Edgar Filing: EMERGENT INFORMATION TECHNOLOGIES INC

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-K
(MARK ONE)

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000

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

COMMISSION FILE NUMBER 0-23585

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EMERGENT INFORMATION TECHNOLOGIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

CALIFORNIA 33-0080929
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

4695 MACARTHUR COURT, 8TH FLOOR, NEWPORT BEACH, CALIFORNIA 92660
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

(949) 975-1487
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, NO PAR VALUE
(TITLE OF CLASS)

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]

As of April 6, 2001, 18,943,734 shares of the Registrant's common stock, no
par value ("Common Stock"), were outstanding. The aggregate market value of
shares of Common Stock held by non-affiliates, based upon the closing sale price
of the stock on the Nasdaq Small Capitalization Market on April 6, 2001, was
approximately $11,989,506.(1)

This document incorporates certain information by reference from the
Definitive Proxy Statement for the Annual Meeting of Shareholders scheduled for
June 6, 2001.

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1. For purposes of this report, in addition to those shareholders which fall
within the definition of "affiliate" under Rule 405 of the Securities Act of
1933, as amended, holders of ten percent or more of the Registrant's Common
Stock are deemed to be affiliates.

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PART I

ITEM 1

INTRODUCTION

This Annual Report on Form 10-K contains certain statements which are
not historical in nature, and are intended to be, and are hereby identified as,
"forward-looking statements" for purposes of the safe harbor provided by Section
21E of the Securities Exchange Act of 1934, as amended by Public Law 104-6. Such
forward-looking statements are principally contained in the sections entitled
"Business" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" including, without limitation, statements relating to (i)
the anticipated growth in the proposal management, management consulting,
contract support, systems engineering and program management services markets;
(ii) anticipated trends in the financial condition and results of operations of
Emergent Information Technologies, Inc. ("Emergent" or the "Company") (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
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 in the
"Risk Factors" discussion contained herein, important factors to consider in
evaluating such forward-looking statements include (i) the shortage of reliable
market data regarding the information technology solutions, high-end systems
engineering, and integrated proposal management 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 information technology services solutions, high-end
systems engineering and integrated 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 in the "Risk
Factors" discussion contained herein, there can be no assurance that the actual
results will not differ materially from such forward-looking statements
contained herein. When used in this report, the words "anticipate," "believe,"
"intends," "estimate," and "expect" and similar expressions as they relate to
the Company or its management are intended to identify such forward-looking
statements. The Company cautions readers that forward-looking statements,
including without limitation, those relating to the Company's future business
prospects, revenues, working capital, liquidity, and income, are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those indicated in the forward-looking statements, due to
several important factors herein identified, among others, and other risks and
factors identified from time to time in the Company's reports with the
Securities and Exchange Commission.

OVERVIEW

Emergent Information Technologies, Inc, formerly SM&A Corporation, was
founded in 1982. After years of consistent revenue and profit growth, the
Company completed an initial public offering in January 1998 and embarked on a
strategic acquisition program to broaden its service and product offering
capabilities. The Company is a comprehensive provider of high-end systems
engineering services and integrated proposal management services. The Company
has two distinct operating groups: Information technology support, science, and
program management for government clients ("Emergent-East"), and proposal
management and competitive strategy consulting services ("Steven Myers &
Associates"). During 2000, the Company made a strategic decision to discontinue
a third line of business consisting of commercial software development. Emergent
Information Technologies, Inc. delivers its services and products to a diverse
group of clients including aerospace and defense contractors as well as federal
and state government agencies.

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Emergent-East

Emergent-East provides (i) information technology, systems engineering,
and program integration services, (ii) modeling and simulation support, (iii)
advanced scientific research, and (iv) management and technical analysis to
federal and state government agencies, major aerospace and defense contractors.
Emergent-East provides a full spectrum of information technology services such
as wargaming capabilities, and modeling and simulation services which
significantly enhances and expands a client's technical evaluation and decision
making capabilities. Emergent-East's systems engineering services helps its
clients to define the work that must be done to meet the objectives of a program
or contract. Systems engineers define top level program objectives, perform cost
studies and analyses, and then manage the process to ensure that top level
requirements are being met as the program evolves from design through
development, test and production phases. Concurrent with systems engineering,
Emergent-East provides program integration functions, which ensure that the
program has been meticulously planned and that the program team follows the
plan.

Emergent-East's IT and related services are provided on either a
time-and-materials or cost reimbursable basis. Those services provided to
federal and state agencies are done so through a number of contract vehicles
including, but not limited to, full and open competitive contracts, the GSA
schedules, blanket purchase agreements and indefinite delivery and indefinite
quantity agreements. Revenue growth rates and margins in the government IT and
related services sector, while not providing the same economics as commercial
activities, do provide a predictability of revenue and profit due to the
long-term structured orientation of government IT and related services that is
uncharacteristic of the commercial market in general.

Steven Myers & Associates ("SM&A")

SM&A is the largest and most successful provider of integrated proposal
management services through a proprietary proposal management strategy and
process. In conjunction with this process, SM&A typically assumes a leadership
role and places dedicated teams at client facilities to manage all aspects of
the competitive proposal development process. Since 1982, SM&A has supported
over 500 proposals worth over $173 billion in value for clients with a
corresponding proposal win rate of 86.4% based on the dollar value of contracts
awarded. SM&A had over $2.3 billion in new contract awards and 20 proposal wins
by its clients during 2000. The combination of its unprecedented win rate and
superior reputation has contributed to SM&A's dominant market share of proposal
management services actually outsourced by government contractors.

Emergent-East has leveraged SM&A's win rate to its advantage by using
SM&A's proposal management expertise to win a major contract in 2000,
potentially worth over $40M in contract revenues over its five year life time.
One additional proposal has been submitted by Emergent-East using SM&A's
leadership, that is potentially worth over $350M in its eight year contract
life. Several additional prime proposals using this relationship are in various
stages of preparation, prior to submittal to the government.

SM&A also 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 SM&A's comprehensive capabilities in the areas of information
technology services, systems engineering program integration, and other
technical areas.

SM&A has been expanding its management consulting practice with both
traditional aerospace and defense as well as non-aerospace customers.

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Integration of Acquisitions

During 1998, the Company acquired two high-end engineering and
information technology consulting firms (the "1998 Acquisitions"): Space
Applications Corporation ("SAC") and Decision-Science Applications, Inc.
("DSA"). SAC, founded in 1969, provided systems engineering, scientific
research, program management support and technical support to military and
civilian space programs, the intelligence community and the armed services. DSA,
founded in 1977, provided systems engineering, information systems development,
scientific research and program management support to the U.S. Government,
principally the Department of Defense ("DoD"). The 1998 Acquisitions increased
the scope and depth of the Company's high-end profile services, adding more than
400 systems engineering, information technology and program integration experts
and expanding Emergent's domestic presence with offices in strategic locations
near significant market centers.

In March 1999, the Company acquired Systems Integration Softare, Inc.
("SIS"). SIS developed proprietary software products and services focused on
improving system performance and network reliability. This transaction was
accounted for as a purchase. The SIS operations were discontinued effective
August 2, 2000, and therefore included in discontinued operations.

In September 1999, the Company acquired Kapos Associates Inc. ("KAI").
KAI provides operations research, wargaming and systems analysis to the U.S.
Government. This transaction was accounted for as a purchase and, accordingly,
the consolidated financial statements include the financial results of KAI from
the effective date of the acquisition. Its operations have been integrated with
Emergent-East. The acquisitions of SIS and KAI are collectively referred to
herein as "the 1999 Acquisitions."

In February 2000, the Company acquired System Simulation Solutions, Inc.
("S3I"). S3I specializes in the design, development and application of powerful
simulation software products for the United States Air Force assisting it in
evaluating large-scale campaign level operations. The operations have been
integrated with Emergent-East. This transaction was accounted for as a purchase
and, accordingly, the consolidated financial statements include the financial
results of S3I from the effective date of the acquisition.

The Company has consolidated the acquisitions of DSA, SAC, KAI, and S3I
under common management into Emergent-East. During 2000, the Company began
integration of the systems and operations of the acquisitions and the
acquisitions have been fully integrated by the first quarter 2001.

On August 2, 2000, the Company's Board of Directors adopted a plan to
discontinue the operations of Emergent-Central, previously disclosed as a
business segment of the Company formed in 1999 to develop and license
proprietary commercial software applications with focuses in telecommunications,
enterprise security solutions, medical information and network management
solutions. Emergent-Central was developed from the acquisition of SIS and a
portion of DSA. The Company determined by August 2000 that the additional
capital needed to further develop the software and bring it to market was not
available due to the change in the Company's access to bank financing and its
inability to raise additional capital for commercial software development.

MARKETS

The Company is actively competing in two addressable markets: (i) the
government services market (both as prime contractor and subcontractor) and,
(ii) the proposal management and management consulting services market. The
former market is mainly addressed by Emergent-East, the latter market mainly by
SM&A.

Government Services (Emergent-East)

The Company estimates the annual market for government services of
interest to the Company at about $89 billion, including $69 billion of Federal
Services and $20 billion of State and local services. Within this market, the
Company currently focuses on providing IT services, systems engineering,
science, modeling and simulation, and decision support services.

Federal Procurement Spending. The Federal government will spend
approximately $230 billion in fiscal year 2001 to acquire goods and services, of
which approximately two-thirds will be spent by the Department of Defense (DoD).
Of the remaining third, a significant portion is spent on information technology
goods and services. Approximately 36% of Federal procurement dollars are spent
on supplies, 50% on services, and 14% on research and development (R&D). The
Company primarily addresses specific niches within the services market,
including professional services, automated data processing, and
telecommunications services. This market constitutes about 14% of Federal
procurement spending, or about $37 billion in 2001. In addition, the Company
competes successfully

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for various research and development contracts as well. Outsourced Federal R&D
spending will be about $32 billion in 2001. Thus, the total Federal services
market addressable by the Company is about $69 billion per year, the majority of
which resides in the DoD.

Spending at the DoD reached a modern era peak in 1986. The decline in
defense spending accelerated with the ending of the Cold War and the completion
of the Gulf War in 1991. Spending on defense goods declined 67% from 1986 to
1997 (the recent nadir of spending) and has since rebounded modestly. Spending
on defense operations and maintenance (O&M) and R&D is still declining, reaching
an expected low this year of 16% less than the peak in 1986. The decline has
been less steep than the decline in procurement spending as the level of
activity of the remaining, less numerous U.S. armed forces has never been higher
in peacetime than today. Of significance to the Company is the fact that, as the
Defense end-strength has declined (both uniformed and civilian), the requirement
for outsourcing of services has increased. The significant decline in spending
on defense goods since 1986 has had a dramatic affect on aerospace and defense
suppliers, resulting in a massive market consolidation. On the other hand, the
increased outsourcing of information technology and other defense O&M services
has led to a 314% increase in service contracts with commercial entities since
1987 -- increasing from approximately $5.1 billion to approximately $21.1
billion in 2001 (in inflation adjusted 1999 dollars). The Company believes this
represents a highly addressable subset of the $36.8 billion Federal services
market mentioned above.

State and Local Procurement Spending. State and local governments will
procure approximately $400 billion of goods and services in 2001. Of this
amount, the Company estimates that approximately 5% is spent on services for
which the Company can successfully compete -- a market of approximately $20
billion annually. State and local service-based projects are generally smaller
and less complex than Federal ones, thus reducing the addressable market.

The Government Services Market and Trends

The Company believes that growth of the market for government services
is dependent on a number of factors, including but not limited to:

* U.S. Government Outsourcing. In response to a reduced federal budget and
demands for efficiencies in government operation, many services that
were once performed in-house by U.S. Government employees are now being
outsourced to private industry. It is well-documented that this trend
will likely continue as the government finds it increasingly difficult
to recruit, train, and retain qualified IT specialists, scientists,
engineers, and other professionals.

* U.S. Government Contract Bundling. In the past, contracts were awarded
in larger numbers for smaller amounts. As part of the streamlining of
government initiatives, services contracts are often being bundled into
larger value contracts. In addition, the government's traditional role
as program integrator is now often delegated to prime contractors. This
provides fewer opportunities for bidding, but allows the winning prime
contractors to significantly increase revenue and profit. This factor
allows companies who can write proposals well (such as Emergent-East, in
partnership with its SM&A subsidiary) and manage subcontractors
efficiently to grow rapidly in a flat market.

* DoD Focus on Interoperability. Many of the command and control (C2)
systems developed in the last decade use information technologies
inefficiently, do not capitalize on commercial standards, and do not
interoperate with each other. A major trend in the marketplace is the
modification of systems to work with each other and the testing and
certification of those systems for use in joint and coalition warfare.
New C2 systems must be designed from the beginning to work with other C2
systems. The Company's expertise in the engineering of these C2 systems
positions it to take advantage of this trend.

* New administration. The new administration has expressed interest in
"skipping a generation" of weapon systems. This may result in the
cancellation or restructuring of existing programs and the analysis of
new alternatives. The Company is well positioned to provide the
engineering services to support this restructuring and analysis work
through systems analysis, modeling and simulation, systems engineering
and systems integration services.

* Focus on Commercial Technology. The U.S. Government, in order to reduce
the total cost of ownership of information systems, has emphasized
commercial-off-the shelf (COTS) hardware and software. As these systems
evolve, the needs of the government users often differ from the original
customer expectations of the targeted COTS technology, thus requiring
customized solutions, either through the development of database
structures that process and display information or through software
adaptations that process the data in a different manner.

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Proposal Management and Management Consulting Services (SM&A)

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 new business. In
addition, companies interested in penetrating new markets or consolidating
existing markets will often retain the services of firms capable of conducting
unbiased research and providing clear advice about needed investments or
restructuring, unencumbered by internal corporate expectations.

The Company estimates that the annual market for SM&A's proposal
management services is about $200 million, of which $60 million is readily
addressable within SM&A's current business model. The market for management
consulting services is much larger, depending on how broadly the Company wants
to pursue that market by competing with the more established firms in the field.

