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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the quarterly period ended March 31, 2005

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 April 26, 2005, 15,506,419 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, 2005 AND DECEMBER 31, 2004

See Notes to Consolidated Financial Statements

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ANALEX CORPORATION

CONSOLIDATED BALANCE SHEETS

MARCH 31, 2005 AND DECEMBER 31, 2004

See Notes to Consolidated Financial Statements

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ANALEX CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004

See Notes to Consolidated Financial Statements

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ANALEX CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004

See Notes to Consolidated Financial Statements

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ANALEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. Business Groups

Analex Corporation (“Analex” or the “Company”) is a provider of mission-critical professional services to federal government clients. The Company specializes in providing information technology, systems engineering, security services and intelligence services in support of the U.S. Government. Analex focuses on developing innovative technical approaches for the intelligence community, analyzing and supporting defense systems, and designing, developing and testing aerospace systems. The Company provides its services through its two strategic business units: 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.

The Homeland Security Group accounted for approximately 61.5% of the Company’s 2005 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 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 38.5% of the Company’s 2005 year-to-date revenue. 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.

During the second quarter of 2004, the Company concluded that Advanced Biosystems, Inc. (ABS), a then wholly owned subsidiary of the Company, did not fit with the Company’s long-term strategic plan and decided to divest ABS. The Company disposed of ABS on November 16, 2004 and has presented the results of operations of ABS as a discontinued operation for all periods.

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, 2004 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, 2004 (“2004 Form 10-K”) filed with the Securities and Exchange Commission on March 28, 2005.

3. Acquisition of Beta Analytics, Inc.

Analex acquired Beta Analytics, Incorporated (“BAI”) on May 28, 2004. 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. The Common Stock was valued at $3.80, which was the closing price on the day prior to the announcement of the acquisition. 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 the Series B Senior Subordinated Notes (see note 9).

The total cost of the acquisition of BAI, which was valued at approximately $37.9 million, including the assumption of BAI’s debt of $1.7 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 Stock Purchase Agreement contains certain financial representations which will survive 24-months after the closing date. In addition, an escrow account containing $1 million cash and 523,560 shares of Analex Common Stock was established with proceeds of the sale to secure the indemnification obligations of the sellers of BAI, should a claim arise.

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The unaudited pro forma financial information reflects the results of the Company for the three months ended March 31, 2004, as if BAI had been acquired on January 1, 2004. This combined result is not necessarily indicative of future operating results of the Company.

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. The Credit Facility has a maturity date of May 31, 2007. On behalf of the Company, Bank of America may issue Letters of Credit secured by the Credit Facility. As of March 31, 2005, the Company has one Letter of Credit outstanding in the amount of $100,000. The interest rate on the Credit Facility is set at the LIBOR plus an applicable margin as specified in a pricing grid. As of March 31, 2005, the Credit Facility outstanding balance was $3,881,800, and the interest rate was 5.35%.

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 March 31, 2005, 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 was swapped into a fixed rate obligation at 4.25%. The purpose of the swap was to protect the Company from potential rising interest rates on debt with variable interest rate features. During periods of rising interest rates, the Company will benefit from the protection of the swap, during periods of declining interest rates the Company will incur additional interest expense due to the fixed interest rate component of the swap agreement. During the term of the swap agreement, comprehensive income or loss related to the swap agreement was recorded as a current liability with an offset to accumulated other comprehensive income(loss) which is a component of shareholders’ equity. The swap agreement matured on December 1, 2004. The Company’s comprehensive loss available to common shareholders for 2004 was $4,302,400, which included the net loss available to common shareholders of $4,346,200 and other comprehensive income of $43,800, arising from the interest rate swap.

The Company has outstanding a $10,000,000 Series A Convertible Note issued on December 9, 2003 in connection with the Pequot Transaction (see note 8).

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5. Earnings Per Share

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

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 March 31, 2005, shares issuable upon conversion of such instruments are as follows:

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6. Stock-based compensation

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure—an amendment of SFAS No. 123.” This statement amends SFAS No. 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. 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:

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing fair value model. The following assumptions were used for grants: dividend yield of 0%; expected volatility of 40 to 76%; expected life of the otion term of 5 years; and risk-free interest rate of 2.25% to 5.85%.

