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TABLE OF CONTENTS
INDEX TO FINANCIAL INFORMATION

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

Commission File Number 000-50420

DIGITALNET HOLDINGS, INC.
(Exact Name of Registrant as Specified in Its Charter)

(703) 563-7500
(Registrant's Telephone Number, Including Area Code)

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

        Securities registered pursuant to Section 12(g) of the Act: Common Stock, Par Value $.001 Per Share

         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 at least the past 90 days. YES ý    NO o

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

        Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act): YES o    NO ý

        The aggregate market value of the Common Stock held by non-affiliates of the Registrant was approximately $120 million as of December 31, 2003, based upon the closing price for the shares of common stock reported on The Nasdaq Stock Market on such date.

        As of March 22, 2004, there were 16,290,158 shares of Common Stock, par value $0.001 per share, outstanding.

        Portions of the Registrant's definitive Proxy Statement for the 2004 Annual Meeting of Stockholders are incorporated by reference, in whole or in part, into Part III hereof.

TABLE OF CONTENTS

        Unless otherwise indicated (a) all references to "DigitalNet," "Company," "Registrant," "we," "us," "our," and "ours," mean DigitalNet Holdings, Inc. and its subsidiaries, taken as a whole, and (b) all references to "GTCR" refer to GTCR Golder Rauner, L.L.C. and its affiliates, including GTCR Fund VII, L.P.; GTCR Co-Invest, L.P. and GTCR Partners VII, L.P.

CAUTIONARY NOTICE
REGARDING FORWARD-LOOKING STATEMENTS

        This report contains statements that we believe are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact in this report, including statements regarding our competitive strengths, business strategy, expected benefits of any acquisition, future financial position, budgets, projected costs and plans and objectives of management are forward-looking statements. In addition, forward-looking statements generally can be identified by the use of forward-looking terminology such as "may," "will," "expect," "should," "intend," "estimate," "anticipate," "believe," "plan," "continue" or similar terminology. We undertake no obligation to publicly update or revise any forward-looking statements contained in this report. These forward-looking are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control, that could cause actual results to differ materially from those we express or imply in those forward-looking statements. These factors include those we describe under the caption "Risk Factors" in Part I, Item 1 of this report, and these factors expressly qualify all written and oral forward-looking statements attributable to us.

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PART I

Item 1. BUSINESS

Company Overview

        We are a leading provider of strategic consulting, managed network, information security, and application development services and solutions to U.S. civilian, defense and intelligence federal government agencies as measured by our revenues. We have more than 30 years of proven experience in providing information technology services and solutions to our U.S. federal government clients. Our comprehensive information technology services and solutions allow our clients to outsource the design, implementation, integration, management, and security of their increasingly complex computer networks and systems. We are focused on increasing network reliability, reducing overall network costs, and rapidly migrating mission critical network computing environments to new technologies, which are critical elements for maintaining the daily operations of numerous federal agencies. We were formed as a Delaware corporation on September 7, 2001.

        On November 26, 2002, we acquired all of the membership interests of DigitalNet Government Solutions, LLC (DGS, formerly Getronics Government Solutions, L.L.C.). DGS' results of operations have been included in our consolidated statement of operations for the year ended December 31, 2002 from the date of acquisition. For the year ended December 31, 2002 we discuss our pro forma results giving effect to the acquisition of our predecessor, Getronics Government Solutions, L.L.C. as if such transaction had occurred on January 1, 2002. Although this approach is not consistent with generally accepted accounting principles, we believe it is the most practical way to comment on the results of operations for the year ended December 31, 2002. Because our performance under a contract with the Immigration and Naturalization Service (INS) Facilities Operations Support (FOS) ended November 30, 2002, and our performance under a subcontract for the National Aeronautics and Space Administration (NASA) Consolidated Space Operations Contract (CSOC) will end on March 31, 2004, we believe that information adjusted to exclude the effects of these contracts gives our investors a more meaningful depiction of our ongoing business. Therefore, we often refer to our financial and operating results for 2002 and 2003 as adjusted to reflect the exclusion of these contracts.

        We provide comprehensive information technology services and solutions through an integrated set of four core offerings:

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Strategic Consulting Services. We provide strategic consulting services that better enable our clients to improve mission performance and meet legislative mandates through the efficient use of information technology (IT) and human capital. For example, for one of our Department of Defense customers who wanted to rapidly consolidate functionally related IT projects from a management and investment oversight perspective, we developed an overall plan that facilitated the realignment of each of the IT projects that reduced the total investment dollars required, and simplified project management and the implementation process.



•

Managed Network Services. We provide managed network services that help our clients more reliably and efficiently manage their increasingly complex network computing environments. For example, for one of our civilian agency clients who wanted to outsource a number of its managed network services requirements, we designed and currently maintain an improved network architecture that significantly increased network capacity and reliability for more than 17,000 users in more than 2,000 field locations across several different departments.



•

Information Security Solutions. We provide information security solutions that help our clients protect the availability, integrity, and confidentiality of their data and underlying computing systems. For example, for one of our intelligence agency clients who wanted to outsource a number of its managed network services requirements, we designed and currently maintain an improved network architecture and we engineered a number of security systems. In order to provide secure access for personnel working in overseas locations, we deployed security systems

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that operate at multiple security levels and allow increased flexibility, responsiveness and security in managing classified data.

•

Application Development and Integration. We provide application development and integration services and solutions that help our clients more efficiently run their organizations through the use of customized software applications. We have developed electronic web-based procurement systems, logistics systems, financial systems, command and control systems, and knowledge management systems. For example, for one of our Department of Defense clients, we designed, developed, deployed, integrated and currently maintain a financial software application that is used to manage our client's standard accounting systems as well as its standard base supply and medical logistics systems.

        The following table provides a percentage breakout of revenue for the indicated years for each of our core offerings:

Competitive Strengths

        We believe we are well positioned to address the specific requirements of our clients because we possess the following key competitive strengths:

    Knowledge of Our Clients' Business Processes, Information Architecture and Technology Initiatives

        We have served a number of our clients for more than 10 years, including some for more than 30 years. Through these long-standing relationships, we have developed an extensive knowledge of our clients' business processes, cultures, contracting environments, information architectures, and technology initiatives, providing us with an opportunity to further expand these relationships. This knowledge also enhances our ability to deliver services and solutions that can be efficiently integrated with our clients' existing systems and business processes in a manner that is consistent with our clients' strategic goals. We have also strategically recruited employees with significant government, military, or technical experience to increase our knowledge of our clients' business processes and to extend our expertise into new areas. We believe the strength of our long-term relationships is demonstrated by our success in the task order renewal process.

    In-Depth Managed Network Computing and Information Security Expertise

        We believe our core strengths are in providing complex network and information security solutions.

        In-depth Network Computing.    Our expertise in complex network technologies covers the entire life cycle of an organization's network requirements, including network design, implementation, integration, and management. We consider an organization's network to extend from the desktop to the wide-area network. Our services and solutions allow our clients to more effectively and predictably manage their network, server, and desktop computing environments. Our services and solutions include network design, implementation, integration, and management. Our clients have the ability to outsource all of their network requirements to us, or they can retain control over certain aspects of their network and outsource only selected network management tasks. We have extensive experience in providing large scale network design and installation and managed network services. As of December 31, 2003, we

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managed and supported approximately 123,000 users across 24 different networks, including networks in the Department of Defense, the Department of the Treasury, the Department of State, and the Department of Justice.

        Information Security Expertise.    We offer a comprehensive, integrated set of information security services and solutions designed to meet our clients' information security needs. We evaluate our clients' security risks and develop a comprehensive plan to address these risks through the implementation, integration, and management of our information security solutions.

        As part of our information security services and solutions, we offer TEMPEST and Zone solutions to our clients. Our TEMPEST and Zone solutions involve modifying electronic equipment for our clients to eliminate or reduce electromagnetic radiation emanations to prevent electronic eavesdropping. We also offer, customize, integrate, and manage a secure software operating system called XTS, which enables network administrators to control the access, data processing, and storage capability of multiple users across disparate networks with differing security levels. This operating system has been evaluated by the National Security Agency, or NSA, and received a B3 rating. Division B is the second highest federal security level and B3 is the highest rating within that level. A B3-rated system is highly resistant to penetration and is tamper-proof.