The Company believes that growth of the market for proposal management
is dependent on a number of factors, including but not limited to:

* Increase in the Defense Spending Budget. The defense budget is growing
in some areas as the drawdown from the end of Cold War has ceased,
combined with the need for modernization. A good deal of that spending
will be driven by increased investment in IT, command and control
systems, communications, computers and intelligence systems. Additional
funding for new weapons could originate from additional cost savings in
existing programs. The decrease in operational overhead of the
Department of Defense will create additional opportunities to provide
proposal management for new defense services contracts. Spending on new
competitive defense systems contracts bottomed out in 1997 at barely
more than one-third of the peak in 1986. The Company estimates that new
competitive contract spending on defense systems increased 22% from 1997
to 2000 and will increase at the same or better rate in the next three
years. Spending on new competitive defense R&D contracts is still in
decline as R&D spending has declined overall and resources have been
shifting into government-run R&D centers and away from contractors. From
1997 to 2000, the decline in the value of new R&D starts was about 17%.
The new administration has pledged a 20% increase in defense R&D
spending. As mentioned before, the market for outsourced defense
services has actually increased since 1986, rising some 314% through
2001. Of that increase, new competitive starts increased about 20% from
1997 to 2000 with new service contract starts estimated to have
surpassed R&D starts for the first time in fiscal year 2000, confirming
the shift away from cutting-edge defense research to more routine
implementation of IT projects.

* Increasing Importance of Proposal Management Services. The Company
believes that various factors in the aerospace 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 relatively 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
allocated a program sub-contract or be required to shut down an existing
production facility and re-assign or lay off several thousand workers.
Consequently, proposal management services and a winning outcome are
becoming increasingly crucial to all competitors.

* Internal Proposal Capabilities of Existing Clients is Decreasing. The
Company believes that the internal proposal capabilities of existing
clients may be decreasing due to fiscal pressures currently being
exerted on the organizations. This trend is expected to create
additional opportunities for regional management services.

* Expanding into supporting traditional management consulting companies.
The Company is expanding its proposal management services to support
traditional management consulting companies and state and local
municipalities. In addition, SM&A has always provided management
consulting services to its traditional customers, performing market
research, management studies and other services. The Company believes
that SM&A's excellent reputation and market access will continue to
offer an avenue to increase this area of service.

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GOVERNMENT SERVICES AND SUBCONTRACTING PERFORMED BY THE COMPANY

Systems Engineering. The Company's systems engineering work assists its clients
to define the work that must be done to meet a given program's objectives. The
first step formally defines the top level program objectives including mission
requirements, annual and total budget, and the schedule for each major program
milestone and then communicates them to each engineering, information technology
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 constantly evaluate the work of
the program's design and test groups to be certain that these top level
requirements are being met.

Program Integration. Concurrent with systems engineering are the Company's
program integration functions. This work is done to ensure that a given program
has been meticulously planned and that the program team follows the plan. The
Emergent program integration effort is 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, the scheduling
of these tasks, the sizing of each task and the definition of the
inter-relationship among the tasks. This information is maintained by the
program integration team in an electronic and sometimes web-enabled 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
re-evaluated to allow proactive management decisions to mitigate risk.

Systems Analysis. A major part of systems engineering and program integration is
the ability to quantify and justify decisions in the definition, design, and
execution of a program. Determining military utility and the impact a decision
has on that utility is key to providing clients with the irrefutable data needed
to design, develop and integrate their systems. Our modeling and simulation
capability provides the framework where these decisions can be evaluated in an
unbiased manner, and documented in a repeatable, validated format.

Applied Research and Space Science. NASA has outsourced many of the applied
research aspects of space physics and solar physics. Our scientists conduct
research into origins and effects of the sun, and the environment in space and
its effects upon satellites and our environment. These scientists use data from
a wide range of scientific spacecraft, earth based sensors, and laboratory
experiments to conduct this research. The results of their research are often
published in scientific journals or used to develop next generation scientific
payloads for future exploration.

Software and Database Development. Many government customers need customized
solutions for specific needs for information. This involves either the tailoring
of a database to sort and present information in a meaningful way, or the
development of processing algorithms and the coding of those algorithms to
process the data in a specific way. We start with a set of requirements, derive
a design, develop the necessary code or database structures and integrate the
results into our customers systems. We also develop stand-alone solutions
through the integration of commercial hardware and software tailoring of
databases.

Modeling and Simulation. The Company provides modeling and simulation support to
the U.S. Air Force, other government agencies, and contractors. The Company's
customers use modeling and simulation to quickly and inexpensively test
(compared to building and testing actual prototypes) new concepts, tactics and
doctrine.

PROPOSAL MANAGEMENT AND MANAGEMENT CONSULTING SERVICES PERFORMED BY THE COMPANY

Proposal Management. Proposal management involves assisting clients with the
procurement of government and commercial programs. The process whereby SM&A
manages a proposal can be divided into three phases: the pursuit phase, the
proposal phase, and the evaluation phase.

The Pursuit Phase. Once hired to manage a proposal, 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 often advises or coordinates the
marketing campaign as well. At the proper time, 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 production specialists expert in the new forms of
electronic proposals often required by a government acquisition agency.

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The Proposal Phase. Each SM&A team manages a client team, typically 50
to 200 engineers, IT specialists 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 responses 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 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. 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 (technical charts, videos, models) for the oral
presentations, which are becoming more common. Various forms of
electronically formatted proposal content are becoming an increasingly
larger component of the delivered work product.

The Evaluation Phase. 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, systems engineers and IT
specialists to assist the client's team to meet early post-award
commitments.

After a contract award, SM&A can leverage its marketplace dominance to generate
follow-on contracts for Emergent-East.

CLIENTS

The Company provides its high-end systems engineering, and integrated
proposal management services to numerous Fortune 100 clients and the U.S.
Government. The Company provides contract support services to various branches
of the U.S. Government including the U.S. Air Force, U.S. Navy, U.S. Army, NASA
and government intelligence agencies.

Raytheon Company and Lockheed Martin Corporation combined accounted for
approximately 29% and 36% of the Company's revenues for the years ended December
31, 2000 and 1999, respectively. In addition, for the year ended December 31,
2000, the U.S. Government accounted for 27% (28% in 1999) of the Company's
revenues. These revenues are a result of various engagements by several business
units of these companies and governmental entities. 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 and governmental unit.

In 2000, 27% (28% in 1999) of the Company's revenues resulted from
contracts directly with the U.S. Government. Contracts with the U.S. Government
are subject to termination, reduction or modification as a result of changes in
the U.S. Government's requirements or budgetary restrictions, at the convenience
of the U.S. Government, or when we participate as a subcontractor, if the
primary contractor is in default. Upon termination of a contract at the
convenience of the U.S. Government, the contractor is generally entitled to
reimbursement for allowable costs incurred up to the date of termination and a
proportionate amount of the stipulated profits or fees attributable to the work
actually performed.

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 December 31, 2000 the Company's backlog was approximately $116
million. 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

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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, trade advertising, attending
industry seminars featuring presentations by Emergent personnel, attending trade
shows and authoring articles and other publications about the industry and the
Company's methodologies, processes and technologies.

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
Company's senior management team is actively involved in meeting with companies
that have not yet engaged Emergent and newly appointed senior managers in
current Emergent clients who might not be thoroughly knowledgeable of Emergent's
previous assistance to the client.

GOVERNMENT CONTRACTS

COMPETITION

In each of its markets, Emergent has able competitors, which differ
depending upon the characteristics of the customer including its size,
geographic location, and computing environment. Many established competitors
have greater marketing, technical, and financial resources than the Company, and
there can be no assurance that Emergent will be able to continue to compete
successfully with existing or new competitors.

PROFESSIONAL SERVICES

Systems Engineering. Systems engineering markets are highly competitive
and include a large number of highly capable firms in the United States, such as
Booz-Allen & Hamilton, Science Applications International Corporation, Veridian,
and Litton TASC. The market is also highly fragmented. The Company, however, has
found increasing opportunities to work with clients who have previously retained
Emergent. The trend towards contract bundling has driven larger government
contractors into the same market space, which has increased competition from
companies with much larger sales and marketing workforces and the ability to
apply a larger team of experts into winning contracts. However, this same trend
has provided the opportunity for more teaming opportunities with potential
competitors, leveraging individual strengths.

Program Integration. Program integration markets are highly competitive,
with internal resources of the larger prime contractors being the primary
competitor. There is also a large number of smaller firms who provide similar
services.

Systems Analysis. The systems analysis marketplace is dominated by
smaller companies that dominate specific niches, with a smaller number of medium
size firms that compete in many of the larger market segments. The Company
dominates the Air Force Modeling and Simulation market for campaign and
strategic level analyses, and in the air to air engagement arena. There is more
competition on the horizon as the U.S. Government is looking at joint service
simulations at the strategic and campaign levels, but none of these systems are
operational, nor provide the fidelity of our models.

Applied Research. The applied research market is limited to a few
companies that effectively recruit, retain and motivate high level scientists.
Typically, companies in this market hire away talent in pursuit of competitive
procurements, as the skills of most researchers are unique. This makes
competition very fragmented and diffuse and requires vigilance on the part of
the Company to maintain a competitive and enjoyable work environment.

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. Shipley Associates,
with approximately one-third the revenue as SM&A, is the largest competitor. 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.

8
10

PRINCIPAL COMPETITIVE FACTORS IN PROFESSIONAL SERVICES

The Company believes the principal competitive factors in the
professional services market include in priority order: Industry and program
knowledge, rapidly deployable skilled personnel, responsiveness, reputation and
price.

Proposal management factors are similar but in a different priority,
they 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 where the cost of proposal development is
likely to be a larger percentage of the contract amount than with a large
program.

EMPLOYEES

As of December 31, 2000, the Company had approximately 735 employees.
Approximately 94% are information technology and proposal management
professionals and 6% are administrative personnel. The Company believes that its
success depends significantly upon attracting, retaining and motivating
talented, innovative and experienced professionals. For this reason, Emergent is
comprised of highly experienced information technology specialists, program
managers, engineers and skilled technicians, tested in some of the largest and
most complex military, commercial and government programs of the past 30 years.
The typical Emergent employee has more than 20 years of applicable experience
and a majority of our employees possess advanced degrees in science, engineering
or information technology fields.

The Company has instituted a training and recruitment program to help
acquire and ensure retention of high quality personnel and to enable it to
respond to expanding customer needs. The performance of each Emergent employee
is constantly evaluated both by the Emergent team with whom the employee is
working and by the client who has engaged the Company. Emergent executives are
always on call to discuss any and all personnel issues. Emergent 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.

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.

In addition to the other information in this Annual Report on Form 10-K,
the following factors should be considered carefully in evaluating us and our
business and prospects.

9
11

RISK FACTORS

THERE ARE RISKS ASSOCIATED WITH THE COMPANY'S ABILITY TO INTEGRATE ITS PRIOR
ACQUISITIONS

In recent years, the Company expanded its operations through the
acquisition of complementary businesses.

There can be no assurance that the anticipated economic, operational and
other benefits of these acquisitions will be realized or that the Company will
be able to successfully integrate these acquired businesses. The difficulties of
such integration may initially be increased by the need to integrate personnel
with different business backgrounds and corporate cultures. 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, and this could result in increased difficulty in marketing services or
acquiring companies in the future. In addition, the Company cannot be certain
that the acquired companies will operate profitably. There are other risks with
acquisitions. These include 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 business,
operating results and financial condition.

The Company's ability to manage the integration of its operations will
require the Company 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 in prior years has presented and will continue to present
numerous operational challenges, such as the assimilation of financial reporting
systems and increased pressure on our senior management and will increase the
demands on our 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. 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 the Company will be able to attract and retain
the qualified personnel necessary to effectively manage its operations. To the
extent the Company is unable to manage its integration effectively and
efficiently, its business, financial condition and results of operations could
be materially and adversely affected.

OUR BUSINESS DEPENDS SUBSTANTIALLY ON THE DEFENSE INDUSTRY

Approximately 31% of the Company's revenues were derived from proposal
management services from SM&A related to government procurement contracts for
the fiscal year ended December 31, 2000. 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 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, on the
Company. A number of trends may contribute to such a decline, including:

- large weapon systems being replaced with smaller, more precise high
technology systems;

- multiple procurements for similar weapons being consolidated into joint
service procurements, such as the Joint Strike Fighter program;

- threat scenarios evolving away from global conflicts to regional
conflicts; and

- 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.

10
12

THERE ARE RISKS ASSOCIATED WITH GOVERNMENT CONTRACTING

The Company is subject to risks associated with compliance with
governmental regulations, both directly and through government-contractor
clients. The fines and penalties which could result from noncompliance with
appropriate standards and regulations, or a client's suspension or disbarment
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 is in the process of integrating the 1998, 1999 and 2000
acquisitions and has not yet put in place all systems and procedures required
for the satisfactory compliance with all government regulations. If the Company
cannot comply with all government reporting and compliance it may be subject to
fines, penalties or the loss of the ability to retain government contract work.

The Company relies on the continuance and expansion of our business on a
facility security clearance from the U.S. Government and individual security
clearances, at various levels, for nearly all members of 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 is derived
from contracts or subcontracts with the U.S. Government. The Company's services
are performed pursuant to the following types of contracts:

- cost reimbursable;

- time-and-materials; and

- fixed-price contracts and subcontracts.

Under fixed-price contracts, the Company bears any risk of increased or
unexpected costs that may reduce its profits or cause the Company 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. When the Company participates as a subcontractor, it is
also 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
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.

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.

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 of its major clients could have a material adverse effect upon the Company.
The Company's books and records are subject to annual audit by the Defense
Contract Audit Agency, which can result in 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 require the Company to refund such
amounts to the government. If improper or illegal activities are discovered in
the course of any audits or investigations, the contractor may also 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 our business, financial
condition and results of operations. Currently the government has not completed
their audit of the Company's books and records for 1998, 1999 and 2000.

11
13

THE COMPANY RELIES ON A RELATIVELY LIMITED NUMBER OF CLIENTS

The Company derives a significant portion of revenues from a relatively
limited number of clients. For example, revenues from the ten most significant
clients accounted for approximately 79%, 80%, and 76%, of total revenues for the
years ended December 31, 2000, 1999, and 1998, respectively. Three clients, the
U.S. Government, Raytheon Systems Company, and Lockheed Martin Corporation
accounted for approximately 56%, 64%, and 58% of total revenues for the years
ended December 31, 2000, 1999 and 1998, respectively. Raytheon Systems Company
is the Company's single largest commercial client, accounting for approximately
17%, 20% and 16% of total revenues for the years ended December 31, 2000, 1999
and 1998, respectively.

