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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

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

For the Year Ended December 31, 2003

Commission File Number 0-5404

Analex Corporation

(Exact name of registrant as specified in its charter)

5904 Richmond Highway, Suite 300

Alexandria, Virginia 22303

(Address of principal executive offices)

Registrant’s telephone number including area code

(703) 329-9400

Securities registered pursuant to Section 12(b) of the Act:

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

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K 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.  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act)    Yes  ¨    No  x

The aggregate market value of the common stock of the registrant held by non-affiliates of the registrant (based upon the closing price of the common stock on the American Stock Exchange on June 30, 2003) was approximately $23,965,092.

As of March 25, 2004, 13,061,175 shares of the common stock of the registrant were outstanding.

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PART I

Introduction

Analex Corporation (“Analex” or the “Company”) specializes in providing information technology, engineering and bio-defense services and solutions in support of our nation’s security. Analex focuses on developing innovative technical approaches for the intelligence community, analyzing and supporting defense systems, designing, developing and testing aerospace systems and developing medical defenses and treatments for infectious agents used in biological warfare and terrorism.

Name Change

Pursuant to shareholders’ approval obtained at the Company’s annual shareholder meeting held on May 21, 2002, Hadron, Inc. changed its name on July 1, 2002, to Analex Corporation by merging Hadron, Inc. into its wholly owned subsidiary Analex Corporation. Hadron acquired Analex on November 5, 2001. Hadron’s name was changed to Analex to improve marketing effectiveness and take advantage of Analex’s broader name recognition in both the intelligence and aerospace systems engineering market segments. Under the resulting corporate structure, Analex Corporation has two wholly owned subsidiaries, SyCom Services, Inc. (“SyCom”) and Advanced Biosystems, Inc. (“ABS”).

Operations

The Company has two reportable segments: Analex, which is engaged in professional services related to information technology and systems engineering for the U.S. government, primarily NASA and the Department of Defense; and Advanced Biosystems (ABS), which is engaged in biomedical research for broad-spectrum defenses against toxic agents capable of being used as bioterrorist weapons, such as anthrax and smallpox. The segments are distinguished by their individual clients, past experience and technical skills.

The Analex segment consists of two business groups: the Homeland Security Group and the Systems Engineering Group. The Homeland Security Group provides information technology services, systems integration, hardware and software engineering and independent quality assurance in support of the U.S. intelligence community and Department of Defense. The Systems Engineering Group provides engineering, information technology and program management support to NASA, the Department of Defense, and major aerospace contractors such as Lockheed Martin and Northrop Grumman.

Financial information on each segment is included in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Analex Segment

Homeland Security Group.    Since 1964, the Company has provided hardware and software engineering, systems integration, information technology solutions and independent quality assurance to support the requirements of the U.S. intelligence community. The Homeland Security Group’s role in the support of the intelligence community brings specialized skills to a broad set of technical requirements. In the area of intelligence, reconnaissance and surveillance, it provides solutions that enable the simulation of a realistic operational environment so that satellites and related systems can be tested prior to deployment. Homeland Security performs verification and validation of test results to ensure the reliability of the data and also develops radar, modeling and simulation, and system software, all in support of testing, collecting, and analyzing data from various intelligence systems.

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The Homeland Security Group is an independent expert in the design and testing of expendable launch vehicles for the Department of Defense and intelligence community. Its highly specialized expertise provides test analysis and independent validation and verification support in areas such as structural dynamics, trajectory and performance, thermal system performance, and range safety.

Homeland Security provides independent validation and verification services to the United States Air Force and the National Reconnaissance Office in support of launches of expendable launch vehicles. The Company’s contribution to the success and reliability of these launches has earned two prestigious awards: the Defense Department’s David Packard Excellence in Acquisition Award, and the National Reconnaissance Office’s Gold Medal Award.

Homeland Security supports other intelligence agencies such as the National Security Agency by providing software development, systems integration, configuration management and network administration services. A substantial majority of the Company’s operating income, 72% in 2003, is derived from one contract within this group.

Systems Engineering Group.    The Systems Engineering Group provides sophisticated professional services to NASA, the Defense Department and major aerospace contractors such as Lockheed Martin and Northrop Grumman. The Company provides engineering and information technology services to assist in the development of space systems and support operations of terrestrial assets. These systems include expendable launch vehicles, satellites, space-based experiments, and components and payloads associated with the International Space Station. The Company also supports Northrop Grumman in development of sophisticated airborne electronic sensors and systems.

On May 29, 2002, the Company announced that it had been awarded a $164 million Expendable Launch Vehicle Integrated Support (ELVIS) prime contract by NASA. The ELVIS contract was effective July 1, 2002 and has a nine-year and four-month period of performance if all option terms are exercised. Under the ELVIS contract, Analex will provide a broad range of expendable launch vehicle support services for NASA requirements at John F. Kennedy Space Center, Florida; Cape Canaveral Air Force Station, Florida; Vandenberg Air Force Base, California; and other locations. Under the contract, Analex is responsible for engineering services, performing safety and mission assurance functions, and providing communications, computing and telemetry support. In October 2003, Analex Corporation was named Small Business Prime Contractor of the Year by NASA’s Kennedy Space Center based on the Company’s outstanding performance on the ELVIS contract.

Under the ELVIS contract, the Company is the prime contractor with three subcontractors performing various functions. Approximately 27% of the contract is expected to be performed by the subcontractors. As the prime contractor, the Company is responsible for all aspects of work performed by the subcontractors including, but not limited to, quality of work, timeliness of performance, and cost control. The Company records all customer payments under this contract as revenues and all subcontractor invoices as contract costs. Approximately 30% of the Company’s revenues in 2003 are derived from the ELVIS contract.

The Systems Engineering Group provides a broad range of aerospace engineering services to support the programs of NASA Glenn Research Center in Cleveland, Ohio. These support services include development of next generation launch vehicles, engineering design and development of aerospace systems, engineering support for research and technology development, engineering support for operations of experimental systems, and project management support.

Under the Company’s Microgravity Research Development and Operations Contract with Northrop Grumman, Systems Engineering also supports NASA Glenn Research Center in development of an automated laboratory environment to be installed aboard the International Space Station to enable research in the performance of fluids and combustion in the near-zero gravity of space. The Company participates in the design,

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development, manufacturing, test and delivery of the fluids and combustion facility and associated subsystems. The contract ends in November 2007, however, upon our completion of contract-defined deliverables, our effort on this contract will end. At this time, we anticipate completion in the latter part of 2004.

Advanced Biosystems Segment

The Company’s role in bio-defense began in 1999 when it established its Advanced Biosystems (ABS) subsidiary. Since then, an elite group of biologists, immunologists and other researchers have conducted research to develop effective medical defenses and treatments for anthrax, smallpox and other biological warfare agents. Some of these researchers are also on the faculty of George Mason University and also provide research services to that University’s National Center for Biodefense.

ABS scientists have advised Congress, members of the Bush administration, Department of Defense officials and senior members of the medical community on strategies for bio-defense. ABS also provides training on biological warfare agents, their effects, and defensive strategies to improve preparedness. ABS has been awarded almost $12 million in contracts with the Defense Advanced Research Projects Agency (“DARPA”). ABS has filed patent applications with respect to novel scientific and research insights into pathogenic processes and the effects of experimental agents in interrupting toxic pathways, but none of these patent applications have yet been reviewed by the Patent and Trademark Office.

Parties such as ABS that are interested in performing federally-funded research apply for available research grants and are selected on the basis of expertise, past research activity and research plans. The grants mandate that contract researchers submit regular reports on the progress of their research. Award grantees submit invoices and are paid on a regular basis, usually monthly, for their actual costs incurred in performing research, up to the total amount of the grant. As with any government contract, these research grants are terminable at the convenience of the government at any time. Moreover, it is possible that Congress or the government agencies that administer government research programs will decide to scale back programs or terminate them. In certain cases with respect to on-going programs of research, there are opportunities to receive additional grants upon the achievement of stated research objectives.

Under the Defense Federal Acquisition Regulations and the Federal Acquisition Regulation, ABS owns any intellectual property developed under its DARPA and NIH contracts, respectively, subject to a non-exclusive, royalty free license to the U.S. Government. Although ABS has not yet developed technologies or products that would be subject to federal regulations, any technologies or products which ABS may develop may be subject to the regulatory processes of the Federal Drug Administration or other governmental agencies.

Government Procurement and Significant Customers

The principal customer for the Company’s services is the U.S. government. The Company’s sales to the U.S. government and its prime contractors represented approximately 98% of total net sales during the Company’s twelve months ended December 31, 2003, 2002, 2001 and are expected to continue to account for a substantial portion of the Company’s revenues for the foreseeable future.

The principal U.S. government customer is the Department of Defense, which, directly or through its prime contractors, accounted for approximately 44%, 52%, and 64% of the Company’s revenues in the twelve months ended December 31, 2003, 2002, and 2001, respectively. With the acquisition of the former Analex Corporation in November 2001, NASA became a significant customer, generating 53% and 45% of revenues for the twelve months ended December 31, 2003 and 2002. Approximately 30% of our revenue for fiscal year 2003 came from one prime contract with NASA, which has a potential nine-year and four-month contract term if all options are exercised. In addition, the Homeland Security Group’s contract with one Department of Defense customer generated 17% of the Company’s revenues and 72% of the Company’s operating income for the twelve months ended December 31, 2003.

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During 2003, the Company derived revenues from subcontracts with Northrop Grumman and QSS Group, Inc., which in the aggregate comprised 18% and 15%, respectively, of the Company’s total revenues for the year. Approximately 57% of the Company’s revenues were generated as a prime contractor to the federal government and approximately 43% of the Company’s revenues were generated as a subcontractor to a prime contractor to the federal government during the year ended December 31, 2003.

The Company’s contracts with the U.S. government are subject to the availability of funds through annual appropriations, may be terminated by the government for its convenience at any time, and generally do not require the purchase of a fixed quantity of services or products. Reductions in U.S. government defense spending could adversely affect the Company’s operating results. While the Company is not aware of present or anticipated reductions in U.S. government spending on specific programs or contracts, there can be no assurance that such reductions will not occur or that decreases in U.S. government defense spending in general will not have an adverse effect on the Company’s revenues in the future. Contracts with the U.S. government are subject to audit by the Defense Contract Audit Agency.