    Highly Skilled Technical and Managerial Professionals

        We believe our competitive position is enhanced by our ability to attract, retain, and develop qualified technical and managerial professionals. As of December 31, 2003, approximately 80% of our nearly 1,650 employees were professional staff. As of December 31, 2003, approximately 67% of our employees held government security clearances and approximately 54% of these employees held Top Secret clearance or higher, allowing us to work with our clients in highly classified environments. We believe our technical and managerial training programs have contributed to our ability to attract and retain our professionals. For example, we have developed a Best Practices Program, which is required training for all of our program managers, deputy program managers, and business managers. This program focuses on teaching our managers how to comply with government regulations, successfully manage client programs, and develop themselves and their subordinates into better leaders for future assignment.

    Disciplined Program Management Review Process

        Our disciplined program management review process brings our project teams together on a regular basis to review each of our individual client programs. This review helps ensure that we are meeting project goals. Employees from our operations, human resources, contracts, and finance organizations meet, at a minimum, on a quarterly basis for each client program to discuss and evaluate the client program's progress and to develop a plan to ensure that the program is progressing on budget, on time, and that the client is satisfied. We also have implemented a Quality Initiative Program survey as part of our program management review process. This program allows us to assess our clients' views of our performance and to address any concerns that are identified.

    Experienced Management Team

        Our executive team includes Ken S. Bajaj, our Chairman and Chief Executive Officer, who has more than 27 years of experience in the information technology industry, including 17 years in a government contracting environment. Our core group of eight senior executives has an average of 20 years of experience in the information technology industry and an average of 15 years of experience providing information technology services and solutions to the federal government. Our Chief Executive Officer and our Chief Financial Officer previously worked together at AppNet, Inc. in connection with the initial public offering and subsequent sale of AppNet, Inc. to Commerce One, Inc. Members of our executive team have held senior positions with a number of large information technology services

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providers, such as Computer Sciences Corporation, Electronic Data Systems Corporation, Getronics NV, I-NET, Inc., Perot Systems Corporation, Wang Laboratories, Inc., Mantech International, Science Applications International Corporation, and General Dynamics.

Business Strategy

        Our objective is to continue to profitably grow our business as a leading provider of information technology services and solutions. Key elements of our strategy include:

    Leverage Our Differentiated Services and Solutions to Expand Our Client Base

        We believe our experience and highly differentiated services and solutions offerings will enable us to expand our client base in high growth areas of the federal information technology services market. We also believe our investment in emerging technologies, and our processes, methodologies, and best practices ensure high quality and consistent offerings in managed network services, information security solutions, and application development and integration solutions. We intend to continue to leverage our differentiated services and solutions to win contracts from new clients in the federal government.

    Build on Our Longstanding Client Relationships to Cross-Sell Our Full Range of Services and Solutions

        We intend to continue our efforts to expand the scope of our existing client relationships by broadening the range of services we provide to our clients. Providing additional services to our clients should increase our overall knowledge of our clients' business and technical requirements, which we believe will contribute to increased use of our services over time.

    Accelerate Our Sales and Marketing Efforts

        Our business development organization is responsible for marketing, developing and acquiring contracts within the federal government. We intend to accelerate our sales and marketing efforts by adding additional business development personnel, increasing our spending on bid and proposal efforts, and leveraging the industry relationships of Ken S. Bajaj, our Chief Executive Officer, and Steven Hanau, the President of DGS.

    Expand Our Services and Solutions Offerings

        We plan to continue expanding our offerings of directory services, mobile computing solutions, and secure remote access solutions. We intend to continue to expand our services and solutions in areas such as managed network services, information security services, and other emerging technologies. We maintain three state-of-the art technology labs where our networking and security engineers use their extensive experience to learn about and then test emerging technologies and products. These labs provide an environment for evaluating the performance and interoperability of networking and security solutions.

        Our advanced technology group develops methodologies and best practices for the introduction of the use of new technologies in our client engagements.

    Pursue Strategic Acquisitions

        We may pursue strategic acquisitions that can cost-effectively add new clients, specific federal agency knowledge, or technological expertise to accelerate our access to existing or new markets. We plan to be very selective in our acquisition program and will focus on those businesses in either the government or commercial sectors that broaden and complement our existing expertise. On February 5, 2004, we announced that we had entered into a definitive agreement to acquire User Technology Associates, Inc. We anticipate that this transaction will close by the end of March 2004.

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Our Services and Solutions

        We provide comprehensive information technology services and solutions through an integrated set of four core offerings:

•

Strategic consulting services and solutions;



•

managed network services and solutions;



•

information security services and solutions; and



•

application development and integration services and solutions.

        We provide many of our services under multi-year contracts.

    Strategic Consulting Services and Solutions

        We provide strategic consulting services that better enable our clients to improve mission performance and meet legislative mandates through the efficient use of information technology (IT) and human capital. Our approach to providing strategic consulting services is described in the following table:

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        As part of our strategic consulting services and solutions, we recently achieved certification as a Global Registered Education Provider by the Project Management Institute (PMI). This certification enables us to better assist our government clients to maintain their existing program management professional credentials or obtain their initial credentials by preparing our client's employees to sit for the Project Management Professional examination. We also plan to leverage this qualification by providing additional training to our corporate program management staff.

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    Managed Network Services and Solutions

        We provide managed network services that help our clients more reliably and efficiently manage their increasingly complex network computing environments. Our services and solutions can be delivered to our clients remotely and onsite. Our approach to providing managed network services and solutions is described in the following table:

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        As part of our managed network services and solutions offerings, we have developed several services to assist us in assessing, monitoring, and managing our clients' network computing environments to improve network reliability and performance. Our Platform Performance Monitor service allows us to assess whether each individual component of a client's network is functioning properly. Our Network Performance Monitor service allows us to assess a client's network traffic patterns, network delays, and network failures. These tools help us provide improved network reliability and performance.

    Information Security Services and Solutions

        We provide information security services and solutions that help our clients protect the availability, integrity, and confidentiality of their data and underlying computing systems. Our approach to providing information security services and solutions is described in the following table:

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        As part of our information security offerings, we provide TEMPEST and Zone solutions to our clients. Our TEMPEST and Zone solutions involve modifying electronic equipment to eliminate or reduce electromagnetic radiation emanations to prevent electronic eavesdropping. This work is done in our Tewksbury, Massachusetts integration facility where we modify computer equipment and peripherals. The TEMPEST solution is designed to meet the standards set by the NSA.

        Our information security offerings also include a proprietary secure operating system called XTS, which we developed and customize to enable network administrators to control the access, data processing, and storage capability of multiple users across disparate networks with differing security levels. This operating system has been evaluated by the NSA and received a B3 rating. We are also in the process of updating and enhancing several of our other information security solutions, such as our High Assurance Web Guard, High Assurance Web Server, and High Assurance Directory Server solutions. We believe these solutions will augment our current XTS offering and meet our clients' continuing information security requirements.

        We also maintain three Special Compartmentalized Information Facilities, or SCIFs, which are specially designed and authorized to store U.S. government classified information and provide secure workspace, laboratory, and communications capabilities for classified-related work. Each of our SCIFs is accredited by U.S. intelligence agencies or military departments within the Department of Defense.

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    Application Development and Integration Services and Solutions

        We provide application development and integration services and solutions that help our clients more efficiently run their organizations through the use of customized software applications. Our approach to providing application development and integration services and solutions is described in the following table:

        As part of our application development and integration services and solutions offerings, we have developed:

•

electronic web-based procurement systems that have significantly reduced procurement cycle time and submission costs for our clients;



•

logistics systems that register, forward, transport, validate, assign, and manage sensitive equipment;



•

financial systems that ensure compliance with all federal financial management regulations;



•

command and control systems that manage the mission critical aspects of weapons systems and their supporting operations; and



•

knowledge management systems.

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        Our application development and integration services methodologies are based on the practice guidelines established within the capability maturity model, or CMM, advocated by the Software Engineering Institute, or SEI. The CMM assists organizations in the adoption and sustained use of standards of excellence for software development. We have established a data repository for software code that we have developed that may be reused in subsequent application development programs.

Intellectual Property

        We rely on a combination of patent and trade secret laws and contractual restrictions to protect our proprietary rights. We have filed a provisional patent application relating to our XTS operating system. There can be no assurance that we will be successful in obtaining patent protection for any of our intellectual property or that third parties will not challenge them. In addition, there can be no assurance that others will not independently develop similar or competing technology or design around any patents that may be issued.