Clients typically retain the Company's services as needed on an
engagement basis rather than pursuant to long-term contracts, and a client can
usually terminate the engagement at any time without a significant penalty.
Moreover, there can be no assurance that 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
our business, financial condition and results of operations. In addition, the
level of services required by an individual client may diminish over the life of
the relationship, and there can be no assurance the Company will be successful
in establishing relationships with new clients as this occurs.

THE MARKETS IN WHICH THE COMPANY OPERATES ARE HIGHLY COMPETITIVE

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 clients' internal proposal development resources.

12
14

THE COMPANY RELIES HEAVILY UPON ITS KEY EMPLOYEES

The Company's success is highly dependent upon the efforts, abilities,
business generation capabilities and project execution of its executive
officers, in particular those of Steven S. Myers, our President, Chief Executive
Officer and Chairman of the Board, and Ajay K. Patel, our Executive Vice
President and Chief Operating Officer. The loss of the services of either of
these individuals for any reason could materially and adversely affect our
business, operating results and financial condition.

QUARTERLY RESULTS MAY FLUCTUATE SIGNIFICANTLY

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."

THE STOCK PRICE IS SUBJECT TO SIGNIFICANT VOLATILITY

The Company's common stock was first publicly traded on January 29, 1998
after our initial public offering at $12.00 per share. Between January 29, 1998
and April 6, 2001, the closing sale price has ranged from a low of $0.75 per
share to a high of $31.13 per share. The market price of the Company's 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;

- loss of key employees;

- changes in the regulatory environment or market conditions affecting the
defense and aerospace industry;

- changes in earnings estimates and ratings by analysts;

- lack of market liquidity resulting from a relatively small amount of
public stock float;

- changes in generally accepted accounting principles;

- sales of common stock by existing holders;

- the announcement and market acceptance of proposed acquisitions; and

- financial performance for any period which results in the violation of
debt covenants with any of the Company's lenders and subsequent loss of
available bank lines for working capital.

PRINCIPAL SHAREHOLDER HAS SIGNIFICANT CONTROL OVER THE COMPANY

Steven S. Myers, the Chief Executive Officer and Chairman of the Board,
beneficially owns or controls approximately 39.15% 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 Company's board of
directors is currently comprised entirely of individuals nominated with the
approval of Mr. Myers.

LOSS OF LIQUIDITY

The Company has a revolving credit commitment with three major banks.
The commitment expires January 31, 2002. There is risk that the Company may
violate covenants associated with this commitment which would result in the loss
of the Company's ability to borrow under the revolving credit agreement. There
are no assurances that the Company may be able to refinance the current
commitment by January 31, 2002.

13
15

As conditions to the revolving credit commitment, the Company is
obligated to reduce the $22.7 million commitment by a minimum of $1.0 million
per quarter or by the earlier reduction due to the proceeds of tax refunds or
the sale of assets. As of March 30, 2001, the Company has met the commitment
reduction requirements and no further reductions are required until termination
of the facility.

ITEM 2--PROPERTIES

FACILITIES

The Company and its subsidiary, SM&A, occupy its principal executive
offices adjacent to the Orange County (John Wayne) Airport in Newport Beach,
California. The Company has approximately 19,500 square feet of office space in
this location.

As of December 31, 2000, the Company's other primary offices housed
Emergent-East including an approximately 73,000 square foot facility in Vienna,
Virginia. The Company maintains additional offices, each consisting of 20,000
square feet or less, throughout the United States. The Company estimates it has
approximately 100,000 square feet in excess real estate due to the discontinued
operations of Emergent-Central and the integration of the Company's
acquisitions. The Company is actively attempting to sublease its excess facility
space.

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

ITEM 3--LEGAL PROCEEDINGS

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.

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

Not applicable.

14
16

PART II

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

Price Range Of Common Stock

The Company's Common Stock has been traded on the Nasdaq National Market
under the symbol "WINS" from January 29, 1998 through May 3, 2000. On May 4,
2000 the Company changed its name to Emergent Information Technologies, Inc.,
and changed its symbol to "EITI". On May 30, 2000 the Company began trading
under the Nasdaq small capitalization listing following notification from Nasdaq
that it did not comply with the requirements for continued listing on the Nasdaq
National Market.

The following table sets forth, for the quarters indicated, the high and
low closing sale prices as reported on Nasdaq.

2000 1999
----------------------------------------------
HIGH LOW HIGH LOW
------- ------- ------- -------

First Quarter Ending March 31 .......... $ 5.250 $ 5.063 $11.625 $ 9.875
Second Quarter Ending June 30 .......... $ 2.500 $ 2.125 $ 8.00 $ 7.00
Third Quarter Ending September 30 ...... $ 1.719 $ 1.250 $ 7.875 $ 7.531
Fourth Quarter Ending December 31 ...... $ 1.000 $ .750 $ 6.250 $ 6.000

At April 6, 2001, there were approximately 2,250 registered holders of
the Company's outstanding shares of Common Stock and on April 6, 2001 the
closing sale price of the Common Stock on the Nasdaq Small Cap Market was $1.50
per share.

DIVIDENDS

On January 27, 1998, immediately prior to consummating its initial
public offering, the Company declared an S corporation dividend, in the amount
of $711,000, 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.

RECENT SALES OF UNREGISTERED SECURITIES

On May 29, 1998, the Company acquired SAC. In connection with such
acquisition and in exchange for all of the issued and outstanding SAC common
stock and options, the Company issued an aggregate of 819,743 shares of its
common stock and 175,906 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 Company 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 Company 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 Company in connection with the
transaction. Due to certain price protection provisions relating to the shares
of common stock issued in connection with the acquisition of SAC and the market
price of the Company's stock during 1999, the Company issued 714,000 additional
shares of common stock to former shareholders of SAC based upon the market price
of the common stock at certain defined liquidation dates.

On August 20, 1998, the Company acquired DSA. In connection with such
acquisition and in exchange for all of the issued and outstanding DSA common
stock, the Company 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 Company as "accredited
investors" under Rule 501(a) of 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 Company 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
Company in connection with the transaction.

15
17

The shareholders of common stock issued in the SAC and DSA acquisitions
had demand registration rights. Substantially all of the shareholders exercised
such demand rights on February 1, 1999 and on April 29, 1999, the Company filed
a registration statement with the SEC on Form S-3 to register these common
shares (such registration statement was amended on May 13, 1999).

The Company entered into a Note and Stock Purchase Agreement (the
"Subordinated Debt Agreement") dated as of December 29, 2000, by and among the
Company, the subsidiaries of the Company as Guarantors, and various investors
including Libra Mezzanine Partners II, L.P. (such investors, the "Purchasers").
In consideration of a $25,000,000 investment, the Company issued to the
purchasers (i) 13% Senior Subordinated Notes due in 2005 in the aggregate
principal amount of $25,000,000 (the "Notes"), and (ii) 2,250,000 shares of the
common stock of the Company ("Common Stock") with a fair value of $1,968,750.
The Purchasers have demand registration rights.

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18

ITEM 6--SELECTED FINANCIAL DATA

YEARS ENDED DECEMBER 31,
-------------------------------------------------------------
2000(1) 1999(1) 1998(1) 1997 1996
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net revenues .................................................... $ 120,140 $ 95,533 $ 68,449 $ 36,962 $ 25,699
Cost of revenues ................................................ 72,980 58,592 40,483 20,529 14,512
--------- --------- --------- --------- ---------
Gross margin ................................................ 47,160 36,941 27,966 16,433 11,187
Selling, general and administrative expenses(2) ................. 32,921 23,725 13,756 8,184 8,274
Amortization of goodwill and other intangibles .................. 1,716 816 770 -- --
Cancelled secondary offering costs .............................. -- -- 361 -- --
--------- --------- --------- --------- ---------
Operating income ............................................ 12,523 12,400 13,079 8,249 2,913
Other income (expense) .......................................... (2,062) (702) 1,520 (292) 136
--------- --------- --------- --------- ---------
Income before income taxes .................................. 10,461 11,698 14,599 7,957 3,049
Income tax expense(3) ........................................... 4,289 4,738 6,072 3,183 1,219
--------- --------- --------- --------- ---------
Income or pro forma income from continuing operations ........... 6,172 6,960 8,527 4,774 1,830
Loss from operations of discontinued business, net of
income tax benefit of $3,364, $2,009, and $137 in 2000,
1999, and 1998, respectively(4) ............................. (5,928) (2,950) (208) -- --
Loss from disposal of discontinued business, net of income
tax benefit of $3,509 and $390 in 2000 and 1998,
respectively(4) ............................................. (30,607) -- (607) -- --
--------- --------- --------- --------- ---------
Net income (loss) or pro forma net income ................... $ (30,363) $ 4,010 $ 7,712 $ 4,774 $ 1,830
========= ========= ========= ========= =========
Income (loss) or pro forma income per share from continuing
operations(5):
Basic ....................................................... $ .38 $ .43 $ .55 $ .37 $ .12
Diluted ..................................................... $ .37 $ .42 $ .53 $ .37 $ .12
========= ========= ========= ========= =========
Loss per share from discontinued operations(5):
Basic ....................................................... $ (2.23) $ (.18) $ (.05) $ .00 $ .00
Diluted ..................................................... $ (2.20) $ (.18) $ (.05) $ .00 $ .00
========= ========= ========= ========= =========
Net income (loss) or pro forma net income per share(5):
Basic ....................................................... $ (1.85) $ .25 $ .50 $ .37 $ .12
Diluted ..................................................... $ (1.83) $ .24 $ .48 $ .37 $ .12
========= ========= ========= ========= =========
Weighted average shares outstanding(5):
Basic ....................................................... 16,350 16,257 15,645 12,948 14,893
Diluted ..................................................... 16,579 16,431 15,984 12,948 14,893
========= ========= ========= ========= =========
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents ....................................... $ 2,040 $ 1,226 $ 454 $ 150 $ 1,927
Working capital ................................................. 20,841 22,224 15,979 101 (279)
Total assets .................................................... 75,849 96,573 66,324 5,331 11,820
Long-term debt, including current portion(6)(7) ................. 36,633 29,017 -- 7,729 6,250
Shareholders' equity (deficit)(6) ............................... 22,910 50,456 55,329 (6,328) 755

17
19

Footnotes

(1) The consolidated statements of operations and balance sheet data include the
results of operations and acquired net assets of the Company and Space
Applications Corporation (SAC) beginning May 15, 1998, Decision Science
Applications (DSA) beginning August 1, 1998, Systems Information Solutions,
Inc., (SIS), beginning March 1, 1999, Kapos Associates Inc., beginning
September 1, 1999, and System Simulation Solutions, Inc., beginning February
1, 2000.

(2) Selling, general and administrative expenses for fiscal 1997 and 1996
reflect pro forma adjustments for compensation for the principal executive
officers (which have historically been included in SG&A expenses) who are to
be paid a maximum of $2.7 million in salaries and bonuses for 1998 under the
Executive Compensation Program.

(3) Amounts reflect pro forma adjustments for 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 years prior to 1998.

(4) Loss from operations on discontinued business and loss from disposal of
discontinued business reflect the operations of StamiNet, Inc., a subsidiary
of SAC in 1998, and Emergent-Central in 1999 and 2000. Emergent-Central was
comprised of the commercial software development operations of DSA and SIS.
On August 2, 2000, management decided to discontinue the Emergent-Central
operation. See Note 5 to the Consolidated Financial Statements.

(5) Net income (loss) or pro forma net income per share was computed as
explained in Note 1 to the Consolidated Financial Statements.

(6) In 1999, the Company purchased 1,146,000 of its common shares for
approximately $9.3 million in cash using funds borrowed under the Company's
currently existing bank facility. In January 1998, the Company sold
2,100,000 shares of Common Stock in the IPO for net proceeds of
approximately $22.4 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. On December 29, 2000, in consideration of a $25,000,000
investment, the Company issued 2,250,000 shares of the Company's common
stock. See Note 6 to the Consolidated Financial Statements.

(7) In April 1996, the Company purchased an aircraft for $5.8 million and
financed the purchase through a bank. In January 1997, the Company sold the
aircraft to a company which is owned by Steven S. Myers, the Company's
principal shareholder.

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20

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

FACTORS CONCERNING FORWARD-LOOKING STATEMENTS

From time to time, the Company, through its management, may make
forward-looking public statements, such as statements concerning then expected
future revenues or earnings or concerning projected plans, performance, contract
procurement as well as other estimates relating to future operations.
Forward-looking statements may be in reports filed under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), in press releases or informal
statements made with the approval of an authorized executive officer. The words
or phrases "will likely result," "are expected to," "will continue," "is
anticipated," "estimate," "project," or similar expressions are intended to
identify "forward-looking statements" within the meaning of Section 21E of the
Exchange Act and Section 27A of the Securities Act of 1933, as amended, as
enacted by the Private Securities Litigation Reform Act of 1995.

The Company wishes to caution readers not to place undue reliance on these
forward-looking statements, which speak only as of the date on which they are
made. In addition, the Company wishes to advise readers that the factors listed
below, as well as other factors not currently identified by management, could
affect the Company's financial or other performance and could cause the
Company's actual results for future periods to differ materially from any
opinions or statements expressed with respect to future periods or events in any
current statement.

The Company will not undertake and specifically declines any obligation to
publicly release any revisions which may be made to any forward-looking
statements to reflect events or circumstances after the date of such statements
or to reflect the occurrence of anticipated or unanticipated events which may
cause management to re-evaluate such forward-looking statements.

In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company is hereby filing cautionary
statements identifying important factors that could cause the Company's actual
results to differ materially from those projected in forward-looking statements
of the Company made by or on behalf of the Company.

19
21

QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

The following tables presents unaudited quarterly consolidated financial
information for each of the Company's last eight fiscal quarters. In the opinion
of the Company's management, this quarterly information has been prepared on the
same basis as the audited consolidated financial statements appearing elsewhere
in this Form 10-K and includes all adjustments necessary to present fairly the
unaudited quarterly results set forth herein. The Company's quarterly results
have in the past been subject to fluctuations, and thus, the operating results
for any quarter are not necessarily indicative of results for any future period.

The amounts for the quarters ending September 30, June 30, and March 31,
2000 have been restated from the amounts previously presented in the respective
Form 10-Q's for certain corrections. The restatements are detailed on page 21.

