement, the Custody Agreement signed by
such Selling Shareholder and U.S. Stock Transfer Corporation, as Custodian,
relating to the deposit of the Shares to be sold by such Selling Shareholder
(the "CUSTODY AGREEMENT") and the Power of Attorney of such Selling Shareholder
appointing certain individuals as such Selling Shareholder's attorneys-in-fact
(the "ATTORNEYS") to the extent set forth therein, relating to the transactions
contemplated hereby and by the Registration Statement and the Custody Agreement
(the "POWER OF ATTORNEY") and to sell, assign, transfer and deliver the Shares
to be sold by such Selling Shareholder in the manner provided herein and
therein.

(d) This Agreement has been duly authorized, executed and delivered by
or on behalf of such Selling Shareholder.

(e) The Custody Agreement of such Selling Shareholder has been duly
authorized, executed and delivered by such Selling Shareholder and is a valid
and binding agreement of such Selling Shareholder, enforceable in accordance
with its terms.

(f) The Power of Attorney of such Selling Shareholder has been duly
authorized, executed and delivered by such Selling Shareholder and is a valid
and binding instrument of such Selling Shareholder, enforceable in accordance
with its terms, and, pursuant to such Power of Attorney, such Selling
Shareholder has, among other things, authorized the Attorneys, or any one of
them, to execute and deliver on such Selling Shareholder's behalf this Agreement
and any other document that they, or any one of them, may deem necessary or
desirable in connection with the transactions contemplated hereby and thereby
and to deliver the Shares to be sold by such Selling Shareholder pursuant to
this Agreement.

<PAGE> 14

(g) Upon delivery of and payment for the Shares to be sold by such
Selling Shareholder pursuant to this Agreement, good and clear title to such
Shares will pass to the Underwriters, free of all restrictions on transfer,
liens, encumbrances, security interests, equities and claims whatsoever.

(h) The execution, delivery and performance of this Agreement and the
Custody Agreement and Power of Attorney of such Selling Shareholder by or on
behalf of such Selling Shareholder, the compliance by such Selling Shareholder
with all the provisions hereof and thereof and the consummation of the
transactions contemplated hereby and thereby will not (i) require any consent,
approval, authorization or other order of, or qualification with, any court or
governmental body or agency (except such as may be required under applicable
federal, state or foreign securities laws), (ii) conflict with or constitute a
breach of any of the terms or provisions of, or a default under, the
organizational documents of such Selling Shareholder, if such Selling
Shareholder is not an individual, or any indenture, loan agreement, mortgage,
lease or other agreement or instrument to which such Selling Shareholder is a
party or by which such Selling Shareholder or any property of such Selling
Shareholder is bound or (iii) violate or conflict with any applicable law or any
rule, regulation, judgment, order or decree of any court or any governmental
body or agency having jurisdiction over such Selling Shareholder or any property
of such Selling Shareholder.

(i) (i) To the knowledge of such Selling Shareholder, the
representations and warranties of the Company contained in Section 6 hereof are
true and correct and (ii) such parts of the Registration Statement under the
caption "Principal and Selling Shareholders" which specifically relate to such
Selling Shareholder do not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading.

(j) At any time during the period described in Section 5(d), if there is
any change in the information referred to in Section 7(i), such Selling
Shareholder will immediately notify you of such change.

(k) Each certificate signed by or on behalf of such Selling Shareholder
and delivered to the Underwriters or counsel for the Underwriters shall be
deemed to be a representation and warranty by such Selling Shareholder to the
Underwriters as to the matters covered thereby.

SECTION 8. Indemnification. (a) The Sellers, jointly and severally,
agree to indemnify and hold harmless each Underwriter, its directors, its
officers and each person, if any, who controls any Underwriter within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act, from and
against any and all losses, claims, damages, liabilities and judgments
(including, without limitation, any legal or other expenses incurred in
connection with investigating or defending any matter, including any action,
that could give rise to any such

<PAGE> 15

losses, claims, damages, liabilities or judgments) caused by any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement (or any amendment thereto), the Prospectus (or any
amendment or supplement thereto) or any preliminary prospectus, or caused by any
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading,
except insofar as such losses, claims, damages, liabilities or judgments are
caused by any such untrue statement or omission or alleged untrue statement or
omission based upon information relating to any Underwriter furnished in writing
to the Company by such Underwriter through you expressly for use therein;
provided however, that (i) the aggregate liability of any Selling Shareholder
pursuant to this Section 8(a) shall be limited to an amount equal to the
purchase price received by such Selling Shareholder from the sale of such
Selling Shareholder's Shares hereunder and (ii) the foregoing indemnity
agreement with respect to any preliminary prospectus shall not inure to the
benefit of any Underwriter who failed to deliver a Prospectus (as then amended
or supplemented, provided by the Company to the several Underwriters in the
requisite quantity and on a timely basis to permit proper delivery on or prior
to the Closing Date) to the person asserting any losses, claims, damages and
liabilities and judgments caused by any untrue statement or alleged untrue
statement of a material fact contained in any preliminary prospectus, or caused
by any omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not misleading, if
such material misstatement or omission or alleged material misstatement or
omission was cured in such Prospectus and the delivery of such Prospectus was
required by law to be delivered at or prior to the written confirmation of sale
to such person.

