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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-K



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



For the Year Ended December 31, 2005



Commission File Number 0-5404



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Analex Corporation

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|Delaware                                                       |  | 71-0869563                             
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification Number)



2677 Prosperity
Avenue, Suite 400

Fairfax, Virginia 22031

(Address of principal executive offices)



5904 Richmond Highway, Suite 300

Alexandria, Virginia 22303

(Former address of principal executive offices)



Registrants telephone number including area code

(703) 852-4000



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



|                                        |  |                                      
|--------------------------------------- |  | -------------------------------------
|Title of Class                          |  | Name of exchange on which registered:
|Common Stock, par value $0.02 per share |  | American Stock Exchange              



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



Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes ̈No  x



Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act.    Yes ̈No  x



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



Indicate by check mark if disclosure of delinquent
filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.  x



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



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act)    Yes ̈No  x



The aggregate market value of the Common Stock of the registrant held by
non-affiliates of the registrant (based upon the closing price of the Common Stock on the American Stock Exchange on June 30, 2005) was approximately $56,965,518.



As of March 8, 2006, 16,640,004 shares of the Common Stock of the registrant were outstanding.



Documents incorporated by reference: Portions of the registrants Proxy
Statement to be filed in connection with the registrants 2006 Annual Meeting of Stockholders are incorporated by reference in Part III of the Annual Report pursuant to General Instruction G(3) to Form 10-K.



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PART I



Item 1.    Business



GENERAL OVERVIEW



We are a leading provider of mission-critical professional services to the U.S. government. We specialize in providing intelligence, systems engineering
and security services in support of our nations security. Analex focuses on developing innovative technical approaches for the intelligence community, analyzing and supporting defense systems, designing, developing and testing aerospace
systems and providing a full range of security support and engineering services to the U.S. government. We provide these services through one reportable segment represented by two strategic business units, our Homeland Security Group and our Systems
Engineering Group.



Our principal customer is the U.S.
government. Our principal U.S. government customer is the Department of Defense (DoD), which, directly or through its prime contractors, represented approximately 69%, 55%, and 42%, of our revenue for the years ended December 31,
2005, 2004, and 2003, respectively. The National Aeronautical and Space Administration (NASA) is also a significant customer, generating 30%, 44%, and 57% of our revenue for the years ended December 31, 2005, 2004 and 2003,
respectively.



Our contracts with the U.S. government are
subject to the availability of funds through annual appropriations, may be terminated by the government for its convenience at any time, and generally do not require the purchase of a fixed quantity of services or products. Reductions in U.S.
government defense or other spending could adversely affect our operating results. Contracts with the U.S. government are subject to audit by the Defense Contract Audit Agency (DCAA).



GOVERNMENT CONTRACTING INDUSTRY BACKGROUND



The preponderance of our technology and professional services business with
the DoD and NASA is obtained through competitive procurement and follow-on services related to existing business. In certain instances, however, we are awarded contracts because of our technical expertise, special professional competency or
proprietary knowledge in specific subject areas.



There are
currently three widely used contract methods in federal procurement, single award/defined statement of work contracts, indefinite delivery/indefinite quantity (ID/IQ) contracts and General Services Administration (GSA)
schedule contracts:



Single award/defined statement of work
contracts. Under this contract method, which can take a year or more to complete, an agency solicits, qualifies, and then requests proposals from interested contractors. The agency then evaluates the bids and typically awards the contract to a
single contractor for a specified service. Historically, single award/defined statement of work contracts were the most prevalent type of contract award used by federal government clients; however, the use of this type of contract is known to have
been declining for the past several years.



Indefinite
delivery/indefinite quantity (ID/IQ) contracts. Under this contract method, a federal government agency can form preferred provider relationships with one or more contractors. These umbrella contracts outline the basic terms and
conditions under which federal government agencies may order services. ID/IQ contracts are typically managed by one agency, the sponsoring agency, and may be either for the use of a specific agency or available for use by any agency of the federal
government. Contractors within the industry compete to be pre-selected to perform work under an ID/IQ contract. An ordering agency then issues delivery orders for services to be performed under the contract. If the ID/IQ contract has a single prime
contractor, only that contractor may be awarded delivery orders. If the contract has multiple



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prime contractors, the award of the delivery order typically will be competitively determined among the pre-selected contractors.



GSA schedule contracts. GSA schedule contracts are listings of
services and products, along with their respective prices, offered by federal government contractors. The GSA maintains the schedules for use by any federal agency or other authorized entity, including state and local governments. In order for a
contractor to enter into a contract with the GSA and be listed on a GSA schedule, the contractor must be pre-qualified and selected by the GSA. When an agency selects services under a GSA schedule contract, the user agency, or the GSA on its behalf,
will typically conduct a competitive process, limited to qualified GSA schedule contractors.



Due to the lower contract procurement costs, reduced procurement time, and increased flexibility associated with ID/IQ contracts and GSA schedule contracts, these vehicles have been utilized more frequently in the
last several years.



KEY FACTORS DRIVING INDUSTRY GROWTH



There are several key factors which we believe will continue to drive the
growth in the U.S. federal technology services market and our business in particular:



| |  |  | Increased spending on homeland security and national defense: National defense spending is projected to grow steadily over the next five years with the federal government
increasing its commitment to strengthen the nations security, defense and intelligence capabilities. Projections on federal government spending show increases in homeland security, information systems security, intelligence operations and
warfare simulation and training. The Presidents budget for 2006 defense spending is $419.3 billion, a 4.8% increase over the government fiscal year 2005 budget and is the largest defense budget in history in actual dollars. The
Presidents budget for 2007, presented to Congress for approval, includes $439.3 billion related to defense spending and $58.3 billion related to homeland security spending, increases of 7% and 6%, respectively, from the prior year.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Emphasis on system modernization:To offset the costs of ongoing military operations and new initiatives in homeland security, we believe the DoD will focus on technology
upgrades to take existing aircraft and ship platforms to the next generations rather than procure completely new systems. The armed services are becoming increasingly dependent on highly skilled contractors to provide the full spectrum of services
needed to support these modernization activities while focusing a reduced number of military personnel on war fighting and preparedness operations.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Increased reliance on outsourcing. Outsourcing of operations is becoming an increasingly attractive alternative for federal agencies that are striving to maintain their core
functions with limited resources and a shrinking workforce, while at the same time upgrading, standardizing and streamlining operations. We expect reductions in the federal workforce to continue due to, among other factors, a projected increase in
the number of retiring government employees.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Emphasis on security and training initiatives. The DoD has budgeted $77 billion for six years beginning in 2007 to fund new training and certification requirements for
systems administrators, and an additional $500 million has been requested for IT security initiatives resulting from the most recent quadrennial review. This funding is in addition to the $2 billion now being spent annually on information assurance
from the DODs $30 billion IT budget. We expect the government to continue to emphasize security and training initiatives as part of the focus on the war on terror and strengthening homeland defense.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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OUR APPROACH



We provide the following professional services for our federal government clients.