2000 1999
----------------------------------------- -----------------------------------------
12/31 9/30 6/30 3/31 12/31 9/30 6/30 3/31
-------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

Net revenues .............................. $ 29,987 $ 27,924 $ 31,382 $ 30,847 $ 24,474 $ 23,332 $ 23,076 $ 24,651
Cost of revenues .......................... 19,221 16,460 18,641 18,658 16,186 14,724 13,628 14,054
-------- -------- -------- -------- -------- -------- -------- --------
Gross margin .......................... 10,766 11,464 12,741 12,189 8,288 8,608 9,448 10,597
Selling, general and administrative
expenses ................................. 8,433 8,865 7,944 7,679 7,527 5,752 5,093 5,353
Amortization of goodwill and
other intangibles ........................ 437 437 437 405 214 214 195 193
-------- -------- -------- -------- -------- -------- -------- --------
Operating income ...................... 1,896 2,162 4,360 4,105 547 2,642 4,160 5,051
Other expense ..................... (522) (608) (550) (382) (175) (175) (176) (176)
-------- -------- -------- -------- -------- -------- -------- --------
Income from continuing
operations before income
taxes ........................ 1,374 1,554 3,810 3,723 372 2,467 3,984 4,875
Income tax expense ........................ 563 487 1,638 1,601 287 983 1,614 1,854
-------- -------- -------- -------- -------- -------- -------- --------
Income from continuing operations ..... 811 1,067 2,172 2,122 85 1,484 2,370 3,021
Discontinued operations:
Loss from operations of
discontinued business, net .......... -- (1,343) (2,457) (2,128) (1,342) (749) (168) (691)
Loss from disposal of discontinued
business, net ....................... -- (30,607) -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss) ......................... $ 811 $(30,883) $ (285) $ (6) $ (1,257) $ 735 $ 2,202 $ 2,330
======== ======== ======== ======== ======== ======== ======== ========
Income per share from continuing
operations:
Basic ................................. $ .05 $ .07 $ .13 $ .13 $ -- $ .09 $ .15 $ .18
Diluted ............................... $ .05 $ .07 $ .13 $ .13 $ -- $ .09 $ .15 $ .18
======== ======== ======== ======== ======== ======== ======== ========
Loss per share from discontinued
operations:
Basic ................................. $ -- $ (1.95) $ (.15) $ (.13) $ (.08) $ (.05) $ (.01) $ (.04)
Diluted ............................... $ -- $ (1.95) $ (.15) $ (.13) $ (.08) $ (.05) $ (.01) $ (.04)
======== ======== ======== ======== ======== ======== ======== ========
Net income (loss) per share:
Basic ................................. $ .05 $ (1.88) $ (.02) $ -- $ (.08) $ .04 $ .14 $ .14
Diluted ............................... $ .05 $ (1.88) $ (.02) $ -- $ (.08) $ .04 $ .14 $ .14
======== ======== ======== ======== ======== ======== ======== ========
Weighted average common shares
outstanding:
Basic ................................. 16,515 16,324 16,199 16,181 16,093 16,307 16,090 16,515
Diluted ............................... 16,516 16,348 16,238 16,231 16,190 16,371 16,247 16,927
======== ======== ======== ======== ======== ======== ======== ========

-----------

20
22

THREE MONTHS ENDED THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2000 JUNE 30, 2000 SEPTEMBER 30, 2000
-------------------- -------------------- --------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
AS AS AS
PREVIOUSLY AS PREVIOUSLY AS PREVIOUSLY AS
REPORTED RESTATED REPORTED RESTATED REPORTED RESTATED
---------- -------- ---------- -------- ---------- --------

Net revenues .................................................. $ 30,847 $ 30,847 $ 31,382 $ 31,382 $ 27,924 $ 27,924
Cost of revenues .............................................. 18,658 18,658 18,641 18,641 16,460 16,460
-------- -------- -------- -------- -------- --------
Gross profit .......................................... 12,189 12,189 12,741 12,741 11,464 11,464
Selling, general & administrative expenses (1) ................ 7,464 7,679 7,729 7,944 8,946 8,865
Amortization of goodwill and other intangibles ................ 405 405 437 437 437 437
-------- -------- -------- -------- -------- --------
Total selling, general & administrative expenses .......... 7,869 8,084 8,166 8,381 9,383 9,302

Operating income ......................................... 4,320 4,105 4,575 4,360 2,081 2,162
Other expense ........................................ (382) (382) (550) (550) (608) (608)
-------- -------- -------- -------- -------- --------
Income from continuing operations before taxes ................ 3,938 3,723 4,025 3,810 1,473 1,554
Income tax expense (2) ........................................ 1,693 1,601 1,730 1,638 378 487
-------- -------- -------- -------- -------- --------
Income from continuing operations ................... 2,245 2,122 2,295 2,172 1,095 1,067
Discontinued operations:
Loss from operations of discontinued business, net of
income tax benefit (3) ............................ (1,582) (2,128) (1,853) (2,457) (576) (1,343)
Loss from disposal of discontinued business, net of
income tax benefit (4) ............................ -- -- -- -- (28,882) (30,607)
-------- -------- -------- -------- -------- --------
Net income (loss) ................................... 663 (6) 442 (285) (28,363) (30,883)
======== ======== ======== ======== ======== ========

Income per share from continuing operations:
Basic .............................................. $ .14 $ .13 $ .14 $ .13 $ .07 $ .07
Diluted ............................................ $ .14 $ .13 $ .14 $ .13 $ .07 $ .07
======== ======== ======== ======== ======== ========
Loss per share from discontinued operations:
Basic .............................................. $ (.10) $ (.13) $ (.11) $ (.15) $ (1.80) $ (1.95)
Diluted ............................................ $ (.10) $ (.13) $ (.11) $ (.15) $ (1.80) $ (1.95)
======== ======== ======== ======== ======== ========
Net income (loss) per share:
Basic ..................................................... $ .04 $ .00 $ .03 $ (.02) $ (1.73) $ (1.88)
Diluted ................................................... $ .04 $ .00 $ .03 $ (.02) $ (1.73) $ (1.88)
======== ======== ======== ======== ======== ========
Weighted average common shares outstanding:
Basic ..................................................... 16,181 16,181 16,199 16,199 16,324 16,324
Diluted ................................................... 16,231 16,231 16,238 16,238 16,348 16,348
======== ======== ======== ======== ======== ========

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

(1) To recognize additional depreciation expense of $215 in each of the quarters
presented and to recognize additional previously unrecorded expenses of $296
as loss from operations of discontinued business in the quarter ended
September 30, 2000.

(2) To adjust income tax expense for the adjustments noted in (1) in each of the
quarters presented and to adjust the effective tax rate to the actual
projected annual rate as of September 30, 2000.

(3) To reverse commercial software development revenues of $826, $916 and $158,
net of income tax benefit, in the quarters ended March 31, June 30 and
September 30, 2000, respectively; to write off uncollectible receivables of
the discontinued business of $416 at September 30, 2000; and to correct tax
benefit for loss from operations of the discontinued business at September
30, 2000.

(4) To recognize previously unrecorded liabilities related to the disposal of
the discontinued business of $1,607 and to correct the tax benefit for loss
from disposal of the discontinued business at September 30, 2000.

Certain amounts in prior quarters have been reclassified
to conform to current presentation.

RESULTS OF OPERATIONS

The following table sets forth certain historical operating results as a
percentage of net revenues for 2000, 1999 and 1998.

YEARS ENDED DECEMBER 31,
------------------------------
2000 1999 1998
------ ------ ------

Net revenues ....................................... 100.0% 100.0% 100.0%
Cost of revenues ................................... 60.7 61.3 59.1
------ ------ ------
Gross margin ..................................... 39.3 38.7 40.9
Selling, general and administrative expenses ....... 27.4 24.8 20.1
Amortization of goodwill and other intangibles ..... 1.4 .9 1.1
Cancelled secondary offering costs ................. -- -- 0.6
------ ------ ------
Operating income ................................... 10.5 13.0 19.1
====== ====== ======
Income from continuing operations .................. 5.1 7.3 12.5
Loss from discontinued operations .................. (30.4) (3.1) (1.2)
------ ------ ------
Net income (loss) .................................. (25.3%) 4.2% 11.3%
====== ====== ======

FISCAL YEAR ENDED DECEMBER 31, 2000 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1999

Net Revenues. Net revenues increased $24.6 million, or 25.8% to $120.1
million for fiscal 2000 compared to $95.5 million for fiscal 1999. The increase
resulted primarily from a combination of the acquisition of S3I and a full year
of KAI revenues, aggregating $17.1 million, and internal revenue growth. Factors
contributing to the Company's internal growth are increased demand in the
systems engineering and high-end contract support services market and increased
contract awards at Emergent-East.

Gross Margin. Gross margin increased $10.2 million, or 27.7%, to $47.1
million, for fiscal 2000 as compared to $36.9 million for fiscal 1999. As a
percentage of net revenues, gross margin increased to 39.3% compared to 38.7%
for the prior year period. The majority of the gross margin increase is due to
the higher margins on revenues generated by S3I and KAI acquisitions and
improved pricing on Emergent-East contracts.

Selling, General and Administrative Expenses, Amortization of Goodwill and
Other Intangibles. Selling, general and administrative expenses increased $9.2
million, or 38.8%, to $33.0 million for fiscal 2000, as compared to $23.7
million for fiscal 1999. As a percentage of revenues, selling, general and
administrative expenses increased to 27.4% for fiscal 2000, as compared to 24.8%
for the prior year period. This increase was the result of increases in
administrative costs related to the implementation of new systems and
infrastructure and the increase in the number of personnel as well as facility
expenses attributable to the Company's new office facilities in Vienna,
Virginia, and increased facility cost of S3I and KAI. Amortization of goodwill
and other intangibles increased from $0.8 million in 1999 to $1.7 million in
2000 reflecting a full year of amortization related to the goodwill and
intangibles recorded in conjunction with the acquisition of KAI and increased
goodwill amortization for the S3I acquisition.

Operating Income. Operating income was $12.5 million for 2000 compared to
$12.4 million for 1999, an increase of $0.1 million. As a percentage of net
revenues, operating income decreased to 10.5% for 2000 from 13.0% in the prior
year. Operating income was flat due to the increased administrative cost
associated with the acquisitions and increased facility costs of S3I and KAI. In
September 2000, the Company began a cost reduction plan to reduce general and
administrative costs, including facility costs it incurred due to the
acquisitions. The Company expects these costs will continue to decrease as the
acquisitions are further integrated and excess real estate is reduced.

Other Income (Expense). Other expense, net was $2.1 million for 2000
compared to other expense, net of $0.7 million for 1999. The increase primarily
results from increased interest expense of $1.0 million based on increased bank
borrowings due to acquisitions.

Income From Continuing Operations. Income from continuing operations was
$6.2 million for 2000 compared to $7.0 million for 1999, a decrease of $0.8
million or 11.3%. Income from continuing operations declined due to: 1) increase
in personnel and facilities costs primarily related to acquisitions; 2) increase
in interest expense on increase debt from financing of the acquisitions; 3) an
increase in goodwill amortization related to acquisitions and the full year
effect of these costs in 2000; 4) a general increase in operating expenses; and
5) the additional cost associated with the implementation of new systems and
infrastructure.

22
24

Net Income (Loss). Net loss was ($30.4) million for 2000 compared to net
income of $4.0 million for 1999. The 2000 loss was due primarily to a loss from
operations and loss on disposal aggregating $36.5 million related to the
discontinuance of a business segment, Emergent-Central, on August 2, 2000.

Discontinued Operations. On August 2, 2000, the Company's Board of Directors
adopted a plan to discontinue the operation of Emergent-Central, a business
segment of the Company formed in 1999 from the acquisition of SIS and a portion
of DSA. The principal business of the segment was commercial software
development. Accordingly, the operating results of Emergent-Central, including
provisions for estimated losses during the phase-out period, severance, facility
lease costs and other shut down expenses expected to be incurred in connection
with the disposal, have been recorded in 2000. Estimated expenses and operating
losses from the measurement date, including the write-off of the segment's
assets primarily comprised of $22.9 million of goodwill, through the anticipated
date of disposal amounted to $30.6 million, net of income tax benefit of $3.5
million. The loss from discontinued operations up to the measurement date was
$5.9 million, net of income tax benefit of $3.4 million, in 2000 and $3.0
million, net of income tax benefit of $2.0 million, in 1999.

FISCAL YEAR ENDED DECEMBER 31, 1999 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1998

Net Revenues. Net revenues increased $27.1 million, or 40.0% to $95.5
million for fiscal 1999 compared to $68.4 million for fiscal 1998. The increase
resulted primarily from internal revenue growth both in SM&A and Emergent-East
and from the acquisition of KAI. Factors contributing to internal growth rate
include: increased demand for the Company's services and the Company's ability
to generate increased contract revenues.

Gross Margin. Gross margin dollars increased $9.0 million, or 32.1%, to
$36.9 million, for fiscal 1999 as compared to $28.0 million for fiscal 1998. As
a percentage of net revenues, gross margin decreased to 38.7% compared to 40.9%
for the prior year period. The decrease in gross margin as a percentage of
revenues was attributed to an increase in compensation and benefits to direct
employees and a reduction in SM&A's contribution as a percentage of total
revenues.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $23.7 million for fiscal 1999, as compared
to $13.8 million for fiscal 1998. As a percentage of revenues, selling, general
and administrative expenses increased to 24.8% for fiscal 1999, as compared to
20.1% for the prior year period. This increase was the result of increases in
administrative costs associated with the acquisition of DSA and SAC. These
increased costs included personnel, facilities, and the increased operating
costs associated with the acquisitions.

Operating Income. Operating income was $12.4 million for 1999 compared to
$13.1 million for 1998, a decrease of $0.7 million. As a percentage of net
revenues, operating income decreased to 13.0% for 1999 from 19.1% for the prior
year period, which is attributed to the increase in general and administrative
costs associated with the acquisitions as well as a $1.0 million increase in
interest expense.

Other Income (Expense). Other expense, net was $0.7 million for 1999
compared to other income, net of $1.5 million for 1998. The net expense in 1999
results from increased interest expense of $0.9 million based on increased bank
borrowings and net other income in 1998 was due to a gain of approximately $0.8
million on the sale of an aircraft and a higher level of interest income earned
on proceeds from the initial public offering, which were invested in short-term
marketable securities.

Income From Continuing Operations. Income from continuing operations was
$7.0 million for 1999 compared to $8.5 million for 1998, a decrease of $1.5
million or 18.4%. This decrease is due primarily to the increased cost resulting
from acquisitions as detailed above.

Net Income. Net income was $4.0 million for 1999 compared to $7.7 million
for 1998, a decrease of $3.7 million or 48.0%. This decrease reflects the
increased operating costs of the acquisitions and the related increase in
interest.