(b) Each Underwriter agrees, severally and not jointly, to indemnify and
hold harmless the Company, its directors, its officers who sign the Registration
Statement, each person, if any, who controls the Company within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act, each Selling
Shareholder and each person, if any, who controls such Selling Shareholder
within the meaning of Section 15 of the Act or Section 20 of the Exchange Act to
the same extent as the foregoing indemnity from the Sellers to such Underwriter
but only with reference to information relating to such Underwriter furnished in
writing to the Company by such Underwriter through you expressly for use in the
Registration Statement (or any amendment thereto), the Prospectus (or any
amendment or supplement thereto) or any preliminary prospectus.

(c) In case any action shall be commenced involving any person in
respect of which indemnity may be sought pursuant to Section 8(a) or 8(b) (the
"INDEMNIFIED PARTY"), the indemnified party shall promptly notify the person
against whom such indemnity may be sought (the "INDEMNIFYING PARTY") in writing
and the indemnifying party shall assume the defense of such action, including
the employment of counsel reasonably satisfactory to the indemnified party and
the payment of all fees and expenses of such counsel, as incurred (except that
in the case of any action in respect of which indemnity may be sought pursuant
to both Sections 8(a) and 8(b), the Underwriter shall not be required to assume
the defense of such action pursuant to this Section 8(c), but may employ
separate counsel and participate in the defense thereof, but the fees and
expenses of such counsel, except as provided below, shall be at the expense of
such Underwriter). Any indemnified party shall have the right to employ separate
counsel in any such action and participate in the defense thereof, but the

<PAGE> 16
fees and expenses of such counsel shall be at the expense of the indemnified
party unless (i) the employment of such counsel shall have been specifically
authorized in writing by the indemnifying party, (ii) the indemnifying party
shall have failed to assume the defense of such action or employ counsel
reasonably satisfactory to the indemnified party or (iii) the named parties to
any such action (including any impleaded parties) include both the indemnified
party and the indemnifying party, and the indemnified party shall have been
advised by such counsel that there may be one or more legal defenses available
to it which are different from or additional to those available to the
indemnifying party (in which case the indemnifying party shall not have the
right to assume the defense of such action on behalf of the indemnified party).
In any such case, the indemnifying party shall not, in connection with any one
action or separate but substantially similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances, be
liable for (i) the fees and expenses of more than one separate firm of attorneys
(in addition to any local counsel) for all Underwriters, their officers and
directors and all persons, if any, who control any Underwriter within the
meaning of either Section 15 of the Act or Section 20 of the Exchange Act, (ii)
the fees and expenses of more than one separate firm of attorneys (in addition
to any local counsel) for the Company, its directors, its officers who sign the
Registration Statement and all persons, if any, who control the Company within
the meaning of either such Section and (iii) the fees and expenses of more than
one separate firm of attorneys (in addition to any local counsel) for all
Selling Shareholders and all persons, if any, who control any Selling
Shareholder within the meaning of either such Section, and all such fees and
expenses shall be reimbursed as they are incurred. In the case of any such
separate firm for the Underwriters, their officers and directors and such
control persons of any Underwriters, such firm shall be designated in writing by
DLJ. In the case of any such separate firm for the Company and such directors,
officers and control persons of the Company, such firm shall be designated in
writing by the Company. In the case of any such separate firm for the Selling
Shareholders and such control persons of any Selling Shareholders, such firm
shall be designated in writing by the Attorneys. The indemnifying party shall
indemnify and hold harmless the indemnified party from and against any and all
losses, claims, damages, liabilities and judgments by reason of any settlement
of any action (i) effected with its written consent or (ii) effected without its
written consent if the settlement is entered into more than twenty business days
after the indemnifying party shall have received a request from the indemnified
party for reimbursement for the fees and expenses of counsel (in any case where
such fees and expenses are at the expense of the indemnifying party) and, prior
to the date of such settlement, the indemnifying party shall have failed to
comply with such reimbursement request. No indemnifying party shall, without the
prior written consent of the indemnified party, effect any settlement or
compromise of, or consent to the entry of judgment with respect to, any pending
or threatened action in respect of which the indemnified party is or could have
been a party and indemnity or contribution may be or could have been sought
hereunder by the indemnified party, unless such settlement, compromise or
judgment (i) includes an unconditional release of the indemnified party from all
liability on claims that are or could have been the subject matter of such
action and (ii) does not include a statement as to or an admission of fault,
culpability or a failure to act, by or on behalf of the indemnified party.

<PAGE> 17
(d) Notwithstanding the foregoing, no Selling Shareholder shall be
required to provide indemnification under this Section 8 until the earlier to
occur of (i) the Underwriters seeking indemnification shall have first made a
written demand for payment on the Company (a "DEMAND") and the Company shall
have failed to make such demanded payment within sixty (60) days after receipt
of such Demand or (ii) the Underwriters seeking indemnification shall have made
a Demand and the Company shall deny in writing its liability for such demanded
payment; provided, that this Section 8(d) shall be of no force or effect (i) if
a petition under the Bankruptcy Code shall have been filed by or with respect to
the Company or the Company shall have sought protection from its creditors
generally under any similar federal or state law or (ii) with respect to any
Selling Shareholder if a petition under the Bankruptcy Code shall have been
filed by or with respect to such Selling Shareholder or such Selling Shareholder
shall have sought protection from its creditors generally under any similar
federal or state law.