Information Technology Services.Our information technology services
focus on design, development, test, integration and support of software and networks for mission critical systems. We develop radar, modeling and simulation and system software, all in support of collecting, testing, and analyzing data from various
intelligence systems. We also provide the military with program management, systems engineering and software development services and the development of command, control, communications, computers and intelligence (C4I) programs.



Aerospace Engineering Services.Our aerospace
engineering services focus on engineering associated with the development, support and operations of space launch vehicles and facilities as well as independent verification and validation services. We provide services in the design and testing of
expendable launch vehicles for the Department of Defense and intelligence community. Our highly specialized expertise includes test, analysis and independent validation and verification support in areas such as structural dynamics, trajectory and
performance, thermal system performance, and range safety. Our solutions enable the simulation of a realistic operational environment so that satellites and related systems can be tested prior to deployment. We also perform verification and
validation of test results to ensure the reliability of the data.



Security and Intelligence Support Services.Our security and intelligence support services focus on analysis support and threat assessments, counterintelligence, information, network and facilities security, technology protection and
security education and training.



We provide these services
through one reportable segment consisting of two strategic business units, the Homeland Security Group and the Systems Engineering Group.



Homeland Security Group (HSG)



Our HSG provides various information technology solutions and services to our customers in the military and intelligence communities. Specific information
technology solutions and services we provide include:



| |  |  | The Tomahawk Communication System (TCOMMS) and the TCOMMS Interface Processor, which together provide the front-end interface to all communications systems and networks
required to support the operation of the Tomahawk Command and Control Systems (TC2S);
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | The PC Mission Distribution System, which provides the external link between the TC2S and the operating forces through automated and interactive Tomahawk command and control
capabilities supporting strike planning and real-time management of strike execution. Its primary mission is to distribute information and data in support of Tomahawk employment and integrated Tactical Air Operations;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | The Intelligence Situation Awareness Tool (ISAT), which is a multi-functional solution which provides tools to build, maintain and display a near real-time tactical
picture by fusing information from multiple sources. ISAT processes and combines textual, parametric and positional information to produce a situation awareness display which can be used to support a variety of command and control, tactical and
analytical situations;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | C4I program management services for the United States Air Force at the Electronic Systems Center at Hascom AFB;
| | - |  | ---------------------------------------------------------------------------------------------------------------

| |  |  | Software development, systems integration, configuration management and network administration services for the National Security Agency (NSA); and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Program management, systems engineering, software development and technical and administrative support to the Space and Naval Warfare Systems Command (SPAWAR).
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



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We provide various aerospace engineering services to our military and intelligence community customers
including independent validation and verification services to both the United States Air Force (USAF) and the National Reconnaissance Office (NRO) in support of launches of expendable launch vehicles.



We provide security and intelligence services to the Missile Defense Agency
(MDA) including an effective partnership with the Ballistic Missile Defense System (BMDS) program. Specific services include security to protect the enterprise; serving as the foreign disclosure authority for the MDA to
manage international security operations; responsibility for the management and execution of counterintelligence programs; operation security services in support of BMDS worldwide; managing the MDA Sensitive Compartmented Information
(SCI) security operations and all internal security programs; and operating and maintaining the Security Operations Center/Access Control Center. In support of the U.S. Army, we established and operate the Army Research and Technology
Protection Center (ARTPC) under the Deputy Chief of Staff for Intelligence as the single Army focal point for the integration of technology and acquisition program protection.



Systems Engineering Group (SEG)



Our SEG provides information technology and aerospace engineering services to various NASA programs. We provide engineering and information technology
services to assist in the development of space launch systems and support operations of terrestrial assets. We also assist in the launch of expendable launch vehicles and satellites, and assist in the design and construction of space-based
experiments, components and payloads associated with the International Space Station.



Our Expendable Launch Vehicle Integrated Support (ELVIS) contract with NASA was effective July 1, 2002 and has a nine-year and four-month period of performance if all option terms are exercised. In
October 2005, NASAs Kennedy Space Center exercised the first of two possible contract options. The performance period for this $65 million option is from October 1, 2005 through September 30, 2008. During this three-year option, we
will provide ground services and flight technical support in the areas of engineering; safety and mission assurance; facilities; payloads; launch vehicle/payload integration; launch operations; systems management and business services. We will
continue to provide these services for NASA at the John F. Kennedy Space Center and Cape Canaveral Air Force Station, Florida, and also at the Vandenberg Air Force Base, California. In 2005, the ELVIS contract generated $28.0 million in revenue, or
20% of our total revenue for the year. In February 2006, we were awarded an additional $32.7 million in new tasks under our ELVIS contract.



We also provide information technology and aeronautical engineering services supporting the programs of the NASA Glenn Research Center in Cleveland, Ohio
under the Glenn Engineering and Scientific Services (GESS) subcontract with QSS Corporation. These support services include development of next generation launch vehicles, engineering design and development of aerospace systems,
engineering support to research and technology development, engineering support to operations of experimental systems, and project management support. In 2005, the GESS contract generated $11.5 million in revenue, or 8.2% of our total revenue for
the year. The contract is scheduled to end in April 2006. We are currently a subcontractor to a small-business prime contractor on this contract that will not qualify as a small business for the recompetition. We plan to participate in a follow-on
recompetition with another small-business prime contractor for the follow-on recompetition of the contract in 2006.



Under our Microgravity Research Development and Operations Contract (MRDOC) subcontract with Zin Technologies, we support the NASA Glenn
Research Center in development of an automated laboratory environment to be installed aboard the International Space Station to enable research in the performance of fluids and combustion in the near-zero gravity of space. We participate in the
design, development, manufacturing, test and delivery of the fluids and combustion facility and associated subsystems. Following a contract modification received in February 2006, the MRDOC contract is scheduled to continue at a modest level through
November 2006. However, activity under this contract has been declining for the past two years since funding for additional



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experimentation facilities for the International Space Station has not been forthcoming. In 2005, the MRDOC contract generated $2.2 million in revenue, or
1.6% of our total revenue for the year.



CORE STRENGTHS



Our core strengths include our management team and the technical expertise
and capabilities of our professional staff, our past proven track record, our knowledge of the government contracting industry and processes, and our work as a prime contractor.