23
25

LIQUIDITY AND CAPITAL RESOURCES

Net Cash Provided by Operating Activities. During 2000, net cash
provided by operating activities of $15.6 million was improved over a use of
cash of $6.2 million in 1999 primarily due to the more timely collection and
billing of accounts receivables, a $1.8 million tax refund, and increased
accruals at year end. During 1999, net cash used by operating activities of $6.2
million compared with net cash provided in 1998 of $3.2 million. The increased
use of cash in 1999 was due to the increase in accounts receivables due to slow
collections.

Cash Used in Investing Activities. During 2000, 1999 and 1998, net cash
used in investing activities was $6.4 million, $9.5 million, and $14.5 million,
respectively. The cash used in 2000 was due to the acquisition of S3I of $6.5
million, capital expenditures of $1.6 million, reduced by net proceeds received
on a note from affiliate of $1.7 million. The cash used in investing activities
in 1999 was due to the acquisitions of KAI and SIS of approximately $6.2
million, $0.7 million of additional consideration on a prior year acquisition,
and capital expenditures of approximately $4.1 million. In 1998, the cash used
in investing activities was primarily for the acquisitions of DSA and SAC.

Net Cash Provided by Financing Activities. During 2000, net cash of
$10.3 million was provided by financing activities, compared with $20.1 million
in 1999. This decrease is due to the reduced borrowings under the credit
facility for acquisitions. During 1999, net cash of $20.1 million was provided
by financing activities compared with $12.3 million in 1998. The increase in
1999 is due to increased borrowings for funding the acquisitions and general
operations reduced by the repurchase of $9.3 million in Common Stock.

Net Cash Used in Discontinued Operations. During 2000, 1999, and 1998
net cash used in discontinued operations was $18.7 million, $3.6 million and
$0.7 million, respectively. The cash used in 2000 was to fund operating losses
and pay severance and costs related to closing the Emergent-Central operations.
The cash used in 1999 and 1998 was to fund operating losses of Emergent-Central
and StamiNet, respectively.

Debt and Liquidity. The Company's total debt was $36.6 million, net of
issuance costs of $3.5 million, and $29.0 million at December 31, 2000 and 1999,
respectively. The debt in 2000 consisted of $15.1 million in a revolving credit
commitment which is due on January 31, 2002 and 13% Senior Subordinated notes
due in 2005, in the aggregate principal amount of $25 million. At December 31,
2000, the Company had $7.6 million of availability under its revolving credit
commitment.

Definitive agreements with KAI and S3I obligate the Company to make earn
out payments contingent upon achievement of certain operating results. The earn
outs are payable in cash and payable based on performance in 2000 and 2001. The
Company believes no earn out payments were earned in 2000. The Company estimates
that any final earn out payments should range between $1.2 million and $1.5
million. The Company expects to pay such earn outs from existing cash flow from
operations and available borrowing under the credit agreement.

It is expected the Company's operations will generate cash in 2001.
However the Company does need working capital available to fund timing
differences between receipts and disbursements on long-term contracts. It is
anticipated with the internally generated working capital and availability under
the revolving credit commitment, the Company will have sufficient liquidity to
finance its operations during 2001. In addition, the Company continues to
streamline its operations, reducing overhead and facility expenses and improving
pricing on its contracts, thereby increasing its ability to generate cash from
operations. The Company does not anticipate any cash needs other than to fund
ongoing operations through 2001. As of year end, the Company had available under
the revolving credit commitment approximately $7.6 million for working capital.
There are no assurances the Company will not violate covenants under this
commitment and if so the liquidity provided by this facility may not be
available to the Company for working capital.

24
26

RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARD

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"), as amended, which is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000 (January 1, 2001
for the Company). SFAS 133 establishes accounting and reporting standards for
derivative instruments embedded in other contracts and for hedging activities.
SFAS 133 requires that an entity recognize all derivatives as either assets or
liabilities in the statement of position and measure those instruments at fair
value. SFAS 133 requires that changes in the derivatives fair value be
recognized in earnings unless specific hedging criteria are met. Accounting for
qualifying hedges allows a derivative's gain and losses to offset related
results on the hedged item in the income statement, and requires that an entity
must formally document, designate and assess the effectiveness of transitions
that receive hedge accounting. The Company adopted SFAS 133 on January 1, 2001.

The Company has one interest rate swap agreement which does not qualify as a
cash flow hedge as the Company did not prepare the required formal
documentation. Accordingly, during the first quarter of fiscal 2001, the Company
expects to record a net-of-tax cumulative-effect type adjustment of accumulated
other comprehensive loss of $668,000 to recognize the interest swap at fair
value at January 1, 2001. Future changes in the fair value will be recorded
through current operations.

ITEM--7A

The Securities and Exchange Commission requires that registrants include
information about potential effects of changes in interest rates in their
financial statements. The Company's exposure to interest rate changes is
primarily related to its variable rate debt based on fluctuations in the Bank's
Prime rate. To assess exposure to interest rate changes, the Company has
performed a sensitivity analysis assuming a hypothetical 100 basis point
increase in interest rates in the first quarter of fiscal year 2001. This
analysis indicates that such market movements would reduce fiscal 2001 net
income, based on the December 2000 debt balance, by approximately $151,000.
Actual gains and losses in the future may differ materially from this
hypothetical amount based on changes in the timing and amount of interest rate
movements and the Company's actual debt balances.

ITEM 8--CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

The Consolidated Financial Statements of the Company are annexed to the
report as pages F-2 through F-22. An index to such materials appears on page
F-1.

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

Not Applicable.

25
27

INDEX

Independent Auditors' Report........................................................................... F-2

Consolidated Balance Sheets at December 31, 2000 and 1999.............................................. F-3

Consolidated Statements of Operations for the Years Ended December 31, 2000, 1999 and 1998............ F-4

Consolidated Statements of Shareholders' Equity (Deficiency) for the Years Ended December 31, 2000,
1999 and 1998........................................................................................ F-5

Consolidated Statements of Cash Flows for the Years Ended December 31, 2000, 1999 and 1998............. F-6

Notes to Consolidated Financial Statements............................................................. F-8

Schedule II--Valuation and Qualifying Accounts for the Years Ended December 31, 2000, 1999 and 1998.... F-22

F-1
28

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Shareholders of
Emergent Information Technologies, Inc.:

We have audited the accompanying consolidated balance sheets of Emergent
Information Technologies, Inc. and subsidiaries (the "Company") as of December
31, 2000 and 1999 and the related consolidated statements of operations,
shareholders' equity (deficiency) and cash flows for each of the years in the
three-year period ended December 31, 2000. In connection with our audits of the
consolidated financial statements, we also audited the financial statement
schedule. These consolidated financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial statements and
financial statement schedule based on our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Emergent
Information Technologies, Inc. and subsidiaries as of December 31, 2000 and 1999
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States of America. Also in our
opinion, the related financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth herein.

Orange County, California
April 11, 2001

F-2
29

EMERGENT INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2000 AND 1999
(IN THOUSANDS, EXCEPT SHARE DATA)

2000 1999
-------- --------
ASSETS

Current assets:
Cash and cash equivalents ....................................................... $ 2,040 $ 1,226
Accounts receivable, net of allowance of $551 and $935, respectively ............ 24,417 22,676
Costs and estimated earnings in excess of billings on contracts in progress ..... 4,464 7,851
Prepaid income taxes ............................................................ 2,846 4,665
Prepaid expenses and other assets ............................................... 1,081 440
Deferred income taxes ........................................................... 1,362 1,197
-------- --------
Total current assets ........................................................ 36,210 38,055
Property and equipment, net ......................................................... 5,408 5,636
Notes receivable--affiliates ........................................................ -- 1,744
Deferred income taxes ............................................................... 164 --
Other assets ........................................................................ 1,426 2,360
Goodwill, net ....................................................................... 32,641 48,778
-------- --------
$ 75,849 $ 96,573
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
Trade accounts payable .......................................................... $ 5,155 $ 3,475
Accrued compensation and payroll taxes .......................................... 6,823 6,093
Accrued earnout payable ......................................................... -- 6,000
Net liabilities of discontinued operations ...................................... 2,334 --
Other liabilities ............................................................... 1,057 263
-------- --------
Total current liabilities ................................................... 15,369 15,831
Deferred income taxes ............................................................... -- 399
Other liabilities ................................................................... 937 870
Long-term debt ...................................................................... 36,633 29,017
-------- --------
Total liabilities ........................................................... 52,939 46,117

Commitments and contingencies

Shareholders' equity:
Common stock, no par value; Authorized 50,000,000 shares. Shares issued and
outstanding 18,667,000 and 16,167,000, respectively .................... 187 161
Additional paid-in capital ...................................................... 48,076 45,285
Retained earnings (accumulated deficit) ......................................... (25,353) 5,010
-------- --------
Total shareholders' equity .................................................. 22,910 50,456
-------- --------
$ 75,849 $ 96,573
======== ========

See accompanying notes to consolidated financial statements.

F-3
30

EMERGENT INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)

2000 1999 1998
--------- --------- ---------

Net revenues ........................................................................ $ 120,140 $ 95,533 $ 68,449
Cost of revenues .................................................................... 72,980 58,592 40,483
--------- --------- ---------
Gross margin ................................................................ 47,160 36,941 27,966
Selling, general and administrative expenses ........................................ 32,921 23,725 13,756
Amortization of goodwill and other intangibles ...................................... 1,716 816 770
Cancelled secondary offering costs .................................................. -- -- 361
--------- --------- ---------
Operating income ............................................................ 12,523 12,400 13,079
Other income (expense):
Interest expense, net ........................................................... (2,010) (1,053) (148)
Other, net ...................................................................... (52) 351 1,668
--------- --------- ---------
Income from continuing operations before income taxes ....................... 10,461 11,698 14,599
Income tax expense .................................................................. 4,289 4,738 6,072
--------- --------- ---------
Income from continuing operations ........................................... 6,172 6,960 8,527
Discontinued operations:
Loss from operations of discontinued business, net of income tax
benefit of $3,364, $2,009, and $137 in 2000, 1999, and 1998, respectively .... (5,928) (2,950) (208)
Loss from disposal of discontinued business, net of income tax
benefit of $3,509 and $390 in 2000 and 1998, respectively ..................... (30,607) -- (607)
--------- --------- ---------
Net income (loss) ................................................................... $ (30,363) $ 4,010 $ 7,712
========= ========= =========
Income per share from continuing operations:
Basic ........................................................................... $ .38 $ .43 $ .55
Diluted ......................................................................... $ .37 $ .42 $ .53
========= ========= =========
Loss per share from discontinued operations:
Basic ........................................................................... $ (2.23) $ (.18) $ (.05)
Diluted ......................................................................... $ (2.20) $ (.18) $ (.05)
========= ========= =========
Net income (loss) per share:
Basic ........................................................................... $ (1.85) $ .25 $ .50
Diluted ......................................................................... $ (1.83) $ .24 $ .48
========= ========= =========
Weighted average shares outstanding:
Basic ........................................................................... 16,350 16,257 15,645
Diluted ......................................................................... 16,579 16,431 15,984
========= ========= =========

See accompanying notes to consolidated financial statements.

F-4
31

EMERGENT INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)

DECEMBER 31, 2000, 1999 AND 1998
(IN THOUSANDS, EXCEPT SHARE DATA)

COMMON STOCK
--------------------------- RETAINED TOTAL
ADDITIONAL EARNINGS SHAREHOLDERS'
SHARES PAID-IN DUE FROM (ACCUMULATED EQUITY
OUTSTANDING AMOUNT CAPITAL SHAREHOLDER DEFICIT) (DEFICIENCY)
----------- ----------- ----------- ----------- ------------ -------------

BALANCES AT DECEMBER 31, 1997 ...... 12,900,000 $ 5 $ 316 $ (679) $ (5,970) $ (6,328)
Net income ......................... -- -- -- -- 7,712 7,712
Collection of shareholder note ..... -- -- -- 679 -- 679
Issuance of common shares in
initial public offering .......... 2,100,000 145 22,276 -- -- 22,421
Issuance of common shares in
connection with acquisitions ..... 1,535,000 15 31,717 -- -- 31,732
Dividends declared ................. -- -- -- -- (711) (711)
Repurchase and retirement of
common stock ..................... (13,000) -- (145) -- (31) (176)
----------- ----------- ----------- ----------- ----------- -----------
BALANCES AT DECEMBER 31, 1998 ...... 16,522,000 165 54,164 -- 1,000 55,329
Net income ......................... -- -- -- -- 4,010 4,010
Repurchase and retirement of
common stock ..................... (1,146,000) (12) (9,330) -- -- (9,342)
Shares issued upon exercise of
options .......................... 77,000 1 458 -- -- 459
Issuance of common shares in
connection with 1998
acquisition ...................... 714,000 7 (7) -- -- --
----------- ----------- ----------- ----------- ----------- -----------
BALANCES AT DECEMBER 31, 1999 ...... 16,167,000 161 45,285 -- 5,010 50,456
Net (loss) ......................... -- -- -- -- (30,363) (30,363)
Shares issued for employee stock
purchase plan .................... 250,000 3 754 -- -- 757
Stock options issued to consultants -- -- 91 -- -- 91
Issuance of common shares in
connection with subordinated debt 2,250,000 23 1,946 -- -- 1,969
----------- ----------- ----------- ----------- ----------- -----------
BALANCES AT DECEMBER 31, 2000 ...... 18,667,000 $ 187 $ 48,076 $ -- $ (25,353) $ 22,910
=========== =========== =========== =========== =========== ===========

See accompanying notes to consolidated financial statements.