(e) To the extent the indemnification provided for in this Section 8 is
unavailable to an indemnified party or insufficient in respect of any losses,
claims, damages, liabilities or judgments referred to therein, then each
indemnifying party, in lieu of indemnifying such indemnified party, shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages, liabilities and judgments (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Sellers on the one hand and the Underwriters on the other hand from the offering
of the Shares or (ii) if the allocation provided by clause 8(e)(i) above is not
permitted by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause 8(e)(i) above but also the
relative fault of the Sellers on the one hand and the Underwriters on the other
hand in connection with the statements or omissions which resulted in such
losses, claims, damages, liabilities or judgments, as well as any other relevant
equitable considerations. The relative benefits received by the Sellers on the
one hand and the Underwriters on the other hand shall be deemed to be in the
same proportion as the total net proceeds from the offering (after deducting
underwriting discounts and commissions, but before deducting expenses) received
by the Sellers, and the total underwriting discounts and commissions received by
the Underwriters, bear to the total price to the public of the Shares, in each
case as set forth in the table on the cover page of the Prospectus. The relative
fault of the Sellers on the one hand and the Underwriters on the other hand
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information supplied by the Company or the
Selling Shareholders on the one hand or the Underwriters on the other hand and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such statement or omission.

The Sellers and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 8(e) were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation

17
<PAGE> 18

which does not take account of the equitable considerations referred to in the
immediately preceding paragraph. The amount paid or payable by an indemnified
party as a result of the losses, claims, damages, liabilities or judgments
referred to in the immediately preceding paragraph shall be deemed to include,
subject to the limitations set forth above, any legal or other expenses incurred
by such indemnified party in connection with investigating or defending any
matter, including any action, that could have given rise to such losses, claims,
damages, liabilities or judgments. Notwithstanding the provisions of this
Section 8, no Underwriter shall be required to contribute any amount in excess
of the amount by which the total price at which the Shares underwritten by it
and distributed to the public were offered to the public exceeds the amount of
any damages which such Underwriter has otherwise been required to pay by reason
of such untrue or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters' obligations to
contribute pursuant to this Section 8(e) are several in proportion to the
respective number of Shares purchased by each of the Underwriters hereunder and
not joint.

(f) The remedies provided for in this Section 8 are not exclusive and
shall not limit any rights or remedies which may otherwise be available to any
indemnified party at law or in equity.

(g) Each Selling Shareholder hereby designates SM&A Corporation, 4695
MacArthur Court, Eighth Floor, Newport Beach, California 92660, as its
authorized agent, upon which process may be served in any action which may be
instituted in any state or federal court in the State of New York by any
Underwriter, any director or officer of any Underwriter or any person
controlling any Underwriter asserting a claim for indemnification or
contribution under or pursuant to this Section 8, and each Selling Shareholder
will accept the jurisdiction of such court in such action, and waives, to the
fullest extent permitted by applicable law, any defense based upon lack of
personal jurisdiction or venue. A copy of any such process shall be sent or
given to such Selling Shareholder, at the address for notices specified in
Section 12 hereof.

SECTION 9. Conditions of Underwriters' Obligations. The several
obligations of the Underwriters to purchase the Firm Shares under this Agreement
are subject to the satisfaction of each of the following conditions:

(a) All the representations and warranties of the Company contained in
this Agreement shall be true and correct on the Closing Date with the same force
and effect as if made on and as of the Closing Date.

(b) If the Company is required to file a Rule 462(b) Registration
Statement after the effectiveness of this Agreement, such Rule 462(b)
Registration Statement shall have become effective by 10:00 P.M., New York City
time, on the date of this Agreement; and no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose shall have been commenced or shall be pending
before or contemplated by the Commission.

<PAGE> 19

(c) You shall have received on the Closing Date a certificate dated the
Closing Date, signed by Steven S. Myers and Kenneth W. Colbaugh, in their
capacities as the President, Chairman of the Board and Chief Executive Officer
and Executive Vice President and Chief Operating Officer, respectively, of the
Company, confirming the matters set forth in Sections 6(v), 9(a) and 9(b) and
that the Company has complied with all of the agreements and satisfied all of
the conditions herein contained and required to be complied with or satisfied by
the Company on or prior to the Closing Date.

(d) Since the respective dates as of which information is given in the
Prospectus other than as set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of this Agreement), (i)
there shall not have occurred any change or any development involving a
prospective change in the condition, financial or otherwise, or the earnings,
business, backlog, management or operations of the Company and its subsidiaries,
taken as a whole, (ii) there shall not have been any change or any development
involving a prospective change in the capital stock or in the long-term debt of
the Company or any of its subsidiaries and (iii) neither the Company nor any of
its subsidiaries shall have incurred any liability or obligation, direct or
contingent, the effect of which, in any such case described in clause 9(d)(i),
9(d)(ii) or 9(d)(iii), in your judgment, is material and adverse and, in your
judgment, makes it impracticable to market the Shares on the terms and in the
manner contemplated in the Prospectus.

(e) All the representations and warranties of each Selling Shareholder
contained in this Agreement shall be true and correct on the Closing Date with
the same force and effect as if made on and as of the Closing Date and you shall
have received on the Closing Date a certificate dated the Closing Date from each
Selling Shareholder to such effect and to the effect that such Selling
Shareholder has complied with all of the agreements and satisfied all of the
conditions herein contained and required to be complied with or satisfied by
such Selling Shareholder on or prior to the Closing Date.

