ANALEX CORP - 10-Q Quarterly Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2004

¨	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the period from to

Commission file number 0-5404

ANALEX CORPORATION

(Exact name of registrant as specified in its charter)

Delaware

71-0869563

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

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 November 12, 2004, 15,307,512 shares of the common stock of the registrant were outstanding.

ANALEX CORPORATION

TABLE OF CONTENTS


		Page No.
Part I Financial Information:

Item 1.	Financial Statements

	Consolidated Balance Sheets at September 30, 2004 (unaudited) and December 31, 2003	3

	Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2004 and 2003 (unaudited)	5

	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2004 and 2003 (unaudited)	6

	Notes to Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14

Item 3.	Quantitative and Qualitative Disclosure About Market Risk	22

Item 4.	Controls and Procedures	23

Part II Other Information:

Item 1. Legal Proceedings		23

Item 4. Submission of matters to a Vote of Security Holders		23

Item 6. Exhibits and Reports on Form 8-K		24

SIGNATURES		26

ANALEX CORPORATION

CONSOLIDATED BALANCE SHEETS

SEPTEMBER 30, 2004 AND DECEMBER 31, 2003


	September 30, 2004 (unaudited)		December 31, 2003
ASSETS
Current assets:
Cash and cash equivalents	$	2,204,600	$	14,177,500
Accounts receivable, net		17,671,800		10,068,100
Deferred tax asset		421,100		150,000
Prepaid expenses and other		1,343,700		483,600
Current assets of business held for sale		1,113,800		658,100

Total current assets		22,755,000		25,537,300

Fixed assets, net		1,587,100		546,100
Contract rights and other intangibles, net		6,862,500		1,753,000
Goodwill		41,614,100		15,281,600
Other assets		842,200		514,100

Total other assets		50,905,900		18,094,800

Total assets	$	73,660,900	$	43,632,100

See Notes to Consolidated Financial Statements

ANALEX CORPORATION

CONSOLIDATED BALANCE SHEETS

SEPTEMBER 30, 2004 AND DECEMBER 31, 2003


	September 30, 2004 (unaudited)			December 31, 2003
LIABILITIES, CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	2,019,600		$	736,200
Note payable - line of credit		6,565,600			—
Note payable - bank term note		—			700,000
Notes payable – other		953,900			1,487,400
Other current liabilities		9,794,500			5,387,500
Current liabilities of business held for sale		81,600			116,000

Total current liabilities		19,415,200			8,427,100

Note payable - bank term note		—			1,341,700
Notes payable – other		511,600			1,209,300
Deferred tax liability		2,325,300			—
Convertible note		4,237,500			2,881,400
Other		7,700			43,800

Total long-term liabilities		7,082,100			5,476,200

Total liabilities		26,497,300			13,903,300

Commitments and contingencies
Series A convertible preferred stock		3,049,800			236,300
Series B convertible preferred stock		12,000,000			—
Shareholders’ equity:
Common stock $.02 par; authorized 65,000,000 shares; issued and outstanding - September 30, 2004, 15,307,512 shares and December 31, 2003, 13,036,666 shares		306,200			260,700
Additional paid in capital		38,972,500			28,519,100
Warrants outstanding		6,803,300			5,762,900
Accumulated other comprehensive loss		(7,700	)		(43,800	)
Accumulated deficit		(13,960,500	)		(5,006,400	)

Total shareholders’ equity		32,113,800			29,492,500

Total liabilities, convertible preferred stock and shareholders’ equity	$	73,660,900		$	43,632,100

See Notes to Consolidated Financial Statements

ANALEX CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003


	Three Months Ended September 30						Nine Months Ended September 30
	2004			2003			2004			2003
	(unaudited)
Revenues	$	27,852,000		$	15,877,700		$	66,698,900		$	46,581,200
Operating costs and expenses:
Costs of revenue		22,477,600			13,428,700			53,886,200			39,160,200
Selling, general and administrative		2,791,100			1,374,800			7,147,600			4,125,300
Amortization of intangible assets		541,000			104,200			967,500			308,700

Total operating costs and expenses		25,809,700			14,907,700			62,001,300			43,594,200

Operating income		2,042,300			970,000			4,697,600			2,987,000

Other income (expense):
Interest income		4,500			200			49,900			1,200
Interest expense		(5,631,800	)		(83,200	)		(8,031,800	)		(279,800	)

Total other expense, net		(5,627,300	)		(83,000	)		(7,981,900	)		(278,600	)

Income (loss) from continuing operations before income taxes		(3,585,000	)		887,000			(3,284,300	)		2,708,400
Provision for income taxes		1,455,900			253,000			1,840,700			771,900

Income (loss) from continuing operations		(5,040,900	)		634,000			(5,125,000	)		1,936,500
Income (loss) from discontinued operations, net of income taxes		76,100			(53,000	)		(3,200	)		54,000
Gain (loss) on disposal of discontinued operations, net of income taxes		214,700			—			(307,100	)		—

Net income (loss)		(4,750,100	)		581,000			(5,435,300	)		1,990,500

Dividends on Series A convertible preferred stock		(225,000	)		—			(675,000	)		—
Dividends on Series B convertible preferred stock		(29,600	)		—			(29,600	)		—
Accretion of convertible preferred stock		(937,600	)		—			(2,814,200	)		—

Net income (loss) available to common shareholders	$	(5,942,300	)	$	581,000		$	(8,954,100	)	$	1,990,500

Net income (loss) available to common shareholders per share:
Continuing operations
Basic	$	(0.41	)	$	0.04		$	(0.61	)	$	0.13

Diluted	$	(0.41	)	$	0.03		$	(0.61	)	$	0.11

Discontinued operations
Basic	$	0.02		$	0.00		$	(0.02	)	$	0.00

Diluted	$	0.02		$	0.00		$	(0.02	)	$	0.00

Net income (loss) available to common shareholders:
Basic	$	(0.39	)	$	0.04		$	(0.63	)	$	0.13

Diluted	$	(0.39	)	$	0.03		$	(0.63	)	$	0.11

Weighted average number of shares:
Basic		15,295,773			14,971,765			14,134,314			14,750,464

Diluted		15,295,773			17,811,841			14,134,314			17,601,869

See Notes to Consolidated Financial Statements

ANALEX CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003


	September 30, 2004			September 30, 2003
Cash flows from operating activities:
Net income (loss)	$	(5,435,300	)	$	1,990,500

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation		196,700			68,800
Amortization of intangible assets		967,500			308,700
Amortization of deferred financing costs and debt discount		6,417,800			—
Loss on disposal of discontinued operations		307,100			—
Stock-based compensation expense		—			7,700
Deferred tax benefit		(271,100	)		—
Changes in operating assets and liabilities net of effect of business combination:
Accounts receivable, net		(2,669,200	)		(316,800	)
Prepaid expenses and other		(22,700	)		(24,700	)
Other assets		(385,300	)		(368,100	)
Accounts payable		1,015,800			(933,800	)
Other current liabilities		2,351,100			1,982,100

Net cash provided by operating activities		2,472,400			2,714,400

Cash flows from investing activities:
Property additions		(557,000	)		(325,900	)
Intangible additions		—			(25,700	)
Cash paid for BAI, net of cash acquired		(27,106,500	)		—

Net cash used in investing activities		(27,663,500	)		(351,600	)

Cash flows from financing activities:
Proceeds from borrowings on bank and other loans		8,254,700			1,829,000
Proceeds from stock options and warrants exercised		305,800			97,000
Proceeds from employee stock purchase plan		130,400			74,000
Proceeds from issuance of Senior Subordinated Notes and warrants		12,000,000			—
Payments on bank and other loans		(6,725,000	)		(4,896,300	)

Net cash provided by (used in) financing activities		13,965,900			(2,896,300	)

Net cash from discontinued operations		(747,700	)		324,200

Net decrease in cash and cash equivalents		(11,972,900	)		(191,100	)
Cash and cash equivalents at beginning of period		14,177,500			301,800

Cash and cash equivalents at end of period	$	2,204,600		$	110,700

See Notes to Consolidated Financial Statements

ANALEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. Business Groups

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 discontinued subsidiary, Advanced Biosystems, Inc. (“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. During the second quarter of 2004, the Company decided to divest ABS. Therefore, the results of operations of ABS are reported as discontinued operations for all periods presented herein (see note 12).