        We believe that we have a number of trade secrets that contribute to our success and competitive position, and we endeavor to protect the secrecy of this proprietary information. While we believe that retaining continuing protection of our trade secrets and confidential information is important, we are not materially dependent on any specific trade secret or group of trade secrets.

Clients

        We have a broad base of over 65 U.S. civilian, defense, and intelligence federal government agency clients on over 170 active engagements, across many defense, intelligence, and civilian agencies, which creates a diversified revenue stream. We have served many of our clients for over 10 years, and some for more than 30 years, which we believe fosters a stable and predictable business environment for us as we provide ongoing modifications and support for our solutions. We believe our long-standing relationships are due in large part to our technical expertise and proven performance on individual contracts, particularly in mission critical areas involving intelligence, national security, and other sensitive or classified government functions. We derived approximately 50% of our revenues from civilian agency clients, approximately 32% of our revenues from Department of Defense clients, and approximately 17% of our revenues from intelligence agency clients for the year ended December 31, 2003. Excluding our National Aeronautics and Space Administration, or NASA, Consolidated Space Operations Contract, or CSOC, contract, we derived approximately 43% of our revenues, as adjusted, from civilian agency clients, approximately 36% of our revenues, as adjusted, from Department of Defense clients, and approximately 20% of our revenues, as adjusted, from intelligence agency clients for the year ended December 31, 2003.

        Contracts for which we act as the prime contractor represented approximately 67% of our revenues for the year ended December 31, 2003. Excluding our NASA CSOC contract, contracts for which we act as the prime contractor represented approximately 77% of our revenues, as adjusted, for the year ended December 31, 2003.

        For the year ended December 31, 2003, our NASA CSOC contract accounted for 13% of our revenues and was the only contract that accounted for more than 10% of our revenues. Our NASA CSOC contract work is performed through a subcontract relationship with Lockheed Martin Corporation and will end in March 2004.

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Backlog

        We define total backlog as the estimate of the sum of:

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the amount of revenue we expect to realize (i) over the remaining base contract performance period and (ii) from the exercise of option periods that we reasonably believe will be exercised, from signed contracts in hand as of the measurement date; and



•

the amount of revenue we expect to realize (i) over the remaining task order performance period and (ii) from the renewal of these task orders that we reasonably believe will be renewed, for a period not to exceed the ensuing five fiscal year ends, from signed task orders in hand as of the measurement date.

        We do not include in total backlog:

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the expected amount of revenue that would be realized if, and when, we were successful in the re-compete of signed contracts in hand as of the measurement date;



•

the expected amount of revenue that would be realized from future unidentified growth on signed contracts and task orders in hand as of the measurement date; and



•

the expected amount of revenue to be realized from any information security solutions sales.

        Our total backlog was approximately $890 million and approximately $792 million as of December 31, 2003 and 2002, respectively. Excluding the backlog associated with our NASA CSOC contract from our total backlog, our total backlog was approximately $888 million and approximately $744 million as of December 31, 2003 and 2002, respectively.

        We define funded backlog as the portion of our backlog for which funding currently is appropriated and obligated to us under a signed contract or task order by the purchasing agency, or otherwise authorized for payment to us by a customer upon completion of a specified portion of work, less the amount of revenue we have previously recognized under the contract. Our funded backlog does not include the full potential value of our contracts, because Congress often appropriates funds to be used by an agency for a particular program or contract on a yearly or quarterly basis, even through the contract may call for performance over a number of years.

        Our funded backlog was approximately $117 million and approximately $109 million as of December 31, 2003 and 2002, respectively. Excluding the funded backlog associated with our NASA CSOC contract, our funded backlog was approximately $114 million and approximately $97 million as of December 31, 2003 and 2002, respectively.

Seasonality

        Our revenues, gross profit and operating income have typically been negatively affected in the quarter ending September 30, primarily due to lower staff utilization rates. These lower utilization rates are attributable both to summer vacations and to increased proposal activity in connection with the end of the federal government fiscal year. We expect to continue to experience this seasonality and our future periods may be materially affected by it.

        Our revenues, gross profit, and operating income has typically been positively affected in the quarter ending December 31, primarily due to increased information security solutions sales. The increased solutions sales levels are attributable to purchases made by our clients in advance of the federal government fiscal year. Although we expect to continue to experience this seasonality, we cannot assure you that future periods will be positively affected by it.

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Business Development

        Our business development organization, in cooperation with several of our other organizations, has designed systems and processes to successfully market, develop, and acquire contracts within the government sector. These systems and processes include the development and management of company-wide new business opportunity pipeline reports, the bid and proposal process, monthly agency and program account opportunity reviews, sales training, research, and competitive analyses.

        Our business development professionals are highly experienced in marketing to government clients and have extensive knowledge of both the services and solutions we offer, as well as the particular client's organization, mission culture, and technology initiatives. These professionals also possess a working knowledge of the rules governing the marketing limitations that are specific to the government arena. This includes knowledge of government funding systems, conflict of interest restrictions, procurement integrity limitations, and other pertinent procedural requirements designed to establish a competitive playing field and to ensure the appropriate use of public funds. In fulfilling its mission, the business development organization cooperates closely with the various operations groups and other support organizations.

        Our business development organization is responsible for managing the contract bidding process. For each new contract we bid for, members of our senior management team, along with the business development organization, go through the following three-step process:

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opportunity identification;



•

target capture plan; and



•

proposal cycle.

        In the opportunity identification stage, we assess the value of and our likelihood of success in competing for a specific contract opportunity and consider, among other factors, our relationship with the specific agency, the strength of our services offering in relation to the contract requirements, potential competitors, and vulnerabilities of any existing contractor serving the client. In the target capture plan stage, we formalize an offer plan and assemble a program team to perform detailed competitive and investment return analyses. In the offer cycle stage, we conduct our formal bid proposal activities.

Competition

        Our key competitors include divisions of large federal information technology services contractors such as Computer Sciences Corporation, Electronic Data Systems Corporation, Lockheed Martin Corporation, Northrop Grumman Corporation, and Science Applications International Corporation, as well as a number of smaller federal information technology contractors with specialized capabilities, such as CACI International Inc, ManTech International Corporation, PEC Solutions, Inc., SRA International, Inc., and Anteon Corporation. Because of the diverse requirements of our U.S. government clients and the highly competitive nature of large procurement awards, companies frequently form teams to pursue contract opportunities. The same companies listed as our competitors will, at times, team with us in the pursuit of new business. We believe that the major competitive factors that affect our ability to compete are:

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technical competencies;



•

knowledge of the client and their specific needs;



•

the reputation and results of past performance on similar engagements;



•

size;

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•

key management and technical personnel;



•

number and level of security clearances; and



•

price.

        Although we believe that we compare favorably with our competitors based on these factors, we may not maintain our competitive position against current or potential competitors.

Employees

        Our ability to attract, train, and retain top quality employees is an important element in our ability to provide effective information technology services and solutions. As of December 31, 2003, we had approximately 1,650 employees, located in 30 states, Washington, D.C., and seven foreign countries. The depth and breadth of the security clearances held by our employees is instrumental in allowing us to compete for, and work on, classified projects. As of December 31, 2003, we had approximately 1,100 cleared personnel, of which approximately 54% possessed top secret-level clearances or above. In addition, we had approximately 120 additional initial clearances pending as of December 31, 2003, which would provide an initial clearance for approximately 120 of our personnel. We endeavor to be an employer of choice in the government information technology industry, and we intend to improve our recruitment and retention efforts through the use of stock options and other incentive plans. None of our employees are represented by a labor union or subject to a collective bargaining agreement. We believe that our relations with our employees are good.

Risk Factors

        Investing in our securities involves risk. Before making an investment in our securities, potential investors should carefully consider the following risks, as well as the other information included in or incorporated by reference into this report, including our consolidated financial statements and the related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Additional risks and uncertainties not currently known to us, or risks that we currently deem immaterial, may also impair our business operations. Any of the risk factors described below could significantly and adversely affect our business and results of operations. As a result, the trading price of our securities could decline and you may lose all or part of your investment.

    We depend on contracts with U.S. government agencies for substantially all of our revenues. If our relationships with these agencies were harmed, our business would be adversely affected.