(f) You shall have received on the Closing Date an opinion (satisfactory
to you and counsel for the Underwriters), dated the Closing Date, of Rutan &
Tucker, counsel for the Company and the Selling Shareholders, to the effect
that:

(i) each of the Company and its subsidiaries has been duly
incorporated, is validly existing as a corporation in good standing
under the laws of California and has the corporate power and authority
to carry on its business as described in the Prospectus and to own,
lease and operate its properties;

(ii) each of the Company and its subsidiaries is duly qualified and
is in good standing as a foreign corporation authorized to do business
in each

<PAGE> 20

jurisdiction in which the nature of its business, as described
in the Prospectus, or its ownership or leasing of property requires such
qualification, except where the failure to be so qualified would not
have a material adverse effect on the business, prospects, financial
condition or results of operations of the Company and its subsidiaries,
taken as a whole;

(iii) all the outstanding shares of capital stock of the Company
(including the Shares to be sold by the Selling Shareholders) have been
duly authorized and validly issued and are fully paid and
non-assessable;

(iv) all of the outstanding shares of capital stock of each of the
Company's subsidiaries have been duly authorized and validly issued and
are fully paid and non-assessable, and are owned by the Company free and
clear of any security interest, claim, lien, encumbrance or adverse
interest of any nature;

(v) the Shares to be issued and sold by the Company hereunder have
been duly authorized and, when issued and delivered to the Underwriters
against payment therefor as provided by this Agreement, will be validly
issued, fully paid and non-assessable;

(vi) Neither the outstanding Shares of capital stock of the Company
nor the Shares to be issued under this Agreement are subject to any
preemptive rights under the Company's Articles of Incorporation,
California law or any contract known to such counsel;

(vii) this Agreement has been duly authorized by the Company and by
or on behalf of each Selling Shareholder that is not a natural person;
this Agreement has been duly executed and delivered by the Company and
by or on behalf of each Selling Shareholder;

(viii) the authorized capital stock of the Company conforms as to
legal matters to the description thereof as set forth under
"Capitalization" and "Description of Capital Stock" in the Prospectus;

(ix) the Registration Statement has become effective under the Act,
and to such counsel's knowledge after due inquiry (a) no stop order
suspending the effectiveness of the Registration Statement has been
issued and (b) no proceedings for that purpose have been instituted or
are pending before, or threatened by, the Commission;

(x) the statements under the captions "Risk Factors--Anti-Takeover
Provisions", "Risk Factors--Shares Eligible for Future Sale",
"Management--1997 Stock Option Plan", "Management--Bonus Plan",
"Management--Employment Agreements", "Management--Indemnification of
Officers and Directors",

<PAGE> 21

"Description of Capital Stock", "Shares Eligible for Future Sale",
"_________" and "Underwriting" in the Prospectus and Items 14 and 15 of
Part II of the Registration Statement, insofar as such statements
constitute a summary of the legal matters, documents or proceedings
referred to therein, fairly present the information called for with
respect to such legal matters, documents and proceedings;

(xi) the execution, delivery and performance of this Agreement by
the Company, the compliance by the Company with all the provisions
hereof and the consummation of the transactions contemplated hereby and
as described in the Prospectus will not (A) require any consent,
approval, authorization or other order of, or qualification with, any
California or federal court or governmental body or agency (except such
as has been obtained or as may be required under the securities or Blue
Sky laws of the various states), (B) conflict with or constitute a
breach of any of the terms or provisions of, or a default under, the
charter or by-laws of the Company or any of its subsidiaries or any
indenture, loan agreement, mortgage, lease or other agreement or
instrument that is material to the Company and its subsidiaries taken as
a whole, to which the Company or any of its subsidiaries is a party or
by which the Company or any of its subsidiaries or any of their
respective property is bound, (C) violate or conflict with any
applicable California or federal law or any California or federal rule
or regulation, or any judgment, order or decree known to such counsel,
that is applicable to the Company or any of its subsidiaries or their
respective properties or business, issued by any court or any
governmental body or agency having jurisdiction over the Company, any of
its subsidiaries or any of their respective property or (D) result in
the suspension, termination or revocation of any Authorization of the
Company or any of its subsidiaries or any other impairment of the rights
of the holder of any such Authorization;

(xii) to the knowledge of such counsel, except as set forth in the
Prospectus, there are no legal or governmental proceedings pending or
threatened to which the Company or any of its subsidiaries is a party or
to which any of their respective property is subject that are required
to be described in the Registration Statement or the Prospectus and are
not so described. To the knowledge of such counsel, there are no
statutes, regulations, contracts or other documents that are required to
be described in the Registration Statement or the Prospectus or to be
filed as exhibits to the Registration Statement that are not so
described or filed as required;

(xiii) the Company is not and, after giving effect to the offering
and sale of the Shares and the application of the proceeds thereof as
described in the Prospectus, will not be, an "investment company" as
such term is defined in the Investment Company Act of 1940, as amended;

<PAGE> 22

(xiv) to such counsel's knowledge, there are no contracts,
agreements or understandings between the Company and any person granting
such person the right to require the Company to file a registration
statement under the Act with respect to any securities of the Company or
to require the Company to include such securities with the Shares
registered pursuant to the Registration Statement;