F-5
32

EMERGENT INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
DECEMBER 31, 2000, 1999 AND 1998
(IN THOUSANDS)

2000 1999 1998
-------- -------- --------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ................................................................... $(30,363) $ 4,010 $ 7,712
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Loss from discontinued operations, net of tax ................................... 5,928 2,950 208
Loss from disposal of discontinued operations, net of tax ....................... 30,607 -- 607
Depreciation and amortization ................................................... 4,115 2,033 1,324
Deferred income taxes ........................................................... (755) (894) 588
Loss (gain) on sale of property and equipment ................................... 22 (5) (772)
Non-cash charge -- consultant stock options ..................................... 91 -- --
Changes in assets and liabilities, net of effect of acquisitions:
Accounts receivable, net .................................................... (1,101) (7,871) (1,231)
Costs and estimated earnings in excess of billings .......................... 3,387 (2,708) (1,873)
Prepaid income taxes ........................................................ 1,819 (2,589) (603)
Prepaid expenses and other assets ........................................... (179) (778) 644
Trade accounts payable ...................................................... 1,156 877 (956)
Accrued compensation and payroll taxes ...................................... 372 (957) (1,650)
Other liabilities ........................................................... 500 (296) (776)
-------- -------- --------
Net cash provided by (used in) operating activities ..................... 15,599 (6,228) 3,222
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired .................................................. (6,521) (6,198) (12,181)
Additional consideration on prior year acquisition .................................. -- (716) --
Payment on stock options in acquisition ............................................. -- -- (2,449)
Payment on note receivable from affiliate ........................................... 1,744 -- 92
Proceeds from sale of minority interest in investment ............................... -- -- 200
Purchases of property and equipment ................................................. (1,622) (4,134) (401)
Repayments from shareholder ......................................................... -- 1,088 679
Other ............................................................................... 24 445 (445)
-------- -------- --------
Net cash used in investing activities ................................... (6,375) (9,515) (14,505)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock .............................................. 757 459 22,421
Borrowings under long-term credit facility .......................................... 15,644 30,050 7,553
Repayments under long-term credit facility .......................................... (29,538) (1,035) (16,793)
Issuance of subordinated notes ...................................................... 25,000 -- --
Debt issuance costs ................................................................. (1,521) -- --
Distributions to shareholders ....................................................... -- -- (711)
Repurchase of common stock .......................................................... -- (9,342) (176)
Payments on capital lease obligations ............................................... (71) -- --
-------- -------- --------
Net cash provided by financing activities ............................... 10,271 20,132 12,294
-------- -------- --------
Net increase in cash and cash equivalents from continuing operations .... 19,495 4,389 1,011
Net decrease in cash from discontinued operations ....................... (18,681) (3,617) (707)
-------- -------- --------
Net increase in cash and cash equivalents ............................... 814 772 304
Cash and cash equivalents at beginning of year ...................................... 1,226 454 150
-------- -------- --------
Cash and cash equivalents at end of year ............................................ $ 2,040 $ 1,226 $ 454
======== ======== ========
SUPPLEMENTAL INFORMATION--CASH PAID (RECEIVED) FOR:
Interest ............................................................................ $ 1,883 $ 936 $ 232
======== ======== ========
Income taxes ........................................................................ $ (500) $ 7,051 $ 5,552
======== ======== ========

(CONTINUED)

F-6
33

EMERGENT INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS-(CONTINUED)
(IN THOUSANDS)

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:

In September 1998, the Company sold its approximate 37% ownership
interest in Savant Corporation to an affiliated company. Payment included a $1.8
million note guaranteed by a principal shareholder.

In June 1998, the Company sold an aircraft to an affiliated company.
Payment included a note for $880,000.

In December 1999, the Company accrued $6.0 million to satisfy an earn
out obligation related to the acquisition of SIS.

On December 29, 2000, the Company issued in the aggregate principal
amount $25,000,000 of 13% Senior Subordinated Notes due in 2005 and issued
2,250,000 shares of the common stock of the Company to the purchaser with a fair
market value of $1,968,750.

The Company acquired equipment with a value of $333,000 under capital
leases during 2000.

Detail of businesses acquired in purchase transactions (in thousands):

2000 1999 1998
-------- -------- --------

Total consideration ...................................... $ 6,359 $ 5,636 $ 45,767
Less stock consideration issued in acquisitions .......... -- -- (31,732)
-------- -------- --------
Cash consideration paid for acquisitions ................. 6,359 5,636 14,035
Plus acquisition expenses ................................ 1,198 661 1,215
Less cash acquired in acquisitions ....................... (1,036) (99) (3,069)
-------- -------- --------
Cash paid for acquisitions, net of cash acquired ..... $ 6,521 $ 6,198 $ 12,181
======== ======== ========

See accompanying notes to consolidated financial statements.

F-7
34

EMERGENT INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998

NOTE 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business

The Company's primary business is providing information technology
solutions for complex problems and proposal management services. In January
1998, the Company completed an initial public offering ("IPO") of Common Stock.

In May 1998 the Company acquired Space Applications Corporation ("SAC").
SAC provides information technology, systems engineering, scientific research,
program management support and technical services to the military, civilian
space programs, the intelligence community, and the armed services.

In August 1998, the Company acquired Decision-Science Applications, Inc.
("DSA"). DSA provides information technology, system engineering, information
systems development, scientific research and program management support to the
U.S. Government, principally the Department of Defense. The acquisitions of SAC
and DSA are collectively referred to as the "1998 Acquisitions." In November
1998, DSA changed its name to SM&A Corporation (East), and in December 1998, SAC
merged into SM&A Corporation (East). On May 4, 2000, SM&A Corporation (East)
became known as Emergent Information Technologies-East ("Emergent-East").

In March 1999, the Company acquired Systems Integration Software, Inc.,
("SIS"). SIS provides systems engineering, information systems development,
scientific research and program management support to the U.S. Government,
primarily the Department of Defense.

In September 1999, the Company acquired Kapos Associates Inc. ("KAI").
KAI provides simulation and test systems engineering services to the U.S.
Government.

In February 2000, the Company acquired substantially all of the assets
and assumed certain liabilities of System Simulation Solutions, Inc. ("S3I").
S3I provides campaign level modeling and simulation services to support
quantitative analysis of military operations.

In May 2000, the Company changed its name from SM&A Corporation to
Emergent Information Technologies, Inc.

On August 2, 2000, the Company's Board of Directors adopted a plan to
discontinue the operations of Emergent-Central, previously disclosed as a
business segment of the Company formed in 1999, and developed from the
acquisition of SIS and a portion of DSA. This segment was principally involved
in the development of commercial software. Accordingly, the operating results of
Emergent-Central, including provisions for estimated losses for severance,
facility costs, and expenses to be incurred in connection with the disposal
including consulting, legal and accounting, have been accrued for as of December
31, 2000.

The operations of Emergent-Central terminated on December 15, 2000. The
net liabilities of Emergent-Central as of December 31, 2000 which are
approximately $2.3 million, are included in current liabilities.

Principles of Consolidation

The consolidated financial statements include the accounts of Emergent
Information Technologies, Inc. and its wholly owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.

F-8
35

EMERGENT INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.

Long-Lived Assets

Property and equipment are stated at cost. Depreciation is calculated on
a straight-line basis over the estimated useful lives of the related assets,
generally three to five years. Amortization of leasehold improvements is
computed using the straight-line method over the shorter of the lease term or
estimated useful life of the asset.

Goodwill, which represents the excess of purchase price over fair value
of net assets acquired, is amortized on a straight-line basis over the expected
periods to be benefited, not to exceed 30 years. We assess the impairment of
other identifiable intangibles and goodwill related to our consolidated
subsidiaries, whenever events or changes in circumstances indicate the carrying
value may not be recoverable. Enterprise goodwill is evaluated using
undiscounted future operating cash flows.

Long-lived assets, enterprise goodwill and certain identifiable
intangibles and goodwill associated with business units are reviewed for
impairment in value based upon undiscounted future operating cash flows, and
appropriate losses are recognized and reflected in current earnings, to the
extent the carrying amount of an asset exceeds its estimated fair value
determined by the use of appraisals, discounted cash flow analysis or comparable
fair values of similar assets.

Revenue Recognition

Systems Engineering--A significant portion of the Company's professional
services are performed for the United States Government under various cost
reimbursable, time and materials and fixed-price contracts and subcontracts. The
Company records revenues from cost-reimbursable contracts, including
cost-plus-fixed-fee contracts, on the basis of reimbursable costs plus a pro
rata portion of the fee. Revenue from time and materials contracts (government
and commercial) are recognized based on the contractual hourly billing rates as
the services are performed. For financial reporting purposes, the Company
records revenue from fixed-price contracts on the percentage-of-completion
method. Accrued income is based on the percentage of estimated total income that
costs incurred to date bear on 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 targets to which applicable recognition has been given in the
contract revenue estimates.

Proposal Management Services--The majority of proposal management
services activities are provided under "time and expenses" billing arrangements,
and revenues are recorded as work is performed. Revenue is directly related to
the total number of hours billed to clients and the associated hourly billing
rates. A limited amount of revenue is 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. Success fees are billable by the Company when
a contract is won by the client.

As many contracts extend over a long period of time, revisions in cost
and price estimates during the progress of work are accounted for prospectively.
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.
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.

F-9
36

EMERGENT INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

Fair Value of Financial Instruments

The carrying value of cash, accounts receivable, other accounts
receivable, trade accounts payable and other accrued liabilities are measured at
cost, which approximates their fair value. The aggregate fair value of the
Company's total debt at December 31, 2000 was $40,123,000, approximately its
carrying value, before reduction for issuance costs. The fair value was based on
market quotes for similar terms and maturities.

Income Taxes

The Company provides for income taxes using an asset and liability
approach that requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been recognized in
the Company's financial statements or tax returns. In estimating future tax
consequences, the Company generally considers all expected future events other
than enactments of changes in the tax laws or rates.

Prior to the initial public offering, 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.

In January 1998, the Company still operated as an S corporation; thus,
the consolidated income statement presentation for the year ended December 31,
1998 includes only applicable federal and state income taxes for the period in
which the Company was a C corporation. Upon termination of the S corporation
status on January 28, 1998, the Company recorded income 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.

Net Income (Loss) Per Share

Basic net income (loss) per share is computed by dividing net income
(loss) available to common shareholders by the weighted average number of common
shares outstanding during the periods presented. Diluted net income per share is
computed by dividing net income available to common shareholders by the weighted
average number of common and common equivalent shares outstanding during the
periods presented assuming the exercise of all in-the-money stock options.
Common equivalent shares have not been included where inclusion would be
anti-dilutive.

The following is a reconciliation between the number of shares used in
the basic and diluted net income (loss) per share calculations (in thousands):

2000 1999 1998
------ ------ ------

Weighted average number of shares outstanding-basic ........ 16,350 16,257 15,645
Dilutive effect of stock options ........................... 229 174 339
------ ------ ------

Weighted average number of shares outstanding-diluted ...... 16,579 16,431 15,984
====== ====== ======

Anti-dilutive shares excluded from the reconciliation above were
1,570,648, 1,602,500, and 114,500, for 2000, 1999 and 1998, respectively.

F-10
37

EMERGENT INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

Stock-Based Compensation

The Company measures stock-based compensation for option grants to
employees and members of the board of directors using a method, which assumes
that options granted at market price at the date of grant have no intrinsic
value. Proforma net income (loss) and earnings (loss) per share are presented in
Note 9 as if the fair value method had been applied.

The Company uses the fair value method to account for stock options and
other equity instruments issued to non-employees.

Use of Estimates

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

Reclassifications

Certain items in the prior period financial statements have been
reclassified to conform to the current period presentation.

Recent Accounting Developments

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"), as amended, which is effective
for all fiscal quarters of fiscal years beginning after June 15, 2000 (January
1, 2001 for the Company). SFAS 133 establishes accounting and reporting
standards for derivative instruments, including derivative instruments embedded
in other contracts, and for hedging activities. SFAS 133 requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
position and measure those instruments at fair value. SFAS 133 requires that
changes in the derivatives' fair value be recognized in earnings unless specific
hedging criteria are met. Accounting for qualifying hedges allows a derivative's
gains and losses to offset related results on the hedged item in the income
statement, and requires that an entity must formally document, designate and
assess the effectiveness of transitions that receive hedge accounting. The
Company adopted SFAS 133 on January 1, 2001.

The Company has one interest rate swap agreement that does not qualify
as a cash flow hedge as the Company did not prepare the required formal
documentation as of December 31, 2000. Accordingly, during the first quarter of
fiscal 2001, the Company expects to record a net-of-tax cumulative effect-type
adjustment of accumulated other comprehensive loss of approximately $668,000 to
recognize the interest swap at fair value at January 1, 2001.

F-11
38

EMERGENT INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

NOTE 2. ACQUISITIONS

In May 1998, the Company issued 819,743 unregistered shares of common
stock valued at approximately $14.7 million and stock options with a fair value
of $2.7 million for 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. Due to certain price protection provisions
relating to the shares of common stock issued in connection with the acquisition
of SAC and the market price of the Company's stock during 1999, the Company
issued 714,000 additional shares of common stock to former shareholders of SAC
based upon the market price of the common stock at certain defined liquidation
dates.

In August 1998, the Company issued 714,839 unregistered shares of common
stock valued at approximately $14.4 million, and $14.0 million cash for all the
outstanding common stock and options of DSA. This transaction was accounted for
as a purchase and, accordingly, the consolidated financial statements include
the financial results of DSA from August 1, 1998, the beginning of the
accounting period in which the purchase transaction was finalized.

The Company acquired SIS in March 1999 and KAI in September 1999, for an
aggregate amount of $5.5 million in cash and additional consideration contingent
upon the achievement of certain operating results. The Company paid $7.1 million
in April 2000 as an earn out payment under the SIS acquisition agreement. These
transactions were accounted for as purchases and accordingly, the consolidated
financial statements include the financial results of SIS and KAI from the
effective dates of each such acquisition. Results of operations for the years
ended December 30, 2000 and 1999 would not have been materially impacted on a
pro forma basis if the acquisitions of SIS and KAI had occurred as of the
beginning of the respective periods.

The Company discontinued the software development operations of
Emergent-Central in August 2000. The discontinued segment included the total SIS
acquisition and an allocated portion of the DSA acquisition. The write off of
intangible assets associated with the acquisitions of SIS and DSA were $10.2
million and $12.7 million, respectively.

In February 2000, the Company acquired substantially all of the assets
and assumed certain liabilities of S3I for approximately $6.4 million in cash.
Net assets acquired was principally cash of approximately $1.0 million. The
excess of the cash paid over the fair value of net assets acquired has been
recorded as goodwill of approximately $6.6 million. S3I has the right to receive
up to approximately $1.0 million in additional consideration contingent upon
S3I's achievement of certain operating results for the twelve-month periods
ending February 28, 2001 and February 28, 2002. The earnouts are payable in cash
and, if earned, are due within 60 days after each of the first and second
anniversary of the closing date, and will be recorded as an addition to
goodwill. The Company does not anticipate any earnout will be paid for the
period ending February 2001. This transaction was accounted for as a purchase
and, accordingly, the consolidated financial statements include the financial
results of S3I from February 1, 2000, the beginning of the accounting period in
which the purchase transaction was finalized. Results of operations for the
years ended December 31, 2000 and 1999 would not have been materially impacted
on a pro forma basis if the acquisition of S3I had occurred as of the beginning
of the respective periods.