The Company has been a contractor or subcontractor with the Department of Defense continuously since 1973 with periodic renewals. During this time, neither the Company nor its subsidiaries have experienced any material adjustment of profits under its contracts. However, no assurance can be given that the Department of Defense will not seek and obtain an adjustment of profits in the future. All U.S. government contracts contain clauses that allow for the termination of contracts at the convenience of the U.S. government.

The preponderance of the Company’s technical and professional services business with the Department of Defense and other governmental agencies is obtained through competitive procurement and through follow-on services related to existing business. In certain instances, however, the Company acquires such service contracts because of special professional competency or proprietary knowledge in specific subject areas.

Government Contracts

Direct and indirect contracts with government defense and intelligence agencies comprise the majority of the Company’s business base. During 2003, 51% of the Company’s contracts were cost-reimbursement, 33% were time-and-materials, and 16% were firm fixed-price. Following are brief descriptions of the various types of contracts the Company receives from the government.

Cost-reimbursement contracts provide for payment of allowable incurred costs, to the extent prescribed in the contract, plus a profit component. These contracts establish an estimate of total cost for the purpose of obligating funds and establishing a ceiling that the contractor may not exceed without the approval of the contracting officer. Cost-reimbursement contracts are suitable for use when uncertainties involved in contract performance do not permit costs to be estimated with sufficient accuracy to use a fixed-price contract. Cost-reimbursement contracts covered by the Federal Acquisition Regulation require an audit of actual costs and provide for upward or downward adjustments if actual recoverable costs differ from billed recoverable costs. If our costs exceed the ceiling or are not allowable under the terms of the contract or applicable regulations, we may not be able to recover those costs.

Time-and-materials (T&M) contracts provide for acquiring services on the basis of direct labor hours at specified fixed hourly rates. A T&M contract may also provide for acquiring materials, including, if appropriate, material handling costs. Profit margins on T&M contracts fluctuate based on the difference between negotiated billing rates and actual labor and overhead costs directly charged or allocated to such contracts. We assume the risk that a contract’s costs of performance may exceed the negotiated hourly rates.

Firm fixed-price contracts provide for delivery of products or services for a price that is negotiated in advance on the basis of the contractor’s cost experience. The price is not subject to any adjustment unless there is a change in the scope of work. Profit margins increase to the extent that costs are below the contracted amounts. If the costs exceed the estimates, profit margins decrease and a loss may be realized on the contract.

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Contract Backlog

The Company’s backlog of orders, based on remaining contract value, believed to be firm as of December 31, 2003 was approximately $171 million, of which approximately $170.4 million was attributable to the Analex segment and $0.6 million was attributable to the ABS segment. The portion of the total backlog expected to be realized within 2004 is $56 million. Funded backlog as of December 31, 2003 was approximately $19.3 million, of which approximately $0.6 million was attributable to the ABS segment. We expect to consume all of the funded backlog during 2004. Included in the backlog approximation are amounts from future years of government contracts under which the government has the right to exercise an option for the Company to perform services.

Competition

In general, the industry in which the Company operates includes a large number of competitors of varying sizes. Competition within the information technology and government contracting arenas is intense. The Company maintains a primary commitment to its current direct and indirect government clients, while intensifying its business development efforts to win additional government clients. The Company is continuing efforts to diversify its client base.

The Analex segment generally competes against federal systems integrators such as Anteon International Corporation, CACI International Inc., Computer Sciences Corporation, and Science Applications International Corporation, among others including a variety of small, privately-held government contractors offering information technology and systems engineering services to the U.S. government. In addition, the Systems Engineering Group competes against large aerospace contractors such as Boeing and Lockheed Martin and other small privately held firms in the provision of launch related services. Selection is based primarily on a combination of the price of services and evaluation of technical capability, as well as past performance, quality of service and responsiveness to client requirements.

Within the Analex segment, the Company believes that the Homeland Security Group has a competitive advantage in its skilled engineers and customer relationships within the intelligence community and in its expertise and experience with independent verification and validation of space launch vehicles. However, larger government contractors can provide a breadth of professional offerings that the smaller Homeland Security Group may not be able to match. The Company also believes that the Systems Engineering Group has a competitive advantage in space launch support, especially in the expendable launch vehicle support segment, arising from the Company’s work on the ELVIS contract. Given the Company’s size, larger government contractors operating in this business area may be able to provide a breadth of service offerings beyond the Company’s capabilities.

The ABS segment’s main competition comes from individual research professionals and research groups at academic institutions seeking government funded research work. ABS competes for research grants on the basis of scientific expertise, past research activity and past performance under previous research grants. In the event that any technologies or products are developed based on ABS’ research, ABS will likely compete against a variety of large and small biotechnology and pharmaceutical businesses.

Employees

As of December 31, 2003, the Company (including its subsidiaries) employed approximately 552 people including full time, part time and casual employees. Of the 552 employees, 48 are members of unions, and employee relations are believed by management to be generally good. In October 2002, the Company entered into a three-year Collective Bargaining Agreement with the International Brotherhood of Teamsters now representing approximately 37 employees on the NASA ELVIS contract at Vandenberg Air Force Base in California. In February 2003, the Company entered into a three-year Collective Bargaining Agreement with the International Brotherhood of Electrical Workers now representing approximately 11 employees on the NASA ELVIS contract at the Kennedy Space Center in Florida.

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General Information

Raw materials, patents, licenses, trademarks, franchises and concessions are not material to the operation of the Company’s business and the Company’s business is not seasonal. The Company derives no revenues from foreign operations.

Recent Developments

On March 4, 2003, Analex began trading on the American Stock Exchange under the symbol “NLX”.

On July 18, 2003, the Company entered into a Subordinated Note and Series A Convertible Preferred Stock Purchase Agreement (together with the First Amendment thereto dated September 30, 2003 and the Second Amendment thereto dated November 4, 2003, the “Pequot Purchase Agreement”) with Pequot Private Equity Fund III, L.P., a Delaware limited partnership, and Pequot Offshore Private Equity Partners III, L.P., a Cayman Islands limited partnership (“Pequot”). Details of the terms of the securities sold to Pequot pursuant to the Pequot Purchase Agreement are contained in Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. Accounting treatment of these securities is discussed in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Available Information

The Company files annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (“SEC”). The public may read and copy any materials the Company files with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site at http://www.sec.gov that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC, including the Company. The Company also provides a link to certain of its most recent filings with the SEC at the Company’s Internet site at http://www.analex.com. The information contained on the Company’s Internet site is not part of this Annual Report.

Item 2.    Properties

The Company owns no real property. As of December 31, 2003, the Company leased a total of 68,373 square feet of office space at various locations in Virginia, Maryland, Colorado and Ohio. These leases expire between December 2004 and September 2006. (See Note 13 of the Notes to Consolidated Financial Statements.)

Item 3.    Legal Proceedings

The Company was served on October 9, 2003 with a complaint filed by Swales & Associates, Inc. in the Maryland Circuit Court for Prince George’s County alleging breach of contract and other claims relating to Swales’ termination as a subcontractor under the Company’s ELVIS contract with NASA. Management believes that the allegation is without merit and is vigorously contesting the complaint. Management believes and will assert that it validly exercised its contractual right to terminate the subcontract for Analex’s convenience and that termination of Swales occurred only after NASA was informed of Swales’ cost overruns and negotiations with Swales failed to yield an acceptable alternative. The Company will assert that Swales entered into the subcontract after it had hired incumbent ELVIS personnel at cost-prohibitive rates, knowing that its actual costs would greatly exceed the subcontract’s funding limitations. Under the complaint, Swales is seeking damages in excess of $4.0 million. Management believes that any liability that may ultimately result from the resolution of this matter will not have a material adverse effect on the financial position or results of operations of the Company.

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Item 4.    Submission of Matters to a Vote of Security Holders

(a)  The Company held a Special Meeting of Stockholders on December 9, 2003.

(b)  At the Special Meeting, the Company’s stockholders approved (i) the Pequot Transaction and (ii) amendments to the Company’s Certificate of Incorporation to increase the Company’s authorized capital stock from 35,000,000 shares, consisting of 30,000,000 shares of Common Stock and 5,000,000 shares of preferred stock, par value $0.02 per share (“Preferred Stock”), to 100,000,000 shares consisting of 65,000,000 shares of Common Stock and 35,000,000 shares of Preferred Stock.

The following votes were cast with respect to each of the matters voted on at the Special Meeting:

PART II

Item 5.    Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Prior to March 3, 2003, the Company’s common stock was traded over the counter (OTC) and quoted on the OTC Bulletin Board under the symbol “ANLX”. On March 4, 2003, the common stock was listed on the American Stock Exchange and began trading under the symbol “NLX”.

The range of high and low bid quotations for the Common Stock, as reported by the American Stock Exchange and the OTC Bulletin Board, for each quarterly period during 2003, 2002, and 2001 is shown below. The prices presented below reflect inter-dealer prices without retail mark-ups, mark-downs or commissions, and may not reflect actual transactions.

As of March 25, 2004, there were approximately 2,054 shareholders of record of the Company’s Common Stock. No cash dividends were paid to common shareholders during 2003 or during the past three fiscal years, and no dividends are expected to be declared during 2004 for common shareholders. The ability of the Company to pay dividends on its Common Stock requires the consent of Bank of America, N.A. under the Company’s credit agreement with Bank of America, and the consent of the holders of at least a majority of the outstanding shares of Series A Preferred Stock pursuant to the Certificate of Designations.

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Pequot Transaction

Pursuant to the Pequot Purchase Agreement dated July 18, 2003, the Company agreed to:

In addition, on July 18, 2003, the Company entered into a Securities Repurchase Agreement (together with the First Amendment thereto dated September 30, 2003 and the Second Amendment thereto dated November 4, 2003, the “Stout Repurchase Agreement”) with Company’s former Chairman Jon M. Stout, certain members of Mr. Stout’s immediate family including former Company director Shawna Stout, and certain entities controlled by Mr. Stout and his family (collectively, the “Stout Parties”), pursuant to which the Company agreed to purchase an aggregate of 2,625,451 shares of Common Stock and warrants and options exercisable to purchase an aggregate of 1,209,088 shares of Common Stock from the Stout Parties for aggregate consideration of $9,166,844.