(xv) (A) the Registration Statement and the Prospectus and any
supplement or amendment thereto (except for the financial statements and
other financial data included therein as to which no opinion need be
expressed) comply as to form in all material respects with the
requirements of the Act, (B) each document filed by the company pursuant
to the Exchange Act (except for financial statements and other financial
data included therein as to which no opinion need be expressed) complied
when so filed as to form with the Exchange Act, (C) such counsel has no
reason to believe that at the time the Registration Statement became
effective or on the date of this Agreement, the Registration Statement
and the prospectus included therein (except for the financial statements
and other financial data as to which such counsel need not express any
belief) contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make
the statements therein not misleading and (D) such counsel has no reason
to believe that the Prospectus, as amended or supplemented, if
applicable (except for the financial statements and other financial
data, as aforesaid) contains any untrue statement of a material fact or
omits to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made,
not misleading;

(xvi) each Selling Shareholder is the record owner of the Shares to
be sold by such Selling Shareholder pursuant to this Agreement;

(xvii) each Selling Shareholder that is not a natural person has
full legal right, power and authority, and all authorization and
approval required by law, to enter into this Agreement and the Custody
Agreement and the Power of Attorney of such Selling Shareholder and to
sell, assign, transfer and deliver the Shares to be sold by such Selling
Shareholder in the manner provided herein and therein;

(xviii) the Custody Agreement and Power of Attorney of each Selling
Shareholder (a) has been duly executed and delivered by such Selling
Shareholder, (b) as to such Selling Shareholders which are not natural
persons, has been duly authorized, and (c) is a valid and binding
agreement of such Selling Shareholder, enforceable in accordance with
its terms. Pursuant to such Power of Attorney, such Selling Shareholder
has, among other things, authorized the Attorneys, or any one of them,
to execute and deliver on such Selling Shareholder's behalf this
Agreement and any other document they, or any one of them, may deem
necessary or desirable in connection with the transactions contemplated
hereby and thereby and to deliver the Shares to be sold by such Selling
Shareholder pursuant to this Agreement;

<PAGE> 23

(xix) Assuming the Underwriters purchase the Shares from the Selling
Shareholders in good faith and without knowledge of any adverse claim to
such Shares, the Underwriters who have purchased such Shares will, upon
payment therefor and delivery of the Shares to be sold by each Selling
Shareholder pursuant to this Agreement, acquire the respective Shares
purchased by them free and clear of all restrictions on transfer, liens,
encumbrances, security interests or adverse claims, including any claims
that the claimant has a property interest in the Shares or that it is a
violation of the rights of the claimant for another person to hold,
transfer, or deal with the Shares; and

(xx) the execution, delivery and performance of this Agreement and
the Custody Agreement and Power of Attorney of each Selling Shareholder
by such Selling Shareholder, the compliance by such Selling Shareholder
with all the provisions hereof and thereof and the consummation of the
transactions contemplated hereby and thereby will not (A) require any
consent, approval, authorization or other order of, or qualification
with, any court or governmental body or agency under any California or
federal law (except such as may be required under, the securities or
Blue Sky laws of the various states) (B) conflict with or constitute a
breach of any of the terms or provisions of, or a default under, the
organizational documents of such Selling Shareholder, if such Selling
Shareholder is not an individual, or any contract or agreement known to
such counsel to which such Selling Shareholder is a party or (C) violate
or conflict with any California or federal law or any rule or regulation
or any judgment, order or decree known to such counsel of any court or
any governmental body or agency having jurisdiction over such Selling
Shareholder or any property of such Selling Shareholder.

The opinion of Rutan & Tucker described in Section 9(f) above shall be
rendered to you at the request of the Company and the Selling Shareholders and
shall so state therein.

(g) You shall have received on the Closing Date an opinion, dated the
Closing Date, of Milbank, Tweed, Hadley & McCloy, counsel for the Underwriters,
as to the matters referred to in Sections 9(f)(v), 9(f)(vii) (but only with
respect to the Company), 9(f)(x) (but only with respect to the statements under
the caption "Description of Capital Stock" and 9(f)(xv).

In giving such opinions with respect to the matters covered by Section
9(f)(xv), counsel for the Company and the Selling Shareholders and counsel for
the Underwriters may state that their opinion and belief are based upon their
participation in the preparation of the Registration Statement and Prospectus
(other than documents incorporated therein by reference)

<PAGE> 24

and any amendments or supplements thereto and review and discussion of the
contents thereof, but are without independent check or verification except as
specified.

(h) You shall have received, on each of the date hereof and the Closing
Date, letters dated the date hereof or the Closing Date, as the case may be, in
form and substance satisfactory to you, from each of KPMG Peat Marwick LLP,
Deloitte & Touche and Ernst & Young independent public accountants, containing
the information and statements of the type ordinarily included in accountants'
"comfort letters" to the Underwriters with respect to the financial statements
and certain financial information contained in the Registration Statement and
the Prospectus.

(i) The Company shall have delivered to you the agreements specified in
Section 2 hereof which agreements shall be in full force and effect on the
Closing Date.

(j) The Shares shall have been duly listed for quotation on the Nasdaq
National Market.

(k) The Company and the Selling Shareholders shall not have failed on or
prior to the Closing Date to perform or comply with any of the agreements herein
contained and required to be performed or complied with by the Company or the
Selling Shareholders, as the case may be, on or prior to the Closing Date.

(l) You shall have received on the Closing Date, a certificate of each
Selling Shareholder who is not a U.S. Person (as defined under applicable U.S.
federal tax legislation) to the effect that such Selling Shareholder is not a
U.S. Person, which certificate may be in the form of a properly completed and
executed United States Treasury Department Form W-8 (or other applicable form or
statement specified by Treasury Department regulations in lieu thereof).