F-12
39

EMERGENT INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

NOTE 3. PROPERTY AND EQUIPMENT

A summary of property and equipment follows (in thousands):

2000 1999
------- -------

Computer equipment ................................. $ 4,396 $ 3,209
Furniture and equipment ............................ 2,980 2,211
Leasehold improvements ............................. 2,044 1,887
------- -------
9,420 7,307
Less accumulated depreciation and amortization ..... (4,012) (1,671)
------- -------
$ 5,408 $ 5,636
======= =======

NOTE 4. DUE FROM AFFILIATES AND RELATED PARTY TRANSACTIONS

In June 1998, the Company sold an aircraft to an affiliate of the
Company's principal shareholder. Terms included a promissory note for the total
sales price of $880,000, which was paid in April 1999. As the aircraft was
nearly fully depreciated at the time of sale, the majority of the proceeds were
recognized as a gain on sale.

In September 1998, SAC sold its 37% ownership interest in Savant, an
equity investment, to an affiliate of the Company's principal shareholder for
its net book value of $2.0 million. The sales proceeds were $200,000 cash and a
promissory note for $1.8 million. The note bears interest at 9% and is payable
in thirty monthly installments of $30,000 commencing on October 31, 1998 through
March 31, 2001. All remaining principal is due and payable on March 31, 2001.
The note is guaranteed by the principal shareholder of the Company. No principal
payments were received in 1999. As of December 31, 1999 and 1998, $1.7 million
remained outstanding on the promissory note. The note was paid in full on
September 22, 2000.

In November 1998, Savant engaged the Company to perform certain
consulting services through December 31, 1998. Included in accounts receivable
as of December 31, 1999 is $225,000, due from Savant for this consulting
project. This receivable is guaranteed by the principal shareholder of the
Company. Terms of the agreement were commensurate with market rates for similar
consulting services. The receivable was paid in full in December 2000.

The Company charters aircraft from time to time through an air service
chartering company controlled by the Company's principal shareholder. The terms
of use and charter rates paid by the Company 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. Charter fees amounted to approximately $148,700, $396,000,
and $300,000 for the years ended December 31, 2000, 1999, and 1998,
respectively.

F-13
40

EMERGENT INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

NOTE 5. DISCONTINUED OPERATIONS

On December 1, 1998, the Company's Board of Directors adopted a plan to
discontinue the operations of StamiNet, Inc., a subsidiary of SAC, which was
acquired in May 1998. Accordingly, the operating results of StamiNet, including
provisions for estimated losses during the phase-out period, severance, facility
lease costs and other shut down expenses expected to be incurred in connection
with the disposal, were accrued as of December 31, 1998. Estimated expenses and
operating losses from the measurement date through the anticipated date of
disposal amounted to $997,000. The operations of StamiNet were fully terminated
by March 31, 1999.

On August 2, 2000, the Company's Board of Directors adopted a plan to
discontinue the operations of Emergent-Central, a business segment of the
Company formed in 1999 from the acquisitions of SIS and a portion of DSA. The
principal business of the segment was commercial software development.
Accordingly, the operating results of Emergent-Central, including provisions for
estimated losses during the phase-out period, severance, facility lease costs
and other shut down expenses expected to be incurred in connection with the
disposal, have been accrued for as of December 31, 2000. Estimated expenses and
operating losses from the measurement date through the anticipated date of
disposal amounted to $34.1 million, which included the write-off of associated
goodwill approximating $22.9 million. The operations of Emergent-Central were
fully terminated by December 31, 2000. The net liabilities of Emergent-Central
as of December 31, 2000, which amounted to approximately $2.3 million, are
included in current liabilities.

NOTE 6. LONG-TERM DEBT

Effective on December 29, 2000, the Company completed a refinancing of
its existing indebtedness. The refinancing transactions resulted in the creation
of two classes of debt for the Company with both new and existing lenders.

In connection with the refinancing, the Company entered into a Second
Amended and Restated Credit and Security Agreement (the "Senior Facility"),
dated December 29, 2000, by and among the Company and its existing lending
group, Mellon Bank, N.A. as agent and Wells Fargo Bank, N.A., as co-agent,
whereby that certain Amended and Restated Credit Agreement dated June 7, 1999
(the "Original Facility") was amended and restated to provide in part for an
extension of the maturity date to January 31, 2002, to reset financial
covenants, to reduce the existing revolving loan lending commitments to
$22,700,000, and to permit the subordinated indebtedness discussed below.
Borrowings bear interest at the bank's prime rate (9.5% at December 31, 2000)
plus 1%. The Senior Facility is guaranteed by all of the Company's subsidiaries
and is secured by a lien on all of the assets of the Company and its
subsidiaries (including stock of subsidiaries). As of December 31, 2000, the
Company was in compliance with the financial covenants. The Company has agreed
to reduce the $22,700,000 in borrowing availability under the Senior Facility to
no more than $18,700,000 by the end of 2001. As of December 31, 2000, after
giving effect to the refinancing transactions, the Company had $7,600,000 in
undrawn availability under the Senior Facility.

F-14
41

EMERGENT INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

The Company also entered into a Note and Stock Purchase Agreement (the
"Subordinated Debt Agreement") dated as of December 29, 2000, by and among the
Company, the subsidiaries of the Company as Guarantors, and various investors
including Libra Mezzanine Partners II, L.P. (such investors, the "Purchasers").
In consideration of a $25,000,000 investment, the Company issued to the
purchasers (i) 13% Senior Subordinated Notes due in 2005 in the aggregate
principal amount of $25,000,000 (the "Notes"), and (ii) 2,250,000 shares of the
common stock of the Company ("Common Stock") with a fair value of $1,968,750.
The Subordinated Debt Agreement contains financial and other covenants for the
benefit of the Purchasers, and requires payment of a premium if the Notes are
prepaid within three years of the Closing (including a reduced premium if
repayment occurs in connection with a change of control of the Company). As of
December 31, 2000, the Company was in compliance with the financial and other
covenants. The Notes are not secured.

The table below provides details of the Company's long-term debt
instruments as of December 31 (in thousands):

2000 1999
-------- --------

Revolving credit facility ($22.7 million, 2000 and $50 million, 1999)
Outstanding balance ....................................................... $ 15,123 $ 29,017
Subordinated notes ($25 million face amount) .............................. 25,000 --
Original issue discount on subordinated notes ............................. (1,969) --
Debt issuance costs ....................................................... (1,521) --
-------- --------
Net long-term debt ........................................................ $ 36,633 $ 29,017
======== ========

The issuance costs will be amortized as interest expense on a
straight-line basis over the life of the Notes.

NOTE 7. INCOME TAXES

Income tax expense attributable to income from continuing operations
consists of (in thousands):

CURRENT DEFERRED TOTAL
------- -------- -------

Year ended December 31, 2000:
Federal .............................. $ 3,971 $ (648) $ 3,323
State ................................ 1,073 (107) 966
------- ------- -------
$ 5,044 $ (755) $ 4,289
======= ======= =======
Year ended December 31, 1999:
Federal .............................. $ 4,867 $ (754) $ 4,113
State ................................ 765 (140) 625
------- ------- -------
$ 5,632 $ (894) $ 4,738
======= ======= =======
Year ended December 31, 1998:
Federal .............................. $ 4,470 $ 484 $ 4,954
State ................................ 1,014 104 1,118
------- ------- -------
$ 5,484 $ 588 $ 6,072
======= ======= =======

A reconciliation of the Company's effective tax rate compared to the
statutory federal tax rate is as follows:

2000 1999 1998
------ ------ ------

Income taxes at statutory federal rates ............ 35.0% 35.0% 34.0%
State taxes, net of federal income tax benefit ..... 3.6 5.3 5.5
Amortization of non-deductible goodwill ............ 3.0 2.1 3.7
Other, net ......................................... (0.6) (1.9) (1.6)
------ ------ ------
41.0% 40.5% 41.6%
====== ====== ======

F-15
42

EMERGENT INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

The Company provides deferred income taxes for temporary differences
between assets and liabilities recognized for financial reporting and income tax
purposes. The income effects of these temporary differences representing
significant portions of deferred tax assets and deferred tax liabilities are as
follows (in thousands):

2000 1999
------- -------

Accrued expenses not currently deductible for tax purposes ..................... $ 855 $ 781
Project reserves ............................................................... 86 222
Allowance for doubtful accounts ................................................ 172 303
Depreciation ................................................................... 684 54
Change of accounting from cash to accrual method for acquired subsidiaries ..... (349) (598)
Prepaid expenses ............................................................... (19) (40)
Installment sale transaction ................................................... 83 61
State net operating loss carry forward ......................................... 164 --
Other .......................................................................... 14 15
Valuation allowance .................................................... (164) --
------- -------
Total net deferred income tax asset ........................................ $ 1,526 $ 798
======= =======

In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected future
taxable income and tax planning strategies in making this assessment. Based upon
the level of historical taxable income and projections for future taxable income
over the periods which the deferred tax assets are deductible, management
believes it is more likely than not the Company will realize the benefits of
these deductible differences. The amount of deferred tax asset considered
realizable, however, could be reduced in the near term if estimates of future
taxable income are reduced.

NOTE 8. SHAREHOLDERS' EQUITY

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 at
an offering price of $12.00 per share, 1,050,000 were sold by existing
shareholders and 2,100,000 were sold by the Company, generating $22.4 million in
net proceeds to the Company, net of offering expenses of $1.0 million.

The Company made cash payments of S corporation distributions (the "S
Corporation dividend") to shareholders totaling $711,000 which were accrued as
of 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.

In December 1998, the Company repurchased and retired 13,000 shares of
common stock pursuant to a Board authorization to reacquire up to 300,000 shares
of Company stock. Repurchase prices ranged from $13.31 to $14.00 per share.
During 1999, the Company repurchased and retired 1,146,000 shares of common
stock pursuant to a Board authorization for approximately $9.3 million in cash.

In December 2000, the Company issued 2,250,000 shares of common stock
with a fair market value of $1,968,750 to the purchaser of the 13% Senior
Subordinated Notes (see Note 6). Additionally, 100,000 stock options with an
exercise price of $1.53 per share granted to a consultant fully vested upon the
issuance of the 13% Senior Subordinated Notes. The fair value of the options of
$91,000 was determined using the Black-Scholes option-pricing model, with the
following assumptions: Volatility -- 138%; risk free interest rate -- 6%;
expected life -- 3.6 years; and dividend yield -- 0%.

F-16
43

EMERGENT INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

NOTE 9. STOCK OPTION PLAN AND EMPLOYEE BENEFIT PLANS

In 1997, the Company adopted the 1997 Stock Option Plan (the "Option
Plan") under which incentive and non-statutory stock options to acquire shares
of the Company's common stock may be granted to officers, employees, and
consultants of the Company. The Option Plan is administered by the Board of
Directors and permits the issuance of up to 4,000,000 shares of the Company's
common stock. Incentive stock options must be issued at an exercise price not
less than the fair market value of the underlying shares on the date of grant.
Options granted under the Option Plan vest over various terms up to ten years
and are exercisable over a period of time, not to exceed ten years, and are
subject to other terms and conditions specified in each individual employee
option agreement. A summary of employee stock options follows:

WEIGHTED
WEIGHTED AVERAGE
AVERAGE FAIR VALUE OF
NUMBER OF EXERCISE OPTIONS
SHARES PRICE GRANTED
---------- -------- -------------

Outstanding as of December 31, 1997 ....... -- -- --
Granted ............................... 1,547,200 $13.05 $ 7.60
Canceled .............................. (86,700)
----------
Outstanding as of December 31, 1998 ....... 1,460,500
Granted ............................... 1,616,709 $ 7.07 $ 3.82
Exercised ............................. (5,000)
Canceled .............................. (495,234)
----------
Outstanding as of December 31, 1999 ....... 2,576,975
Granted ............................... 2,117,300 $ 2.43 $ 2.01
Exercised ............................. --
Canceled .............................. (1,921,834)
----------
Outstanding as of December 31, 2000 ....... 2,772,441
==========

The following table summarizes information concerning stock options
outstanding at December 31, 2000:

WEIGHTED
AVERAGE WEIGHTED WEIGHTED
NUMBER OF REMAINING AVERAGE NUMBER OF AVERAGE
RANGE OF OPTIONS CONTRACTUAL EXERCISE OPTIONS EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
--------------- ----------- ----------- -------- ----------- --------

$1.06-2.86 .............. 1,190,600 6.1 $ 1.93 125,000 $ 1.53
$2.86-5.73 .............. 511,779 3.7 5.15 120,113 5.18
$5.73-8.59 .............. 357,000 3.1 7.63 103,449 7.44
$8.59-11.45 ............. 23,362 1.9 9.63 9,230 9.74
$11.45-14.31 ............ 501,525 2.1 12.04 252,374 12.04
$14.31-17.18 ............ 127,175 2.6 15.72 59,475 15.63
$17.18-20.04 ............ 61,000 2.0 19.04 32,250 19.05
--------- ------ ------ --------- ------
$1.06-20.04 ............. 2,772,441 4.3 $ 6.16 701,891 $ 8.91
========= ====== ====== ========= ======

As part of the SAC acquisition, SAC's outstanding options were converted
into Emergent options for 175,906 shares of the Company's common stock with a
weighted average exercise price of $5.67 per share. These options are not part
of the Option Plan. The proforma information does not include the effect of
these converted options as their fair value has been included in the calculation
of goodwill from acquisition.

F-17
44

EMERGENT INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

The fair value of stock-based awards to employees is calculated through
the use of option-pricing models, even though such models were developed to
estimate the fair value of freely tradable, fully transferable options without
vesting restrictions, which significantly differ from the Company's stock option
awards. These models also require subjective assumptions, including future stock
price volatility and expected time to exercise, which greatly affect the
calculated values. The Company's calculations were made using the Black-Scholes
option-pricing model, with the following weighted average assumptions:

2000 1999 1998
------- ------- -------

Stock volatility ..................... 138.05% 77.58% 84.37%
Risk-free interest rate .............. 6.00% 5.50% 6.00%
Option term in years ................. 3.66 3.01 3.07
Stock dividend yield ................. 0.00 0.00 0.00

The Company's calculations are based on a single option valuation
approach and forfeitures are recognized as they occur. If the computed fair
values of the stock-based awards had been amortized to expense over the vesting
period of the awards, pro forma net income would have been $2.5 million, or
$0.15 per basic and diluted share in 1999; and $6.4 million, or $0.41 per basic
share and $0.40 per diluted share in 1998. Due to the large amount of stock
option forfeitures in 2000, pro forma net loss would be unchanged from reported
net loss.

