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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the quarterly period ended March 31, 2004

For the period from                      to                     

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

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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act)

Yes ¨    No x

As of May 10, 2004, 13,416,789 shares of the common stock of the registrant were outstanding.

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ANALEX CORPORATION

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ANALEX CORPORATION

CONSOLIDATED BALANCE SHEETS

MARCH 31, 2004 AND DECEMBER 31, 2003

See Notes to Consolidated Financial Statements

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ANALEX CORPORATION

CONSOLIDATED BALANCE SHEETS

MARCH 31, 2004 AND DECEMBER 31, 2003

See Notes to Consolidated Financial Statements

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ANALEX CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003

See Notes to Consolidated Financial Statements

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ANALEX CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003

See Notes to Consolidated Financial Statements

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ANALEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Analex Corporation (the “Company”) provides information technology and systems engineering services to the United States government through two groups: the Homeland Security Group, supporting intelligence systems; and the Systems Engineering Group, supporting the development of space-based systems, the operation of terrestrial assets, and the launch of unmanned rockets by NASA under the Company’s Expendable Launch Vehicle Integrated Support (“ELVIS”) contract. In addition, its Advanced Biosystems Inc. subsidiary (“ABS”) is engaged in biomedical research for broad spectrum defenses against toxic agents capable of being used as bioterrorist weapons, such as anthrax and smallpox (See note 11).

The Homeland Security Group has accounted for approximately 42% of the Company’s 2004 year-to-date revenue. This group provides engineering, scientific and information technology services and solutions to assist in the development, implementation and support of intelligence systems. Analex provides these services to the intelligence community, including the National Reconnaissance Office, the National Security Agency, the Department of Defense, and major aerospace contractors, such as Lockheed Martin and Northrop Grumman.

The Systems Engineering Group has accounted for approximately 55% of the Company’s 2004 year-to-date revenues. This group provides engineering and information technology services and solutions to assist in the development of space-based systems and support operations of terrestrial assets. Capabilities include expendable launch vehicle engineering, space systems development, and ground support for space operations.

ABS has accounted for approximately 3% of the Company’s 2004 year-to-date revenues. ABS pursues research in the areas of defenses against, and treatments for, biological warfare agents and other infectious diseases. ABS also provides consulting services regarding biological weapons, threats, and defensive strategies.

The interim consolidated financial statements for the Company are unaudited, but in the opinion of management, reflect all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of results for such periods. The results of operations for any interim period are not

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necessarily indicative of results for the full year. The balance sheet at December 31, 2003 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. These unaudited consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003 (“2003 Form 10-K”) filed with the Securities and Exchange Commission on March 30, 2004.

The Company pursues acquisitions to complement its Analex segment. In accordance with the provisions of Statement of Financial Accounting Standards No. 141, Business Combinations, the direct costs associated with these acquisitions are accounted for as additional purchase consideration. Costs associated with transactions for which we discontinue our pursuit are expensed in the period in which the transaction is abandoned.

On November 2, 2001, to finance the acquisition of Analex, the Company entered into a Credit Agreement (“Credit Agreement”) with Bank of America, N.A. The Credit Agreement originally provided the Company with a $4,000,000 revolving credit facility (the “Credit Facility”) through November 2, 2006 and a five-year $3,500,000 term loan (“Term Loan”). The Credit Facility has an annual renewal occurring April 30 of each year. To fund additional working capital requirements generated by the award of the ELVIS contract, the Company negotiated an increase of the Credit Facility to $8,000,000 in August 2002. The principal amount of the Term Loan is amortized in sixty equal monthly payments of $58,333. Interest on each of the facilities is at the LIBOR Rate plus an applicable margin as specified in a pricing grid. As of March 31, 2004, the Credit Facility and Term Loan balances were zero and $1,925,000, respectively. The interest rate at March 31, 2004 was 3.59% for the Credit Facility and 4.10% for the Term Loan.