The several obligations of the Underwriters to purchase any Additional
Shares hereunder are subject to the delivery to you on the applicable Option
Closing Date of such documents as you may reasonably request with respect to the
good standing of the Company, the due authorization and issuance of such
Additional Shares and other matters related to the issuance of such Additional
Shares.

SECTION 10. Effectiveness of Agreement and Termination. This Agreement
shall become effective upon the execution and delivery of this Agreement of the
parties hereto.

This Agreement may be terminated at any time on or prior to the Closing
Date by you by written notice to the Sellers if any of the following has
occurred: (i) any outbreak or escalation of hostilities or other national or
international calamity or crisis or change in economic conditions or in the
financial markets of the United States or elsewhere that, in your judgment, is
material and adverse and, in your judgment, makes it impracticable to market the
Shares on the terms and in the manner contemplated in the Prospectus, (ii) the
suspension or material limitation of trading in securities or other instruments
on the New York Stock Exchange, the American

<PAGE> 25

Stock Exchange, the Chicago Board of Options Exchange, the Chicago Mercantile
Exchange, the Chicago Board of Trade or the Nasdaq National Market or limitation
on prices for securities or other instruments on any such exchange or the Nasdaq
National Market, (iii) the suspension of trading of any securities of the
Company on any exchange or in the over-the-counter market, (iv) the enactment,
publication, decree or other promulgation of any federal or state statute,
regulation, rule or order of any court or other governmental authority which in
your opinion materially and adversely affects, or will materially and adversely
affect, the business, prospects, financial condition or results of operations of
the Company and its subsidiaries, taken as a whole, (v) the declaration of a
banking moratorium by either federal or New York State authorities or (vi) the
taking of any action by any federal, state or local government or agency in
respect of its monetary or fiscal affairs which in your opinion has a material
adverse effect on the financial markets in the United States.

If on the Closing Date or on an Option Closing Date, as the case may be,
any one or more of the Underwriters shall fail or refuse to purchase the Firm
Shares or Additional Shares, as the case may be, which it has or they have
agreed to purchase hereunder on such date and the aggregate number of Firm
Shares or Additional Shares, as the case may be, which such defaulting
Underwriter or Underwriters agreed but failed or refused to purchase is not more
than one-tenth of the total number of Firm Shares or Additional Shares, as the
case may be, to be purchased on such date by all Underwriters, each
non-defaulting Underwriter shall be obligated severally, in the proportion which
the number of Firm Shares set forth opposite its name in Schedule I bears to the
total number of Firm Shares which all the non-defaulting Underwriters have
agreed to purchase, or in such other proportion as you may specify, to purchase
the Firm Shares or Additional Shares, as the case may be, which such defaulting
Underwriter or Underwriters agreed but failed or refused to purchase on such
date; provided that in no event shall the number of Firm Shares or Additional
Shares, as the case may be, which any Underwriter has agreed to purchase
pursuant to Section 2 hereof be increased pursuant to this Section 10 by an
amount in excess of one-ninth of such number of Firm Shares or Additional
Shares, as the case may be, without the written consent of such Underwriter. If
on the Closing Date any Underwriter or Underwriters shall fail or refuse to
purchase Firm Shares and the aggregate number of Firm Shares with respect to
which such default occurs is more than one-tenth of the aggregate number of Firm
Shares to be purchased by all Underwriters and arrangements satisfactory to you,
the Company and the Selling Shareholders for purchase of such Firm Shares are
not made within 48 hours after such default, this Agreement will terminate
without liability on the part of any non-defaulting Underwriter, the Company or
the Selling Shareholders. In any such case which does not result in termination
of this Agreement, either you or the Sellers shall have the right to postpone
the Closing Date, but in no event for longer than seven days, in order that the
required changes, if any, in the Registration Statement and the Prospectus or
any other documents or arrangements may be effected. If, on an Option Closing
Date, any Underwriter or Underwriters shall fail or refuse to purchase
Additional Shares and the aggregate number of Additional Shares with respect to
which such default occurs is more than one-tenth of the aggregate number of
Additional Shares to be purchased on such date, the non-defaulting Underwriters
shall have the option to (i) terminate their obligation hereunder to purchase

<PAGE> 26

such Additional Shares or (ii) purchase not less than the number of Additional
Shares that such non-defaulting Underwriters would have been obligated to
purchase on such date in the absence of such default. Any action taken under
this paragraph shall not relieve any defaulting Underwriter from liability in
respect of any default of any such Underwriter under this Agreement.

SECTION 11. Agreements of the Selling Shareholders. Each Selling
Shareholder agrees with you and the Company:

(a) To pay or to cause to be paid all transfer taxes payable in
connection with the transfer of the Shares to be sold by such Selling
Shareholder to the Underwriters.

(b) To do and perform all things to be done and performed by such
Selling Shareholder under this Agreement prior to the Closing Date and any
Option Closing Date and to satisfy all conditions precedent to the delivery of
the Shares to be sold by such Selling Shareholder pursuant to this Agreement.

SECTION 12. Miscellaneous. Notices given pursuant to any provision of
this Agreement shall be addressed as follows: (i) if to the Company, to SM&A
Corporation, 4695 MacArthur Court, Eighth Floor, Newport Beach, California
92626, (ii) if to the Selling Shareholders, to Kenneth W. Colbaugh and Ronald A.
Hunn c/o SM& Corporation, 4695 MacArthur Court, Eighth Floor, Newport Beach,
California 92626 and (iii) if to any Underwriter or to you, to you c/o
Donaldson, Lufkin & Jenrette Securities Corporation, 277 Park Avenue, New York,
New York 10172, Attention: Syndicate Department, or in any case to such other
address as the person to be notified may have requested in writing.