        Contracts funded by U.S. government agencies accounted for approximately 99% of our revenues for the year ended December 31, 2003. We believe that federal government contracts will continue to be the source of substantially all of our revenues for the foreseeable future. For this reason, any issue that compromises our relationship with agencies of the federal government in general, or with the Department of Defense in particular, would cause serious harm to our business. Among the key factors in maintaining our relationships with federal government agencies and departments are our performance on individual contracts and delivery orders, the strength of our professional reputation, and the relationships of our key executives with client personnel. To the extent that our performance does not meet client expectations, or our reputation or relationships with one or more key clients are impaired, our revenues and operating results could be materially harmed.

    We may not receive the full amount of our backlog, which could harm our business.

        Our total backlog includes both funded and unfunded orders for services under existing signed contracts, assuming the exercise of all options relating to those contracts that we reasonably believe will be exercised. Congress often appropriates funds for our clients on a yearly basis, even though their

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contracts with us may call for performance that is expected to take a number of years. As a result, contracts typically are only partially funded at any point during their term, and all or some of the work to be performed under the contracts may remain unfunded unless and until Congress makes subsequent appropriations and the procuring agency allocates funding to the contract.

        Our backlog was approximately $890 million as of December 31, 2003, of which approximately $117 million was funded. Excluding the backlog associated with our NASA CSOC contract, our backlog was approximately $888 million as of December 31, 2003, of which approximately $114 million was funded. Our backlog includes orders under contracts that in some cases extend for several years, with the latest expiring at the end of calendar year 2015.

        There can be no assurance that our backlog will result in actual revenues in any particular period, or at all, or that any contract included in backlog will be profitable. This is because the actual receipt and timing of any of these revenues is subject to various contingencies, many of which are beyond our control. In addition, we may never realize revenues from some of the engagements that are included in our backlog, and there is a higher degree of risk in this regard with respect to unfunded backlog. The federal government's ability to select multiple winners under multiple award schedule contracts, government-wide acquisition contracts, blanket purchase agreements and other indefinite delivery/indefinite quantity, or IDIQ, contracts, as well as its right to award subsequent task orders among such multiple winners, means that there is no assurance that unfunded contract backlog will result in actual orders. The actual receipt of revenues on engagements included in backlog may never occur or may change because a program schedule could change or the program could be canceled, or a contract could be reduced, modified, or terminated early. Moreover, under multiple award schedule contracts, government wide acquisition contracts, blanket purchase agreements, and other IDIQ contracts, the government is frequently not obligated to order more than a minimum quantity of goods or services.

        For example, our backlog as of December 31, 2001 included $10.9 million for a contract with a Department of Defense client that we believed at the time would continue through 2005. The contract was not renewed during 2002, and we only realized $1.1 million in pro forma revenue in 2002. This resulted in a $9.8 million reduction of our backlog during 2002 without a corresponding increase in revenue.

    Loss of our prime contractor position on one or more of our contracts would impair our operating results and our ability to win new business.

        We believe many of our clients have recently shown a preference for procuring services and solutions from only a limited number of contracts or schedules. If we were to lose our prime contractor position on any of our contracts, we could lose revenues and our ability to win new business and our operating results could be adversely affected.

    Most of our sales are made under contracts with limited initial terms. We may expend significant resources in connection with these contracts that we may not recover if our clients do not exercise their contract options.

        Our contracts typically have a one- or two-year initial term, with multiple options that are exercisable by our government clients to extend the contract for one or more years. For example, the initial term under our managed network services contract that we signed with the Federal Technology Service office of the GSA, or FTS, during 2002, was a one-year contract, with four subsequent one-year options. FTS has exercised the first two option years but we cannot assure you that FTS will exercise any of the remaining options on this contract, nor can we assure you that any of our other clients will exercise options under their contracts. Moreover, because we believe that our contracts with limited initial terms represent the early portion of longer client programs, we expend significant financial and personnel resources and expand our operations to be able to fulfill these programs beyond the initial contract term. If a significant number of our contracts are not extended beyond their initial terms, we

17

may be unable to recover the costs we incurred, we would not recognize anticipated revenues, and our operating results would be harmed.

    The loss of key members of our senior management team could impair our relationships with government clients and disrupt the management of our business.

        We believe that our success depends on the continued contributions of the members of our senior management, including Ken S. Bajaj, our co-founder, Chairman, and Chief Executive Officer. We rely on our executive officers and senior management to generate business and ensure successful performance of our contracts. The loss of the services of Mr. Bajaj or one or more of our other executive officers or senior management members could have a material adverse effect on our financial performance and our ability to compete. In addition, the relationships and reputation that many members of our senior management team have established and maintain with government personnel contribute to our ability to maintain good client relations and to identify new business opportunities. Although we have employment agreements with several members of our senior management, none of these contracts provide for a specific term of employment. The loss of any member of our senior management could impair our ability to identify and secure new contracts, to maintain good client relations, and to otherwise manage our business.

    If we fail to attract and retain skilled employees, we might not be able to perform under our contracts, and we may lose revenues.

        The growth of our business and revenues depends in large part upon our ability to attract and retain sufficient numbers of highly qualified individuals who have advanced information technology and technical services skills and who work well with our government and defense clients. For example, networking engineers and security experts are in great demand throughout our industry and are likely to remain a limited resource in the foreseeable future. If we are unable to recruit and retain a sufficient number of these employees, our ability to maintain and grow our business could be limited. If we encounter a tight labor market, as our predecessor did in the first half of the year ended December 31, 2000, we could be required to engage larger numbers of subcontractor personnel, which could cause our profit margins to suffer. In addition, some of our contracts contain provisions requiring us to staff an engagement with personnel that the client considers key to our successful performance under the contract. In the event we are unable to provide these key personnel or acceptable substitutions, the client may terminate the contract, we may not be able to recover our costs, and we may lose revenues.

    We face intense competition from many competitors that have greater resources than we do, which could result in price reductions, reduced profitability, and loss of market share.

        We operate in highly competitive markets and generally encounter intense competition to win contracts. For example, we must often discount our GSA schedule rates in order to secure contracts from many of our customers in competitive situations. We expect competition in our markets to increase as a result of a number of factors, including the entrance of new or larger competitors, including those formed through consolidation, who have greater financial, technical, marketing, and public relations resources, larger client bases, and greater brand or name recognition than we do. These competitors could, among other things:

•

divert sales from us by winning very large-scale government contracts due to different or greater technical capabilities, past performance on large-scale contracts, geographic presence, price, and the availability of key professional personnel, a risk that is enhanced by the recent trend in government procurement practices to bundle services into larger contracts;



•

force us to charge lower prices; and

18

•

adversely affect our relationships.

If we lose business to our competitors or are forced to lower our prices, our revenues, and our operating profits could decline.

        In addition, we may face competition from our subcontractors who, from time to time, seek to obtain prime contractor status on contracts for which they currently serve as a subcontractor for us. If one or more of our current subcontractors are awarded prime contractor status on such contracts in the future, it would divert sales from us and could force us to charge lower prices.

    If we are not successful in developing, or if we are delayed in introducing, new and enhanced solutions and features that keep pace with technology and our clients' needs and expectations, our sales and competitive position will suffer.

        The market for our solutions is characterized by rapidly changing technologies, frequent new product introductions, increasingly complex network environments, and evolving client requirements and industry standards. In order to remain competitive, we will need to introduce on a timely basis new solutions or product enhancements that offer significantly improved performance and features. We could damage our reputation and competitive position and experience reduced revenues if:

•

we are not able to develop new solutions;



•

we are delayed in introducing new or enhanced solutions, such as planned enhancements to our High Assurance Web Guard, High Assurance Web Server, and High Assurance Directory Server Solutions;



•

any manufacturer or supplier of equipment limits or eliminates our ability to apply TEMPEST and Zone solutions to its products and we are not able to find alternative equipment sources in a timely manner; or



•

we introduce new solutions which do not meet the evolving demands of our clients.

    We derive significant revenues from contracts awarded through a competitive procurement process, which can impose substantial costs upon us, and negatively impact our operating results.

        We derive significant revenues from federal government contracts that are awarded through a competitive procurement process. We expect that most of the government business we seek in the foreseeable future will be awarded through competitive procedures. Competitive procurements impose substantial costs and present a number of risks, including:

•

the substantial cost and managerial time and effort that we spend to prepare bids and proposals for contracts that may not be awarded to us; and



•

the expense and delay that we may face if our competitors protest or challenge contract awards made to us pursuant to competitive procedures, and the risk that any such protest or challenge could result in the resubmission of offers, or in termination, reduction, or modification of the awarded contract.