The transactions contemplated by the Pequot Purchase Agreement and the Stout Repurchase Agreement were consummated simultaneously at closing (the “Closing”) which occurred on December 9, 2003. The Closing occurred immediately following the approval by the Company’s stockholders of the Pequot Transaction. Because the consummation of the transactions under each of the Pequot Purchase Agreement and the Stout Repurchase Agreement were conditioned upon each other, they constituted a single transaction to be voted upon by the stockholders. The transactions contemplated by the Pequot Purchase Agreement and the Stout Repurchase Agreement are collectively referred to herein as the “Pequot Transaction.” The Series A Preferred Stock, the Convertible Notes and the related warrants sold and issued to Pequot in December 2003 are collectively referred to as the “Pequot Instruments”.

The proceeds from the sale of the Convertible Notes were used to repurchase the securities from the Stout Parties and pay expenses incurred by the Company in connection with the Pequot Transaction. Subsequent to year end, the Company used a portion of the proceeds from the sale of the Series A Preferred Stock to pay in full the outstanding promissory note issued to the Department of Justice under a Settlement Agreement between the former Analex Corporation and the Department of Justice. Remaining proceeds from the sale of the Series A Preferred Stock will be used to finance all or a portion of the cost of future acquisitions by the Company.

Discussed below is a summary of the key terms of the Pequot Instruments. Accounting treatment of these instruments is discussed in further detail in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. A substantial portion of the face value of these instruments is allocated to the Company’s equity account on its balance sheet, subject to annual accretion over the next four years.

Series A Preferred Stock

The Series A Preferred Stock bears a cumulative annual dividend of 6%, payable quarterly in cash or, if the Company’s available cash for operations does not meet specified levels or such payment would result in an event

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of default under the Company’s senior credit facility, in additional shares of Series A Preferred Stock. Due to non-cash accounting accretion related to the Series A Preferred Stock, the annual charges taken on the Company’s statement of operations are expected to be substantially larger than the 6% dividend. Holders of Series A Preferred Stock are entitled to vote together with all other classes and series of voting stock of the Company on all actions to be taken by the stockholders of the Company. In addition, as long as 50% of the Series A Preferred Stock originally issued remains outstanding, the Company may not take numerous actions without obtaining the written consent of the holders of a majority of the Series A Preferred Stock.

Upon any liquidation, dissolution or winding up of the Company, holders of the Series A Preferred Stock are entitled to receive, out of the Company’s assets available for shareholder distributions and prior to distributions to junior securities (including the Common Stock), an amount equal to the Series A Purchase Price plus any accrued but unpaid dividends thereon.

The Series A Preferred Stock is convertible into Common Stock at any time at the election of its holders, initially at a ratio of one share of Common Stock for every share of Series A Preferred Stock. The Series A Preferred Stock will automatically convert into Common Stock if, any time following 18 months after the Closing, the average closing price of the Common Stock over a 20 consecutive trading day period exceeds 2.5 times the conversion price then in effect ($2.23 as of December 31, 2003) for the Series A Preferred Stock. In addition, the Series A Preferred Stock held by holders that do not accept an offer by the Company to purchase the Series A Preferred Stock for at least 2.5 times the conversion price then in effect also will automatically convert into Common Stock. The Series A Preferred Stock will also automatically convert into Common Stock upon the agreement of the holders of a majority of the Series A Preferred Stock.

Holders of the Series A Preferred Stock may require the Company to redeem their shares in four equal quarterly installments any time on or after the fourth anniversary of the Closing at the Series A Purchase Price, as adjusted for stock splits, stock dividends and similar events, plus accrued but unpaid dividends.

Convertible Notes

The Convertible Notes mature on December 9, 2007. The Convertible Notes bear interest at an annual rate of 7%, payable quarterly in cash or, if the Company’s available cash for operations does not meet specified levels or such payment would result in an event of default under the Company’s senior credit facility, such interest will be accrued and added to the outstanding principal. Due to non-cash accretion related to the Convertible Notes, the annual charges taken on the Company’s statement of operations are expected to be substantially larger than the 7% interest charge.

Prior to the date which is 18 months after the Closing, the Convertible Notes may not be prepaid without the consent of the holders of a majority of the outstanding principal amount of the Convertible Notes. Any time following 18 months after the Closing, the Company, at its sole option, may prepay the Convertible Notes. Such prepayment will be made, at the option of the Convertible Note holders, either in cash in an amount equal to the outstanding principal plus the net present value of interest to maturity discounted at 7% per annum or by conversion of the principal into shares of Series A Preferred Stock and the payment of interest in cash or in shares of Series A Preferred Stock. Holders of the Convertible Notes may convert the outstanding principal and accrued interest on the Notes into Series A Preferred Stock at any time. The conversion price for the Convertible Notes is 135% of the Series A Purchase Price, subject to adjustment for stock splits, stock dividends and similar events. The Company may cause the automatic conversion of the Convertible Notes into Common Stock if, any time following 18 months after the Closing, the average closing price for the Common Stock over a 20 consecutive trading day period exceeds 2.5 times the Series A Purchase Price.

The Company’s obligations under the Convertible Notes are secured by a lien on substantially all of the assets of the Company and its subsidiaries and are guaranteed by the Company’s subsidiaries. Such obligations are subordinated to the rights of the Company’s present and future senior secured lenders.

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Warrants

The Warrants are exercisable at any time before the tenth anniversary of the Closing. The Preferred Warrants are exercisable to purchase one share of Common Stock for every five shares of Common Stock issued or issuable upon conversion of the Series A Preferred Stock. The Note Warrants are exercisable to purchase one share of Common Stock for every five shares of Common Stock issued or issuable upon conversion of the Convertible Notes. The initial exercise price of the Warrants is $3.28 representing a 47% premium to the Series A Purchase Price.

Item 6.    Selected Consolidated Financial Data

The following selected consolidated financial data as of December 31, 2003, 2002 and 2001, for the six months ended December 31, 2000 and 1999 and for the fiscal years ended June 30, 2000 and 1999 have been taken from the consolidated financial statements of the Company. This data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the consolidated financial statements and the related notes thereto included elsewhere in this Report.

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with the “Selected Consolidated Financial Data”, and the consolidated financial statements and related notes included elsewhere in this Form 10-K.

Overview

Analex specializes in developing intelligence, system engineering and bio-defense services in support of our nation’s security. All of our sales are generated using written contractual arrangements. The contracts require us to deliver technical services to the intelligence community, analyze and support defense systems, design, develop and test aerospace systems according to the specifications provided by our customers. In the case of ABS, the contracts require us to develop medial defenses and treatments for infectious agents such as anthrax and smallpox used in biological warfare and terrorism.

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Sales to U.S. federal government agencies and their prime contractors represented approximately 98% of our total revenues during the twelve months ended December 31, 2003 and 2002. The Department of Defense accounted for approximately 44% and 52% of our revenues in the twelve months ended December 31, 2003 and 2002, respectively. With the acquisition of the former Analex Corporation in November 2001, NASA became our largest customer, generating 53% and 45% of our revenues for the twelve months ended December 31, 2003 and 2002, respectively. Approximately 17% of our revenues and 72% of our operating income for fiscal year 2003 came from one prime contract with an agency within the Department of Defense. Approximately 30% of our revenues for fiscal year 2003 came from one prime contract with NASA, which has a potential nine-year and four-month contract term if all options are exercised. We expect that federal government contracts will continue to be the source of substantially all of our revenues for the foreseeable future.

In fiscal year 2003, a majority of our revenues were generated as a prime contractor to the federal government. We intend to focus on retaining and increasing the percentage of our business as prime contractor because it provides us with stronger client relationships. The following table shows our revenues as prime contractor and as subcontractor as a percentage of our total revenues for the following periods:

We have two reportable segments: (1) Analex, which is engaged in professional services related to information technology and systems engineering for the U.S. government, primarily NASA and the Department of Defense, and (2) Advanced Biosystems (ABS), which is engaged in biomedical research for medical defenses against toxic agents capable of being used as bioterrorist weapons, such as anthrax and smallpox. The Analex segment consists of two business groups: the Homeland Security Group and the Systems Engineering Group. The Homeland Security Group provides information technology services, systems integration, hardware and software engineering and independent quality assurance in support of the U.S. intelligence community and Department of Defense. The Systems Engineering Group provides engineering, information technology and program management support to NASA, the Department of Defense, and major aerospace contractors such as Lockheed Martin and Northrop Grumman. The following table shows our revenues from each of these segments as a percentage of our total revenues for the past three years:

Percent of Revenues by Segment

Our services are provided under three types of contracts: cost-plus-fees, time-and-materials, and fixed price contracts.

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The following table shows our revenues from each of these types of contracts as a percentage of our total revenues for the past three years:

Our objective is to grow sales organically and through acquisitions. In order to assist in accomplishing this objective, we have continued to increase our sales, general and administrative expenditures so as to increase our efforts in new business development and to provide the necessary infrastructure to support rapid growth from organic growth and from acquisitions.

Our ABS segment, focusing on biodefense research, is dependent upon continued funding of its research efforts from various governmental agencies. New sources of funding for ABS have been identified, however, these new contracts are at a substantially decreased level of effort and shorter duration than our previous contracts. At this time, we are uncertain of our ability to continue to obtain funding sources for ABS. Management is exploring options for divestiture of ABS.

In addition, one of our key strategies following the Pequot Transaction in December 2003 is to pursue growth through acquisitions. We plan to selectively acquire companies that complement and enhance our existing businesses, and are currently reviewing potential targets. We anticipate that we will need to obtain additional financing through sale of equity and debt securities to fund our acquisitions.

The Company’s backlog of orders, based on remaining contract value, believed to be firm as of December 31, 2003 was approximately $171 million, of which approximately $170.4 million was attributable to the Analex segment and $0.6 million was attributable to ABS. The portion of the total backlog expected to be realized within 2004 is $56 million. Funded backlog as of December 31, 2003 was approximately $19.3 million, of which approximately $0.6 million was attributable to the ABS segment. We expect to consume all of the funded backlog during 2004. Included in the backlog approximation are amounts from future years of government contracts under which the government has the right to exercise an option for the Company to perform services.