The Homeland Security Group accounted for approximately 53.5% of the Company’s 2004 year-to-date revenues. 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 Missile Defense Agency, the National Security Agency, the Department of Defense, and major aerospace contractors, such as Lockheed Martin and Northrop Grumman.

The Systems Engineering Group accounted for approximately 46.5% 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.

On May 28, 2004, Analex acquired Beta Analytics, Inc. (“BAI”). BAI is reported as a part of the Homeland Security Group. BAI provides information and technology asset protection solutions, intelligence analysis, and security services to federal government and Department of Defense agencies. BAI’s services cover a range of life cycle protection and physical security services specifically in the areas of information protection, physical security, intelligence threat assessment and analysis, technology protection, security management and security education and training.

2. Basis of Presentation

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 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 U.S. 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 business. 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.

3. Acquisition of Beta Analytics, Inc.

Under the terms of a Stock Purchase Agreement, dated May 6, 2004, Analex acquired all of the issued and outstanding stock of BAI for approximately (i) $27.7 million in cash, and (ii) 1,832,460 unregistered shares of Analex common stock. These shares were valued at $3.332 per share. Analex financed the cash portion of the consideration for the acquisition through its cash on hand, senior debt from Bank of America, N.A. and new debt in the initial principal amount of $12 million Senior Subordinated Notes (see note 9). The Stock Purchase Agreement contains an earn-out provision contingent upon award of a certain contract by a specific date. The Company does not believe the contract will be awarded within the required time limit and therefore has not included the earn-out in the computation of the purchase price.

Management believes that the acquisition of BAI will yield additional significant yearly revenues and operating income, enhanced attractiveness to institutional investors and an enhanced ability to compete effectively within the government services industry. Value associated with BAI’s intangible assets including contract rights and customer relationships was the primary factor contributing to a purchase price in excess of net assets acquired. These intangible assets have an estimated useful life of five years.

The acquisition of BAI, which was valued at approximately $35.3 million, was accounted for using the purchase method of accounting. Under the purchase method of accounting, the purchase price is allocated to the underlying tangible and intangible assets acquired and liabilities assumed based on their respective fair market values, with the excess recorded as goodwill. The financial statements as of September 30, 2004 reflect preliminary estimates of the fair market value for the purchased intangible assets. The allocation of the purchase price is summarized as follows:


Cash purchase price	$	27,726,500
Stock purchase price		6,102,100
Transaction fees		1,440,500

		35,269,100

Cash		2,060,500
Accounts receivable		4,934,500
Fixed assets		776,300
Intangible assets		6,078,000
Other assets		669,500
Accounts payable		(267,600	)
Line of credit		(1,700,000	)
Other current liabilities		(152,600	)
Other liabilities		(1,136,600	)
Deferred tax liability		(2,325,300	)

Goodwill	$	26,332,400

The unaudited pro forma financial information reflects the results of the Company for the three and nine months ended September 30, 2004, as if BAI had been acquired on January 1, 2004, and for the three and nine months ended September 30, 2003, as if BAI had been acquired on January 1, 2003. This combined result is not necessarily indicative of future operating results of the Company.


	Three Months Ended September 30, 2004			Nine Months Ended September 30, 2004			Three Months Ended September 30, 2003		Nine Months Ended September 30, 2003
Revenues	$	27,852,000		$	81,854,400		$	23,800,300	$	69,775,600
Income (loss) from continuing operations		(5,040,900	)		(4,312,000	)		1,045,700		2,897,600
Net income (loss)		(4,750,100	)		(4,622,200	)		992,700		2,897,600
Net loss available to common shareholders		(5,942,300	)		(8,141,000	)		992,700		2,951,600
Basic earnings per share available to common shareholders	$	(0.39	)	$	(0.61	)	$	0.06	$	0.15
Diluted earnings per share available to common shareholders	$	(0.39	)	$	(0.61	)	$	0.06	$	0.15

4. Debt

The Company has a credit agreement with Bank of America, N.A. (“the Credit Facility”). On May 28, 2004, in connection with the acquisition of BAI, the Credit Facility was amended and restated to provide a $20,000,000 revolving credit facility, and the remaining outstanding balance on the Company’s term loan of $1,750,000 was consolidated into the Credit Facility. An uncommitted annual guidance facility not to exceed an additional $20,000,000 is available to fund future acquisitions upon application by the Company and approval by Bank of America. The Credit Facility has an annual renewal occurring April 30 of each year. Interest on the Credit Facility is at the LIBOR Rate plus an applicable margin as specified in a pricing grid. As of September 30, 2004, the Credit Facility outstanding balance was $6,565,600. The interest rate at September 30, 2004 was 4.33% for the Credit Facility.

The Credit Facility contains financial covenants setting forth maximum ratios for total funded debt to EBITDA and minimum ratios for fixed charge coverage. As of September 30, 2004, the Company was in compliance with these covenants. The Credit Facility also restricts the Company’s ability to dispose of properties other than ABS, incur additional indebtedness, pay dividends (except to holders of the Series A and Series B 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 is secured by the accounts receivable and other assets of the Company.

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 $1,300,000, 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 revolving credit facility amounted to 6.75% at September 30, 2004.

The Company’s comprehensive loss available to common shareholders for the three months ended September 30, 2004 was $5,932,300 which includes the net loss available to common shareholders of $5,942,300 and other comprehensive income of $10,000 arising from the interest rate swap. The Company’s comprehensive loss for the nine months ended September 30, 2004 was $8,918,000, which includes the net loss available to common shareholders of $8,954,100 and other comprehensive income of $36,100 arising from the interest rate swap.

The Company has outstanding a $10,000,000 Convertible Note issued on December 9, 2003 in connection with the Pequot Transaction (see note 8). In connection with the BAI acquisition and the Series B Financing, the Company issued $12,000,000 Senior Subordinated Notes on May 28, 2004 (see note 9).