Management Team



Our senior executive management team has a diversified background with experiences and has taken leadership positions, in the U.S. defense, space and
intelligence communities and with larger federal government contractors. This team also has significant experience acquiring companies and successfully integrating companies after they have been acquired.



Technical Expertise of Professional Staff



We have approximately 1,100 professional staff, approximately 800 of whom
are cleared. Many of our skilled engineers hold advanced degrees and have background in and experiences with the defense and intelligence communities. Our employees include individuals who are members of the board of directors of the American
Institute of Aeronautics and Astronautics, the Institute of Validation Technology and the Colorado Space Business Roundtable, among other professional and business organizations. Our employees also write for peer-reviewed journals and give national
presentations on engineering methodologies and management techniques. In addition, we are a member of the Institute of Electrical and Electronics Engineers, the American Management Association, the Regulatory Affairs Professionals Society and the
Colorado Medical Device Association, among others.



Past proven track record



We have received numerous awards and recognition
including our being named a Deloitte Virginia Fast 50 Company in 2005 and 2004 and winning the NASA Kennedy Space Centers Prime Contractor of the Year award in 2003 and Small Business Contractor of the Year
award in 2005. In addition, since 1995 we have been the recipients of nine different industry and customer awards for excellence in the areas of customer service and project performance.



Knowledge of government contract processes



We have been a contractor or subcontractor with the DoD continuously since 1973. While we have not experienced any material adjustment of profits under
our contracts since current management has been involved with the Company, no assurance can be given that the DoD or other customers will not seek and obtain an adjustment of profits in the future. All U.S. government contracts contain clauses that
allow for the termination of contracts at the convenience of the U.S. government.



Our executives and employees have backgrounds within the U.S. military, various federal government agencies and government contractors. These experiences help us understand the government contracting industry and the
requirements to successfully compete and operate.



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Work as prime contractor



Approximately 73% of our revenue was generated as a prime contractor to the federal government and approximately 27% of our revenue was generated as a
subcontractor to a prime contractor to the federal government during the year ended December 31, 2005. We intend to focus on retaining and increasing the percentage of our business as a prime contractor because we believe it provides us with
stronger client relationships. The following table shows our revenue as a prime contractor and as a subcontractor as a percentage of our total revenue for the following years ended December 31,:



|                       |  |      |   |  |      |   |  |      |  
|---------------------- |  | ---- | - |  | ---- | - |  | ---- | -
|                       |  | 2005 |   |  | 2004 |   |  | 2003 |  
|Prime contract revenue |  | 73   | % |  | 68   | % |  | 57   | %
|Subcontract revenue    |  | 27   | % |  | 32   | % |  | 43   | %
|                       |  |      |   |  |      |   |  |      |  
|Total revenue          |  | 100  | % |  | 100  | % |  | 100  | %
|                       |  |      |   |  |      |   |  |      |  



OUR GROWTH STRATEGY



The two components of our strategy for growth are organic new business
development and completing strategically targeted acquisitions.



Organic New
Business Development



Leverage Our Longstanding Client
Relationships to Cross-Sell Our Broad Range of Services



We plan to continue expanding the volume and scope of the services we provide to our existing clients. We believe our high level of client satisfaction and deep knowledge of our clients business processes enhance our ability to
cross-sell our broad range of professional services including, but not limited to, information technology, engineering and integration, advanced scientific research, systems and mission assurance, program acquisition and advisory services, and
program and personnel security management.



Expand Our
Client Base



We believe that the federal governments
increasing reliance on outsourcing and the increased emphasis on national security and homeland security have increased our market opportunity. We have a longstanding heritage of supporting the federal government in the areas of information
technology, systems engineering, security and program management support. We intend to leverage this broad experience to expand our client base to include organizations within the federal government for which we have not historically worked. In
addition, we intend to continue strategic hiring to expand the breadth of our expertise into new areas of the federal government or new technologies.



Pursue Strategic Acquisitions



Our industry remains fragmented and we believe industry consolidation will continue. We will continue to selectively review acquisition candidates with
complementary skills and market focus to enhance our internal growth and strategically position ourselves to capitalize on anticipated high growth areas.



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EXISTING CONTRACT PROFILES



As of December 31, 2005, we had more than 200 active contract engagements, each employing one of three types of price
structures: cost-plus-fee, time and material, and fixed-price. The following table summarizes our revenue from each type of contract as a percentage of our total revenue for each year ended December 31,



|                  |  |      |   |  |      |   |  |      |  
|----------------- |  | ---- | - |  | ---- | - |  | ---- | -
|                  |  | 2005 |   |  | 2004 |   |  | 2003 |  
|Cost-plus-fee     |  | 42   | % |  | 42   | % |  | 51   | %
|Time and material |  | 34   | % |  | 39   | % |  | 33   | %
|Fixed-price       |  | 24   | % |  | 19   | % |  | 16   | %
|                  |  |      |   |  |      |   |  |      |  
|Total             |  | 100  | % |  | 100  | % |  | 100  | %
|                  |  |      |   |  |      |   |  |      |  



The
following are summary descriptions of our various contract types:



Cost-plus-fee contracts. Cost-plus-fee contracts provide for payment of allowable incurred costs, to the extent prescribed in the contract, plus a profit component. These contracts establish an estimate of total cost for the purpose
of obligating funds and establishing a ceiling that we may not exceed without the approval of the contracting officer. Cost-plus-fee contracts are suitable for use when uncertainties involved in contract performance do not permit costs to be
estimated with sufficient accuracy to use a fixed-price contract. Cost-plus-fee contracts covered by the Federal Acquisition Regulation require an audit of actual costs and provide for upward or downward adjustments if actual recoverable costs
differ from billed recoverable costs. If our costs exceed the ceiling or are not allowable under the terms of the contract or applicable regulations, we may not be able to recover those costs. Approximately 47% of our current cost-plus-fee contracts
contain ceilings on various categories of expenses. Therefore, if we incur expenses in excess of these ceilings, we will not be fully reimbursed by the government.



Time and material (T&M) contracts. T&M contracts provide for acquiring services on the basis of
direct labor hours at specified fixed hourly rates. T&M contracts may also provide for acquiring materials, including, if appropriate, material handling costs. Profit margins on T&M contracts fluctuate based on the difference between
negotiated billing rates and actual labor and overhead costs directly charged or allocated to such contracts. We assume the risk that a contracts costs of performance may exceed the negotiated hourly rates.



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



CLIENTS



Revenue derived from the U.S. government and its prime contractors represented approximately 99%, 100%, and 99% of our total revenue for the years ended December 31, 2005, 2004, 2003, respectively. The U.S.
Government is expected to continue to account for substantially all of our revenue for the foreseeable future.