        The costs we incur in the competitive procurement process may be substantial and, to the extent we participate in competitive procurements and are unable to win particular contracts, these costs could negatively affect our operating results. In addition, GSA multiple award schedule contracts, government-wide acquisitions contracts, blanket purchase agreements, and other IDIQ contracts do not guarantee more than a minimal amount of work for us, but instead provide us access to work generally through further competitive procedures. This competitive process may result in increased competition and pricing pressure, requiring that we make sustained post-award efforts to realize revenues under the relevant contract.

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    We may lose money on some contracts if we miscalculate the resources we need to perform under the contract.

        We provide services to the federal government under three basic types of contracts: time-and-materials, fixed-price, and cost-plus. For the year ended December 31, 2003, we derived approximately 44%, 47% and 9% of our revenues from time-and-materials, fixed-price, and cost-plus contracts, respectively. Excluding our NASA CSOC contract, for the year ended December 31, 2003, we derived approximately 50%, 39% and 11% of our revenues, as adjusted, from time-and-materials, fixed-price and cost-plus contracts, respectively. Each of these types of contracts, to differing degrees, involves the risk that we could underestimate our cost of fulfilling the contract, which may reduce the profit we earn or lead to a financial loss on the contract.

        For all three basic contract types, we bear varying degrees of risk associated with the assumptions we use to formulate our pricing for the work. To the extent our working assumptions prove inaccurate, we may lose money on the contract, which would adversely affect our operating results. For example, we miscalculated the costs we would incur to provide telecommunications circuits in connection with our NASA CSOC contract and, as a result, the total costs to perform under the contract exceeded the contract's fixed fee revenue through December 31, 2003.

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

        We estimate that revenues derived from contracts in which we acted as a subcontractor to other companies represented approximately 33% of our revenues for the year ended December 31, 2003. We expect to continue to depend on relationships with other contractors for a portion of our revenues in the foreseeable future. The reduction or elimination of any of our subcontractor relationships could adversely affect our business and prospects. For example, in connection with our NASA CSOC contract, we were recently involved in litigation with Lockheed Martin Space Operations Company regarding disputed charges under the contract. Although this litigation has been settled, it could adversely affect our ability to team with Lockheed Martin Space Operations Company in the future.

    If our subcontractors fail to perform their contractual obligations, our performance and reputation as a prime contractor and our ability to obtain future business could suffer.

        As a prime contractor, we often rely significantly upon other companies as subcontractors to perform work we are obligated to perform for our clients. We estimate that revenues derived from work performed by our subcontractors represented approximately 18% of our revenues for the year ended December 31, 2003. Excluding our NASA CSOC contract, we estimate that revenues derived from work performed by our subcontractors represented approximately 7% of our revenues, as adjusted, for the year ended December 31, 2003. If one or more of our subcontractors fail to perform satisfactorily the agreed-upon services on a timely basis, or violate government contracting policies, laws, or regulations, our ability to perform our obligations or meet our clients' expectations as a prime contractor may be compromised. In some cases, we have limited involvement in the work performed by the subcontractors but are nevertheless responsible for the work performed. In extreme cases, performance or other deficiencies on the part of our subcontractors could result in a client terminating our contract for default. A default termination could expose us to liability for the agency's costs of reprocurement, damage our reputation, and hurt our ability to compete for future contracts.

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    Unfavorable government audit results could subject us to a variety of penalties and sanctions, and could harm our reputation and relationships with our clients.

        The federal government audits and reviews our performance on contracts, pricing practices, cost structure, and compliance with applicable laws, regulations, and standards. Like most large government contractors, our contracts are audited and reviewed on a continual basis by federal agencies, including the Defense Contract Audit Agency, or the DCAA. An unfavorable audit of us or our subcontractors could have a substantial adverse effect on our operating results. For example, any costs which were originally reimbursed could subsequently be disallowed. In this case, cash we have already collected may need to be refunded and future operating margins may be reduced.

        Our incurred cost submissions have been audited by the DCAA through December 31, 2001. Costs for which we were reimbursed after January 1, 2002 may be subsequently disallowed upon the completion of future audits. In addition, non-audit review by the U.S. government may still be conducted on all of our government contracts.

        If a government audit uncovers improper or illegal activities, we may be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, suspension of payments, fines, and suspension or debarment from doing business with U.S. government agencies. In addition, we could suffer serious harm to our reputation if allegations of impropriety were made against us, whether or not true.

    If we experience systems or services failures, our reputation could be harmed and our clients could assert claims against us for damages or refunds.

        We create, implement, and maintain information technology solutions that are often critical to our clients' operations, some of which involve U.S. government-classified or other sensitive information and work. We have experienced and may in the future experience some systems or services failures, schedule or delivery delays, and other problems in connection with our work. If our solutions, services, or other applications have significant defects or errors, are subject to delivery delays, or fail to meet our clients' expectations, we may:

•

lose revenues due to adverse client reactions;



•

be required to provide additional services to clients at no charge;



•

receive negative publicity, which could damage our reputation and adversely affect our ability to attract or retain clients; or



•

suffer claims for substantial damages.

        Many, although not all, of our contracts limit our liability for consequential damages that may arise from negligence in rendering services to our clients. We cannot assure you, however, that these contractual provisions will be legally sufficient to protect us if we are sued. In addition, our errors and omissions and product liability insurance coverage may not continue to be available on reasonable terms or in sufficient amounts to cover one or more large claims, or the insurer may disclaim coverage as to some types of claims. The successful assertion of any large claims against us could seriously harm our business. Even if not successful, these claims could result in significant legal and other costs, may be a distraction to our management, and may harm our reputation.

    Security breaches in sensitive government systems could result in the loss of clients and negative publicity.

        Many of the systems we develop, install, and maintain involve managing and protecting information involved in intelligence, national security, and other sensitive or classified government functions. A security breach in one of these systems could cause serious harm to our business, damage our reputation, and prevent us from being eligible for further work on sensitive or classified systems for

21

federal government clients. We could incur losses from such a security breach that could exceed the policy limits under our errors and omissions and product liability insurance. Damage to our reputation or limitations on our eligibility for additional work resulting from a security breach in one of the systems we develop, install, and maintain could materially reduce our revenues.

    Our failure to obtain and maintain necessary security clearances may limit our ability to perform classified work for government clients, which could cause us to lose business.

        Some government contracts require us to maintain facility security clearances, and require some of our employees to maintain individual security clearances. If our employees lose or are unable to timely obtain security clearances, or we lose a facility clearance, the government client can terminate the contract or decide not to renew it upon its expiration. As a result, to the extent we cannot obtain or maintain the required security clearances for a particular contract, or we fail to obtain them on a timely basis, we may not derive the revenues anticipated from the contract, which, if not replaced with revenues from other contracts, could harm our operating results. To the extent we are not able to obtain facility security clearances or engage employees with the required security clearances for a particular contract, we will be unable to perform that contract and we may not be able to compete for or win new contracts for similar work.

    Our quarterly operating results may fluctuate significantly as a result of factors outside of our control, which could cause the market price of our common stock to decline.

        We expect our revenues and operating results to vary from quarter to quarter. As a consequence, our operating results may fall below the expectations of securities analysts and investors, which could cause the price of our common stock to decline. Factors that may affect our operating results include those listed in this "Risk Factors" section of this prospectus and others such as:

•

fluctuations in revenues earned on contracts;



•

variability in demand for our services and solutions;



•

seasonal fluctuations in our staff utilization rates;



•

seasonal fluctuations in our information security solutions sales;



•

commencement, completion, or termination of contracts during any particular quarter;



•

variable purchasing patterns under GSA schedule contracts, government-wide acquisition contracts, blanket purchase agreements, and other IDIQ contracts;



•

delays in commencement of contracts during any particular quarter;



•

changes in contract requirements;



•

strategic decisions by us or our competitors, such as acquisitions, divestitures, spin-offs, joint ventures, strategic investments, or changes in business strategy;



•

changes in the extent to which we use subcontractors; and



•

changes in presidential administrations and senior federal government officials that affect the timing of technology procurement.