All of our U.S. Government contracts are subject to audit and various cost controls, and include standard provisions for termination for the convenience of the U.S. Government. Multi-year U.S. Government contracts and related orders are subject to cancellation if funds for contract performance for any subsequent year become unavailable.

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Critical Accounting Policies

The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, which require the Company to make estimates and assumptions. The Company’s significant accounting policies are described in Note 2 to the consolidated financial statements. The Company believes that the following critical accounting policies require significant management judgments, estimates and assumptions in the preparation of the consolidated financial statements.

Revenues

The Company’s contracts with the government are typically cost plus fee, time and materials, or fixed-price contracts. Revenues result from work performed on these contracts by the Company’s employees and from pass-through of costs for material and work performed by subcontractors. Revenues on cost-type contracts are recorded as contract-allowable costs are incurred and fees earned. Revenues for time and materials contracts are recorded on the basis of contract-allowable labor hours worked multiplied by the contract defined billing rates, plus the cost of materials used in performance on the contract. Profits on time and material contracts result from the difference between the cost of services performed and the contract defined billing rates for these services. Revenues on certain fixed-price service contracts are recorded each period based on a monthly amount for services provided. Revenues on other fixed-price contracts are recorded as costs are incurred, using the percentage-of-completion method of accounting. Profits on fixed-price contracts result from the difference between the incurred costs and the revenue earned. In the normal course of business, the Company may be party to claims and disputes resulting from modifications and change orders and other contract matters. Claims for additional contract compensation are recognized when realization is probable and estimable.

Long-Lived Assets

In assessing the recoverability of long-lived assets, including goodwill and other intangibles, the Company must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. If these estimates or the Company’s related assumptions change in the future, the Company may be required to record impairment charges not previously recorded for these assets.

Contingencies

From time to time, the Company is subject to proceedings, lawsuits and other claims related to labor and other matters. The Company is required to assess the likelihood of any adverse judgments or outcomes to these contingencies as well as potential ranges of probable losses and establish reserves accordingly. The amount of reserves required, if any, may change in future periods due to new developments in each matter or changes in approach to a matter such as a change in settlement strategy.

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Results of Operations

Comparison of Year Ended December 31, 2003 to

the Year Ended December 31, 2002

Revenues by Segment

Percentage Revenue Growth Year Over Year by Segment

Revenues for the year ended December 31, 2003 were approximately $66.1 million, an 11.5% increase from the $59.3 million in revenues for the year ended December 31, 2002. Revenues for the Homeland Security Group grew by $2.1 million, or 8%, while revenues for the Systems Engineering Group grew by $7.7 million, or 28%. This growth was offset by a decline in revenues in ABS of $3.0 million, or 44%. The net revenues growth of approximately $6.8 million is primarily due to a full year of revenues generated within the Systems Engineering Group by the NASA ELVIS contract that began July 1, 2002, which amounted to an $11.2 million increase in revenues from 2002 to 2003. This increase was offset by a decline of $4.0 million in the Systems Engineering Group due to reduced efforts on the MRDOC contract. Revenues for the Homeland Security Group increased by $2.1 million, or 8%, due to growth in services provided to the intelligence community and related agencies. In addition, revenues at ABS declined by $3.0 million due to a reduction in research activity as contracts were

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completed. New sources of funding for ABS have been identified, however, these new contracts are at a substantially decreased level of effort and shorter duration than our previous contracts. At this time, we are uncertain of our ability to continue to obtain funding sources for ABS. If we are unable to obtain funding, the result will be a continued decrease in revenues and operating profit. Increases or decreases in revenue are predominantly attributable to changes in the volume of services provided. As a government contractor, costs billed to the government are prescribed by the Federal Acquisition Regulation and include recovery of allowable costs such as labor, fringe benefits, overhead and general and administrative expenses plus a reasonable fee.

Costs of revenue for the year ended December 31, 2003 were approximately $55.8 million, an increase of approximately 11% from the prior year. The increase is primarily due to the costs of revenue within the Systems Engineering Group associated with the ELVIS contract, which were approximately $19.2 million for 2003 compared to $8.8 million for 2002. This was offset by a decline in the costs of revenue of ABS of $2.5 million due to reduced research staff and a reduction of $3.7 million due to declining efforts on the MRDOC contract. Costs of revenue as a percentage of revenues declined from 2002 to 2003. For the year ended December 31, 2003, costs of revenues were approximately 84% and approximately 85% for the year ended December 31, 2002.

Selling, general and administrative expenses totaled approximately $6.3 million, or 9.6% of revenues, for the year ended December 31, 2003, compared with approximately $5.0 million, or 8.5% of revenues, for the year ended December 31, 2002. The $1.3 million, or 25%, increase is due to various factors including the addition of senior business development staff members and increased general and administrative expenses such as corporate insurance, legal fees, shareholder communications expenses, recruiting expenses, and board of director fees.

Operating Income by Segment

Percentage of Operating Income by Segment

Percentage Growth of Operating Income Year Over Year by Segment

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The Company had operating income of approximately $3.6 million for the year ended December 31, 2003, compared to operating income of approximately $3.5 million for the year ended December 31, 2002. This $0.06 million increase is primarily attributable to operating income within the Systems Engineering Group generated by the ELVIS contract, which approximated a $0.9 million increase over the prior year offset by a decrease of $0.4 million in operating income generated by the MRDOC contract. The Homeland Security Group experienced increased operating income of $0.3 million, or 11%, due to growth in services provided to the intelligence community and related agencies. In addition, ABS experienced a decrease in operating income of $0.5 million for 2003 compared to 2002 due to declining revenues and a one-time charge to write down intangible assets related to patent development. Also contributing to decreased operating income was increased selling, general and administrative expenses as noted above.

The Company had interest expense of $0.5 million for the year ended December 31, 2003, compared to interest expense of $1.0 million for the year ended December 31, 2002. The decrease is primarily due to the removal of guarantee fees associated with the Bank of America Credit Agreement. In addition, during 2003, the Company began accounting for the accretion of non-cash interest charges on its Convertible Notes issued under the Pequot Transaction. This accretion charge amounted to approximately $120,500. On a full year basis, the accretion component of interest expense is expected to be $1.9 million, assuming that the Convertible Notes are not converted to common shares.

The Company had amortization expense of $0.5 million for the year ended December 31, 2003, compared to amortization expense of $0.3 million for the year ended December 31, 2002. The increase in amortization expense is due to the non-compete agreement entered into with Jon Stout, which was entered into under the Pequot Transaction, and amortization expense related to intangible assets established with the award of the ELVIS contract.

Income tax expense for the year ended December 31, 2003 was $0.3 million compared with $0.1 million in the prior year. The Company’s effective tax rate did not change significantly from 2002 to 2003. In both years, the Company’s provision for income taxes was limited to state taxes and alternative minimum tax as the Company has been able to utilize its net operating loss carryforwards to offset taxable income. The Company consumed all net operating loss carryforwards during 2003 and will experience an increase in income tax expense in 2004.

Net income amounted to $2.7 million, or 4% of revenues, an increase of $390,000, or 17%, over the $2.4 million net income last year.

Dividends accrued with respect to 2003 amounted to $56,700, with an additional non-cash accretion charge of approximately $236,300. On a full year basis, the Company expects that cash dividends on the preferred stock will amount to $0.9 million and the non-cash accretion charge will amount to $3.8 million, assuming that the preferred stock is not converted to common shares. Net income available to common shareholders for 2003 amounted to $2.5 million after the dividends on and accretion of Series A Preferred Stock.

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Results of Operations

Comparison of Year Ended December 31, 2002 to

the Year Ended December 31, 2001

Revenues by Segment

Percentage Revenue Growth Year Over Year by Segment

Revenues for the year ended December 31, 2002 were approximately $59.3 million, a 170% increase from the $21.9 million in revenues for the year ended December 31, 2001. Revenues for the Homeland Security Group grew by $12.4 million, or 99%, while revenues for the Systems Engineering Group grew by $22.9 million, or 488%, and revenues for ABS grew by $2.1 million, a 43% increase. This increase is primarily due to revenues of approximately $27.0 million attributable to the business acquired from the former Analex Corporation in November 2001, coupled with revenues of approximately $9.0 million generated by the NASA ELVIS contract that began July 1, 2002. In addition, approximately $2.0 million of additional revenues were generated by ABS due to an increase in research under National Institutes of Health grants that were awarded in mid-2001 and early 2002. Increases or decreases in revenue are predominantly attributable to changes in the volume of services provided. As a government contractor, costs billed to the government are prescribed by the Federal Acquisition Regulation and include recovery of allowable costs such as labor, fringe benefits, overhead and general and administrative expenses plus a reasonable fee.

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Costs of revenue for the year ended December 31, 2002 were approximately $50.4 million, an increase of approximately 180% from the prior year. The increase is primarily due to the costs of revenue from the business acquired from the former Analex Corporation, which were approximately $23.0 million, coupled with costs associated with the ELVIS contract, which were approximately $8.0 million. In addition, approximately $1.0 million of additional costs were attributable to the increased research efforts at ABS. Costs of revenue as a percentage of revenues were approximately 85% for the year ended December 31, 2002 and 83% for the year ended December 31, 2001.

Selling, general and administrative expenses totaled approximately $5.0 million, or 8.5% of revenues, for the year ended December 31, 2002, compared with approximately $3.0 million, or 13.5% of revenues, for the year ended December 31, 2001. The $2.0 million, or 70% increase is primarily due to the addition of the former Analex Corporation’s costs associated with additional corporate and management staff required by the increased size of the Company. In addition, 2002 included the bid and proposal costs associated with winning the ELVIS contract, which were approximately $0.2 million. However, the increase in the Company’s revenues reduced selling, general and administrative expenses as a percentage of revenues, allowing the Company to increase spending on such items as new business development while improving operating profit margins.