Our federal government clients typically exercise independent contracting authority, and even offices or divisions within an agency or department may
directly, or through a prime contractor, use our services as a separate client so long as that client has independent decision-making and contracting authority within its organization. We consider each office or division within an agency or
department, which directly or through a prime contractor, engages us, to be a separate client.



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Approximately 20% of our revenue for fiscal year 2005 came from one prime contract from NASA, which has a
potential nine-year and four-month total contract term if all options are exercised. In addition, the Homeland Security Groups contract with one Department of Defense customer generated 11% of the Companys revenue and 44% of the
Companys operating income for the year ended December 31, 2005.



BACKLOG



We define backlog to include funded
and unfunded orders for services under existing signed contracts, assuming the exercise of all priced options relating to those contracts. We define funded backlog to be the portion of backlog for which funding currently is appropriated and
obligated to us under a contract or other authorization for payment signed by an authorized purchasing authority, less the amount of revenue we have previously recognized.



The following table summarizes our funded backlog, our unfunded contract values and our total estimated backlog (in
millions) for each year ended December 31,:



|                        |  |      |       |      |   |       |  |   |      
|----------------------- |  | ---- | ----- | ---- | - | ----- |  | - | -----
|                        |  | 2005 |       | 2004 |   | 2003 
|Funded backlog          |  | $    | 50.8  |      | $ | 57.0  |  | $ | 19.3 
|Unfunded contract value |  |      | 240.9 |      |   | 135.0 |  |   | 151.7
|                        |  |      |       |      |   |       |  |   |      
|Total estimated backlog |  | $    | 291.7 |      | $ | 192.0 |  | $ | 171.0
|                        |  |      |       |      |   |       |  |   |      



We currently expect to
recognize approximately $120.0 million of revenue during 2006 from our total backlog as of December 31, 2005. Included in the backlog estimate are amounts from future years of government contracts under which the government has the right, but
not the obligation, to exercise an option for us to perform services.



COMPETITION



In general, the industry in which
we operate includes a large number of competitors of varying sizes. Competition within the information technology and government contracting arenas is intense. We maintain a commitment to our current direct and indirect government clients, while we
are also intensifying our business development efforts to win additional government clients. We are continuing efforts to diversify our defense and intelligence client base by offering a broad-range of services such as information technology,
engineering and integration, advanced scientific research, systems and mission assurance, program acquisition and advisory services, and program and personnel security management.



We generally compete against federal systems integrators such as Booz Allen Hamilton, Lockheed Martin, Northrop Grumman,
Anteon International Corporation, CACI International Inc., Computer Sciences Corporation, and Science Applications International Corporation, among others, including a number of small and medium sized, privately-held government contractors offering
information technology and systems engineering services to the U.S. government. In addition, we compete against large aerospace contractors such as Boeing and Lockheed Martin and other small and medium sized privately held firms in the provision of
launch related services. Contract awards are based primarily on a combination of the price of services and evaluation of technical capability, as well as past performance, quality of service and responsiveness to client requirements.



EMPLOYEES



As of December 31, 2005, we employed approximately 1,100 people including full-time, part-time and casual employees. Of
the 1,100 employees, 48 are members of unions, and we believe employee relations are generally good. On November 1, 2005, the Company renewed its Collective Bargaining Agreement with the International Brotherhood of Teamsters now representing
approximately 38 employees on the NASA ELVIS contract at Vandenberg Air Force Base in California. The renewal extends this Collective Bargaining Agreement



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through November 1, 2009. In February 2006, we renewed our Collective Bargaining Agreement for three years with the International Brotherhood of
Electrical Workers now representing approximately 10 employees on the NASA ELVIS contract at the Kennedy Space Center in Florida.



GENERAL INFORMATION



Raw materials, patents, licenses, trademarks, franchises and concessions are not material to our operations. We did not engage in significant internally
sponsored research and development. We typically experience lower staff utilization rates in our fiscal third and fourth quarters. These lower utilization rates are primarily attributable to our employees taking seasonal leave. We derive no revenue
from foreign operations.



RECENT DEVELOPMENTS



On April 1, 2005, we acquired ComGlobal Systems, Inc, a software
engineering and information technology firm, specializes in C4I programs for the military. Its largest customer is the U.S. Navys Tomahawk Cruise Missile Program. ComGlobal is now a wholly-owned subsidiary of Analex and reported as a part of
our Homeland Security Group.



AVAILABLE INFORMATION



We file annual, quarterly and current reports, proxy statements and other
information with the Securities and Exchange Commission (SEC). The public may read and copy any materials we file with the SEC at the SECs Public Reference Room at 100 F Street, NE, Room 1580, Washington, DC 20549. The public may
also obtain information from the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site at http://www.sec.gov that contains reports, proxy and information statements and other information regarding issuers
that file electronically with the SEC, including us. We also provide a link to certain of our most recent filings with the SEC at our Internet site at http://www.analex.com. The information contained on our Internet site is not part of this Annual
Report.



Item 1A. Risk Factors



Risks Related To Our Business



We depend on contracts with U.S. federal government agencies,
particularly clients within the Department of Defense and NASA, for substantially all of our revenue, and if our relationships with these agencies were impaired, our business could be materially adversely affected.



Revenue derived from U.S. federal government agencies and their prime
contractors represented 99%, 100% and 99% of our total revenue for the fiscal years ended December 31, 2005, 2004 and 2003, respectively. The Department of Defense, our principal U.S. government customer, accounted for approximately 69%, 55%
and 42% of our revenue for the fiscal years ended December 31, 2005, 2004 and 2003, respectively. NASA generated 30%, 44% and 57% of our revenue for the fiscal years ended December 31, 2005, 2004 and 2003, respectively. Approximately 20%,
28% and 30% of our revenue for the fiscal years ended December 31, 2005, 2004 and 2003, respectively, came from one prime contract with NASA, which will continue until September 2011 if the remaining option is exercised in 2008. In the event
that the remaining option term is not exercised, we will not be able to recognize the full value of the contract awarded. In addition, the Homeland Security Groups contract with one Department of Defense customer generated 11%, 16% and 17% of
our revenue for the fiscal years ended December 31, 2005, 2004 and 2003, respectively, and 44%, 62% and 72% of our operating income for the fiscal years ended December 31, 2005, 2004 and 2003, respectively. We expect that federal
government contracts will continue to be the source of substantially all of our revenue for the foreseeable future. If we were suspended or debarred from contracting with the federal government generally, the Department of Defense, NASA or any
significant agency in the intelligence community, if our reputation or relationship with government agencies were impaired, or if the government otherwise ceased doing business with us or significantly decreased



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the amount of business it does with us, our business, operating results, financial condition and business prospects could be materially adversely
affected.