        Reductions in revenues in a particular quarter could lead to lower profitability in that quarter because a relatively large amount of our expenses are fixed in the short-term. We may incur significant operating expenses during the start-up and early stages of large contracts and may not receive corresponding payments in that same quarter. We may also incur additional expenses when contracts expire or are terminated or are not renewed. In addition, payments due to us from government

22

agencies may be delayed due to billing cycles or as a result of failures of governmental budgets to gain Congressional and administration approval in a timely manner.

    We depend on our intellectual property and our failure or inability to protect it could enable competitors to market services and solutions with similar features that may reduce demand for our services and solutions.

        Our success and competitiveness are dependent to a significant degree upon the protection of our internally developed technology, proprietary processes, and other intellectual property that we utilize to provide our services and incorporate in our solutions. If we are unable to protect our intellectual property, our competitors could market services or solutions similar to our services and solutions, which could reduce demand for our offerings.

        Federal government clients typically retain a perpetual, world-wide, royalty-free license to use the intellectual property we develop for them, including providing it to our competitors in connection with their performance of other federal government contracts. Federal government clients typically grant contractors the right to use and commercialize software developed with federal funding. However, if we were to improperly use intellectual property even partially funded by the federal government, the federal government could seek damages from us, sanction us, or prevent us from working on future government contracts.

        We may be unable to prevent unauthorized parties from attempting to copy or otherwise obtain and use our technology. Policing unauthorized use of our technology is difficult, and we may not be able to prevent misappropriation of our technology, particularly in foreign countries where the laws may not protect our intellectual property as fully as those in the U.S. Others, including our employees, may circumvent the protections provided by trade secrets and other intellectual property that we own. Although we require our new employees to execute non-disclosure and intellectual property assignment agreements, many of our employees hired by our predecessor have not executed such agreements. In addition, these agreements may not be legally or practically sufficient to protect our rights. Litigation may be necessary to enforce our intellectual property rights, to protect our trade secrets and to determine the validity and scope of the proprietary rights of others. Any litigation could result in substantial costs and diversion of resources, with no assurance of success. If we are unable to protect our proprietary rights against unauthorized use by others, our reputation may be damaged and our competitive position may be significantly harmed.

    We may be harmed by intellectual property infringement claims.

        We may become subject to claims from our employees or third parties who assert that software and other forms of intellectual property that we use in delivering services and solutions to our clients infringe upon intellectual property rights of such employees or third parties. Our employees develop much of the software and other forms of intellectual property that we use to provide our services and solutions to our clients, but we also license technology from other vendors. If our vendors, our employees, or third parties assert claims that we or our clients are infringing on their intellectual property, we could incur substantial costs to defend those claims. In addition, if any of these infringement claims are ultimately successful, in addition to paying damages, we could be required to do the following, each of which could entail incurring a significant expense or result in a significant reduction in revenues:

•

cease selling or using services or solutions that incorporate the challenged software or technology;



•

obtain a license or additional licenses from our vendors or other third parties; or



•

redesign our services and solutions that rely on the challenged software or technology.

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        In addition, we do not own a federal trademark registration for the DigitalNet service mark or trademark. If a third party challenges our right to use our name, we may be prevented from using the name or may be subject to other remedies sought by any such party. If a third party is successful in challenging the use of the DigitalNet name, in addition to paying damages, we could be required to change our corporate name, which could:

•

cause us to incur significant expense;



•

adversely affect our brand recognition; and



•

adversely affect our development of goodwill.

    If we make strategic acquisitions or investments, we could assume additional liabilities or have integration problems.

        One of our strategies is to pursue growth through acquisitions. On February 5, 2004 we announced that we had entered into a definitive agreement to acquire User Technology Associates, Inc. We expect to consider acquisitions in the future. In connection with the User Technology Associates acquisition and any acquisition or investment we may make in the future, we may:

•

issue stock that would dilute your stock ownership;



•

incur debt that would restrict our cash flow;



•

assume liabilities;



•

incur large and immediate write-offs;



•

experience problems combining the purchased operations, technologies or products with our business;



•

incur unanticipated costs;



•

divert management's attention from our core business;



•

experience risks associated with entering markets in which we have no or limited prior experience; and



•

lose key employees from the purchased organizations.

    Changes in the spending policies or budget priorities of the federal government could cause us to lose revenues.

        We derive substantially all of our revenues from contracts funded by federal government agencies. For the year ended December 31, 2003, civilian agency clients accounted for approximately 50% of our revenues, Department of Defense clients accounted for approximately 32% of our revenues, and national security and intelligence agency clients accounted for approximately 17% of our revenues. Excluding the NASA CSOC contract, for the year ended December 31, 2003, civilian agency clients accounted for approximately 43% of our revenues, Department of Defense clients accounted for approximately 36% of our revenues, and national security and intelligence clients accounted for approximately 20% of our revenues. We believe that contracts with federal government agencies, and defense agencies in particular, will continue to be the primary source of our revenues for the foreseeable future. Accordingly, changes in federal government fiscal or spending policies or the U.S. defense budget could directly affect our financial performance. For example, the reduction in the U.S. defense budget during the early 1990s caused some defense-related government contractors to

24

experience decreased sales, reduced operating margins and, in some cases, net losses. Among the factors that could harm our business are:

•

curtailment of the federal government's use of technology services firms;



•

a significant decline in spending by the federal government, in general, or by specific agencies such as the Department of Defense;



•

reductions in federal government programs or requirements;



•

a shift in spending to federal programs and agencies that we do not support or where we currently do not have contracts;



•

delays in the payment of our invoices by government payment offices;



•

federal governmental shutdowns, such as the shutdown that occurred during the government's 1996 fiscal year, and other potential delays in the government appropriations process; and



•

general economic and political conditions, including any event that results in a change in spending priorities of the federal government.

        These or other factors could cause federal government agencies and departments to reduce their purchases under contracts, to exercise their right to terminate contracts, or not to exercise options to renew contracts, any of which could cause us to lose revenues. In addition, any limitations imposed on spending by U.S. government agencies that result from efforts to reduce the federal deficit may limit both the continued funding of our existing contracts and our ability to obtain additional contracts. Our backlog consists almost exclusively of contracts with federal departments and agencies, and the continuation of these contracts, or award of additional contracts from these agencies, could be materially harmed by federal government spending reductions or budget cutbacks at these departments or agencies.

    Federal government contracts contain provisions giving government clients a variety of rights that are unfavorable to us, including the ability to terminate a contract at any time for convenience.

        Federal government contracts contain provisions and are subject to laws and regulations that provide government clients with rights and remedies not typically found in commercial contracts. These rights and remedies allow government clients, among other things, to:

•

terminate existing contracts, with short notice, for convenience, as well as for default;



•

reduce orders under or otherwise modify contracts;



•

for larger contracts subject to the Truth in Negotiations Act, reduce the contract price or cost where it was increased because a contractor or subcontractor during negotiations furnished cost or pricing data that was not complete, accurate, and current;



•

for GSA multiple award schedule contracts, government-wide acquisition agreements, and blanket purchase agreements, demand a refund, make a forward price adjustment, or terminate a contract for default if a contractor provided inaccurate or incomplete data during the contract negotiation process, or reduce the contract price under certain triggering circumstances, including the revision of pricelists or other documents upon which the contract award was predicated, the granting of more favorable discounts or terms and conditions than those contained in such documents, and the granting of certain special discounts to certain clients;



•

terminate our facility security clearances and thereby prevent us from receiving classified contracts;

25

•

cancel multi-year contracts and related orders if funds for contract performance for any subsequent year become unavailable;



•

decline to exercise an option to renew a multi-year contract or issue task orders in connection with IDIQ contracts;



•

claim rights in solutions, systems, and technology produced by us;



•

prohibit future procurement awards with a particular agency due to a finding of organizational conflict of interest based upon prior related work performed for the agency that would give a contractor an unfair advantage over competing contractors or the existence of conflicting roles that might bias a contractor's judgment;



•

subject the award of contracts to protest by competitors, which may require the contracting federal agency or department to suspend our performance pending the outcome of the protest and may also result in a requirement to resubmit offers for the contract or in the termination, reduction, or modification of the awarded contract; and



•

suspend or debar us from doing business with the federal government.

        If a federal government client terminates one of our contracts for convenience, we may recover only our incurred or committed costs, settlement expenses, and profit on work completed prior to the termination. If a federal government client were to unexpectedly terminate, cancel, or decline to exercise an option to renew with respect to one or more of our significant contracts or suspend or debar us from doing business with the federal government, our revenues and operating results would be materially harmed.