Operating Income by Segment

Percentage of Operating Income by Segment

Percentage Growth of Operating Income Year Over Year by Segment

The Company had operating income of approximately $3.5 million for the year ended December 31, 2002, compared to operating income of approximately $0.4 million for the year ended December 31, 2001. This $3.1 million increase is primarily attributable to the profitability of the business acquired from the former Analex Corporation, which contributed approximately $2.0 million along with operating income generated by the ELVIS contract, which approximated $0.3 million. In addition, ABS operating income increased by approximately $0.2 million from 2001 to 2002, due to factors mentioned above.

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The Company had interest expense of $1.0 million for the year ended December 31, 2002, compared to interest expense of $0.2 million for the year ended December 31, 2001. The increase is primarily due to $0.8 million of interest on debt related to the acquisition of Analex Corporation, partially offset by a reduction in interest rates.

The Company had amortization expense of $0.3 million for the year ended December 31, 2002, compared to amortization expense of $0.4 million for the year ended December 31, 2001. The decrease in amortization expense is due to the adoption of SFAS 142, which ceased amortization of the goodwill resulting from a 1999 acquisition, which was offset by a full year of amortization of certain intangible assets related to the acquisition of Analex Corporation.

Income tax expense for the year ended December 31, 2002 was $0.1 million compared with $0.02 million in the prior year. The Company’s effective tax rate did not change significantly from 2001 to 2002. In both years, the Company’s provision for income taxes was limited to state taxes and alternative minimum tax as the Company has been able to utilize its net operating loss carryforwards to offset taxable income.

Net income amounted to $2.4 million, or 4% of revenues, a $2.2 million increase, an eleven-fold increase, over the $.2 million net income in 2001.

Accounting Treatment of The Pequot Transaction

In July 2003, we entered into a stock purchase agreement with Pequot with respect to the sale of our Series A Preferred Stock, Convertible Notes, Preferred Warrants and Note Warrants to the Pequot funds (the “Pequot Purchase Agreement”). On December 9, 2003, pursuant to the Pequot Purchase Agreement, the Company (i) issued and sold to Pequot an aggregate of 6,726,457 shares of the Company’s Series A Preferred Stock, par value $0.02 per share, (the “Series A Preferred Stock”) for a purchase price of $2.23 per share (the “Series A Purchase Price”), representing an aggregate consideration of approximately $15,000,000; (ii) issued and sold to the Pequot $10,000,000 in aggregate principal amount of the Company’s Secured Subordinated Convertible Promissory Notes (the “Convertible Notes”), the initial conversion price of which is $3.01 (representing 135% of the Series A Purchase Price); and (iii) issued to Pequot Preferred Warrants and Note Warrants, the initial exercise price of which is $3.28 (representing a 47% premium to the Series A Purchase Price). The Series A Preferred Stock, the Convertible Notes and the related warrants are collectively referred to hereinafter as the “Pequot Instruments.”

Series A Preferred Stock

The Company determined the initial carrying value of the Series A Preferred Stock by a two-step allocation process: first to the Preferred Warrants; and second, to an embedded conversion option. First the Company allocated the proceeds from the sale of the Series A Preferred Stock between the Series A Preferred Stock and the Preferred Warrants based on their relative fair values, which resulted in recording a discount on the Series A Preferred Stock. The value of the Preferred Warrants was determined using the Black-Scholes option pricing model. The Preferred Warrants were valued using the exercise price of $3.28 pursuant to the Pequot Purchase Agreement, the stock price as of the date of the date of the Closing of $4.04, a risk free rate of 2.80%, a volatility of 94.80%, and an expected life of four years. The risk free rate was equal to the four-year U.S. Treasury rate, as the period to the earliest redemption date of the Series A Preferred Stock is four years from December 9, 2003 (the “Closing date”). The volatility was based on an average of three measurements: the actual volatility in the Company’s stock price over the four years prior to the Closing date; the actual volatility in the Company’s stock price from the date of the acquisition of the former Analex Corporation, November 3, 2001 to the Closing date; and the actual volatility in the Company’s stock price from the listing date on the American Stock Exchange, March 4, 2003, to the Closing date.

Second, in accordance with EITF No. 00-27, Application of Issue No. 98-5 to Certain Convertible Instruments, after allocating the Series A Preferred Stock proceeds as described above, the Company calculated the embedded conversion price and used it to measure the intrinsic value of the embedded conversion option.

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This value was determined by calculating the number of shares of common stock into which the Series A Preferred Stock is convertible. The value allocated to the Series A Preferred Stock (after value was allocated to the Preferred Warrants) was then divided by the number of shares of common stock into which the Series A Preferred Stock is convertible. The result, $1.66, was then compared to the current fair value of $4.04, the Company’s stock price as of the Closing date. Since the conversion price was less than the fair value as of the Closing date, a beneficial conversion feature exists. The difference between the conversion price and the fair value as of the Closing date was multiplied by the total number of shares of common stock into which the Series A Preferred Stock is convertible. The result was a beneficial conversion of approximately $11.1 million. The amount of the beneficial conversion was recorded as additional paid in capital, resulting in a further discount on the Series A Preferred Stock. The table below details the accounting treatment of the Series A Preferred Stock.

Allocation of Series A Preferred Stock Proceeds

The discount on the Series A Preferred Stock created as a result of the allocation of fair value to the Preferred Warrants and the beneficial conversion charge will be accreted to the Series A Preferred Stock over a four-year period to the earliest redemption date. Issuance costs of $622,600 are recorded as an additional discount and will be accreted to the Series A Preferred Stock over the four-year period to the earliest redemption date.

The Series A Preferred Stock accrues dividends at 6% per annum payable quarterly in cash. Therefore, the Company will accrue the dividends payable each quarter, which is $225,000. Both the accretion of and dividends on the Series A Preferred Stock will reduce net income attributable to common shareholders. As a result, in the absence of acquisitions that might add substantial incremental earnings, the net income to common shareholders for 2004 is likely to be a loss.

The annual cash dividend payable on the Series A Preferred Stock amounts to $900,000 and the annual non-cash accretion amounts to $3,750,000. The total expected annual charge related to the Series A Preferred Stock, thus, amounts to $4,650,000. For 2003, since the Series A Preferred Stock was only issued on December 9, 2003, the total charge amounted to $236,300.

If the holders of the Series A Preferred Stock were to convert their shares into common shares, there would be a one-time, non-cash charge to write-off the unamortized discount related to the Series A Preferred Stock. The unamortized discount is comprised of the amount allocated to the fair value of the Preferred Warrants, the discount on the preferred stock due to beneficial conversion and issuance costs, less any accretion and amortization taken. At December 31, 2003, that amount was $14,763,700.

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Convertible Notes

The Company determined the initial carrying value of the Convertible Notes by a two-step allocation process: first to the Note Warrants; and, second, to an embedded conversion option.

First, the Company allocated the proceeds from the sale of the Convertible Notes between the Convertible Notes and the Note Warrants based on their relative fair values, which resulted in the recording of a discount on the Convertible Notes. The value of the Note Warrants was determined using the Black-Scholes option pricing model. The Note Warrants were valued using the exercise price of $3.28 as stated in the agreement, the stock price as of the date of the date of the Closing of $4.04, a risk free rate of 2.80%, a volatility of 94.80%, and an expected life of four years. The risk free rate was equal to the four-year U.S. Treasury rate, as the Convertible Notes mature in four years. The volatility was based on an average of three measurements: the actual volatility in the Company’s stock price over the four years prior to the Closing date; the actual volatility in the Company’s stock price from the date of the acquisition of the former Analex Corporation, November 3, 2001 to the Closing date; and the actual volatility in the Company’s stock price from the listing date on the American Stock Exchange, March 4, 2003, to the Closing date.

Second, after allocating the Convertible Notes proceeds, the Company calculated the embedded conversion price and used it to measure the intrinsic value of the embedded conversion option. This was determined by calculating the number of shares of common stock into which the Convertible Notes were convertible. The value allocated to the Convertible Notes (after value was allocated to the Warrants) was then divided by the number of shares of common stock into which the Convertible Debt is convertible. The result, $1.66, was then compared to the current fair value of $4.04, the Company’s stock price as of the Closing date. Since the conversion price was less than the current fair value, a beneficial conversion feature exists. The difference between the conversion price and the current fair value was multiplied by the total number of shares of common stock into which the Convertible Notes are convertible. The result was a beneficial conversion of approximately $5.3 million. The amount of the beneficial conversion was recorded as additional paid in capital, resulting in a further discount on the Convertible Notes. The table below details the accounting treatment of the Convertible Notes.

The discount on the Convertible Notes created as a result of the allocation of fair value to the Note Warrants will be amortized to interest expense over the four-year period to the maturity of the Convertible Notes using the effective yield method. Issuance costs of $415,000 are recorded as deferred financings costs and will be amortized to interest expense over the four-year period to the maturity of the Convertible Notes.

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The Convertible Notes accrue interest at 7% per annum, which is payable quarterly in cash.

The annual interest payable on the Convertible Notes amounts to $700,000 and the annual non-cash interest and accretion charges amount to $1,911,900. The total expected annual charge related to the Convertible Notes, thus, amounts to $2,611,900. For 2003, since the Convertible Notes were only issued on December 9, 2003, the total charge amounted to $113,900.

If the holders of the Convertible Notes were to convert the notes into common shares, there would be a one-time, non-cash charge to write-off the unamortized discount related to the Convertible Notes. The unamortized discount is comprised of the amount allocated to the fair value of the Note Warrants, the discount on the convertible notes due to beneficial conversion and issuance costs, less any accretion and amortization taken. At December 31, 2003, that amount was $7,527,100.

Stout Repurchase Agreement

The Stout Repurchase Agreement provided for the Stout Non-Competition Agreement between the Company and Jon Stout. The $600,000 consideration to be paid under the Stout Non-Competition Agreement was recognized as a liability as of the Closing date and will be paid quarterly over the three-year life of the agreement.

Also, included in the Stout Repurchase Agreement was the repurchase of certain warrants and stock options. The Company estimated the fair value of the warrants as of the Closing date using a fair value option pricing model and determined that the amount the Stout Parties are receiving to purchase warrants is less than the fair value as of the Closing date. Therefore, the Company did not incur any additional compensation expense related to the purchase of the warrants. However, as the Company also purchased certain stock options held by the Stout Parties, the Company incurred compensation expense as a result of the purchase of stock options from the Stout Parties of $95,800, which is equal to the amount paid to purchase the stock options.