5. Earnings Per Share

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


	Three Months Ended September 30						Nine Months Ended September 30
	2004			2003			2004			2003
Income (loss) from continuing operations		(5,040,900	)		634,000			(5,125,000	)		1,936,500
Dividends on Series A convertible preferred stock		(225,000	)		—			(675,000	)		—
Dividends on Series B convertible preferred stock		(29,600	)		—			(29,600	)		—
Accretion of convertible preferred stock		(937,600	)		—			(2,814,200	)		—

Net income (loss) available to common shareholders from continuing operations		(6,233,100	)		634,000			(8,643,800	)		1,936,500
Income (loss) from discontinued operations, net of income taxes		76,100			(53,000	)		(3,200	)		54,000
Gain (loss) on disposal of discontinued operations, net of income taxes		214,700			—			(307,100	)		—

Net income (loss) available to common shareholders	$	(5,942,300	)	$	581,000		$	(8,954,100	)	$	1,990,500

Weighted average shares outstanding		15,295,773			14,971,765			14,134,314			14,750,464
Warrants		—			1,590,539			—			1,703,315
Employee stock options		—			1,249,537			—			1,147,300

Diluted weighted average shares outstanding		15,295,773			17,811,841			14,134,314			17,601,079
Net income (loss) available to common shareholders per share:
Continuing operations:
Basic	$	(0.41	)	$	0.04		$	(0.61	)	$	0.13
Diluted	$	(0.41	)	$	0.03		$	(0.61	)	$	0.11

Discontinued operations:
Basic	$	0.02		$	0.0		$	(0.02	)	$	0.00
Diluted	$	0.02		$	0.0		$	(0.02	)	$	0.00

Net income (loss) available to common shareholders:
Basic	$	(0.39	)	$	0.04		$	(0.63	)	$	0.13
Diluted	$	(0.39	)	$	0.03		$	(0.63	)	$	0.11

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. As of September 30, 2004, shares issuable upon conversion of such instruments are as follows:


Instrument	Common Shares Issuable Upon Conversion	Exercise Price/ Conversion Price	Proceeds From Conversion
Series A Preferred Stock	6,726,457	$2.23	$	—
Series A Preferred Stock Warrants	664,341	$3.28		2,179,838
Series A Convertible Notes	3,321,707	$3.01		—
Series A Convertible Notes Warrants	1,345,291	$3.28		4,412,554
Series B Preferred Stock	4,285,714	$2.80		—
Series B Senior Subordinated Notes Warrants	857,143	$4.32		3,702,858
Warrants issued under 2000 financing agreement	32,500	$0.75		24,375
Options issued under Incentive Stock Option Plans	1,202,225	$ 0.50 - $1.37		1,559,388
Options issued under Incentive Stock Option Plans	1,342,545	$ 1.60 - $2.49		3,061,677
Options issued under Incentive Stock Option Plans	1,087,500	$ 2.54 - $4.04		3,847,675

Total	20,866,086		$	18,787,565

6. Stock-based compensation

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 pro forma earnings had the Company accounted for stock option grants based on their fair value as determined under SFAS No. 123:


	Three Months Ended September 30					Nine Months Ended September 30
	2004			2003		2004			2003
Net income (loss) available to common shareholders, as reported	$	(5,942,300	)	$	581,000	$	(8,954,100	)	$	1,990,600
Add: Total stock-based employee compensation expense as reported under intrinsic value method (APB No. 25) for all awards, net of related tax effects		—			—		—			6,900
Deduct: Total stock-based compensation expense determined under fair value based method (SFAS No. 123) for all awards, net of related tax effects		39,400			67,200		754,700			689,600

Pro forma net income (loss) available to common shareholders	$	(5,981,700	)	$	513,800	$	(9,708,800	)	$	1,307,900
Earnings per share:
Basic as reported	$	(0.39	)	$	0.04	$	(0.63	)	$	0.13
Diluted as reported		(0.39	)		0.03		(0.63	)		0.11
Basic proforma		(0.39	)		0.03		(0.69	)		0.09
Diluted proforma		(0.39	)		0.03		(0.69	)		0.07

7. Concentration of Business

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 52% of the Company’s 2004 year-to-date revenues have been derived from various Department of Defense agencies. Approximately 46% of the Company’s 2004 year-to-date revenues have been derived, directly or indirectly, from NASA.

8. Pequot Transaction

On December 9, 2003, the Company consummated the transactions (the “Pequot Transaction”) contemplated by the Subordinated Note and Series A Convertible Preferred Stock 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:

•

issued to Pequot 6,726,457 shares of the Company’s Series A Convertible Preferred Stock (the “Series A Preferred Stock”) for a purchase price of $2.23 per share of Series A Preferred Stock, representing an aggregate consideration of approximately $15,000,000;

•

in connection with the issuance and sale of the Series A Preferred Stock, issued warrants (the “Preferred Warrants”) to purchase 1,345,291 shares of the Company’s common stock, par value $.02 per share, at an exercise price of $3.28 per share at a ratio of one share of common stock for every five shares of common stock issued or issuable upon conversion of the Series A Preferred Stock;

•

issued to Pequot $10,000,000 in aggregate principal amount of the Company’s Secured Subordinated Convertible Promissory Notes (the “Convertible Notes”); and

•

in connection with the issuance and sale of the Convertible Notes, issued warrants (the “Note Warrants,” and together with the Preferred Warrants, the “Warrants”) to purchase 664,341 shares of common stock, at an exercise price of $3.28, at a ratio of one share of common stock for every five shares of common stock issued or issuable upon conversion of the Convertible Notes.

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 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.

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 of $2.23 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.

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 and nine months ended September 30, 2004, the Company recorded $0.9 million and $2.8 million, respectively, of accretion related to these charges. The unamortized discount as of September 30, 2004 was $11.95 million.

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 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’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 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 and nine months ended September 30, 2004, the Company recognized $0.5 million and $1.4 million, respectively, of amortization of that discount. The unamortized discount as of September 30, 2004 was $5.8 million.

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.

9. Series B Financing

Pursuant to a Stock Purchase Agreement among the Company and General Electric Pension Trust (“GEPT”), New York Life Capital Partners II, L.P. (“NYL”), Pequot Private Equity Fund III, L.P., and Pequot Offshore Private Equity Partners III, L.P., (collectively, “Pequot,” together with GEPT and NYL, collectively, the “Investors”), dated May 28, 2004 (the “Series B Purchase Agreement”), the Company:

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issued and sold to the Investors convertible secured senior subordinated promissory notes (“Senior Subordinated Notes”) in the aggregate principal amount of $12,000,000 at the time of the closing of the acquisition of BAI on May 28, 2004 (the “First Closing Date”). The Senior Subordinated Notes were converted into an aggregate of 3,428,571 shares of the Company’s newly designated Series B convertible preferred stock (“Series B Preferred Stock”) upon stockholders approval at the Company’s annual meeting of stockholders; and

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in connection with the issuance and sale of the Senior Subordinated Notes, issued Common Stock Warrants (“Common Stock Warrants”) to purchase 857,143 shares of common stock, at an exercise price of $4.32, at a ratio of one share of common stock for every five shares of common stock issued or issuable upon conversion of the Series B Preferred Stock issued or issuable upon conversion of the Senior Subordinated Notes.

A significant portion of the funds obtained on the First Closing Date was used to pay the cash portion of the consideration for the acquisition of BAI.

Subject to certain approval rights by the holders of the Series A Preferred Stock and the Series B Preferred Stock, the Series B Purchase Agreement also provides that the Company has an option to require the Investors to purchase up to an additional $25 million of Senior Subordinated Notes or Series B Preferred Stock, with additional Common Stock Warrants (the “Company Option”), at any one or more times on or prior to May 27, 2005 for the purpose of paying the cost of acquisition of the stock or assets of one or more other companies in each case with an acquisition value of at least $10 million.