Employee Stock Purchase Plan

In 1999, the Company adopted an Employee Stock Purchase Plan (the
"ESPP") with an initial allocation of 250,000 shares. In September 2000, an
additional 500,000 shares were allocated to the ESPP. The ESPP allows employees
of the Company to purchase common stock, through bi-weekly payroll deductions,
at a 15% discount. Employee contributions to the ESPP are limited to 15% of the
employee's annual compensation. The Company issued 250,000 shares to
participants for year ended December 31, 2000.

Defined Contribution Plans

The Emergent Information Technologies, Inc., 401(k) Plan and Trust is a
defined contribution plan. The Plan includes a tax-deferred 401(k) provision.
The Plan covers all employees. Contributions are made to the Plan by both the
employees and the company.

SAC and DSA each maintained 401(k) and profit sharing plans for their
employees. Contributions were made to the Plan by both the employees and the
Company. The Company's expense under these plans was $110,000 and $479,000 for
the years ended December 31, 1999 and 1998, respectively. In March 1999, the
defined contribution pension plans of Steven Myers & Associates, SAC, and DSA
were merged to form a single 401(k) plan. The new plan, the Emergent Information
Technologies, Inc., 401(k) Plan and Trust, provides for employee contributions
of up to 15% of eligible compensation with Company matching, supplemental
contributions for certain classes of employees based on performance criteria and
profit sharing under certain conditions. The Company's matching contribution was
$257,170 for the year ended December 31, 2000. The Company's supplemental
contribution was $1,050,000 for the year ended December 31, 2000.

F-18
45

EMERGENT INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

NOTE 10. COMMITMENT AND CONTINGENCIES

The Company leases office facilities and certain equipment under lease
agreements classified as operating leases. The Company is obligated under
various capital lease obligations for equipment that expire in 2005. Equipment
under capital leases at December 31, 2000 was $290,000, net of accumulated
depreciation of $43,000. Future minimum lease payments under noncancelable
operating leases and future minimum capital lease payments as of December 31,
2000 are summarized as follows (in thousands):

CAPITAL OPERATING
YEAR ENDING DECEMBER 31: LEASES LEASES
------------------------ ------- ---------

2001 ................................................ $ 91 $ 5,046
2002 ................................................ 91 4,869
2003 ................................................ 91 4,925
2004 ................................................ 91 4,616
2005 ................................................ 32 4,480
Thereafter .......................................... -- 9,671
------- -------
Total minimum lease payments ................... $ 396 $33,607
=======
Less amount representing interest (10.5%) ........... (92)
-------
Present value of minimum capital lease payments ..... 304
Less current obligations under capital leases ....... (54)
-------
Long-term obligations under capital leases .......... $ 250
=======

The capital lease obligations are included in other liabilities in the
accompanying consolidated balance sheet.

Rent expense amounted to $5,260,400, $3,943,000 and $1,700,000 for the
years ended December 31, 2000, 1999 and 1998, respectively, and has been
included in selling, general and administrative expenses in the accompanying
consolidated statements of operations.

The Company is party to various legal actions which arose in the normal
course of business. In the opinion of management, the settlement of these
matters will not materially affect the Company's financial position or results
of operations.

F-19
46

EMERGENT INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

NOTE 11. SEGMENT REPORTING DATA

The Company classifies its operations into two lines of business, each
offering a distinct set of services. These lines of business are summarized as
follows; Steven Myers & Associates, which involves assisting clients with the
procurement of government and commercial programs and Emergent-East, which
includes systems engineering, scientific research, program management and
technical support services.

The Company evaluates performance based on several factors, of which the
primary financial measure is business segment operating income. The revenue
recognition policies of the business segments vary according to the type of
contract involved.

Information as to the operations of the lines of business is set forth
below. The information presented for the years ended December 31, 2000, 1999 and
1998 represents historical supplemental data as described on the consolidated
balance sheets and on the consolidated statements of operations (in thousands):

2000 1999 1998
--------- --------- ---------

Net revenues:
Steven Myers & Associates, Inc. ........................ $ 37,304 $ 38,135 $ 39,594
Emergent-East .......................................... 82,836 57,398 28,855
--------- --------- ---------
Total net revenues ................................. $ 120,140 $ 95,533 $ 68,449
========= ========= =========
Depreciation and amortization expense:
Steven Myers & Associates, Inc. ........................ $ 143 $ 98 $ 115
Emergent-East .......................................... 3,911 1,568 935
Executive Group ........................................ 61 367 274
--------- --------- ---------
Total depreciation and amortization expense ........ $ 4,115 $ 2,033 $ 1,324
========= ========= =========
Operating income (loss):
Steven Myers & Associates, Inc. ........................ $ 11,778 $ 12,820 $ 15,730
Emergent-East .......................................... 11,097 15,869 9,274
Executive Group ........................................ (10,352) (16,289) (11,925)
--------- --------- ---------
Total operating income ............................. $ 12,523 $ 12,400 $ 13,079
========= ========= =========
Income (loss) from continuing operations:
Steven Myers & Associates, Inc. ........................ $ 11,749 $ 7,628 $ 8,990
Emergent-East .......................................... 11,027 9,442 5,832
Executive Group ........................................ (16,604) (10,110) (6,295)
--------- --------- ---------
Total income from continuing operations ............ $ 6,172 $ 6,960 $ 8,527
========= ========= =========
Assets:
Steven Myers & Associates, Inc. ........................ $ 11,706 $ 10,146 $ 8,906
Emergent-East .......................................... 59,372 41,148 30,300
Executive Group ........................................ 4,771 6,332 7,485
Emergent-Central ................................... -- 38,947 19,633
--------- --------- ---------
Total assets ....................................... $ 75,849 $ 96,573 $ 66,324
========= ========= =========

F-20
47

EMERGENT INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

NOTE 12. CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS

Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of trade accounts receivable.
The majority of the Company's receivables are from the U.S. Government and large
companies in the aerospace and defense industries. The Company's ten largest
customers represented 79% of total revenue for fiscal 2000. The Company controls
credit risk through credit approvals and monitoring procedures. Credit losses
have historically been minimal.

The percentage of the Company's net revenues arising from major
customers is summarized as follows:

YEARS ENDED
DECEMBER 31,
----------------------
2000 1999 1998
---- ---- ----

U.S. Government ..................................... 27% 28% 25%
Raytheon Systems Company ............................ 17 20 16
Lockheed Martin Corporation ......................... 12 16 17
Litton .............................................. 6 3 5
The Boeing Company .................................. 4 9 8

F-21
48

EMERGENT INFORMATION TECHNOLOGIES, INC., AND SUBSIDIARIES

SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)

ADDITIONS
--------------------------
BALANCE AT CHARGES TO RECOVERIES BALANCE AT
THE BEGINNING BAD DEBTS AND DEDUCTIONS/ THE END
OF THE PERIOD EXPENSE OTHER(1) WRITE-OFFS OF THE PERIOD
------------- ---------- ---------- ---------- -------------

2000
Allowance for Doubtful Accounts ..... $ 935 $ 29 $ 0 $ (413) $ 551
-------- -------- -------- -------- --------
1999
Allowance for Doubtful Accounts ..... $ 643 $ 142 $ 210 $ (60) $ 935
-------- -------- -------- -------- --------
1998
Allowance for Doubtful Accounts ..... $ -- $ 60 $ 625 $ (42) $ 643
======== ======== ======== ======== ========

-----------

(1) Represents amounts acquired in the acquisitions of SAC and DSA in 1998 and
SIS and KAI in 1999.

F-22
49

SIGNATURES

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

EMERGENT INFORMATION TECHNOLOGIES, INC.

By: /s/ STEVEN S. MYERS
--------------------------------------
Steven S. Myers
Chief Executive Officer
Dated: April 16, 2001

POWER OF ATTORNEY

KNOWN ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Steven S. Myers and Cathy L. Wood his
attorneys-in-fact, each with the power of substitution, for him in any and all
capacities, to sign any amendments to this Report on Form 10-K, and to file the
same, with Exhibits thereto and other documents in connection therewith with the
Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact, or substitute or substitutes, may do or cause to
be done by virtue thereof.

Pursuant to the requirements of the Securities Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.

NAME TITLE DATE
---- ----- ----

/s/ STEVEN S. MYERS Chairman of the Board, President and April 16, 2001
---------------------------------------- Chief Executive Officer
Steven S. Myers (Principal Executive Officer)

/s/ AJAYKUMAR K. PATEL Executive Vice President and April 16, 2001
---------------------------------------- Chief Operating Officer
Ajaykumar K. Patel

/s/ CATHY L. WOOD Chief Financial Officer and April 16, 2001
---------------------------------------- Secretary (Principal Financial
Cathy L. Wood Officer and
Principal Accounting Officer)

/s/ J. CHRISTOPHER LEWIS Director April 16, 2001
----------------------------------------
J. Christopher Lewis

/s/ LUTHER J. NUSSBAUM Director April 16, 2001
----------------------------------------
Luther J. Nussbaum

/s/ JOSEPH B. FULLER Director April 16, 2001
----------------------------------------
Joseph B. Fuller

/s/ VINCENT C. SMITH Director April 16, 2001
----------------------------------------
Vincent C. Smith

/s/ ALBERT S. NAGY Director April 16, 2001
----------------------------------------
Albert S. Nagy

F-23
50

EXHIBIT INDEX

(3) Exhibits (numbered in accordance with item 601 of Regulation S-K).

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 July 22,
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)

2.3 Agreement and Plan of Reorganization and Merger dated March 30,
1999, by and among SM&A Corporation, Systems Integration Software,
Inc., SIS Acquisition, Inc. and the individuals named therein
(filed on May 17, 1999 as Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1999
and incorporated herein by reference)

2.4 Stock Purchase Agreement dated as of September 20, 1999, by and
among SM&A Corporation (East), Kapos Associates Inc., Ervin Kapos
and June Kapos and Verona Oliver and Cordellia Scruggs (filed on
November 15, 1999 as Exhibit 10.1 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1999 and
incorporated herein by reference)

2.5 Agreement of Merger dated November 24, 1998 between Space
Applications Corporation and SM&A Corporation (East), effective
date December 31, 1998 (filed on March 31, 1999 as Exhibit 2.3 to
the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1998 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)

3.4 Certificate of Determination of Preferences of Series L Preferred
Stock.*

4.1 Registration and Antidilution Rights Agreement, dated December 29,
2000, by and among the Registrant and the Holders listed on the
signature pages thereto (filed on January 8, 2001 as Exhibit 99.5
to the Registrant's Current Report on Form 8-K and incorporated by
reference herein).

4.2 Controlling Shareholder Agreement, dated December 29, 2000, by and
among the Registrant, Steven S. Myers as Common Stockholder, and
the Purchasers listed on the signature pages thereto (filed on
January 8, 2001 as Exhibit 99.6 to the Registrant's Current Report
on Form 8-K and incorporated by reference herein).

10.1 Amended and Restated 1997 Stock Option Plan* and related form of
Stock Option Agreement*

10.2 Amended and Restated Employee Stock Purchase*

10.3 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. 3334075) and incorporated herein by reference)

10.4 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)

10.5 Second Amended and Restated Credit and Security Agreement, dated
December 29, 2000, by and among the Registrant, Mellon Bank, N.A.,
as Agent, Wells Fargo Bank, N.A., as Co-Agent, and the Lenders
listed on the signature pages thereto (filed on January 8, 2001 as
Exhibit 99.2 to the Registrant's Current Report on Form 8-K and
incorporated by reference herein).

10.6 Note and Stock Purchase Agreement, dated December 29, 2000, by and
among the Registrant, and the Guarantors and Purchasers listed on
the signature pages thereto (filed on January 8, 2001 as Exhibit
99.3 to the Registrant's Current Report on Form 8-K and incorporated
by reference herein).

10.7 Subordination and Intercreditor Agreement, dated December 29, 2000,
by and among the persons listed on the signature pages thereto as
Subordinated Creditors, Libra Mezzanine Partners II-A, L.P. as agent
of the Subordinated Creditors, the Registrant, and Mellon Bank, N.A.
as agent for all Senior Lenders party to that certain Second Amended
and Restated Credit and Security Agreement of even date therewith
(filed on January 8, 2001 as Exhibit 99.4 to the Registrant's
Current Report on Form 8-K and incorporated by reference herein).

10.8 Management Agreement, dated December 29, 2000, by and between Libra
Mezzanine Partners II-A, L.P. and the Registrant (filed on January
8, 2001 as Exhibit 99.7 to the Registrant's Current Report on Form
8-K and incorporated by reference herein).

10.9 Registration Rights Agreement dated May 29, 1998 by and among the
Registrant and certain shareholders of Space Applications
Corporation identified therein (filed on June 4, 1998 as Exhibit 2
to the Registrant's Current Report on Form 8-K and incorporated
herein by reference)

10.10 Registration Rights Agreement dated August 20, 1998 by and 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)

10.11 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)

10.12 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)

10.13 Employment Agreement dated September 20, 1999, by and between Kapos
Associates Inc. and Ervin Kapos (filed on April 7, 2000 as Exhibit
10.18 to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1999 and incorporated herein by reference)

10.14 Escrow Agreement dated September 20, 1999, among SM&A Corporation
(East), Kapos Associates Inc., Ervin Kapos and June Kapos and First
American Trust Company (filed on November 15, 1999 as Exhibit 10.2
to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1999 and incorporated herein by reference)

10.15 Escrow Agreement dated March 30, 1999, among the Registrant,
Systems Integration Software, Inc., First American Trust Company
and the individuals names therein (filed on May 17, 1999 as Exhibit
10.2 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1999 and incorporated herein by reference)

10.16 Escrow Agreement dated August 20, 1998 by and between
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)

10.17 Employment Agreement dated as of February 1, 2000 between the
Registrant and Steven S. Myers*

21.1 Subsidiaries of the Registrant*

23.1 Consent of KPMG LLP*

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* Filed herewith.