Impact of Pequot Transaction on Shareholder’s Equity

The following table shows the changes in Shareholder’s Equity due to the Pequot Transaction.

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Capital Resources and Liquidity

The working capital at December 31, 2003 increased by approximately $16.4 million from December 31, 2002, primarily due to cash provided by the Pequot Transaction along with the Company’s continued profitability. Proceeds of the Pequot Transaction were $25 million, of which $9.4 million was used to fund the activities pursuant to the Stout Repurchase Agreement. The working capital at December 31, 2002 increased by approximately $1.4 million from December 31, 2001, primarily due to increased profitability generated by the Company’s purchase of the former Analex Corporation and the award of the ELVIS contract.

In the twelve months ended December 31, 2003, the Company recorded net income of $2.7 million and EBITDA (as defined below) of $4.1 million, after add-backs for interest of $0.5 million, taxes of $0.3 million, depreciation of $0.1 million and amortization of $0.5 million. In the twelve months ended December 31, 2002, the Company recorded net income of $2.4 million and EBITDA of $3.9 million, after add-backs for interest of $1.0 million, taxes of $0.1 million, depreciation of $0.1 million and amortization of $0.3 million.

While we expect that the proceeds from the Pequot Transaction, the borrowing availability under our credit facility, together with cash provided by operations will be sufficient to fund our working capital needs for normal operations for at least the next twelve months, we anticipate that we will need to obtain additional financing through sale of equity or debt securities to fund our acquisitions.

In the absence of acquisitions, given the substantial charges associated with the Convertible Notes and the Series A Preferred Stock, it is possible that the Company might need to renegotiate its covenants under its bank line of credit during 2004 in order the remain in compliance with the terms of its credit facility. The Company’s expectation, however, is that acquisitions will be consummated and therefore, we do not consider it a material risk.

Our ability to obtain additional financing will depend on a number of factors, including market conditions, our operating performance and investor interests. These factors may make the timing, amount, terms and conditions of any financing unattractive. If additional financing is raised through sale of our common stock, it may result in significant dilution to our existing stockholders.

In December 2003, we sold to Pequot $10 million in aggregate principal amount of Convertible Notes. The Convertible Notes bear interest at an annual rate of 7%. They are secured by a lien on substantially all of the assets of the Company and its subsidiaries and are guaranteed by the Company’s subsidiaries. The Convertible Notes will mature on December 9, 2007. The indebtedness incurred with respect to the Convertible Notes is material in relation to our ability to service the debt from our operating cash flow and our ability to repay the debt in full at maturity. There can be no assurance that sufficient funds will be available to meet our operating needs, or to repay the Convertible Notes or to redeem the Series A Preferred Stock in accordance with their respective terms. Our ability to repay the Convertible Notes at maturity may also be adversely affected by the right of the holders of the Series A Preferred Stock to contemporaneously require the Company to redeem their shares of Series A Preferred Stock.

EBITDA consists of earnings before interest expense, interest and other income, income taxes, depreciation and amortization. EBITDA does not represent funds available for the Company’s discretionary use and is not intended to represent cash flow from operations. EBITDA should also not be construed as a substitute for operating income or a better measure of liquidity than cash flow from operating activities, which are determined in accordance with accounting principles generally accepted in the U.S. EBITDA excludes components that are significant in understanding and assessing the Company’s results of operations and cash flows. EBITDA is considered to be relevant and useful information, which is often reported and widely used by analysts, investors and other interested parties. Accordingly, the Company is disclosing this information to permit a more comprehensive analysis of the Company’s operating performance, as an additional meaningful measure of performance and liquidity, and to provide additional information with respect to the Company’s ability to meet future debt service, capital expenditure and working capital requirements.

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Net cash provided by operating activities was $2.7 million during the twelve months ended December 31, 2003, compared to $1.3 million for the prior year. The increased net cash provided by operating activities resulted from a decreased accounts receivable balance due to a reduction in days outstanding, offset by a decrease in accounts payables due to the timing of certain trade payments. Net cash provided by operating activities was $1.3 million during the twelve months ended December 31, 2002, compared to a net use of cash from operating activities of $0.4 million for the prior year. The increased net cash provided by operating activities resulted primarily from increased net income in 2002 compared to 2001.

Net cash used in investing activities during the twelve months ended December 31, 2003 was $1.0 million. Net cash used in investing activities in this period was primarily related to the Jon Stout Non-Competition Agreement totaling $0.6 million as an intangible asset related to the Pequot Transaction. In addition, fixed asset purchases of $0.4 million were made. Net cash used in investing activities during the twelve months ended December 31, 2002 was $0.2 million. Net cash used in investing activities in this period was for fixed asset purchases and legal fees associated with the filing of patent applications for ABS.

Net cash provided by financing activities in 2003 amounted to $12.3 million compared to net cash used by financing activities in 2002 of $0.8 million. This increase is primarily attributable to the Pequot Transaction. For 2003, the Company generated a net increase in cash and equivalents of $12.9 million compared to a net increase of $0.2 million in 2002. Net cash used by financing activities in 2002 amounted to $0.8 million compared to net cash provided by financing activities in 2001 of $6.5 million. In 2002 the Company paid down net bank debt of $1.0 million compared to net bank borrowings of $2.3 million and net proceeds from the issuance of common stock of $3.9 million in 2001 associated with the acquisition of the former Analex Corporation. For 2002, the Company generated a net increase in cash and equivalents of $0.2 million compared to a net decrease of $0.2 million in 2001.

Interest expense of $519,800 consists of cash and non-cash expense. Cash interest expense was $405,900 and non-cash interest expense which is generated by amortization of the Convertible Debt discount was $113,900.

Effective November 2001, the Company acquired Analex, a professional services and program management firm whose principal customers are NASA and the U.S. intelligence community, for approximately $13,898,000. The purchase price was satisfied with cash payments of $6,510,000, 3,520,339 shares of Common Stock valued at $4,664,000, the issuance of promissory notes of $1,773,000, non-compete arrangements for which consideration was $892,000, and the satisfaction of other certain liabilities of Analex.

The fair value of the assets acquired and liabilities assumed approximated their book value of $6,092,400 and $5,730,000, respectively. The Company incurred financial, legal and accounting costs associated with the Analex purchase of approximately $570,000. During 2002, certain contingencies were finalized including the settlement of the Analex closing balance sheet requirements and the award of the ELVIS contract.

On November 2, 2001, to finance the acquisition of Analex, the Company entered into a Credit Agreement with Bank of America, which provides the Company with a $4,000,000 Revolving Credit Facility through November 2, 2006 and a five-year $3,500,000 Term Loan. The Revolving Credit Facility has an annual renewal occurring April 30 of each year. The principal amount of the Term Loan is amortized in sixty equal monthly payments of $58,333. In August 2002, the credit limit on the Revolving Credit Facility was increased to $8,000,000. At December 31, 2003, there was no outstanding balance on the Revolving Credit Facility while the outstanding balance on the Term Loan was $2.0 million. Interest on each of the facilities is at the LIBOR Rate plus an applicable margin. The Credit Facility and Term Loan are secured by the accounts receivable and other assets of the Company.

Upon the Closing of the Pequot Transaction, Bank of America and the Company entered into a modification of the Credit Agreement amending financial covenant requirements. The Company must maintain a Total Funded Debt to EBITDA ratio of no greater than 4.0 to 1.0 from Closing until September 30, 2004, and no greater than

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3.5 to 1.0 October 1, 2004 and thereafter. In addition, the Company must maintain a Fixed Charge Coverage Ratio of no less than 1.05 to 1.0 from Closing until December 31, 2003, of no less than 1.1 to 1.0 from January 1, 2004 until September 30, 2004, of no less than 1.2 to 1.0 October 1, 2004 and thereafter. As of December 31, 2003, the Company was in compliance with each of these covenants. The credit agreement also restricts our ability to dispose of properties, incur additional indebtedness, pay dividends (except to holders of the Series A Preferred Stock pursuant to the certificate of designation) or other distributions, create liens on assets, enter into sale and leaseback transactions, make investments, loans or advances, engage in mergers or consolidations, and engage in transactions with affiliates.

Our ability to comply with the financial covenants in our credit agreement will be affected by our financial performance, our ability to complete an acquisition as well as events beyond our control, including prevailing economic, financial and industry conditions. The breach of any of the covenants in our credit agreements could result in a default, which would permit Bank of America to declare all amounts borrowed thereunder, together with accrued and unpaid interest, to be due and payable. If we are unable to repay our indebtedness, Bank of America could proceed against our accounts receivable and other assets which are the collateral securing the indebtedness. In the absence of acquisitions, given the substantial charges associated with the Convertible Notes and the Series A Preferred Stock, it is possible that the Company might need to renegotiate its covenants under its bank line of credit during 2004 in order to remain in compliance with the terms of its credit facility. The Company’s expectation, however, is that acquisitions will be consummated and therefore, we do not consider it a material risk.

In October 2001, the Company issued 3,961,060 shares of Common Stock for aggregate consideration of approximately $3,868,000 through a private placement pursuant to Regulation D under the Securities Act of 1933 consisting of (i) the Company’s Common Stock at a price of $1.14 per share to purchasers who purchased less than $500,000 worth thereof or (ii) units consisting of the Company’s Common Stock and warrants to purchase 0.2061 shares of the Company’s Common Stock at an exercise price of $0.02 per share for each share purchased at a price of $1.14 per unit for purchasers who purchased $500,000 or more of the Company’s equity. Two of such purchasers are former directors or affiliates of a former director. All of these proceeds were directed to financing the acquisition of Analex.

On November 2, 2001, the Company issued promissory notes to certain Analex sellers totaling approximately $773,000 with a five-year term, bearing interest at 6%. As of December 31, 2003, the outstanding balance on the promissory notes was $490,900. The Company also entered into non-competition agreements with these sellers for total payments of $540,000 over a three-year period. In addition, the Company entered into non-competition agreements with former employees totaling $352,000, on a discounted basis, payable over various periods. As of December 31, 2003, the outstanding balance on the non-competition agreements was $534,700.