Senior Subordinated Notes

The outstanding principal of $12,000,000 on the Senior Subordinated Notes was converted into 3,428,517 shares of Series B Preferred Stock upon stockholders’ approval at the Company’s annual meeting on September 15, 2004. The per share conversion price of the Senior Subordinated Notes is $3.50 (the “Series B Original Issue Price”).

Upon issuance of the Senior Subordinated Notes, the Company allocated fair value of $720,000 to the Common Stock Warrants based on a preliminary valuation, and recorded a beneficial conversion charge of $3,720,000. Upon receipt of a final valuation, it was determined that $1,040,400 was the fair value of the Common Stock Warrants resulting in a beneficial conversion charge of $4,040,400. The discount created by these charges was fully amortized to interest expense upon the conversion of the Senior Subordinated Notes. For the three months and nine months ended September 30, 2004, the Company recognized $4.6 million and $5.5 million, respectively, of that discount.

Series B Preferred Stock

An aggregate of 3,428,571 shares of Series B Preferred Stock were issued to the Investors upon stockholders’ approval of the conversion of the $12 million Senior Subordinated Notes into the Series B Preferred Stock at the Annual Meeting of Stockholders on September 15, 2004. The Series B Preferred Stock ranks senior to the Company’s Series A Preferred Stock. The Series B 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 a default under the Company’s Credit Facility, in additional shares of Series B Preferred Stock.

Upon any liquidation, dissolution or winding up of the Company, holders of the Series B Preferred Stock will be entitled to receive, in preference to holders of Series A Preferred Stock and common stock, out of the Company’s assets available for stockholder distributions, an amount per share equal to the Series B Original Issue Price plus any accrued but unpaid dividends thereon. Certain mergers, acquisitions or asset sales involving the Company are treated as a liquidation event unless the holders of 66²/3% of the then outstanding Series B Preferred Stock and Series A Preferred Stock voting together as a class elect not to treat such transactions as liquidation events.

The Series B Preferred Stock will be convertible into common stock at any time at the election of its holders. The per share conversion price (the “Conversion Price”) of the Series B Preferred Stock of $2.80 was calculated using the lowest of (i) $3.10; (ii) the price that reflects a 20% discount to the trailing average closing price of the Company’s common stock for the 20 consecutive trading days immediately preceding the date of the conversion or the Series B Issue Date, but in no event less than $2.80; and (iii) the closing price of the Company’s common stock on the day immediately preceding the Series B Issue Date.

The Series B Preferred Stock will automatically convert into common stock if, any time following 18 months after the Series B Issue Date, (i) the average closing price of the common stock over the immediately preceding 20 consecutive trading day period exceeds 2.5 times the Series B Original Issue Price of $2.80 (as adjusted for certain dilutive equity issuances and for stock splits, stock dividends and similar events related to the Series B Preferred Stock); or (ii) with respect to any holder’s shares of Series B Preferred Stock, such holder does not accept, within 60 days of notice to such holder, the Company’s offer to purchase the Series B Preferred Stock for at least 2.5 times the Series B Original Issue Price of $2.80. The Series B Preferred Stock will automatically convert into common stock upon the agreement of the holders of 75% of the then outstanding Series B Preferred Stock.

Holders of two-thirds of the Series B 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 Series B Issue Date at the Series B Original Issue Price plus accrued but unpaid dividends.

Holders of Series B Preferred Stock are entitled to vote together with all other classes and series of voting stock of the Company as a single class, on all actions to be taken by the stockholders of the Company. As long as at least 25% of the shares of the Series B Preferred Stock issued pursuant to the Series B Purchase Agreement remain outstanding, the Company may not take numerous specified actions (including certain changes to the Company’s Certificate of Incorporation) without first obtaining the written consent of holders of at least a majority of the then outstanding shares of Series B Preferred Stock voting separately as a class. In addition, as long as the Company Option is in effect, holders of 100% of the Series A Preferred Stock and the Series B Preferred Stock, voting together as a single class, shall have the right to veto (i) any Company Acquisition, and (ii) the issuance of any securities ranking senior to or pari passu with the Series A Preferred Stock or the Series B Preferred Stock, with respect to voting, dividend, liquidation or redemption rights, including the issuance of subordinated debt.

Common Stock Warrants

The Common Stock Warrants to purchase 857,143 shares of Common Stock, issued in connection with the Series B Financing will expire on May 28, 2014. They were not exercisable at the time of issuance. Upon stockholders’ approval at the Annual Meeting of Stockholders on September 15, 2004, the Common Stock Warrants became exercisable at the option of the Investors. The exercise price of the Common Stock Warrants is $4.32 per share.

10. Guarantees

Pursuant to the November 2, 2001 acquisition of the former 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 September 30, 2004, the maximum amount payable under the terms of the guaranteed shares was $1,628,600. As the fair market value of the Company’s common stock was in excess of the guaranteed share prices as of September 30, 2004, no amounts were accrued under the guarantee.

11. Segment Reporting

The Company has one reportable segment consisting of the Homeland Security Group and the Systems Engineering Group. Both Homeland Security Group and Systems Engineering Group provide engineering, information technology, medical research or technical services to federal government agencies or major defense contractors. BAI is reported as part of the Homeland Security Group. In prior reporting periods, ABS was reported as a reportable segment. Results for ABS are now reported as discontinued operations.

12. Discontinued Operations

During the second quarter of 2004, the Company concluded that ABS, a wholly owned subsidiary of the Company, did not fit with the Company’s long-term plan and decided to divest ABS. The Company is in the process of disposing of ABS and intends to conclude either a sale or another form of disposition by December 31, 2004. Therefore, the results of operations of this business are reported as discontinued operations, net of applicable income taxes, for all periods presented in accordance with SFAS 144, Accounting for the Impairment of Disposal of Long-Lived Assets. The Company has written down the assets of ABS to the fair value of the expected proceeds to be received from the disposition of ABS.

The Company’s historical financial statements have been restated to reflect ABS as discontinued operations for the periods presented.

Operating results of the discontinued business are as follows:


	Three Months Ended September 30					Nine Months Ended September 30
	2004		2003			2004			2003
Revenues	$	661,300	$	712,100		$	1,639,900		$	3,242,700
Income (loss) from discontinued operations		124,000		(74,100	)		(5,100	)		75,500
Income tax expense (benefit)		47,800		(21,100	)		(2,000	)		21,500
Income (loss) from discontinued operations, net of tax	$	76,200	$	(53,000	)	$	(3,100	)	$	54,000

Tax rates vary between discontinued operations and the Company’s effective tax rate due to the non-deductibility of certain non-cash amortization expenses for tax purposes.