Changes in the spending priorities of the
federal government can materially adversely affect our business.



Our business depends upon continued federal government expenditures on defense, intelligence, aerospace and other programs that we support. Our contracts with the U.S. government are subject to the availability of
funds through annual appropriations. These contracts may be terminated by the government for its convenience at any time, and generally do not require the purchase of a fixed quantity of services or products. Reductions in the U.S. government
defense, intelligence or aerospace spending could adversely affect our operating results. Any reductions in the U.S. government spending on specific defense, intelligence, or aerospace-related programs or contracts can have a material adverse effect
on our business and revenue in the future. A significant change in the spending priorities of the federal government could cause it and its many agencies to reduce their purchases under contracts, to exercise their right to terminate contracts at
any time without penalty, or not to exercise options to renew contracts. Any such actions could cause our actual results to differ materially in an adverse manner from those anticipated. Among the factors that could adversely affect our business
are:



| |  |  | changes in federal government programs or requirements;
| | - |  | -------------------------------------------------------



| |  |  | budgetary priorities limiting or delaying federal government spending generally, or specific departments or agencies in particular, and changes in fiscal policies or reduction in
available funding;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | governmental shutdowns (such as that which occurred during the governments 1996 fiscal year) and other potential delays in the government appropriations process;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | an increase in set-asides for small businesses that could result in our inability to compete directly for certain prime contracts; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------



| |  |  | curtailment of the federal governments use of technology solutions firms.
| | - |  | --------------------------------------------------------------------------



The failure by Congress to approve budgets in a timely manner could cause the federal agencies we support to delay or
reduce spending and that could cause us to lose revenue.



On an annual basis, Congress must approve budgets that govern spending by each of the federal agencies we support. In the past, when Congress was unable to agree on budget priorities, and was therefore unable to pass the annual budget on a
timely basis, Congress has enacted a continuing resolution. A continuing resolution allows government agencies to operate at spending levels approved in the previous budget cycle. When government agencies must operate on the basis of a continuing
resolution it may delay funding we expect to receive from clients for work we are already performing and will likely result in any new initiatives being delayed, and in some cases being cancelled.



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



New legislation, procurement regulations, or union pressure could cause federal agencies to adopt restrictive procurement practices regarding the use of
third party service providers. For example, the American Federation of Government Employees, the largest federal employee union, strongly endorses legislation that may restrict the procedure by which services are outsourced to government
contractors. If such legislation were to be enacted, it would likely reduce the amount of services that could be outsourced by the federal government, which could materially reduce our future revenue.



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The Office of Management and Budget process for ensuring that government agencies would properly
support capital planning initiatives, including information technology investments, could reduce or delay federal information technology spending and cause us to lose revenue.



The Office of Management and Budget, or OMB, supervises spending by federal agencies, including enforcement of the
Government Performance Results Act. This Act requires, among other things, that federal agencies make an adequate business justification to support capital planning initiatives, including all information technology investments. The factors
considered by OMB include, among others, whether the proposed information technology investment is expected to achieve an appropriate return on investment, whether related processes are contemporaneously reviewed, whether inter-operability with
existing systems and the capacity for these systems to share data across government has been considered, and whether existing off-the-shelf products are being utilized to the extent possible. If our clients do not adequately justify proposed
information technology investments to the OMB, the OMB may refuse funding for their new or continuing information technology investments, and we may lose revenue as a result.



The loss of a key executive could impair our relationships with government clients and disrupt the management of our
business.



We believe that our success depends on the
continued contributions of the members of our senior management. We rely on our senior management to generate business and execute programs successfully. In addition, the relationships and reputation that many members of our senior management team
have established and maintain with government personnel contribute to our ability to maintain good client relations and to identify new business opportunities. Although we have stock and bonus incentives for senior management, we do not have any
employment agreements providing for a specific term of employment with any member of our senior management (with the exception of Mr. Sterling E. Phillips, our Chief Executive Officer). The loss of any member of our senior management could
impair our ability to identify new business opportunities, secure new contracts, maintain good client relations, and successfully manage our business.



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



We operate in
highly competitive markets and generally encounter intense competition. If we are unable to successfully compete for new business or win recompetitions of existing business, our revenue growth and operating margins may decline. Many of our
competitors are larger and have greater financial, technical, marketing, and public relations resources, larger client bases, and greater brand or name recognition than we do. Larger competitors include federal systems integrators such as SRA
International, CACI International Inc., ManTech Corporation, Computer Sciences Corporation and Science Applications International Corporation, divisions of large defense contractors such as General Dynamics Corporation, Lockheed Martin Corporation,
and Northrop Grumman Corporation, and consulting firms such as Booz Allen Hamilton. Our larger competitors may be able to compete more effectively for very large-scale government contracts. Our larger competitors also may be able to provide clients
with different or greater capabilities or benefits than we can provide in areas such as technical qualifications, past performance on large-scale contracts, geographic presence, the ability to provide a broader range of services without creating
conflicts of interest or intra-organizational conflicts of interest, price, and the availability of key professional personnel. Our competitors also have established or may establish relationships among themselves or with third parties, including
through joint ventures, teaming arrangements or mergers and acquisitions, to increase their ability to address client needs. Accordingly, it is possible that new competitors or alliances among competitors may continue to emerge.



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We may not receive the full amount authorized under contracts and we may not accurately estimate
our backlog.



Although some of our federal government
contracts require performance over a number of years, Congress appropriates funds for these contracts for only one year at a time. As a result, our contracts typically are only partially funded at any point during their term, and all or some of the
work intended to be performed under the contracts will remain unfunded pending subsequent Congressional appropriations and the obligation of additional funds to the contract by the procuring agency. Nonetheless, in calculating the amount of our
backlog, we include amounts from future years of government contracts under which the government has the right, but not the obligation, to exercise an option for us to perform services. Our backlog of orders, based on remaining contract value,
believed to be firm as of December 31, 2005 was approximately $291.7 million. However, because we may not receive the full amount we expect under a contract, our estimate of our backlog may be inaccurate and we may post results that differ
materially in an adverse manner from those anticipated.



We derive significant revenue from contracts awarded through a competitive bidding process, which can impose substantial costs upon us, and we will fail to maintain our current and projected revenue if we fail to compete effectively.