To avoid recognizing additional compensation expense following the adoption of SFAS No. 123(R) – Share-Based Payment, which will replace SFAS No. 123- Accounting for Stock-Based Compensation, the Company has accelerated vesting of certain options for certain option holders when the exercise price of the option is more than the fair market value. SFAS No. 123(R) will become effective January 1, 2006. The table below summarizes the accelerated vesting of options during the three months ended March 31, 2005.

7. Concentration of Business

Almost all of the Company’s revenue is derived either directly from the U.S. government as prime contractor or indirectly as a subcontractor to other government prime contractors. Approximately 62% of the Company’s 2005 year-to-date revenue has been derived from various Department of Defense agencies. Approximately 38% of the Company’s 2005 year-to-date revenue has been derived, directly or indirectly, from NASA.

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8. Preferred Stock and Convertible Notes

Series A Preferred Stock and Convertible Notes

In December 2003, the Company issued $15,000,000 of Series A Preferred Stock. The Series A Preferred Stock accrues dividends at 6% per annum payable quarterly in cash. Dividend expense for Series A Preferred Stock for the three months ended March 31, 2005 was $221,900, compared to $225,000 for the same period of the prior year.

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 September 15, 2008. For the three months ended March 31, 2005 and 2004, the Company recorded $0.9 million and $0.9 million, respectively, of accretion related to these charges. The unamortized discount as of March 31, 2005 was $10.1 million.

Upon issuance of the Series A Convertible Notes, the Company allocated fair value of $1,905,300 to the Series A 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 Series A Convertible Notes. For the three months ended March 31, 2005 and 2004, the Company recognized $0.5 million and $0.5 million, respectively, of amortization of that discount. The unamortized discount as of March 31, 2005 was $5.2 million.

Series B Preferred Stock

In September 2004, the Company issued $12,000,000 of Series B Preferred Stock. The Series B Preferred Stock accrues dividends at 6% per annum payable quarterly in cash. Dividend expense for Series B Preferred Stock for the three months ended March 31, 2005 was $177,500.

Summary of Charges

The table below details the Series A and Series B Preferred Stock and associated accretion on a quarterly basis for 2005. For the three months ended March 31, 2004, only Series A was outstanding.

The table below details the convertible debt and remaining amortization expense that will be recognized in subsequent quarters as interest expense:

9. 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 March 31, 2005, 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 March 31, 2005, no amounts were accrued under the guarantee.

10. Segment Reporting

The Company has one reportable segment consisting of two strategic business units: the Homeland Security Group and the Systems Engineering Group. Both Homeland Security Group and Systems Engineering Group provide engineering, information technology 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.

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11. 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 disposed of ABS on November 16, 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. Proceeds from the sale of ABS were two non-recourse notes for $1 million. The Company reviewed the future viability of ABS and its underlying credit worthiness and determined a full reserve against the notes was necessary.

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:

The income reflected in discontinued operations is recognition of payments made against the non-recourse notes that were fully reserved. 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.

12. Litigation and Claims

The Company was served on October 9, 2003 with a complaint filed by Swales & Associates, Inc. (“Swales”) alleging breach of contract and other claims relating to Swales’ termination as a subcontractor under the Company’s ELVIS contract with NASA. 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 was billed to NASA and payment was received by the Company. Legal fees are expected to be approximately $290,000. Based on an opinion by 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. Therefore, a receivable in the amount of $984,000 has been recorded. However, on July 28, 2004, based upon discussions with the customer, the Company received from NASA a Notice of Intent to Disallow Costs. Notwithstanding the Notice of Intent to Disallow Costs, the Company continues to believe that the costs of the settlement will be reimbursed by NASA. Discussions with NASA are continuing. However, there can be no assurance that the Company will in fact be reimbursed in full by NASA in the foreseeable future.

13. Subsequent Event

On April 1, 2005, Analex acquired ComGlobal Systems, Incorporated, (“ComGlobal”) a software engineering and information technology firm primarily serving the federal government agencies and organizations. ComGlobal specializes in command, control communications, computers and intelligence (C4I) programs for the military, and its largest customer in the U.S. Navy’s Tomahawk Cruise Missile Program. The consideration for the acquisition consisted of $47 million in cash, $22 million of which was financed with senior bank debt from Bank of America and $25 million of which came from the sale of additional Series B Convertible Preferred Stock to GE Pension Trust, New York Like Capital Partners and Pequot Capital.

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

Overview

Analex specializes in providing information technology, systems engineering, security services and intelligence services in support of the U.S. Government. 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.

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. We believe that our acquisition of BAI will yield additional significant yearly revenue and strong operating income, enhanced attractiveness to institutional investors and an enhanced ability to compete effectively within our industry.