    Our failure to comply with complex procurement laws and regulations could cause us to lose business and subject us to a variety of penalties.

        We must comply with laws and regulations relating to the formation, administration, and performance of federal government contracts, which affect how we do business with our federal government clients and may impose added costs on our business. Among the most significant laws and regulations are:

•

the Federal Acquisition Regulation, and agency regulations analogous or supplemental to the Federal Acquisition Regulation, which comprehensively regulate the formation, administration, and performance of government contracts;



•

the Truth in Negotiations Act, which requires certification and disclosure of all cost or pricing data in connection with some contract negotiations;



•

the Cost Accounting Standards, which impose cost accounting requirements that govern our right to reimbursement under some cost-based government contracts; and



•

laws, regulations, and executive orders restricting the use and dissemination of information classified for national security purposes and the exportation of specified solutions and technical data.

        If a government review or investigation uncovers improper or illegal activities, we may be subject to civil and criminal penalties and administrative sanctions, including the termination of our contracts, the forfeiture of profits, the suspension of payments owed to us, fines, and our suspension or debarment from doing business with federal government agencies. In particular, the civil False Claims Act provides for treble damages and potentially substantial civil penalties where, for example, a contractor presents a false or fraudulent claim to the government for payment or approval, or makes a false statement in order to get a false or fraudulent claim paid or approved by the government. Actions under the civil False Claims Act may be brought by the government or by other persons on behalf of

26

the government. These provisions of the civil False Claims Act permit parties, such as our employees, to sue us on behalf of the government and share a portion of any recovery. Any failure to comply with applicable laws and regulations could result in contract termination, price or fee reductions, or suspension or debarment from contracting with the government, each of which could lead to a material reduction in our revenues.

    The adoption of new procurement laws or regulations could reduce the amount of services that are outsourced by the federal government and cause us to experience reduced revenues.

        New legislation, procurement regulations, or labor organization pressure could cause federal agencies to adopt restrictive procurement practices regarding the use of outside information technology providers. The American Federation of Government Employees, the largest federal employee union, strongly endorses legislation that may restrict the procedure by which services are outsourced to government contractors. One such proposal, the Truthfulness, Responsibility, and Accountability in Contracting Act, or TRAC, would have effectively reduced the volume of services that is outsourced by the federal government by requiring agencies to give in-house government employees expanded opportunities to compete against contractors for work that could be outsourced. Although the TRAC legislation did not pass committee in either house of Congress last term, and it has not been reintroduced in the current term, if TRAC, or similar legislation, were to be enacted, it would likely reduce the amount of information technology services that could be outsourced by the federal government, which could materially reduce our revenues.

    We may not be able to generate adequate cash to service our existing indebtedness and any additional future indebtedness.

        We have a significant amount of debt outstanding, including approximately $81.3 million of outstanding indebtedness under our 9% senior notes due 2010. We anticipate that by the end of March 2004 we will borrow up to an additional $35 million from our $50 million revolving credit facility in connection with the closing of the User Technology Associates acquisition. You should be aware that this level of debt could have important consequences to you. Below we have identified some of the material potential consequences resulting from this significant amount of debt:

•

on an annual basis, approximately $7.3 million of our cash flow from operations must be dedicated to the payment of interest under the 9% senior notes due 2010, thereby reducing the amount of cash we have available for other purposes, including reinvestment in the company;



•

On an annual basis and assuming we close the User Technology Associates acquisition, approximately $1.8 million of our cash flow will be used to service the $35 million of borrowings we expect to incur in connection with the acquisition (assuming an interest rate of approximately 5%);



•

we will be required to repay $81.3 million in respect of the 9% senior notes due 2010 when they mature in 2010;



•

to the extent we incur additional debt, we will need to dedicate additional cash flow from operations to the repayment and servicing of such debt;



•

we may be unable to obtain additional financing for working capital, capital expenditures, acquisitions and general corporate purposes;



•

our ability to adjust to changing market conditions may be hampered;



•

we may be at a competitive disadvantage compared to our less leveraged competitors; and



•

we may be vulnerable to the impact of adverse economic and industry conditions and, to the extent of our outstanding debt under our credit facility, the impact of increases in interest rates.

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        Our ability to repay or refinance our debt, including the 9% senior notes due 2010, depends on our successful financial and operating performance and the availability of financing through our credit facility. We cannot assure you that our business strategy will succeed or that we will achieve our anticipated financial results. Our financial and operating performance depends upon a number of factors including those listed in this "Risk Factors" section of this prospectus, many of which are beyond our control. In addition, our ability to borrow funds in the future to make payments on our debt will depend on our satisfaction of the covenants and other conditions in our credit facility and other agreements we may enter into in the future.

        We cannot assure you that we will continue to generate sufficient cash flow from operations or that we will be able to borrow funds under our credit facility in amounts sufficient to enable us to service our debt, including the 9% senior notes due 2010, or meet our working capital and capital expenditure requirements. We must satisfy borrowing base restrictions in order to borrow additional amounts under our credit facility. If we are not able to generate sufficient cash flow from operations or to borrow sufficient funds to service our debt, due to borrowing base restrictions or otherwise, we may be required to sell assets, reduce capital expenditures, refinance all or a portion of our existing debt, including the 9% senior notes due 2010, or obtain additional financing. We cannot assure you that we will be able to refinance our debt, sell assets or borrow more money on terms acceptable to us, if at all.

    Under our credit facility, we will be able to incur more indebtedness, which may intensify the risks associated with our substantial leverage, including our ability to service our indebtedness.

        We and our subsidiaries will be able to incur substantial additional indebtedness in the future, including up to the greater of (i) $60.0 million and (ii) specified percentages of our accounts receivable under our credit facility. Although our ability to incur additional debt will be restricted under the covenants contained in our credit facility and the indenture governing the 9% senior notes due 2010, these restrictions are subject to a number of qualifications and exceptions, and the indebtedness incurred in compliance with these restrictions could be substantial. To the extent new debt is added to our currently anticipated debt levels, the substantial leverage risks described above would increase. Also, these restrictions do not prevent us from incurring obligations that do not constitute indebtedness.

    Covenants in the financing agreements governing our debt, including the 9% senior notes due 2010 and our credit facility, may restrict our financial and operating flexibility and any event of default could cause acceleration of amounts outstanding under these agreements and have a material adverse effect on our business.

        Our financing agreements, including the 9% senior notes due 2010 and our credit facility, contain covenants that limit or restrict our and our subsidiaries' operating and financial activities.

        Our credit facility contains customary affirmative and negative covenants, including financial covenants that we are required to meet, including a consolidated total leverage ratio; a consolidated fixed charge coverage ratio; and a minimum net worth covenant. Those covenants also restrict certain of our corporate activities, including, among other things, our ability to: make acquisitions, merge or consolidate with other entities, dispose of assets, incur additional indebtedness, pay dividends, create liens, make investments, make capital expenditures, and engage in certain transactions with affiliates. The credit agreement also contains customary events of default, including, among others, defaults based on certain bankruptcy and insolvency events; nonpayment; cross-defaults to other debt; breach of specified covenants; change of control and material inaccuracy of representations and warranties.

        The indenture governing the 9% senior notes due 2010 restricts, among other things, our ability to pay dividends on, or redeem or repurchase, our stock, incur additional debt or sell preferred stock, create liens, restrict dividend payments or other payments from subsidiaries to us, engage in

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consolidations and mergers or sell or transfer assets, make specified types of investments, apply net proceeds from certain asset sales, create unrestricted subsidiaries, and engage in transactions with our affiliates.

        Our ability to satisfy the covenants and other conditions in our credit facility can be affected by events beyond our control, and we cannot assure you that we will satisfy them. If we cannot comply with the financial covenants in our credit facility, we may not be able to borrow under this facility. In addition, failure to comply with any of the covenants in our existing or future financing agreements could result in a default under those agreements and under other agreements containing cross-default provisions. A default would permit the lenders under the applicable agreement to declare amounts outstanding under such agreements to be due and, in the case of our credit facility, the lenders could proceed against the assets that are pledged. We have pledged substantially all of our assets, including the stock of our subsidiaries, to secure the debt under our credit facility. If our creditors decide to exercise their rights, we cannot assure you that our assets would be sufficient to pay that debt and other debt, including the 9% senior notes due 2010.