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 including the total funded debt to EBITDA ratio and the fixed charge coverage ratio. As of March 31, 2004, the Company was in compliance with these covenants. The Credit Agreement also restricts the Company’s ability to dispose of properties, incur additional indebtedness, pay dividends (except to holders of the Series A Preferred Stock) 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. The Credit Facility and

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Term Loan are secured by the accounts receivable and other assets of the Company.

The Company’s $3.5 million Term Loan from Bank of America carries interest comprised of two components: floating-rate LIBOR plus a credit performance margin. In January 2002, the Company entered into an interest-rate swap agreement with Bank of America whereby its obligation to pay floating-rate LIBOR on debt, now totaling $1,600,000,was swapped into a fixed rate obligation at 4.25%. 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 March 31, 2004.

The Company’s comprehensive loss available to common shareholders for the three months ended March 31, 2004 was $1,163,700 which includes the net loss available to common shareholders of $1,174,600 and other comprehensive income of $10,900 arising from the interest rate swap. The Company’s comprehensive income for the three months ended March 31, 2003 was $742,600, which includes net income of $735,400 and other comprehensive income of $7,200 arising from the interest rate swap.

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

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Shares issuable upon the exercise of stock options or warrants or upon conversion of debt have been excluded from the computation to the extent that their inclusion would be anti-dilutive.

The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in APB Opinion No. 25 and related interpretations. Accordingly, compensation expense for stock options is measured as the excess, if any, of the fair market value of the Company’s stock at the date of the grant over the exercise price of the related option. The following table is a computation of the proforma earnings had the Company accounted for stock option grants based on their fair value as determined under SFAS No. 123:

Almost all of the Company’s revenues are derived either directly from the U.S. government as prime contractor or indirectly as a subcontractor to other government prime contractors. Approximately 55% of the Company’s 2004 year-to-date revenues have been derived, directly and indirectly, from NASA. Approximately 43% of the Company’s 2004 year-to-date

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revenues have been derived from various Department of Defense agencies.

On December 9, 2003, the Company consummated the transaction contemplated by the Subordinated Note and Series A Convertible Preferred Stock Purchase Agreement (the “Pequot Purchase Agreement”) by and between the Company and 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”). The Company:

In addition, on December 9, 2003, the Company consummated a Securities Repurchase Agreement (the “Stout Repurchase Agreement”) with the 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 purchased 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.

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The transactions contemplated by the Pequot Purchase Agreement and the Stout Repurchase Agreement are collectively referred to as the “Pequot Transaction.”

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. 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.

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 of default under the Company’s senior credit facility, in additional shares of Series A Preferred Stock. 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 June 9, 2005, 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 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

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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 December 9, 2007, at the Series A Purchase Price, as adjusted for stock splits, stock dividends and similar events, plus accrued but unpaid dividends.

Upon issuance of the Series A Preferred Stock, the Company allocated relative fair value of $3,857,600 to the preferred warrants and recorded a beneficial conversion charge of $11,142,400. These amounts are being recorded as accretion of Series A Preferred Stock over the period to the earliest redemption date which is December 9, 2007. For the three months ended March 31, 2004, the Company recorded $937,500 of accretion related to those charges.

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.

The Convertible Notes may not be prepaid prior to June 9, 2005 without the consent of the holders of a majority of the outstanding principal amount of the Convertible Notes. Any subsequent 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 $3.01 per share. The Company may cause the automatic conversion of the Convertible Notes into Common Stock if, any time following June 9, 2005, the average closing price for the Common Stock over a 20 consecutive trading day period exceeds $5.58 per share.

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.

Upon issuance of the Convertible Notes, the Company allocated fair value of $1,905,300

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to the note warrants and recorded a beneficial conversion charge of $5,327,200. The discount created by these charges is being amortized to interest expense over the life of the Convertible Notes. For the three months ended March 31, 2004, the Company recognized $452,000 of amortization of that discount. The unamortized discount as of March 31, 2004 was $4,761,300.

Warrants

The Warrants are exercisable at any time before December 9, 2013. 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.

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 March 31, 2004, the maximum amount payable under the terms of the guaranteed shares was $3,428,600. As the fair market value of the Company’s common stock was in excess of the guaranteed share prices as of March 31, 2004, no amounts were accrued under the guarantee.