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 disposed of ABS on November 16, 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.

Revenue generated from contracts to U.S. federal government agencies and their prime contractors represented 100% of our total net sales during the three months ended March 31, 2005 and 99.5% during the three months ended March 31, 2004. The Department of Defense accounted for approximately 62% and 43% of our revenue in the three months ended March 31, 2005 and 2004, respectively. NASA is our largest customer, generating 38% and 55% of our revenue for the three months ended March 31, 2005 and 2004, respectively. Approximately 14% of our revenue and 51% of our operating income for the three months ended March 31, 2005 came from one prime contract with an agency within the Department of Defense. Approximately 25% of our revenue for the three months ended March 31, 2005 came from one prime contract with NASA, which has a potential nine-year and three-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, 2005, a majority of our revenue was 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 revenue as prime contractor and as subcontractor as a percentage of our total revenue for the following periods:

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 that our Homeland Security Group will continue 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. In previous reporting periods, ABS was disclosed as a separate segment.

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

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

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 March 31, 2005 was approximately $283 million. Funded backlog as of March 31, 2005 was approximately $77 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.

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COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2005

TO THE THREE MONTHS ENDED MARCH 31, 2004

REVENUE AND PERCENT OF REVENUE BY GROUP

PERCENTAGE REVENUE GROWTH QUARTER OVER QUARTER BY GROUP

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Revenue for the three months ended March 31, 2005 was $28.4 million, an increase of $11.8 million from the $16.6 million in revenue for the three months ended March 31, 2004. Revenue of the Homeland Security Group increased 142% or approximately $10.3 million. This increase was primarily due to the acquisition of BAI, which contributed $8.9 million in revenue. The remaining increase of $1.4 million represents a 18% growth of organic business from services provided to the intelligence community and related agencies. Revenue of the Systems Engineering Group increased 16%, or approximately $1.6 million, primarily due to a $1.8 million increase in revenue under the ELVIS contract, as compared to the first quarter of 2004. In addition, under the Glenn Engineering Support Services contract with NASA, revenues increased approximately $0.2 million as compared to the same period of 2004 due to additional tasking from the customer. These increases were offset by a reduction in revenue 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.

Cost of revenue for the three months ended March 31, 2005 was $23.6 million, an increase of $9.6 million from the same period of the prior year. Cost of revenue for recently acquired BAI accounted for $7.3 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 $0.9 million and $1.3 million of the increase, respectively. Cost of revenue as a percentage of revenue was approximately 83.1% for the quarter ended March 31, 2005 and 84.5% for the same period of the prior year.

Selling, general and administrative (“SG&A”) expenses totaled $2.3 million for the three months ended March 31, 2005 compared with $1.8 million for the same period of the prior year. This 26% increase reflects costs to accommodate the increased demands from Sarbanes Oxley 404 and discretionary spending on sales and marketing. SG&A as a percentage of revenue was 8.0% for the quarter ended March 31, 2005 compared with 10.9% for the same period of the prior year.

Operating income for the three months ended March 31, 2005 was $2.0 million, compared to operating income of $0.6 million for the period ended March 31, 2004. Operating margin for the three months ended March 31, 2005 improved to 7.2% from 3.8% in the same period of the prior year. The growth in operating income was equally attributable to the acquisition of BAI and organic growth.

Interest expense totaled $0.8 million for the quarter ended March 31, 2005, compared with $0.7 million for the same period in the prior year. This increase is due to additional working capital needs funded by the Company’s credit facility.

The income tax expense for the three months ended March 31, 2005 was $0.6 million, compared with a $0.07 million tax benefit for the same period in the prior year. The Company expects to experience a tax provision for calendar year 2005 due to certain amortization costs related to the Series A Financing, which are not deductible for tax purposes.

In the quarter ended March 31, 2005, the Company recorded net loss of approximately $0.7 million and EBITDA, as defined below, of $2.6 million, after add-backs for interest of $0.8 million, depreciation of $0.1 million, amortization of $0.5 million, and income tax expense of $0.6 million. EBITDA as a percent of revenue was 9.2% for the quarter ended March 31, 2005, compared to 4.9% for the quarter ended March 31, 2004.

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.