We derive significant revenue from federal government
contracts that are awarded through a competitive bidding process. We expect that most of the government business we seek in the foreseeable future will be awarded through competitive bidding. Competitive bidding imposes substantial costs and
presents a number of risks. Such risks include, but are not limited to



| |  |  | the need to bid on engagements in advance of the completion of their design, which may result in unforeseen difficulties in executing the engagement and cost overruns;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | the need to accurately estimate the resources and costs that will be required to service any contract we are awarded;
| | - |  | ---------------------------------------------------------------------------------------------------------------------



| |  |  | the expense and delay that may arise if our competitors protest or challenge contract awards made to us pursuant to competitive bidding, and the risk that any such protest or
challenge could result in the resubmission of bids on modified specifications, or in termination, reduction, or modification of the awarded contract; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the opportunity cost of not bidding on and winning other contracts we might otherwise pursue.
| | - |  | ---------------------------------------------------------------------------------------------



To the extent we engage in competitive bidding and are unable to win particular contracts, we not only incur substantial
costs in the bidding process that would negatively affect our operating results, but we may be precluded from operating in the market for services that are provided under those contracts for a number of years. Even if we win a particular contract
through competitive bidding, our profit margins may be depressed as a result of the costs incurred through the bidding process.



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



We provide services to the federal government under three types of contracts:
cost-plus-fee, time-and-material, and fixed-price. For the fiscal year ended December 31, 2005, 42% of our contracts were cost-plus-fee, 34% were time-and-material, and 24% were fixed-price. Each of these types of contracts, to differing
degrees, involves the risk that we could underestimate our cost of fulfilling the contract. In the event that the



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assumptions we use to formulate our pricing for the work prove to be inaccurate, we may lose money on the contract, which would adversely affect our
operating results.



| |  |  | Cost-plus-fee 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.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | Fixed-price contracts provide for delivery of products or services for a price that is negotiated in advance on the basis of the contractors cost experience. The price is not
subject to 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.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Unfavorable government audit results could force us to adjust
previously reported operating results and could subject us to a variety of penalties and sanctions.



The federal government audits and reviews our performance on contracts, pricing practices, cost structure, and compliance with applicable laws,
regulations, and standards. Like most government contractors, our contracts are audited and reviewed on a continual basis. An audit of our work, including an audit of work performed by companies we may acquire or subcontractors we have engaged or
may engage, could result in a substantial adjustment to our previously reported operating results. For example, any costs which were originally reimbursed could subsequently be disallowed. In this case, cash we have already collected may need to be
refunded and operating margins may be reduced. If a government audit uncovers improper or illegal activities, we may be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits,
suspension of payments, fines, and suspension or debarment from doing business with U.S. federal government agencies. In addition, we could suffer serious harm to our reputation if allegations of impropriety were made against us, whether or not
true.



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



Approximately 27%, 32% and 43% of our revenue for the years ended December 31, 2005, 2004 and 2003, respectively, were generated as a subcontractor to various prime contractors to the federal government. Although we intend to focus on
retaining and increasing the percentage of our business as prime contractor because it provides us with stronger client relationships, we may not succeed in doing so. If not, we will continue to depend on relationships with these and other
contractors for a significant portion of our revenue in the foreseeable future. Our business, prospects, financial condition or operating results could be adversely affected if these and other contractors eliminate or reduce their subcontracts with
us, either because they choose to establish relationships with our competitors or because they choose to directly offer services that compete with our business, or if the government terminates or reduces these other contractors programs or
does not award them new contracts.



We must continue to
recruit and retain qualified skilled employees.



An
integral part of our future success is dependent upon our continued ability to provide employees who have advanced information technology and technical services skills and who have excellent customer relationships within the defense, aerospace and
intelligence communities. As described below, many of these employees are required by our federal government clients to have security clearances of various levels issued by the appropriate agency. These employees are in great demand and are likely
to remain a limited resource in the



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foreseeable future. If we are unable to recruit and retain a sufficient number of these highly skilled employees, especially those requiring security
clearances, our ability to maintain and grow our business could be adversely affected. In addition, some of our contracts contain provisions requiring us to commit to staff a program with certain personnel the customer considers key to our
successful performance under the contract. In the event we are unable to provide these key personnel or acceptable substitutions, the client may terminate the contract, and we may not be able to recover its costs in the event the contract is
terminated.



Our business is dependent upon obtaining and
maintaining required security clearances.



Many of our
federal government contracts require our employees to maintain various levels of security clearances, and we are required to maintain certain facility security clearances complying with federal agencies requirements. Obtaining and maintaining
security clearances for employees involves a lengthy process, and it is difficult to identify, recruit and retain employees who already hold security clearances. If our employees are unable to obtain or retain security clearances or if our employees
who hold security clearances leave us, the client whose work requires cleared employees could terminate the contract or decide not to renew it upon its expiration. In addition, we expect that many of the contracts on which we will bid will require
us to demonstrate our ability to obtain facility security clearances and perform work with employees who hold specified types of security clearances. To the extent we are not able to obtain facility security clearances or engage employees with the
required security clearances for a particular contract, we may not be able to bid on or win new contracts, or effectively re-bid on expiring contracts.



Employee or subcontractor misconduct, including security breaches, could result in the loss of clients and our suspension or disbarment from
contracting with the federal government.



We may not be
able to prevent our employees or subcontractors from engaging in misconduct, fraud or other improper activities that could adversely affect our business and reputation. Misconduct could include the failure to comply with federal government
procurement regulations, regulations regarding the protection of classified information and legislation regarding the pricing of labor and other costs in government contracts. Many of the systems we develop involve managing and protecting
information involved in national security and other sensitive government functions. A security breach in one of these systems could prevent us from having access to such critically sensitive systems. The precautions we take to prevent and detect
this activity may not be effective, and we could face unknown risks or losses. As a result of employee or subcontractor misconduct, we could face fines and penalties, loss of security clearance and suspension or debarment from contracting with the
federal government, which could materially adversely affect our business, operating results and financial condition.



If our subcontractors fail to perform their contractual obligations, our performance as a prime contractor and our ability to obtain future business
could be materially and adversely impacted and our actual results could differ materially in an adverse manner from those anticipated.



Our performance of government contracts regularly involves the issuance of subcontracts to other companies upon which we rely to perform all or a portion
of the work we are obligated to deliver to our clients. There is a risk that we may have disputes from time to time with our subcontractors, including disputes regarding the quality and timeliness of the work performed. A failure by one or more of
our subcontractors to satisfactorily deliver on a timely basis the agreed-upon supplies and/or perform the agreed-upon services may materially and adversely impact our ability to perform our obligations as a prime contractor. A subcontractors
performance deficiency could result in the government terminating our contract for default. A default termination could expose us to liability for excess costs of re-procurement by the government and have a material adverse effect on our ability to
compete for future contracts and task orders. Such problems with subcontractors could materially adversely affect our business, operating results and financial condition.