The Company has two reportable segments, Analex and ABS. The Analex segment consists of the Homeland Security Group and the Systems Engineering Group. Each of the operating segments provides engineering, information technology, medical research or technical services to federal government agencies or major defense contractors. The reportable segments are distinguished by their individual clients, prior experience and technical skills.

Operating results are measured at the net income level for each segment. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies contained in Note 2 to the 2003 Form 10-K. The Company’s corporate amounts consist primarily of certain activities and assets not attributable to the reportable segments.

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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. 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.

Subsequent to March 31, 2004 the Company’s Board of Directors decided to sell or otherwise divest its ABS subsidiary no later than December 31, 2004. ABS will therefore be treated as discontinued operations for accounting purposes beginning the fiscal quarter ended June 30, 2004.

On May 6, 2004 the Company entered into an agreement to acquire Beta Analytics, Inc. (BAI), a security and intelligence support services firm, primarily providing services to federal government agencies and organizations. Consideration for the transaction will consist of approximately $26 million in cash and approximately 1.8 million shares of Analex’s unregistered common stock. The agreement contains customary closing conditions, including regulatory approval.

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Also on May 6, 2004, the Company entered into a binding commitment letter with Pequot under which Pequot will provide Analex with $6.5 million of investment capital in the form of convertible debt. The convertible debt will be converted into new Series B Preferred Stock upon stockholders’ approval. A significant portion of the proceeds will be used as consideration for the acquisition of BAI.

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

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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.

Sales to U.S. federal government agencies and their prime contractors represented approximately 99.5% of our total net sales during the three months ended March 31, 2004 and 98% during the three months ended March 31, 2003. The Department of Defense accounted for approximately 43% and 45% of our revenues in the three months ended March 31, 2004 and 2003, respectively. With the acquisition of the former Analex Corporation in November 2001, NASA became our largest customer, generating 55% and 52% of our revenues for the three months ended March 31, 2004 and 2003, respectively. Approximately 20% of our revenue and 156% of our operating income for the three months ended March 31, 2004 came from one prime contract with an agency within the Department of Defense. Approximately 32% of our revenue for the three months ended March 31, 2004 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 revenue for the foreseeable future.

In the three months ended March 31, 2004, 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

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integration, hardware and software engineering and independent quality assurance in support of the U.S. intelligence community and Department of Defense. We expect our Homeland Security Group to benefit from the country’s shifting priorities and new emphasis on enhanced intelligence capabilities. 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.

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

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

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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. It is also our objective to increase our operating profit margins.

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. Subsequent to March 31, 2004, the Board of Directors decided to sell or otherwise divest of ABS no later than December 31, 2004. ABS will therefore be treated as discontinued operations for accounting purposes beginning the fiscal quarter ended June 30, 2004.

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. Subsequent to March 31, 2004, the Company entered into an agreement to acquire Beta Analytics, Inc. (BAI) and entered into a binding commitment letter with Pequot under which Pequot will provide the Company with $6.5 million of investment capital in the form of convertible debt.

The Company’s backlog of orders, based on remaining contract value, believed to be firm as of March 31, 2004 was approximately $176 million, of which approximately $175.5 million was attributable to the Analex segment and $0.5 million was attributable to ABS. The portion of the total backlog expected to be realized within 2004 is $68 million. Funded backlog as of March 31, 2004 was approximately $33 million, of which approximately $0.1 million was attributable to the ABS segment. 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

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U.S. government contracts and related orders are subject to cancellation if funds for contract performance for any subsequent year become unavailable.

COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2004

TO THE THREE MONTHS ENDED MARCH 31, 2003

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REVENUES AND PERCENT OF REVENUES BY SEGMENT

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PERCENTAGE REVENUE GROWTH QUARTER OVER QUARTER BY SEGMENT

Revenues for the three months ended March 31, 2004 were $17.1 million, an increase of $0.5 million from the $16.6 million in revenues for the three months ended March 31, 2003. This increase is primarily due to increases in revenues in the Homeland Security Group and the Systems Engineering Group, offset by a decrease in revenues in ABS. Revenues of the Homeland Security Group increased 8.0%, or approximately $0.5 million, due to growth in services provided to the intelligence community and related agencies. Revenues of the Systems Engineering Group increased 9.5%, or approximately $0.8 million primarily due to an approximate $0.5 million increase in revenues under the ELVIS contract, as compared to the first quarter of 2003. In addition, under the Glenn Engineering Support Services contract with NASA, revenues increased approximately $0.5 million as compared to the same period of 2003 due to additional tasking from the customer. These increases were offset by a reduction in revenues of $0.3 million due to the planned step-down in activities under the Microgravity Research Development and Operations contract with NASA related to designing and building experiments to be run on the International Space Station. In addition, ABS experienced a $0.9 million, or 65%, decline in revenues.

Costs of revenue for the quarter ended March 31, 2004 were $14.5 million, an increase of $0.6 million from the same period of the prior year. The increase is due to the costs of revenue generated by growth in the Homeland Security and Systems Engineering Group. Costs of revenue as a percentage of revenues were approximately 84% for the quarter ended March 31, 2004 and 83% for the same period of 2003.

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Selling, general and administrative expenses totaled $1.9 million for the quarter ended March 31, 2004, compared with $1.5 for the same period of the prior year. This 25% increase is due to investments made to expand the Company’s infrastructure and management team to accommodate an expected increase in the scope of business operations from acquisitions later this year.

Operating income for the three months ended March 31, 2004 was $0.6 million, compared to operating income of $1.1 million for the period ended March 31, 2003. This $0.5 million decrease is primarily attributable to the increase in selling, general and administrative expenses discussed in the previous paragraph.

Interest expense totaled $0.7 million for the quarter ended March 31, 2004, compared with $0.1 million for the same period in the prior year. The $0.6 million increase is due to cash and non-cash interest expense related to the convertible debt issued as part of the Pequot investment. Cash interest payments on the convertible debt were $0.2 million and non-cash amortization recorded as interest expense was $0.5 million.

Income tax benefit for the quarter ended March 31, 2004 was $0.08 million, compared with $0.3 million expense for the same period in the prior year. The Company received a tax benefit due to the net loss incurred during the quarter ended March 31, 2004. The Company will experience an increase in the effective tax rate in 2004. This increase is due to the recognition of certain amortization costs related to the Pequot Transaction which are not deductible for tax purposes, in addition to the Company consuming all net operating loss carryforwards during 2003.

In the quarter ended March 31, 2004, the Company recorded a net loss of approximately $0.01 million and EBITDA, as defined below, of $0.8 million, after add-backs for interest of $0.7 million, depreciation of $0.05 million, amortization of $0.15 million, and income tax benefit of $0.08 million. EBITDA as a percent of revenue was 4.6% for the quarter ended March 31, 2004, compared to 7.6% for the quarter ended March 31, 2003.

EBITDA, or earnings before interest, taxes, depreciation and amortization, is considered a non-GAAP financial measure under applicable SEC rules. Generally, a non-GAAP financial measure is a numerical measure of a company’s performance, financial position or cash flows that either excludes or includes amounts that are not normally excluded or included in the most directly comparable measure calculated and presented in accordance with generally accepted accounting principles.

EBITDA is a widely used measure of operating performance. It is presented as supplemental information that management of the Company believes is useful to investors to evaluate the Company’s results because it excludes certain items that are not directly

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related to the Company’s core operating performance. EBITDA is calculated by adding back net interest expense, income taxes, depreciation and amortization to net income. EBITDA should not be considered as a substitute either for net income, as an indicator of the Company’s operating performance, or for cash flow, as measures of the Company’s liquidity. In addition, because EBITDA is not calculated identically by all companies, the Company’s presentation of EBITDA may not be comparable to other similarly titled measures of other companies.

CAPITAL RESOURCES AND LIQUIDITY

While the Company experienced decreased net income on a quarterly comparison to 2003, the majority of the decrease relates to amortization charges associated with the Pequot investment. Borrowing availability under the Company’s Credit Facility continues to be sufficient to fund normal operations.