With its purchase of Analex, the Company assumed a note payable to the Department of Justice (“DOJ”). The agreement provides for quarterly payments of $80,000 consisting of principal and interest at 7% through February 2006, with a final payment due in May 2006. As of December 31, 2003, the outstanding balance on the DOJ note payable was $538,100. This liability arose as a settlement between the former Analex Corporation and the Department of Justice in 1994 due to false claims made by the former Analex Corporation to the U.S. government during the years 1982 through 1986. The terms of the Pequot Transaction required using proceeds of the transaction to repay the DOJ note in full. An audit was requested by the government prior to acceptance of the note repayment. The government completed their audit subsequent to year end and the repayment was accepted.

On May 29, 2002, Analex announced that it had been awarded a $164 million Expendable Launch Vehicle Integrated Support (“ELVIS”) prime contract by NASA. In conjunction with this award the Company issued promissory notes to certain Analex sellers totaling $1,000,000 with a three-year term, bearing interest at prime plus 1%. At December 31, 2003, the outstanding balance on these notes was $583,300.

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Contractual Obligations

The Company has contractual obligations to pay long-term debt, leases and other non-cancelable obligations. The following table aggregates the amounts of these obligations as of December 31, 2003:

Payments for long-term debt do not include interest payments. Lease commitments could require higher payments than shown in the table due to escalation provisions that are tied to various measures of inflation. The lease commitments reflect only existing commitments and do not include future requirements necessary to replace existing leases. In addition to the contractual obligations included above, the Company also has routine purchase order commitments for materials and supplies that are entered into in the normal course of business and are not in excess of current requirements. Pursuant to the November 2, 2001 acquisition of Analex, the Company issued 3,572,143 shares of the Company’s Common Stock to the shareholders representing all of the outstanding equity of Analex (the “Sellers”). Of the 3,572,143 shares, 857,143 shares are subject to a provision by which the Company guarantees for a five-year period to reimburse the Sellers the difference between the price at which they sell such shares and a guaranteed sales price ranging from $1.60 to $2.20 per share, if such shares are sold within such period and if certain other conditions are satisfied. As of December 31, 2003, the maximum that the Company would be required to pay under the terms of the guarantee was $1,628,571. This amount is calculated by multiplying the number of shares subject to the guarantee by their associated guaranteed purchase price, assuming the Company’s common stock has no fair market value. As of December 31, 2003, there were 214,286 shares with an associated purchase price guarantee of $1.60 per share, 214,286 shares with an associated guaranteed purchase price of $1.80 per share, 214,286 shares with an associated guaranteed purchase price of $2.00 per share, and 214,285 shares with an associated guaranteed purchase price of $2.20 per share. As the fair market value of the Company’s common stock was in excess of the guaranteed share prices as of December 31, 2003, no amounts were accrued under the guarantee.

Recently Issued Accounting Standards

In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 143, “Accounting for Asset Retirement Obligations” (“SFAS No. 143”). SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002. The adoption of SFAS No. 143 did not have a material impact, either positive or negative, on future results of operations or financial condition.

In November 2002, the Emerging Issues Task Force (EITF) reached a consensus on Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. EITF Issue No. 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. The provisions of EITF Issue No. 00-21 will apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The adoption of EITF Issue No. 00-21 did not have a material impact on the financial position or results of operations.

In November 2002, the Financial Accounting Standards Board (FASB) issued Financial Accounting Standards Board Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements for

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Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN 45 requires that upon issuance of certain guarantees, the guarantor must recognize a liability for the fair value of the obligation it assumes under that guarantee. FIN 45’s provisions for initial recognition and measurement are required to be applied on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure provisions of FIN 45 are effective for financial statements of interim or annual periods that end after December 15, 2002. As the Company has not entered into or modified any guarantees subsequent to December 31, 2002, the implementation of FIN 45 did not impact the Company’s financial position or results of operations. The Company has updated its disclosures to comply with the requirements in FIN 45.

In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150 (“SFAS 150”), “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS 150 did not have a significant impact on the Company’s financial position or results of operations.

Forward-looking Statements

Certain matters contained in this discussion and analysis concerning our operations, cash flows, financial position, economic performance, and financial condition, including in particular, the likelihood of our success in growing our business through acquisitions or otherwise, the realization of sales from backlog, and the sufficiency of capital to meet our working capital needs, include forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause our actual results, level of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. In some cases, you can identify these statements by forward-looking words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “should,” “will,” “would” or similar words. We believe that it is important to communicate our future expectations to our investors. However, there are events in the future that we may not be able to predict accurately or control. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, and as a result of many factors, including but not limited to the following:

Readers of this report should not place undue reliance on these forward-looking statements, which apply only as of the date of the filing of this Form 10-K. We assume no obligation to update any such forward-looking statements.

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Item 7A.    Quantitative and Qualitative Disclosure about Market Risk

Market Risks and Hedging Activities

The Company’s outstanding bank debt bears interest at variable interest rates tied to LIBOR. The use of variable-rate debt to finance operations and capital improvements exposes the Company to variability in interest payments due to changes in interest rates. The Company uses an interest rate swap to reduce the interest rate exposure on these variable rate obligations. The Company does not hold any derivatives for trading or speculative purposes.

The Company’s $3.5 million term loan facility from Bank of America carries interest comprised of two components: floating-rate LIBOR plus a credit performance margin. The Company has entered into an interest-rate swap agreement with Bank of America whereby its obligation to pay floating-rate LIBOR was swapped into a fixed rate obligation at 4.25% beginning in January 2002. The Company continues to have the obligation to pay the credit performance margin in addition to its swapped 4.25% payment obligation. The total effective interest rate on the swapped portion of the Term Loan amounted to 7.25% at December 31, 2003.

Interest rate hedges that are designated as cash flow hedges hedge the future cash outflows on debt. Interest rate swaps that convert variable payments to fixed payments, interest rate caps, floors, collars and forwards are cash flow hedges. The unrealized gains/losses in the fair value of these hedges are reported on the balance sheet and included in other long-term liabilities with a corresponding adjustment to either accumulated other comprehensive income/(loss) or in earnings depending on the hedging relationship. If the hedging transaction is a cash flow hedge, then the offsetting gains/losses are reported in accumulated other comprehensive income/(loss). Over time, the unrealized gains/losses held in accumulated other comprehensive income/(loss) will be recognized in earnings consistent with when the hedged items are recognized in earnings.

Under the interest rate swap, the Company pays the bank at a fixed rate and receives variable interest at a rate approximating the variable rate of the Company’s debt, thereby creating the equivalent of a fixed rate obligation. The following table summarizes the original financial terms of the Company’s interest rate swap:

The notional value of the interest rate swap declines as the amount of the Term Loan is paid down. At December 31, 2003, the notional value of the swap was $1,750,000. Increases in prevailing interest rates could increase the Company’s interest payment obligations relating to variable rate debt. For example, a 100 basis points increase in interest rates would increase annual interest expense by $3,000, based on debt levels at December 31, 2003.

Item 8.    Financial Statements and Supplementary Data

The information required by this item is set forth under Item 15(a), which information is incorporated herein by reference.

Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A.    Controls and Procedures

The Company has established and maintains disclosure controls and procedures that are designed to ensure that material information required to be disclosed by the Company in the reports that it files under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods

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specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer, the Company carried out an evaluation of the effectiveness of the design and operation of disclosure controls and procedures as of the end of the period covered in this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective, at the reasonable assurance level, as of December 31, 2003, in timely alerting them to material information relating to the Company required to be included in the Company’s periodic SEC filings.

Our management, including our Chief Executive Officer and Chief Financial Officer, also supervised and participated in an evaluation of any changes in internal controls over financial reporting that occurred during the last fiscal quarter. That evaluation did not identify any significant changes to the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART III

Item 10.    Directors and Executive Officers of the Registrant

The names of our current seven directors and certain other information about them are set forth below:

Sterling E. Phillips, Jr., was appointed the Company’s President and Chief Executive Officer and a director in January 2001. In December 2003, Mr. Phillips was elected Chairman of the Board. He ceased to be the President of the Company in February 2004. Prior to joining the Company, Mr. Phillips held senior management positions with Federal Data Corporation in the Science and Engineering and Corporate Marketing Groups from 1996 to 2001. From 1993 to 1996, he was the Chief Operating Officer of TRI-COR Industries, Inc. an information technology company, and from 1992 to 1993 served as President of Business Development for Computer Sciences Corporation. Prior to these positions, he held senior national and international marketing positions with International Business Machines Corporation for twenty-four years.

Peter C. Belford, Sr., who was appointed to the Board in November 2001, has more than 30 years experience in building and operating companies in the Federal Government sector. Mr. Belford was President of Analex Corporation from 2000 until it was acquired by the Company in November 2001. From 1997 through 2000, he held the position of Senior Vice President for Federal Data Corporation, a government information technology services provider, and from 1985 to 1997 served as President and Chief Operating Officer of NYMA, Inc., a federal contractor. Prior to these positions, Mr. Belford served thirteen years as Vice President with Computer Sciences Corporation, an information technology services provider.

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C. Thomas Faulders, III was appointed to the Board in February 2004. Mr. Faulders has been the Chairman and Chief Executive Officer of LCC International Inc. since June 1999. He has directed the financial turnaround and subsequent growth of the company. He is responsible for the strategic direction, day-to-day operations, sales and financial matters of the company. Prior to joining LCC, Mr. Faulders served as Executive Vice President and Chief Financial Officer of BDM International, as well as President of its Integrated Supply Chain division. From March 1992 through March of 1995, Mr. Faulders was the Chief Financial Officer of COMSAT Corporation. Prior to COMSAT, he served in a variety of areas for MCI – including Senior Vice President of Business Marketing, Vice President of Large Account Sales and Treasurer. Prior to his six years with MCI, Mr. Faulders served in key positions with Satellite Business Systems.

Lincoln D. Faurer was appointed to the Board in April 2003. Mr. Faurer has more than 15 years of experience in building and operating companies in the government contracting industry and was Director of the National Security Agency from 1981 to 1985. Since 1992, Mr. Faurer has been the President of LDF Inc., which provides consulting services on command, control, communications, computing and intelligence (C4I) matters. In addition to being a retired Air Force officer, Mr. Faurer has held senior positions with various intelligence organizations including Defense Intelligence Agency, NATO Military Committee, HQS U.S. European Command and HQS U.S. Southern Command. Mr. Faurer serves as a director of ALPHATECH, Inc. and TSI TelSys Corp. and also serves on the advisory board of ManTech Aegis Research Corporation, a subsidiary of ManTech International Corp.