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



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



| |  |  | terminate existing contracts at any time, with short notice, for convenience, as well as for default;
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | modify contracts or subcontracts;
| | - |  | ---------------------------------



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



| |  |  | cancel multi-year contracts and related orders if funding for contract performance for any subsequent year becomes unavailable;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------



| |  |  | decline to exercise an option to renew a multi-year contract;
| | - |  | -------------------------------------------------------------



| |  |  | claim rights in products, systems, and technology developed or provided by us;
| | - |  | ------------------------------------------------------------------------------



| |  |  | prohibit future procurement awards with a particular agency due to a finding of organizational conflict of interest based upon prior related work performed for the agency that would
give a contractor an unfair advantage over competing contractors;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | subject to applicable laws and regulations and for certain causes, suspend or debar us from doing business with the federal government or with a particular governmental agency.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



We must comply with a variety of laws and regulations, and our failure
to comply could cause our actual results to differ materially in an adverse manner from those anticipated.



We must observe laws and regulations relating to the formation, administration and performance of federal government contracts which affect how we do
business with our clients and may impose added costs on our business. For example, the Federal Acquisition Regulation and the industrial security regulations of the Department of Defense and related laws include provisions that:



| |  |  | allow our federal government clients to terminate or not renew our contracts if we come under foreign ownership, control or influence;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------



| |  |  | require us to disclose and certify cost and pricing data in connection with contract negotiations; and
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | require us to prevent unauthorized access to classified information.
| | - |  | --------------------------------------------------------------------



Our failure to comply with these or other laws and regulations could result in contract termination, loss of security clearances, suspension or debarment
from contracting with the federal government, civil fines and damages and criminal prosecution and penalties, any of which could materially adversely affect our business, operating results and financial condition.



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We may have difficulty identifying and executing acquisitions on favorable terms; and if we
undertake acquisitions, they could be expensive, increase our costs or liabilities, and disrupt our business.



One of our strategies is to pursue growth through acquisitions. We have completed a limited number of acquisitions in our history. We intend to acquire
businesses that complement or expand our current capabilities. These businesses are especially in demand in the current market, and other prospective purchasers who have substantially greater resources than we do may offer to acquire such businesses
upon such economic terms that are hard for us to match. We may not be able to acquire candidates at prices that we consider appropriate or to finance acquisitions on terms that are satisfactory to us. We may desire to use our common stock as
consideration in acquisitions, and therefore any decline in the market price of our common stock or any unwillingness of owners of businesses we wish to acquire to accept our common stock as part of the purchase price could adversely affect our
ability to complete acquisitions or require us to use more of our cash or incur additional financing to do so.



After an appropriate acquisition candidate has been identified, we may not be able to successfully negotiate the terms of the acquisition, finance the
acquisition or, if the acquisition occurs, successfully integrate the acquired business into our existing business. Negotiations of potential acquisitions and the integration of acquired business operations could disrupt our business by diverting
management attention away from day-to-day operations. Acquisitions of businesses or other material operations may require additional debt or equity financing, resulting in additional leverage or dilution of equity ownership. We may also not realize
cost efficiencies or synergies that we anticipated when selecting our acquisition candidates. Acquisition candidates may have liabilities or adverse operating issues that we fail to discover through our due diligence investigation prior to the
acquisition. Any costs, liabilities, or disruptions associated with any future acquisitions we may pursue could adversely affect our operating results. To the extent we are unable to pursue our acquisition strategy, we will be required to rely
exclusively on internal growth to expand our business.



We may need to raise additional capital to fund future acquisitions or be unable to raise such additional capita.



We expect that the borrowing availability under our credit facility, together with cash provided by operations, will be sufficient to fund our normal
operations for at least the next twelve months. However, we anticipate that we will need to obtain additional financing either through sale of equity and debt securities or from our credit facility to fund our acquisitions. We may seek additional
funds by incurring additional indebtedness, issuing additional equity securities, or by other means. There is no assurance that additional financing could be obtained when we need it. If additional financing is raised through sale of our equity
securities, there could be a significant dilutive effect on the ownership interests and voting rights of our existing stockholders and warrant and option holders. Currently, we have no agreements, arrangements or understandings with respect to
acquisition of any entity or business. We may also need to obtain additional financing over the next twelve months if our current plans or projections prove to be inaccurate or our expected cash flows prove to be insufficient to fund our operations
because of lower-than-expected revenues, unanticipated expenses or other unforeseen difficulties. Our ability to obtain additional financing will depend on a number of factors, including market conditions, our operating performance and investor
interest. These factors may make the timing, amount, terms and conditions of any financing unattractive.



Our substantial convertible preferred stock and debt could adversely affect our financial and operating flexibility.



On December 9, 2003, we sold $10 million in aggregate principal amount
of Series A Convertible Notes (Series A Convertible Note). The Series A Convertible Notes bear interest at an annual rate of 7% and mature on December 9, 2007. On December 9, 2003, we also issued for $15 million, 6,726,457
shares of Series A Convertible Preferred Stock (Series A Preferred Stock) and 1,345,291 Common Stock Warrants exercisable at $3.28 per share. The Series A Preferred Stock accrues dividends at 6% per annum payable quarterly in cash.
In



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May 2004, we issued in aggregate principal amount of $12 million of convertible secured senior subordinated promissory notes (Series B-1 Notes)
and 857,142 Common Stock Warrants exercisable at $4.32 per share. In September 2004, the Series B-1 Notes were converted into 3,428,571 shares of Series B Convertible Preferred Stock (Series B-1 Preferred Stock). In April 2005, the
Company issued for $25 million, an additional 7,142,856 shares of Series B Convertible Preferred Stock (Series B-2 Preferred Stock) and 1,785,713 Common Stock Warrants exercisable at $4.29 per share. All Series B Convertible Preferred
Stock accrues dividends at 6% per annum payable quarterly in cash. Our quarterly preferred stock dividend expense is approximately $800,000. No assurance can be given that sufficient funds will be available to meet our operating needs, to pay
the dividends on the Series A Preferred Stock, the Series B Preferred Stock, or to redeem the Series A Convertible Note, the Series A Preferred Stock and the Series B Preferred Stock in accordance with their respective terms. In connection with the
acquisition of ComGlobal, we amended our credit agreement with Bank of America. Our revolving credit facility with Bank of America was increased to $40 million. We drew down $22 million from the credit facility on April 1, 2005 in connection
with our acquisition of ComGlobal. As of December 31, 2005, the Company had an outstanding balance under its credit facility with Bank of America of approximately $27.6 million. The balance outstanding on our revolving credit facility is
serviced by our operating cash flows. This may affect our ability to meet the interest and dividend obligations of the Series A and Series B instruments.