Working capital at March 31, 2004 decreased by $0.2 million from December 31, 2003 primarily due to an increase in trade accounts payable and other current liabilities.

Net cash used in operating activities during the three months ended March 31, 2004 and 2003 was $1.3 million.

Net cash used in investing activities during the three months ended March 31, 2004 and 2003 was $0.05 million. Net cash used in investing activities during both periods was primarily used for fixed asset purchases.

On November 2, 2001, to finance the acquisition of Analex, the Company entered into the Credit Agreement which originally provided the Company with a $4,000,000 Credit Facility through November 2, 2006 and a five-year $3,500,000 Term Loan. The Credit Facility has an annual renewal occurring April 30 of each year. To fund additional working capital requirements generated by the award of the ELVIS contract, the Company negotiated an increase of the Credit Facility to $8,000,000 in August 2002. The principal amount of the Term Loan is amortized in sixty equal monthly payments of $58,333. Interest on each of the facilities is at the LIBOR Rate plus an applicable margin as specified in a pricing grid. As of March 31, 2004, the Credit Facility and the Term Loan balances were zero and $1,925,000, respectively. The interest rate at March 31, 2004 was 3.59% for the Credit Facility and 4.10% for the Term Loan.

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 including the total funded debt to EBITDA ratio and the fixed charge coverage ratio. As of March 31, 2004, the Company was in compliance with these covenants. The credit agreement also restricts our

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ability to dispose of properties, incur additional indebtedness, pay dividends (except to holders of the Series A Preferred Stock) 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. The Credit Facility and Term Loan are secured by the accounts receivable and other assets of the Company.

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. As of March 31, 2004, the maximum amount payable under the terms of the guaranteed shares was $3,428,600. As the fair market value of the Company’s common stock was in excess of the guaranteed share prices as of March 31, 2004, no amounts were accrued under the guarantee.

Pequot Transaction

On December 9, 2003, the Company consummated the transaction contemplated by the Subordinated Note and Series A Convertible Preferred Stock Purchase Agreement (the “Pequot Purchase Agreement”) by and between the Company and 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”). The Company:

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In addition, on December 9, 2003, the Company consummated a Securities Repurchase Agreement (the “Stout Repurchase Agreement”) with the 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 purchased 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 are collectively referred to as the “Pequot Transaction.”

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. 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.

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 of default under the Company’s senior credit facility, in additional shares of Series A Preferred Stock. 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

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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 June 9, 2005, 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 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 December 9, 2007, 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.

The Convertible Notes may not be prepaid prior to June 9, 2005 without the consent of the holders of a majority of the outstanding principal amount of the Convertible Notes. Any subsequent 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 $3.01 per share. The Company may cause the automatic conversion of the Convertible Notes into Common Stock if, any time following June 9, 2005, the average closing price

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for the Common Stock over a 20 consecutive trading day period exceeds $5.58 per share.

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.

Warrants

The Warrants are exercisable at any time before December 9, 2013. 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.

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:

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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-Q. We assume no obligation to update any such forward-looking statements.

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 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

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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 March 31, 2004.

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 March 31, 2004 the notional value of the swap was $1,600,000. Increases in prevailing interest rates could increase the Company’s interest payment obligations relating to variable rate debt, which includes the portion of the term note not covered by the interest rate swap agreement and the Credit Facility. For example, a 100 basis points increase in interest rates would increase annual interest expense by $3,250, based on debt levels at March 31, 2004.

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 specified in the Securities and Exchange Commission’s rules and forms, and that such information is

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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 March 31, 2004, 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 II. Other Information

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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A current Report on Form 8-K, dated February 25, 2004 and filed with the Securities and Exchange Commission on March 1, 2004, reported that the Company had appointed a new member to the Board of Directors and the Audit Committee and reported its financial results for the fourth fiscal quarter and fiscal year ended December 31, 2003.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned there unto duly authorized.

Date: May 14, 2004

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