The major classes of assets and liabilities for this discontinued business were as follows:


	September 30, 2004		December 31, 2003
Accounts receivable, net	$	1,113,800	$	651,300
Fixed assets, net		—		6,800

Total assets of business held for sale	$	1,113,800	$	658,100

Accounts payable	$	8,600		40,000
Other current liabilities		73,000		76,000

Total liabilities of business held for sale	$	81,600	$	116,000

13. Litigation and Claims

The Company was served on October 9, 2003 with a complaint filed by Swales & Associates, Inc. (“Swales”) 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. Under the complaint, Swales sought damages of $4 million. To minimize the expense, effort, uncertainty and inconvenience entailed in proceeding with the litigation, the Company entered into a Settlement Agreement dated July 22, 2004 with Swales. Under the terms of the Settlement Agreement, the Company paid $1,000,000 to Swales in July 2004. Included in the $1,000,000 settlement is approximately $320,000 for work performed by Swales prior to termination. This amount has been billed to NASA and payment has been received by the Company. Legal fees are expected to be approximately $325,000. Based on a legal opinion of the Company’s outside counsel, the Company believes that the unreimbursed amount of the settlement payment, together with legal fees and expenses incurred in connection with the litigation, are costs that are reimbursable under the ELVIS contract with NASA. A receivable in the amount of $860,000 has been recorded in other assets. However, on July 28, 2004, the Company received from NASA a Notice of Intent to Disallow Costs. Discussions with NASA are still ongoing. Notwithstanding the Notice of Intent to Disallow Costs, the Company continues to believe that the costs of the settlement will be reimbursed by NASA. Therefore, no amounts have been accrued for disallowance of this claim as of September 30, 2004. However, there can be no assurance that the Company will in fact be reimbursed in part or in full by NASA in the foreseeable future.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

Analex specializes in developing intelligence, system engineering, technology protection, operations security, and intelligence analysis 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 medical defenses and treatments for infectious agents such as anthrax and smallpox used in biological warfare and terrorism.

During the second quarter of 2004, the Company concluded that Advanced Biosystems, Inc., (“ABS”), a wholly owned subsidiary of the Company, did not fit with the Company’s long-term plan and decided to divest ABS. The Company is in the process of disposing of ABS and intends to conclude either a sale or another form of disposition by December 31, 2004. Therefore, the results of operations of this business are reported as discontinued operations, net of applicable income taxes, for all periods presented in accordance with SFAS 144, Accounting for the Impairment of Disposal of Long-Lived Assets. The Company has written down the assets of ABS to the fair value of the expected proceeds to be received from the disposition of ABS.

Sales to U.S. federal government agencies and their prime contractors represented approximately 99% of our total net sales during the nine months ended September 30, 2004 and during the nine months ended September 30, 2003. The Department of Defense accounted for approximately 52% and 42% of our revenues in the nine months ended September 30, 2004 and 2003, respectively. NASA is our largest customer, generating 46% and 57% of our revenues for the nine months ended September 30, 2004 and 2003, respectively. Approximately 17% of our revenues and 70% of our operating income for the nine months ended September 30, 2004 came from one prime contract with an agency within the Department of Defense. Approximately 29% of our revenues for the nine

months ended September 30, 2004 came from one prime contract with NASA, which will continue until September 2011 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 nine months ended September 30, 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:


	Three Months Ended September 30				Nine Months Ended September 30
	2004		2003		2004		2003
Prime contract revenues	72	%	67	%	54	%	56	%
Subcontract revenues	28		33		46		44

Total revenues	100	%	100	%	100	%	100	%

We have one reportable segment, 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. This 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. With BAI included as a part of the Homeland Security Group, the latter also provides information and technology asset protection solutions, intelligence analysis, and security services to federal government and Department of Defense agencies. 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. In previous reporting periods, ABS was disclosed as a separate segment.

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

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Cost-plus-fees contracts provide for payment of allowable incurred costs, to the extent prescribed in the contract, plus a profit component. These contracts establish a ceiling amount that the contractor may not exceed without the approval of the contracting officer. 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. The majority of our cost-plus contracts contain provisions to limit recovery of excess costs.

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Time-and-material contracts provide for acquiring services on the basis of director labor hours at specified fixed hourly rates. Profit margins on time-and-materials 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 costs of performance may exceed the negotiated hourly rates.

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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 costs experiences. The price is not subject to any adjustment and that means we assume the financial risk of costs overruns. If the costs exceed the estimates, profit margins decrease and a loss may be realized on the contract.

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


	Three Months Ended September 30				Nine Months Ended September 30
	2004		2003		2004		2003
Cost-plus-fees	31	%	50	%	38	%	50	%
Time-and-materials	51		34		46		35
Fixed price	18		16		16		15

Total	100	%	100	%	100	%	100	%

Our objective is to grow sales organically and through acquisitions. In order to assist in accomplishing this objective, we have continued to increase our selling, general and administrative expenditures so as to increase our efforts in new business development and to provide the necessary infrastructure to support a larger organization resulting from organic growth and 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 September 30, 2004 was approximately $281 million. Funded backlog as of September 30, 2004 was approximately $30 million. 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.

COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2004

TO THE THREE MONTHS ENDED SEPTEMBER 30, 2003

REVENUES AND PERCENT OF REVENUES BY GROUP


	Three Months Ended September 30
	2004				2003
Homeland Security Group	$	17,066,000	61	%	$	6,607,400	42	%
Systems Engineering Group		10,786,000	39	%		9,270,300	58	%

Total	$	27,852,000	100	%	$	15,877,700	100	%

PERCENTAGE REVENUE GROWTH QUARTER OVER QUARTER BY GROUP


	2004 vs. 2003
Homeland Security Group	158	%
Systems Engineering Group	16	%

Total	75	%

Revenues for the three months ended September 30, 2004 were $27.9 million, an increase of $12.0 million from the $15.9 million in revenues for the three months ended September 30, 2003. This increase is primarily due to increases in revenues in the Homeland Security Group and the Systems Engineering Group. Revenues of the Homeland Security Group increased 158% or approximately $10.5 million. This increase was primarily due to the acquisition of BAI, which contributed $8.3 million in revenues, and the remainder is due to growth in services provided to the intelligence community and related agencies. Revenues of the Systems Engineering Group increased 16%, or approximately $1.5 million, primarily due to a $1.8 million increase in revenues under the ELVIS contract, as compared to the third quarter of 2003. This increase was offset by a reduction in revenues of $0.4 million due to the planned step-down in activities under the Microgravity Research Development and Operations subcontract providing services to NASA related to designing and building experiments to be run on the International Space Station.

Costs of revenue for the quarter ended September 30, 2004 were $22.5 million, an increase of $9.0 million from the same period of the prior year. Costs of revenue for recently acquired BAI accounted for $6.1 million of the increase. Growth in services provided to the customers of the Homeland Security Group and the Systems Engineering Group as noted in the preceding paragraph, accounted for $1.2 million and $1.7 million of the increase, respectively. Costs of revenue as a percentage of revenues were approximately 81% for the quarter ended September 30, 2004 and 85% for the same period of the prior year.

Selling, general and administrative expenses totaled $2.8 million for the quarter ended September 30, 2004, compared with $1.4 million for the same period of the prior year. This 100% increase is also 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. These investments include upgrading our financial accounting system and additional staff members in the accounting, contracts, marketing and corporate management departments.

Operating income for the three months ended September 30, 2004 was $2.0 million, compared to operating income of $1.0 million for the period ended September 30, 2003. The increased operating income is attributable to the growth of the Homeland Security Group of $1.9 million, of which $1.1 million is attributable to BAI, and $0.8 million is attributable to growth in services provided to the intelligence community and related agencies. Offsetting these increases was a $0.4 million decrease in operating income of the Systems Engineering Group. This is attributable to the planned step-down under the Microgravity Research Development and Operations contract as well as increased business development expenses within the group. In addition, $0.4 million of amortization expense was recognized related to the BAI acquisition.

Interest expense totaled $5.6 million for the quarter ended September 30, 2004, compared with $0.1 million for the same period in the prior year. The $5.5 million increase is primarily due to cash and non-cash interest expense related to the convertible debt issued as part of the Pequot Transaction and the Series B Financing. Cash interest payments on the convertible debt were $0.3 million and non-cash amortization recorded as interest expense was $5.1 million.