Martin M. Hale, Jr. was appointed to the Board in December 2003. Mr. Hale is a General Partner of Pequot Ventures, the venture capital/private equity arm of Pequot Capital Management, Inc. Mr. Hale joined Pequot in February 1997 and focuses on investments in defense, wireless hardware, software and services for the Pequot venture and private equity funds. Prior to joining Pequot, Mr. Hale was an associate at Geocapital Partners, L.L.C., an early stage venture capital firm. Prior to Geocapital, he served as a senior financial analyst in the information technology mergers and acquisitions group at Broadview International L.L.C. Mr. Hale is a director of several private companies.

Gerald A. Poch was appointed to the Board in December 2003. Mr. Poch has served as Managing Director of Pequot Capital Management, Inc., Pequot’s investment manager/advisor, since January 2000. He is also a General Partner of Pequot Ventures. From August 1998 through January 2000, he was a principal of Pequot Capital Management and one of the leaders of Pequot’s venture capital team. From August 1996 to June 1998 he was the Chairman, President and Chief Executive Officer of GE Capital Information Technology Solutions, Inc., a technology solutions provider. Prior to that, he was a founder, and served as Co-Chairman and Co-President, of AmeriData Technologies, Inc., a value-added reseller and systems integrator of hardware and software systems. Mr. Poch is also a director of Andrew Corporation and BriteSmile, Inc., both public companies. In addition, Mr. Poch is a director of a number of private companies.

Daniel R. Young was appointed to the Board in April 2003. In 1976, Mr. Young joined Federal Data Corporation as Executive Vice President. He was appointed President in 1985 and became Chief Executive Officer in 1995. From 1995 until Federal Data was acquired by Northrop-Grumman in 2000, he was Vice Chairman and Chief Executive Officer. Mr. Young is a graduate of the University of Texas where he earned a B.S. degree in engineering and a J.D. from the University of Texas School of Law. He also served as an officer in the U.S. Navy. Mr. Young serves as a director of GTSI Corporation and Halifax Corporation, and also serves on the advisory boards of several public and private companies.

The Board has affirmatively determined that Messrs. Faurer, Faulders and Young are “independent” under the standards and rules of the American Stock Exchange and the Securities and Exchange Commission. Beginning in 2004, at least one executive session per year will be conducted by our independent directors, without the presence of management.

As of February 2004, Messrs. Faurer, Faulders and Young are members of our Audit Committee and Messrs. Faurer, Faulders and Poch are members of our Compensation Committee.

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The Audit Committee is comprised entirely of independent non-employee directors. The Board has affirmatively determined that all members of the Audit Committee are “financially sophisticated” under the definition contained in the American Stock Exchange rules, and that Mr. Faulders has all the necessary attributes to be an “audit committee financial expert” under the SEC rules. The Audit Committee has a written charter which is annually reviewed and updated if necessary. Based on its current charter, the Audit Committee’s responsibilities include, among other things:

The Compensation Committee evaluates management’s recommendations and makes its own recommendations to the Board concerning the compensation of the Company’s executive officers. It is also responsible for the formulation of the Company’s executive compensation policy and the research, analysis and subsequent recommendation regarding the establishment and administration of the Company’s stock option and stock purchase plans.

Compensation of Directors

As of January 1, 2003, directors receive a quarterly cash fee of $3,000 for their services. In addition, directors receive $1,000 per Board meeting attended, and $500 for each committee meeting attended (unless such meeting is combined with a full Board meeting). Under the Company’s 2002 Stock Option Plan, each non-employee director is entitled to be granted an option to purchase 5,000 shares of Common Stock on the date of such director’s initial appointment to the Board and, while such director serves on the Board, he or she is entitled to be granted an option to purchase 5,000 shares of Common Stock on the date of the first Board meeting held in each new fiscal year. Directors who are employees do not receive any additional compensation for their service as directors. Directors are reimbursed for out-of-pocket expenses associated with their attendance at Board meetings.

Executive Officers

The following table contains information as to the executive officers of the Company, who are not also directors of the Company:

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Michael Stolarik was appointed President and Chief Operating Officer of the Company in February 2004. Most recently, Mr. Stolarik was Managing Partner of the INSIGHT Consulting Group, LLC, which focused on introducing commercial businesses to federal government contracting. Prior to INSIGHT, he was Executive Vice President, Technical Resources Sector, of Titan Corporation. Mr. Stolarik joined Titan from GRC International, Inc. where he was President and CEO of this AT&T subsidiary. During this period, he was also a member of the AT&T Government Markets Senior Leadership Team. From 1995 through 1997, he was President and CEO of Space Applications Corporation. Prior to these positions, Mr. Stolarik spent 20 years at BDM International, Inc., where he rose to the position of Corporate Vice President.

Ronald B. Alexander was appointed Senior Vice President and Chief Financial Officer of the Company in November 2001 and Corporate Secretary in June 2002. From March 2000 until joining the Company, Mr. Alexander was the managing director of Alexander & Co., a financial and management consulting firm. From 1990 forward, Mr. Alexander has served as the Chief Financial Officer of public companies doing business in market segments involving computer manufacturing, IT technology and systems’ engineering, software development, internet infrastructure development, telecommunications equipment and services, and professional services. These firms include Commodore International, Ltd., a global computer manufacturing company, GRC International, a professional services government contractor and telecommunications equipment and systems developer, AppNet Systems, Inc., a provider of e-commerce solutions and TTC Inc., a telecommunications equipment and systems manufacturer.

Stephen C. Dolbey was appointed Vice President of the Company in January 2003. Mr. Dolbey is responsible for western operations, focusing on advanced software development and test using modern CASE tools and innovative testing concepts in the area of embedded real time systems. From March 1988 until November 2001, Mr. Dolbey was Vice President and Chief Information Officer of the former Analex Corporation acquired in November 2001. From 1964 to 1988, Mr. Dolbey held various management and engineering positions with Westinghouse Defense Systems.

Charles Floyd was appointed Vice President of the Company in January 2003. Mr. Floyd joined Analex in 2002 as Program Manager of the Company’s ELVIS contract with NASA. He has over 36 years of experience in vehicle systems and sub-systems, systems integration and test, and flight software development and testing. Twenty years were with NASA, and the 16 most recent have been in senior and program management positions in contracts supporting NASA. From 1994 to 1999, Mr. Floyd was with Raytheon, from 1991 to 1994 with Northrop-Grumman, and from 1985 to 1991 with Lockheed Martin.

Heinz Wimmer was appointed Vice President of the Company in January 2003. Mr. Wimmer is responsible for mid-west operations focusing on independent verification and validation activity with the National Reconnaissance Office for their Atlas expendable launch vehicle missions. From February 2000 until November 2001, Mr. Wimmer was Vice President of the former Analex Corporation acquired in 2001. Prior to joining Analex, Mr. Wimmer concluded a 34 year career with NASA at the Glenn Research Center including 25 years experience with expendable launch vehicles.

Julie Holt was appointed Vice President of the Company in January 2003 and also serves as President of the Company’s Advanced Biosystems, Inc. (ABS) subsidiary. Prior to joining the Company, from 1998 to 2002, Ms. Holt was Program Manager at Battelle Memorial Institute, where she coordinated consequence management programs with federal, state, and local emergency management agencies and hazardous material first responders. In addition, Ms. Holt is a former Foreign Service Officer with the U.S. Department of State.

Compliance with Section 16(a) of the Securities Exchange Act of 1934

Section 16(a) of the Exchange Act requires the Company’s officers, directors and persons who own more than 10% of a registered class of he Company’s equity securities to file repots of ownership and changes in ownership with the Securities and Exchange Commission. Officers, directors and greater than 10% stockholders are required by the regulations to furnish the Company with copies of the Section 16(a) forms which they file.

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To the Company’s knowledge, based solely on a review of the copies of such reports furnished to the Company, and written representations that no other reports were required during the year ended December 31, 2003, all Section 16(a) filing requirements applicable to the Company’s officers, directors and greater than ten percent beneficial owners were complied with in a timely manner, except that Mr. Charles Floyd, Mr. Gerald Young, Ms. Lese Ann Kodger, former directors, Messrs. Gilluly and Stout, and former executive officer, George Tonn have failed to timely file their Form 4s.

Code of Conduct and Ethics

The Board has adopted a Code of Conduct and Ethics that is applicable to all officers (including chief executive officer, chief operating officer, chief financial officer, principal accounting officer, controller and any person performing similar functions), directors and employees of the Company. The Code is attached as Exhibit 14 with this Annual Report on Form 10-K.

In support of its Code of Conduct and Ethics and to facilitate reporting of any actual or suspected misconduct, the Company maintains a toll-free Ethics Hotline at 1-866-274-3865, which is available 24 hours a day, 7 days a week. The Hotline’s function is to receive information relating to possible non-compliance with the Code of Conduct and Ethics, as well as concerns or complaints regarding the Company’s accounting, or internal controls, or auditing matters. Both the Code of Conduct and Ethics and the Hotline information will be posted on the Company’s web site at www.analex.com. Any amendment to, or waiver from, a provision of this Code of Conduct and Ethics will be promptly disclosed on the Company’s web site at www.analex.com. The Company will also provide copies of its Code of Conduct and Ethics without charge to any stockholder who makes written request to our Chief Financial Officer at our headquarters address.

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Item 11.    Executive Compensation

Summary Compensation Table

The following table sets forth information concerning all compensation paid by the Company during the year ended December 31, 2003 to its Chief Executive Officer, and each of the five other most highly paid executive officers (the “Named Executive Officers”):

Summary Compensation Table

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Stock Option Grants

The Company grants options to its executive officers under its 2002 Stock Option Plan and, in some cases, pursuant to stock option agreements outside any of its equity incentive plans. The following table provides details regarding all stock options granted to the Named Executive Officers during the year ended December 31, 2003:

Option Grants in Last Fiscal Year