        In addition, in the event of a default, the lenders under our credit facility will, and any future lenders may, be able to terminate any commitments they made to supply us with further funds. Under these circumstances, we might not have sufficient funds or other resources to satisfy all of our obligations, including our obligations under the 9% senior notes due 2010. In addition, the limitations imposed by our financing agreements on our ability to incur additional debt and to take other actions might significantly impair our ability to obtain other financing. We cannot assure you that we will be able to obtain waivers or amendments of our financing agreements, if necessary, at acceptable terms or at all. Any event of default could have a material adverse effect on our business.

    We may not be able to finance a change of control offer as required by the indenture governing the 9% senior notes due 2010, which would result in defaults under the indenture governing the 9% senior notes due 2010 and our credit facility and may require us to repay any debt then outstanding under our credit facility. Any event of default could have a material adverse effect on our business.

        Upon a change of control under the indenture governing the 9% senior notes due 2010, we will be required to offer to repurchase all of the 9% senior notes due 2010 then outstanding at 101% of the principal amount, plus accrued and unpaid interest and liquidated damages, if any, to the repurchase date. Prior to repurchasing any of the 9% senior notes due 2010, we must either repay all debt under our credit facility or obtain the required consents from the applicable lenders to allow us to repurchase the 9% senior notes due 2010. In such circumstances, we cannot assure you that we would have the financial resources available to repay our credit facility and any other debt that would become payable upon a change of control and to repurchase all of the 9% senior notes due 2010 at the required premium. Our failure to do so would constitute an event of default under the indenture and, accordingly, under our credit facility. Any event of default could have a material adverse effect on our business.

Available Information

        Our internet address is www.digitalnet.com. We make available free of charge on or through our Internet website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.

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Item 2. PROPERTIES

        Our executive offices and principal operations are located at 2525 Network Place in Herndon, Virginia. We occupy approximately 273,000 square feet of leased space in Virginia, Massachusetts, Maryland, Alabama, Colorado, Washington, D.C., Hawaii, Ohio, and Illinois. We also occupy government-provided facilities in a variety of locations to support ongoing contracts, and we maintain three Special Compartmentalized Information Facilities. Our Tewksbury, Massachusetts facility houses our TEMPEST and Zone activities and holds certification under the International Organization for Standards 9001, which is an international quality standard for sales, production, installation and distribution. We do not own any real estate and maintain flexibility in facility occupancy through termination options concurrent with contract terms in many of our leases. We believe that our facilities are adequate to meet our current needs, and that additional facilities will be available as we expand in the future.

Item 3. LEGAL PROCEEDINGS

        From time to time, we are involved in various legal proceedings concerning matters arising in the ordinary course of business. We believe that any ultimate liability arising out of these proceedings will not have a material adverse effect on our financial position or results of operations.

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

        No matter was submitted to the stockholders during the fourth quarter of 2003.

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PART II

Item 5.    MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

        Since October 10, 2003, our common stock has been publicly traded on the Nasdaq National Market under the symbol "DNET." Prior to October 10, 2003, our common stock was not publicly traded. From October 10, 2003 to December 31, 2003, the range of high and low prices of our common stock as reported by the Nasdaq for the 4th quarter of 2003 was $17.13 (low) and $24.20 (high).

        As of March 15, 2004, there were approximately 15 holders of record of our common stock. The number of holders of record of our common stock is not representative of the number of beneficial holders because many shares are nominally owned by depositories, brokers or nominees for the benefit of many beneficial holders.

Dividend Policy

        We have never declared or paid any cash dividends on our common stock. We currently intend to retain earnings, if any, to support our growth strategy and do not anticipate paying cash dividends in the foreseeable future. DigitalNet Holdings, Inc. is a holding company and relies upon dividends from DigitalNet, Inc. and its subsidiaries for substantially all of its cash requirements. Under the terms of our 2003 credit facility, DigitalNet, Inc. is not permitted to pay dividends to DigitalNet Holdings, Inc. that are in turn used to pay dividends declared by DigitalNet Holdings, Inc. As a result, DigitalNet Holdings, Inc. is effectively prevented from paying dividends to our stockholders by the terms of our 2003 credit facility. Additionally, the indenture under which our 9% senior notes due 2010 were issued contains covenants that could under certain circumstances restrict the ability of DigitalNet, Inc. to pay dividends to DigitalNet Holdings, Inc.

Equity Compensation Plan Information

        The following table sets forth as of December 31, 2003 regarding our equity compensation plans.

*

Under the terms of our Amended and Restated 2003 Stock Incentive Plan, an additional 325,803 shares became available for issuance as of January 1, 2004.

Unregistered Sales of Securities

        There were no unregistered sales of our common stock during the 4^th quarter of 2003.

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Item 6.    SELECTED FINANCIAL DATA

        The following selected consolidated financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," our consolidated financial statements and the related notes, included elsewhere in this Form 10-K. The historical results are not necessarily indicative of results to be expected for any future period. Our consolidated statement of operations data and other financial data for the period from September 7, 2001 (inception) through December 31, 2001 and for the years ended December 31, 2002 and 2003 and the balance sheet data as of December 31, 2002 and 2003 are derived from our audited consolidated financial statements that are included elsewhere in this Form 10-K.

        The statement of operations data and other financial data for DigitalNet Government Solutions, LLC for the years ended December 31, 2000 and 2001 and the period from January 1, 2002 through November 25, 2002 and the balance sheet data as of December 31, 2000 and 2001 and as of November 25, 2002 are derived from the consolidated financial statements of DigitalNet Government Solutions, LLC, which have been audited and are included elsewhere in this Form 10-K. The balance sheet data as of December 31, 1999 and 2000 and the statement of operations data and the other financial data for DigitalNet Government Solutions, LLC for the year ended December 31, 1999 are derived from audited consolidated financial statements that are not included in this Form 10-K.

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DigitalNet Holdings, Inc.
Selected Data Table
(amounts in thousands, except share and per share data)

(1)

On November 26, 2002 we acquired all of the membership interests of DGS. Our results of operations for the year ended December 31, 2002 include the operating results of DGS from November 26, 2002 through December 31, 2002, along with our operating results for the entire year ended December 31, 2002.

(2)

See unaudited pro forma consolidated financial information on the subsequent pages.

(3)

On January 1, 2002, DGS adopted SFAS No. 142 "Goodwill and Other Intangible Assets" which requires that goodwill no longer be amortized. If SFAS No. 142 had been effective for the years ended December 31, 2000 and 2001, net income would have increased by approximately $5.4 million and $4.2 million, respectively, resulting in net income of approximately $7.2 million and $22.5 million, respectively.

(4)

The pro forma basic and diluted net loss per common share is computed using the pro forma net income (loss) attributable to common stockholders and the pro forma basic and diluted weighted average number of common shares outstanding during the period. The pro forma net income (loss) attributable to common stockholders and the pro forma basic and diluted weighted average common shares assumes the conversion of the Class A Preferred Stock into common stock as of January 1, 2003.

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Unaudited Pro Forma Consolidated Financial Information

        On November 26, 2002, we acquired all of the membership interests of DigitalNet Government Solutions, LLC (DGS, formerly Getronics Government Solutions, L.L.C.). The DGS results of operations have been included in our consolidated statement of operations for the year ended December 31, 2002 from the date of acquisition. The pro forma statement of operations for the year ended December 31, 2002 presented below represents our pro forma statement of operations giving effect to the acquisition of our predecessor, Getronics Government Solutions, L.L.C. and the related financing transactions as if such transactions had occurred on January 1, 2002. Although this approach is not consistent with generally accepted accounting principles, we believe it is the most practical way to comment on the results of operations for 2002.

        The unaudited pro forma consolidated financial information provided below is based upon assumptions and estimates which we believe are reasonable. In our opinion, all adjustments have been made that are necessary to present fairly the pro forma data. This unaudited pro forma consolidated financial information is presented for informational purposes only and is not indicative of either future results of operations or results that might have been achieved if the transactions had been consummated as of January 1, 2002. The pro forma consolidated financial information should be read in connection with our historical consolidated financial statements and those of DGS, together with the related notes thereto, that are included elsewhere in this Form 10-K.

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Unaudited Pro Forma Consolidated Statement of Operations
(Dollars in Thousands)