Income tax expense for the quarter ended September 30, 2004 was $1.5 million, compared with $0.2 million for the same period in the prior year. The Company will experience an increase in the effective tax rate in 2004. This increase is due to certain amortization costs related to the Pequot Transaction and the Series B Financing which are not deductible for tax purposes, in addition to the Company consuming all net operating loss carry forwards during 2003.

In the quarter ended September 30, 2004, the Company recorded a net loss from continuing operations of approximately $5.0 million and EBITDA, as defined below, of $2.7 million, after add-backs for interest of $5.6 million, depreciation of $0.1 million, amortization of $0.5 million, and income tax expense of $1.5 million. EBITDA as a percent of revenues was 9.8% for the quarter ended September 30, 2004, compared to 7.0% for the quarter ended September 30, 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 U.S. 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 related to the Company’s core operating performance. EBITDA is calculated by adding back net interest expense, income taxes, discontinued operations, 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.

COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2004

TO THE NINE MONTHS ENDED SEPTEMBER 30, 2003

REVENUES AND PERCENT OF REVENUES BY GROUP


	Nine Months Ended September 30
	2004				2003
Homeland Security Group	$	35,692,400	54	%	$	19,892,700	43	%
Systems Engineering Group		31,006,500	46	%		26,688,500	57	%

Total	$	66,698,900	100.0	%	$	46,581,200	100.0	%

PERCENTAGE REVENUE GROWTH NINE MONTHS OVER NINE MONTHS BY GROUP


	2004 vs. 2003
Homeland Security Group	79	%
Systems Engineering Group	16	%

Total	43	%

Revenues for the nine months ended September 30, 2004 were $66.7 million, an increase of $20.1 million from the $46.6 million in revenues for the nine months ended September 30, 2003. This increase is primarily due to increases in revenues in the Homeland Security Group and the Systems Engineering Group. Revenues of the Homeland Security Group increased 80%, or approximately $15.8 million, of which $11.5 million was attributable to the acquisition of BAI and $4.3 million was due to growth in services provided to the intelligence community and related agencies. Revenues of the Systems Engineering Group increased 16.3%, or approximately $4.3 million primarily due to a $4.0 million increase in revenues under the ELVIS contract, as compared to the first nine months of 2003. In addition, under the Glenn Engineering Support Services subcontract providing services to NASA, revenues increased approximately $1.1 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 $0.9 million due to the planned step-down in activities under the Microgravity Research Development and Operations subcontract providing services to NASA related to designing and building experiments to be run on the International Space Station.

Costs of revenue for the nine months ended September 30, 2004 were $53.9 million, an increase of $14.7 million from the same period of the prior year. The primary reason for this increase was costs of revenue for the recently acquired BAI, which accounted for $8.5 million of the increase. In addition, growth in services to the customers of the Homeland Security Group and Systems Engineering Group as noted in the preceding paragraph, accounted for $2.2 million and $3.9 million of the increase, respectively. Costs of revenue as a percentage of revenues were approximately 81% for the nine months ended September 30, 2004 and 84% for the same period of 2003.

Selling, general and administrative expenses totaled $7.1 million for the nine months ended September 30, 2004, compared to $4.1 million for the same period of the prior year. This 73% increase is attributable 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. These investments include upgrading our financial accounting system and additional staff members in the accounting, contracts, marketing and corporate management departments.

Operating income for the nine months ended September 30, 2004 was $4.7 million, compared to operating income of $3.0 million for the period ended September 30, 2003. This $1.7 million increase is primarily attributable to growth in the Homeland Security Group of $3.2 million, of which $1.7 million is attributable to BAI and $1.5 million is attributable to growth in the services provided to the intelligence community and related agencies. Offsetting this increase was a reduction in operating income of the Systems Engineering Group of $0.3 million due to the planned step-down under the Microgravity Research Development and Operations contract. In addition to $0.4 million in merger and acquisition expenses, $0.6 million of amortization expense was recognized related to the BAI acquisition.

Interest expense totaled $8.0 million for the nine months ended September 30, 2004, compared with $0.3 million for the same period in the prior year. The $7.7 million increase is due to cash and non-cash interest expense related to the convertible notes issued. Cash interest payments on the convertible notes were $0.8 million and non-cash amortization recorded as interest expense was $6.9 million.

Income tax expense for the nine months ended September 30, 2004 was $1.8 million, compared with $0.8 million for the same period in the prior year. 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 and the Series B Financing, which are not deductible for tax purposes, in addition to the Company consuming all net operating loss carryforwards during 2003.

For the nine months ended September 30, 2004, the Company recorded a net loss from continuing operations of approximately $5.1 million and EBITDA, as defined above, of $5.9 million, after add-backs for interest of $8.0 million, depreciation of $0.2 million, amortization of $1.0 million, and income tax expense of $1.8 million. EBITDA as a percent of revenue was 8.9% for the nine months ended September 30, 2004, compared to 7.2% for the nine months ended September 30, 2003.

CAPITAL RESOURCES AND LIQUIDITY

While the Company experienced a net loss on a quarterly comparison to a net income for the same period of 2003, the majority of the net loss can be attributed to non-cash amortization and accretion charges associated with the Pequot Transaction and Series B Financing. Borrowing availability under the Company’s Credit Facility continues to be sufficient to fund normal operations. The table below details the convertible debt and remaining amortization expense that will be recognized in subsequent quarters as interest expense.


							Quarterly Expenses				Remaining Period of Amortization
Convertible Debt	Face Value		Carrying Value At September 30, 2004		Remaining Amount to be Amortized		Cash		Non –Cash Interest Accretion		Remaining Period of Amortization
Convertible Notes	$	10,000,000	$	4,237,500	$	5,762,500	$	175,000	$	480,000	3¹/4 Years

The table below details the Series A and Series B Preferred Stock and the associated dividends and accretion.


							Quarterly Dividends and Accretion
Preferred Stock	Face Value		Carrying Value At September 30, 2004		Remaining Amount to be Accreted		Cash		Non -Cash Preferred Stock Accretion		Remaining Period of Amortization
Series A	$	15,000,000	$	3,049,800	$	11,950,200	$	225,000	$	937,500	3¹/4 Years
Series B	$	12,000,000	$	12,000,000		—	$	180,000		—	—

For the nine months ended September 30, 2004, net loss available to common shareholders of $9.0 million included $1.0 million of non-cash amortization, $5.1 million of non-cash interest accretion, and $2.8 million of non-cash preferred stock accretion. Available borrowing capacity on the Company’s Credit Facility amounted to $13.4 million. The Company had a standby financing capacity for acquisitions of $45 million, consisting of an annual guidance bank facility of $20 million and the option to draw down on a second round of Series B Preferred Stock financing of $25 million.

Working capital at September 30, 2004 decreased by $13.8 million from December 31, 2003 primarily due to the purchase of BAI which included the use of $12 million of cash from the Pequot Transaction, a draw from our Credit Facility of $8.3 million and the issuance of the Senior Subordinated Notes for $12 million. In addition, accounts receivable increased $7.6 million over the prior year due to accounts receivable acquired in the acquisition of BAI and the timing of receipt of certain accounts receivable.