The respective indemnities, contribution agreements, representations,
warranties and other statements of the Company, the Selling Shareholders and the
several Underwriters set forth in or made pursuant to this Agreement shall
remain operative and in full force and effect, and will survive delivery of and
payment for the Shares, regardless of (i) any investigation, or statement as to
the results thereof, made by or on behalf of any Underwriter, the officers or
directors of any Underwriter, any person controlling any Underwriter, the
Company, the officers or directors of the Company, any person controlling the
Company, any Selling Shareholder or any person controlling such Selling
Shareholder, (ii) acceptance of the Shares and payment for them hereunder and
(iii) termination of this Agreement.

If for any reason the Shares are not delivered by or on behalf of any
Seller as provided herein (other than as a result of any termination of this
Agreement pursuant to Section 10), the Sellers agree, jointly and severally, to
reimburse the several Underwriters for all out-of-pocket expenses (including the
fees and disbursements of counsel) incurred by them. Notwithstanding any
termination of this Agreement, the Company shall be liable for all expenses
which it has agreed to pay pursuant to Section 5(i) hereof. The Sellers also
agree, jointly and severally, to reimburse the several Underwriters, their
directors and officers and any persons

<PAGE> 27

controlling any of the Underwriters for any and all fees and expenses
(including, without limitation, the fees disbursements of counsel) incurred by
them in connection with enforcing their rights hereunder (including, without
limitation, pursuant to Section 8 hereof).

The statements set forth in the last paragraph on the cover page and
under the caption "Underwriting" in the Prospectus, except for the statements
made in the paragraph under the caption "Underwriting" in the Prospectus
relating to sales or dispositions by the Company or the Selling Shareholders
constitute the written information furnished by or on behalf of any Underwriter
referred to in Sections 6(b), 6(c), 8(a) and 8(b) hereof.

Except as otherwise provided, this Agreement has been and is made solely
for the benefit of and shall be binding upon the Company, the Selling
Shareholders, the Underwriters, the Underwriters' directors and officers, any
controlling persons referred to herein, the Company's directors and the
Company's officers who sign the Registration Statement and their respective
successors and assigns, all as and to the extent provided in this Agreement, and
no other person shall acquire or have any right under or by virtue of this
Agreement. The term "successors and assigns" shall not include a purchaser of
any of the Shares from any of the several Underwriters merely because of such
purchase.

This Agreement shall be governed and construed in accordance with the
laws of the State of New York.

This Agreement may be signed in various counterparts which together
shall constitute one and the same instrument.

<PAGE> 28

Please confirm that the foregoing correctly sets forth the agreement among the
Company, the Selling Shareholders and the several Underwriters.

Very truly yours,

SM&A CORPORATION

By:
--------------------------------
Title:

THE SELLING SHAREHOLDERS
NAMED IN SCHEDULE II
HERETO, ACTING SEVERALLY

By:
--------------------------------
Attorney-in-fact

DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
LEHMAN BROTHERS INC.
LEGG MASON WOOD WALKER, INC.

Acting severally on behalf of
themselves and the several
Underwriters named in
Schedule I hereto

By: DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION

By:
-----------------------------
Title:

<PAGE> 29

SCHEDULE I

Number of Firm Shares
Underwriters To be Purchased
- ------------ ---------------------
Donaldson, Lufkin & Jenrette
Securities Corporation

Lehman Brothers Inc.

Legg Mason Wood Walker, Inc.

---------
Total 5,000,000
=========

<PAGE> 30

SCHEDULE II

Selling Shareholders

Number of Firm Number of Additional
Name Shares Being Sold Shares Being Sold
- ---- ----------------- --------------------

--------- -------
Total 2,500,000 750,000
========= =======

<PAGE> 31

Annex I

STEVEN S. MYERS AND PAULA K. MYERS, as Trustees of the Steven Myers and Paula
Mathis Revocable Trust dated June 24, 1992

KENNETH W. COLBAUGH AND ROBIN E. COLBAUGH, as Trustees of the K&R Colbaugh
Revocable Trust dated September 1, 1994

THOMAS F. HEINSHEIMER AND JULIANNE HEINSHEIMER, as Trustees of the Heinsheimer
Living Trust dated June 17, 1968

JOHN W. MONTGOMERY AND DIAN Y. MONTGOMERY, as Trustees of the J. and D.
Montgomery Revocable Trust dated June 24, 1997

RONALD A. HUNN AND LINDA HUNN, as Trustees of the Ronald and Linda Hunn Trust
dated February 26, 1990

CHARLES A. CULLIAN

RICHARD E. COLLART AND MARGARET S. COLLART, as Trustees of the Collart Family
Living Trust dated December 24, 1986

KENNETH M. WISEHART

HOLLY ANN WISEHART

AJAY KUMAR K. PATEL

ELIZABETH ANN STILLMAN

J. CHRISTOPHER LEWIS

PATRICK C. HADEN

J. CHRISTOPHER LEWIS, as Trustee of the R.B. Trust dated June 28, 1993

DAVID E. MCDEVITT

ANN E. MCDEVITT

THOMAS J. AMRHEIN

CHARLES E. PAYNE AND JANET H. PAYNE, as Trustees of the Payne Family Trust

WALLACE THOMAS BUCHER AND PATRICIA ANN BUCHER, as Trustees of the W.T. and P.A.
Bucher Revocable Trust dated March 7, 1997;

CHARLES J. MEYERS, JR.