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CAPITAL RESOURCES AND LIQUIDITY

The Company experienced net loss for the three months ended March 31, 2005 of $0.6 million compared to a net loss of $1.2 million for the first quarter of 2004. The majority of the gain is a reflection of the 7.2% operating margin in 2005 compared to a 3.8% margin in 2004. This gain was offset by $0.2 million of dividends paid on the Series B Preferred Stock issued in the third quarter of 2004. Borrowing availability under the Company’s Credit Facility continues to be sufficient to fund normal operations.

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

The table below details the convertible debt and remaining amortization expense that will be recognized in subsequent quarters as interest expense.

For the three months ended March 31, 2005, net loss available to common shareholders of $0.6 million included $ 0.03 million of non-cash amortization, $0.5 million of non-cash interest accretion, and $0.9 million of non-cash preferred stock accretion. Available borrowing capacity on the Company’s Credit Facility amounted to $11.3 million. 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. Although the guidance facility matured on December 31, 2004, the Company renewed the facility upon closing the acquisition of ComGlobal Systems, Incorporated.

Net cash provided by operating activities was $2.9 million for the three months ended March 31, 2005, compared to net cash used of $1.3 million for the same period of the prior year. Working capital at March 31, 2005 was $5.9 million compared to $4.6 million as of December 31, 2004. This increase of $1.3 million is primarily due to increased billings and collections activity resulting in payments against the Credit facility. Net cash used in investing activities during the three months ended March 31, 2005 was $0.01 million compared to $0.05 million for the same period of the prior year. Net cash used in investing activities during three months ended March 31, 2005 and 2004 was primarily 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 March 31, 2005, the Credit Facility outstanding balance was $3,881,800. The interest rate at March 31, 2005 was 5.35% 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 March 31, 2005, 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.

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 March 31, 2005, 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 March 31, 2005, no amounts were accrued under the guarantee.

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On November 2, 2001, the Company issued promissory notes to certain Analex sellers totaling $772,600 with a five-year term, bearing interest at 6%. As of March 31, 2005 the outstanding balance of the promissory notes was $297,000. The Company also entered into non-competition agreements with former employees totaling $352,000, on a discounted basis, payable over various periods with a current balance of $72,400 at March 31, 2005.

Forward-Looking Statements

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

Readers of this report should not place undue reliance on these forward-looking statements, which apply only as of the date of the filing of this Form 10-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.

The Company’s $3.5 million term loan facility from Bank of America, which carried interest comprised of two components: floating-rate LIBOR plus a credit performance margin, was paid in full on May 28, 2004. The Company had 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 swap agreement expired on December 1, 2004.

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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 paid the bank at a fixed rate and received 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:

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 March 31, 2005, 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 Interim 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

The Company was served on October 9, 2003 with a complaint filed by Swales & Associates, Inc. (“Swales”) alleging breach of contract and other claims relating to Swales’ termination as a subcontractor under the Company’s ELVIS contract with NASA. 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 was billed to NASA and payment was received by the Company. Legal fees are expected to be approximately $290,000. Based on an opinion by 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. Therefore, a receivable in the amount of $984,000 has been booked. However, on July 28, 2004, based upon discussions with the customer, the Company received from NASA a Notice of Intent to Disallow Costs. Notwithstanding the Notice of Intent to Disallow Costs, the Company continues to believe that the costs of the settlement will be reimbursed by NASA. Discussions with NASA are continuing. However, there can be no assurance that the Company will in fact be reimbursed in full by NASA in the foreseeable future.

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Item 6. Exhibits and Reports on Form 8-K

A Current Report on Form 8-K dated February 15, 2005 and filed with the Securities and Exchange Commission on February 17, 2005 reported that Mr. Joseph Keith Kellogg, Jr. has resigned from the Board of Directors.

A Current Report on Form 8-K dated February 23, 2005 and filed with the Securities and Exchange Commission on February 24, 2005 reported that the Company announced it’s financial results for the Fiscal Year ended December 31, 2004.

A Current Report on Form 8-K dated March 11, 2005 and filed with the Securities and Exchange Commission on March 11, 2005 reported that Mr. Peter C. Belford, Sr. has resigned from the Board of Directors.

A Current Report on Form 8-K dated March 15, 2005 and filed with the Securities and Exchange Commission on March 21, 2005 reported that Mr. Stephen Dolbey resigned from his position as Vice President of the Company.

A Current Report on Form 8-K dated March 22, 2005 and filed with the Securities and Exchange Commission on March 22, 2005 reported that the Company entered into a non-binding letter of intent to acquire ComGlobal Systems, Incorporated.

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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: April, 27, 2005

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