Net cash provided by operating activities was $2.5 million for the nine months ended September 30, 2004, compared to $2.7 million for the same period of the prior year. Net cash used in investing activities during the nine months ended September 30, 2004 was $27.7 million in comparison to $0.4 million for the same period of the prior year. Net cash used in investing activities during 2004 was primarily used for the acquisition of BAI, net cash used during 2003 was primarily used for the purchase of fixed assets.

The Company has a credit agreement with Bank of America, N.A. (the “Credit Facility”). On May 28, 2004, in connection with the acquisition of BAI, the Credit Facility was amended and restated to provide a $20,000,000 revolving credit facility, and the

remaining outstanding balance on the Company’s term loan of $1,750,000 was consolidated into the Credit Facility. An uncommitted annual guidance facility not to exceed an additional $20,000,000 is available to fund future acquisitions upon application by the Company and approval by Bank of America. The Credit Facility has an annual renewal occurring April 30 of each year. Interest on the Credit Facility is at the LIBOR Rate plus an applicable margin as specified in a pricing grid. As of September 30, 2004, the Credit Facility outstanding balance was $6,565,600. The interest rate at September 30, 2004 was 4.33% for the Credit Facility.

Pursuant to the November 2, 2001 acquisition of the former 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 September 30, 2004, the maximum amount payable under the terms of the guaranteed shares was $1,628,600. As the fair market value of the Company’s common stock was in excess of the guaranteed share prices as of September 30, 2004, no amounts were accrued under the guarantee.

Series B Financing

On May 28, 2004, the Company consummated the transaction contemplated by a Stock Purchase Agreement (the “Series B Purchase Agreement”) by and among the Company and General Electric Pension Trust (“GEPT”), New York Life Capital Partners II, L.P. (“NYL”), Pequot Private Equity Fund III, L.P., and Pequot Offshore Private Equity Partners III, L.P., (collectively, “Pequot,” together with GEPT and NYL, collectively, the “Investors”). Pursuant to the Series B Purchase Agreement the Company:

•

issued and sold to Investors Senior Subordinated Notes in the aggregate principal amount of $12,000,000 at the time of the closing of the acquisition of BAI on May 28, 2004 (the First Closing Date). The Senior Subordinated Notes will be converted into an aggregate of 3,428,571 shares of the Company’s newly designated Series B convertible preferred stock (“Series B Preferred Stock”) upon stockholders approval at the Company’s annual meeting of stockholders; and

•

in connection with the issuance and sale of the Senior Subordinated Notes, issued Common Stock Warrants to purchase Common Stock at a ratio of one share of Common Stock for every five shares of Common Stock issued or issuable upon conversion of the Series B Preferred Stock issued or issuable upon conversion of the Senior Subordinated Notes.

A significant portion of the funds obtained on the First Closing Date under the Purchase Agreement was used to pay the cash portion of the consideration for the acquisition of BAI.

Subject to certain approval rights by the holders of Series A convertible preferred stock of the Company (the “Series A Preferred Stock”) and the Series B Preferred Stock, the Series B Purchase Agreement also provides that the Company has an option to require the Investors to purchase up to an additional $25 million of Senior Subordinated Notes or Series B Preferred Stock, with additional Common Stock Warrants (the “Company Option”), at any one or more times on or prior to May 27, 2005 for the purpose of paying the cost of acquisition of the stock or assets of one or more other companies in each case with an acquisition value of at least $10 million.

Senior Subordinated Notes

The outstanding principal of $12,000,000 on the Senior Subordinated Notes was converted into Series B Preferred Stock upon stockholders’ approval at the Company’s annual meeting on September 15, 2004. The per share conversion price of the Senior Subordinated Notes is $3.50 (the “Series B Original Issue Price”).

Upon issuance of the Senior Subordinated Notes, the Company allocated fair value of $720,000 to the Common Stock Warrants based on a preliminary valuation, and recorded a beneficial conversion charge of $3,720,000. Upon receipt of a final valuation, it was determined that $1,040,400 was the fair value of the Common Stock Warrants resulting in a beneficial conversion charge of $4,040,400. The discount created by these charges was fully amortized to interest expense upon the conversion of the Senior Subordinated Notes. For the three and nine months ended September 30, 2004, the Company recognized $4.6 million and $5.5 million, respectively, of amortization of that discount.

Series B Preferred Stock

An aggregate of 3,428,571 shares of Series B Preferred Stock were issued to the Investors upon stockholders’ approval of the conversion of the $12 million Senior Subordinated Notes into the Series B Preferred Stock. The Series B Preferred Stock ranks senior to the Company’s existing Series A Preferred Stock. The Series B 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 a default under the Company’s Credit Facility, in additional shares of Series B Preferred Stock.

Upon any liquidation, dissolution or winding up of the Company, holders of the Series B Preferred Stock will be entitled to receive, in preference to holders of Series A Preferred Stock and Common Stock, out of the Company’s assets available for stockholder distributions, an amount per share equal to the Series B Original Issue Price plus any accrued but unpaid dividends thereon. Certain mergers, acquisitions or asset sales involving the Company are treated as a liquidation event unless the holders of 66²/3% of the then outstanding Series B Preferred Stock and Series A Preferred Stock voting together as a class elect not to treat such transactions as liquidation events.

The Series B Preferred Stock will be convertible into Common Stock at any time at the election of its holders. The per share conversion price (the “Conversion Price”) of the Series B Preferred Stock of $2.80 was calculated using the lowest of (i) $3.10; (ii) the price that reflects a 20% discount to the trailing average closing price of the Company’s Common Stock for the 20 consecutive trading days immediately preceding the date of the conversion or the Series B Issue Date, but in no event less than $2.80; and (iii) the closing price of the Company’s Common Stock on the day immediately preceding the Series B Issue Date.

The Series B Preferred Stock will automatically convert into Common Stock if, any time following 18 months after the Series B Issue Date, (i) the average closing price of the Common Stock over the immediately preceding 20 consecutive trading day period exceeds 2.5 times the Series B Original Issue Price (as adjusted for certain dilutive equity issuances and for stock splits, stock dividends and similar events related to the Series B Preferred Stock); or (ii) with respect to any holder’s shares of Series B Preferred Stock, such holder does not accept, within 60 days of notice to such holder, the offer to purchase the Series B Preferred Stock for at least 2.5 times the Series B Original Issue Price of $2.80. The Series B Preferred Stock will automatically convert into Common Stock upon the agreement of the holders of 75% of the Series B Preferred Stock.

Holders of Series B 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. As long as at least 25% of the shares of the Series B Preferred Stock issued pursuant to the Series B Purchase Agreement remain outstanding, the Company may not take numerous specified actions (including certain changes to the Company’s Certificate of Incorporation) without first obtaining the written consent of holders of at least a majority of the then outstanding shares of Series B Preferred Stock voting separately as a class. In addition, as long as the Company Option is in effect, holders of 100% of the Series A Preferred Stock and the Series B Preferred Stock, voting together as a single class, shall have the right to veto (i) any Company Acquisition, and (ii) the issuance of any securities ranking senior to or pari passu with the Series A Preferred Stock or the Series B Preferred Stock, with respect to voting, dividend, liquidation or redemption rights, including the issuance of subordinated debt.

Common Stock Warrants

The Common Stock Warrants issued in connection with the Series B Financing will expire on May 28, 2014. They are not exercisable at the time of issuance. Upon stockholders’ approval at the Annual Meeting on September 15, 2004, the Common Stock Warrants became exercisable at the option of the Investors. The exercise price of the Common Stock Warrants is $4.32 per share.