JAMES F. MADEWELL AND ARLENE F. MADEWELL, as Trustees of the J. and A. Madewell
Revocable Trust dated June 7, 1997

ROBERT E. CASNER

JAMES R. MELLOR

MALCOMB CURRIE

<PAGE> 1

EXHIBIT 4.1

COMMON STOCK COMMON STOCK

NUMBER SHARES
______ ______
[SM&A CORPORATION LOGO]
When You Must Win... You Need Doers, Not Advisors(SM)

INCORPORATED UNDER THE LAWS OF THE STATE OF CALIFORNIA

CUSIP 784432 10 6
________________________________________________________________________________

THIS CERTIFIES THAT SEE REVERSE FOR
STATEMENTS RELATING
TO RIGHTS, PREFERENCES,
PRIVILEGES AND
RESTRICTIONS, IF ANY

SPECIMEN

IS THE RECORD HOLDER OF

FULLY PAID AND NONASSESSABLE SHARES OF THE COMMON STOCK, NO PAR VALUE, OF
SM&A CORPORATION
transferable on the books of the Corporation by the holder hereof in person or
by a duly authorized attorney upon surrender of this Certificate properly
endorsed. This Certificate is not valid unless countersigned and registered by
the Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.

Dated:
[SEAL OF SM&A CORPORATION
INCORPORATED
JAN. 25, 1985
CALIFORNIA]
[SIG] [SIG]
SENIOR VICE PRESIDENT, PRESIDENT, CHIEF EXECUTIVE OFFICER
CHIEF FINANCIAL OFFICER
AND SECRETARY

COUNTERSIGNED AND REGISTERED
U.S. STOCK TRANSFER CORPORATION
TRANSFER AGENT AND REGISTRAR

AUTHORIZED SIGNATURE
<PAGE> 2

A statement of the rights, preferences, privileges and restrictions
granted to or imposed upon the respective classes or series of shares and upon
the holders thereof as established by the Articles of Incorporation of the
Corporation and by any certificate of determination, and the number of shares
constituting each class or series and the designations thereof, may be obtained
by any shareholder of the Corporation upon written request and without charge
from the Secretary of the Corporation at its corporate headquarters.

KEEP THIS CERTIFICATE IN A SAFE PLACE. IF IT IS LOST, STOLEN, OR DESTROYED
THE CORPORATION WILL REQUIRE A BOND OF INDEMNITY AS A CONDITION TO THE ISSUANCE
OF A REPLACEMENT CERTIFICATE.

The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations;

TEN COM - as tenants in common
TEN ENT - as tenants by the entireties
JT ENT - as joint tenants with right
of survivorship and not as
tenants in common

UNIF GIFT MIN ACT - ................. Custodian .................
(Cust) (Minor)
under Uniform Gifts to Minors Act

.............................................
(State)

UNIF TRF MIN ACT - ................. Custodian (until age .....)
(Cust)

..................... under Uniform Transfers
(Minor)

to Minors Act ...............................
(State)

Additional abbreviations may also be used though not in the above list.

FOR VALUE RECEIVED, ______________________ hereby sell, assign and transfer unto

PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE

______________________________________

________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)

________________________________________________________________________________

_________________________________________________________________________ Shares
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint

_______________________________________________________________________ Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.

Dated ___________________________

X ______________________________________

X ______________________________________
THE SIGNATURE(S) TO THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME(S) AS
NOTICE: WRITTEN UPON THE FACE OF THE
CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR
ANY CHANGE WHATSOEVER.
Signature(s) Guaranteed

By_______________________________________
THE SIGNATURE(S) MUST BE GUARANTEED BY AN
ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN
ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE
GUARANTEE MEDALLION PROGRAM), PURSUANT TO
S.E.C. RULE 17AG-15.

<PAGE> 1

EXHIBIT 23.1

The Board of Directors
SM&A Corporation:

We consent to the use of our report included herein and to the reference to our
firm under the heading "Selected Financial Data" and "Experts" in the
prospectus.

/s/ KPMG PEAT MARWICK LLP

Orange County, California
August 27, 1998

<PAGE> 1
EXHIBIT 23.2

CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated October 3, 1997, with respect to the consolidated
financial statements of Space Applications Corporation and Subsidiary included
in Amendment No. 1 to the Registration Statement (Form S-1 No. 333-62163) and
related Prospectus of SM&A Corporation for the registration of 5,000,000 shares
of its common stock.

/s/ ERNST & YOUNG LLP
------------------------------
Ernst & Young LLP

Washington D.C.
August 24, 1998

<PAGE> 1

EXHIBIT 23.3

INDEPENDENT AUDITORS' CONSENT

We consent to the use in this Registration Statement of SM&A Corporation on
Form S-1/A of our report on our audits of the consolidated financial statements
of Decision-Science Applications, Inc. and Subsidiary for the Years Ended
January 31, 1998, 1997, and 1996, dated April 13, 1998, appearing in the
Prospectus, which is part of the Registration Statement, and to the reference
to us under the heading "Experts" in such Prospectus.

/s/ DELOITTE & TOUCHE LLP

August 27, 1998