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:

•

our dependence on contracts with U.S. federal government agencies, particularly clients within the Department of Defense and NASA;

•

our dependence on two material contracts, each of which account for a significant percentage of our revenue and operating income for the six months ended June 30, 2004;

•

the business risks peculiar to the defense industry including changing priorities or reductions in the U.S. Government defense budget;

•

our ability to accurately estimate our backlog;

•

our ability to maintain strong relationships with other contractors;

•

our ability to recruit and retain qualified skilled employees who have the required security clearance;

•

economic conditions, competitive environment, and timing of awards and contracts;

•

our ability to identify future acquisition candidates and to integrate acquired operations;

•

our ability to raise additional capital to fund acquisitions; and

•

our substantial debt and the restrictions imposed on us by certain debt agreements.

•

our ability to control indirect costs, particularly costs related to funding our self-insured health plan.

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.

Item 3. 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.

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:


Original Notional Value	Variable Rate Received	Fixed Rate Paid		Effective Date	Expiration Date
$2,950,000	LIBOR	4.25	%	1/1/02	12/1/04

The notional value of the interest rate swap declines as the amount of the Term Loan is paid down. At September 30, 2004 the notional value of the swap was $1,300,000. 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 $52,700, based on debt levels at September 30, 2004.

Item 4. 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 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 September 30, 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

Item 1. Legal Proceedings

Under the terms of the Settlement Agreement, the Company paid $1,000,000 to Swales in July 2004. Included in the $1,000,000 settlement is approximately $320,000 for work performed by Swales prior to termination. This amount has been billed to NASA and payment has been received by the Company. Legal fees are expected to be approximately $325,000. Based on a legal opinion from the Company’s outside counsel, the Company believes that the unreimbursed amount of the settlement payment, together with legal fees and expenses incurred in connection with the litigation, are costs reimbursable under the ELVIS contract with NASA. A receivable in the amount of $860,000 has been recorded in other assets. However, on July 28, 2004, the Company received from NASA a Notice of Intent to Disallow Costs. Discussions with NASA are still ongoing. Notwithstanding the Notice of Intent to Disallow Costs, the Company continues to believe that the costs of the settlement will be reimbursed by NASA. Therefore, no amounts have been accrued for disallowance of this claim as of September 30, 2004. However, there can be no assurance that the Company will in fact be reimbursed in part or in full by NASA in the foreseeable future.

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

(a) The Company held its Annual Meeting of Stockholders on September 15, 2004.

(b) At the Annual Meeting, the Company’s stockholders approved:

(i) Proposal 1: the election of the incumbent nine (9) directors, namely, Sterling E. Phillips, Jr., Peter C. Belford, Sr., C. Thomas Faulders, III, Lincoln D. Faurer, Martin M. Hale, Jr., Thomas L. Hewitt, Joseph “Keith” Kellogg, Jr., Gerald A. Poch, and Daniel R. Young;

(ii) Proposal 2: conversion of the Senior Subordinated Notes in the aggregate principal amount of $12,000,000 into 3,428,571 shares of Series B Preferred Stock, issuance of up to an additional 7,142,857 shares of Series B Preferred Stock to the Investors pursuant to future financings using Series B Preferred Stock, and the subsequent issuance of 20% or more of the shares of the Company’s common stock upon conversion of the Series B Preferred Stock, or as payment for dividends on the Series B Preferred Stock;

(iii) Proposal 3: exercise of Common Stock Warrants into 857,143 shares of common stock, and to the extent provided for upon the exercise of the Common Stock Warrants, the issuance of 20% or more of the common stock upon exercise of the Common Stock Warrants;

(iv)Proposal 4: amendments to the Company’s 2002 Stock Option Plan to (i) increase the number of shares of Common Stock reserved for issuance thereunder from 2,000,000 to 3,000,000; and (ii) change the date of the initial grant of options to non-employee directors from the date of appointment to the Board to the date of the first Board meeting attended by such directors;

(v) Proposal 5: an amendment to the Company’s Employee Stock Purchase Plan to increase the number of shares of Common Stock reserved for issuance thereunder from 500,000 to 650,000; and

(vi) Proposal 6: ratification of the appointment of Ernst & Young LLP as the Company’s independent auditors for the fiscal year 2004

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


Proposal #1 DIRECTORS	FOR	WITHHELD	TOTAL VOTED
#1-Phillips	19,695,207	49,651	19,744,858
#2-Belford	19,700,854	44,004	19,744,858
#3-Faulders	19,700,444	44,414	19,744,858
#4-Faurer	19,700,209	44,649	19,744,858
#5-Hale	19,700,354	44,504	19,744,858
#6-Hewitt	19,700,229	44,629	19,744,858
#7-Kellogg	19,700,289	44,569	19,744,858
#8-Poch	19,514,823	230,035	19,744,858
#9-Young	19,700,749	44,109	19,744,858

Proposal #2	FOR	AGAINST	ABSTAIN
Total	15,230,642	247,915	10,566

Proposal #3	FOR	AGAINST	ABSTAIN
Total	15,214,128	249,432	25,563

Proposal #4	FOR	AGAINST	ABSTAIN
Total	15,244,186	89,760	7,860

Proposal #5	FOR	AGAINST	ABSTAIN
Total	15,260,944	73,191	7,671

Proposal #6	FOR	AGAINST	ABSTAIN
Total	19,720,277	17,114	7,467

Item 6. Exhibits and Reports on Form 8-K

(a)	Exhibits



31.1		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).

31.2		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).

32.1		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).

(b)	Reports on Form 8-K

A Current Report on Form 8-K dated July 6, 2004 and filed with the Securities and Exchange Commission on July 14, 2004 reported that the Company had appointed Mr. Joseph “Keith” Kellogg Jr. to the Board of Directors.

A Current Report on Form 8-K dated July 28, 2004 and filed with the Securities and Exchange Commission on July 30, 2004 reported (i) it had entered into a settlement agreement and mutual release with Swales and Associates, Inc., which resolves all claims, including a litigation matter between the parties; (ii) its date for the 2004 Annual Stockholders’ Meeting and (ii) its financial results for the second quarter ended June 30, 2004.

An amendment to the Current Report on Form 8-K/A dated June 1, 2004 and filed with the Securities and Exchange Commission on August 9, 2004 reported (i) the audited financial statements for Beta Analytics, Incorporated (“BAI”) as of May 28, 2004 and June 30, 2004 and for the eleven months ended May 28, 2004 and the two years in the period ended June 30, 2003; (ii) the Unaudited Pro Forma Combined Balance Sheet, the Unaudited Pro Forma Combined Statement of Operations, and Notes to Unaudited Pro Forma Combined Financial Statements; and (iii) the Stock Purchase Agreement with BAI and other parties named in the agreement dated May 6, 2004.

A Current Report on Form 8-K dated August 16, 2004 and filed with the Securities and Exchange Commission on August 16, 2004 reported the location and date for the 2004 Annual Stockholders’ Meeting.

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: November 15, 2004


Analex Corporation
(Registrant)

By:	/S/ Sterling E. Phillips, Jr.	By:	/S/ Ronald B. Alexander
	Sterling E. Phillips, Jr.		Ronald B. Alexander
	Chairman and Chief Executive Officer		Chief Financial Officer
	(Principal Executive Officer)		(Principal Financial Officer and Principal Accounting Officer)

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