Our debt instruments contain numerous financial and operational covenants that further limit our operational flexibility.



Our credit facility with Bank of America contains financial covenants setting
forth certain maximum ratios for total funded debt to EBITDA and minimum ratios for fixed charge coverage. The credit facility also restricts our ability to dispose of properties, incur additional indebtedness, pay dividends (except to holders of
Series A and Series B Preferred Stock) or other distributions, create liens on assets, enter into certain leaseback transactions, make investments, loans or advances, engage in mergers or consolidations, and engage in transactions with affiliates.
The credit facility is generally secured by all the assets of our business.



Our ability to comply with the financial covenants in our credit agreement will be affected by our financial performance as well as events beyond our control, including prevailing economic, financial and industry
conditions. The breach of any of the covenants in our credit agreements could result in a default, which would permit Bank of America to declare all amounts borrowed thereunder, together with accrued and unpaid interest, to be due and payable. If we
are unable to repay our indebtedness, Bank of America could exercise its security rights against our accounts receivable and other assets which are the collateral securing the indebtedness.



We cannot predict the results of legal proceedings which may arise from
time to time in the ordinary course of business or in relation to our acquisition activities.



From time to time we are involved in legal proceedings arising in the ordinary course of our business. We cannot predict the nature, extent and timing of
such legal proceedings. Furthermore, we cannot predict whether the outcome of such legal proceedings could have a material adverse effect on our operating results or cash flows.



We were 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. We entered into a Settlement Agreement dated July 22, 2004 with Swales. Under the terms of
the Settlement Agreement, we 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 we received payment. Legal
fees are expected to be approximately $290,000. We have received an opinion from legal counsel 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, we established a receivable of approximately $1.0 million related to the expected reimbursement of these costs. In May 2005, we received oral customer feedback that the costs were
allowable



18



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and allocable to the contract, but the reasonableness of these costs still needed to be assessed by NASA. Based on the opinion of legal counsel and
managements assessment of relevant facts, we believed and continue to believe that the costs incurred are allowable, allocable and reasonable. During the quarter ended December 31, 2005, we met with NASA procurement personnel who
indicated to us that prior NASA communications with respect to allowability and allocability should not be relied upon. While we continue to believe that the full amount is allowable, allocable and reasonable, and therefore should be recoverable
under the ELVIS contract with NASA, we have concluded that a reserve of $500,000 is appropriate as of December 31, 2005. We intend to continue to use all reasonable efforts to recover the full amount of our costs from NASA.



We were served on April 29, 2005 with a complaint filed by H&K
Strategic Business Solutions, LLC (HKSBS) in Virginia Circuit Court alleging breach of contract and other claims relating to a Corporate Acquisition Agreement between the parties, dated February 10, 2004, which we terminated on
February 14, 2005. Under the complaint, HKSBS is seeking damages of $830,000 together with legal fees and expenses. This matter is scheduled for trial on March 20 and 21, 2006, and in the event that HKSBS prevails, we could be held liable for
up to the full amount of the damages sought; and that result could have a material adverse effect on our operating results and cash flows. We have filed a counter-claim against HKSBS seeking reimbursement of prior retainer payments made to HKSBS of
approximately $110,000, plus certain legal fees.



Risks Related to Our
Common Stock



It is likely that we will continue to
report net losses to common shareholders due to certain non-cash accretions arising from our financing instruments.



It is likely that we will continue to report net losses to common shareholders due to non-cash accretions related to the outstanding Series A Convertible
Note, Series A Preferred Stock and Series B Preferred Stock. An aggregate of 3,428,571 shares of Series B Preferred Stock were issued and sold in connection with our acquisition of Beta Analytics, Inc (BAI) in 2004. An aggregate of
7,142,856 shares of Series B Preferred Stock were issued in connection with our acquisition of ComGlobal in April 2005. Pursuant to the U.S. Generally Accepted Accounting Principles, accounting for the Series A Convertible Note, the Series A
Preferred Stock and Series B Preferred Stock and related Warrants (collectively, the Financing Instruments) will include cash and non-cash charges each year for as long as the Financing Instruments remain outstanding and are not
converted into our common stock. We incur quarterly non-cash interest and accretion charges of approximately $2.0 million on our outstanding Financing Instruments and cash charges of approximately $1.0 million. In addition, a significant portion of
these charges are not tax deductible.



Investors, whose
interests may not be aligned with yours, will have the ability to exercise significant influence over the Company, which could result in actions of which you or other stockholders may not approve.



Using the method of calculation in accordance with the SEC rules on
beneficial ownership, General Electric Pension Trust (GEPT) and New York Life Capital Partners II, LP (NYL) together with Pequot Private Equity Fund III, L.P and Pequot Offshore Private Equity Partners III, L.P (collectively,
Pequot, and together with GEPT and NYL, the Investors) currently beneficially hold approximately 29%, 23%, and 52% of our outstanding voting securities, respectively. Pursuant to the provisions of an Amended and Restated
Stockholders Agreement dated May 28, 2004, the Investors together with certain other principal stockholders, have agreed to vote their securities for a nine-person board comprised of the CEO, two (2) directors designated by a Pequot
Majority in Interest (as defined in the Amended and Restated Stockholders Agreement), one (1) non-employee director designated by our CEO and reasonably acceptable to the Investors, and five (5) independent directors nominated by our
Nominating Committee. In the event that we fail to redeem the Series A Preferred Stock or the



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Series B Preferred Stock and such failure continues for a period of nine (9) consecutive months, Pequot or the Investors, if required after
September 15, 2008, as the case may be, will have the right to designate additional members to the Board as is necessary for the members of the Board designated by Pequot or the Investors, as the case may be, to constitute a majority of the
Board. In addition, for as long as 50% of the Series A Preferred Stock originally issued remains outstanding or 25% of the Series B Preferred Stock originally issued remains outstanding, we may not take numerous actions without obtaining the written
consent of the holders of a majority of the Series A Preferred Stock or the Series B Preferred Stock.



Holders of our Preferred Stock have such a significant ownership interests that it could deter any third party from making an offer to buy our
company.



The significant ownership interest and
significant influence of the Investors as a whole could effectively deter a third party from making an offer to acquire our company, which might involve a premium over the current stock price or other benefits for stockholders, or otherwise prevent
changes in the control or management of our company. Both the Series A Preferred Stock and the Series B Preferred Stock bear a cumulative annual dividend of 6%. If our available cash for operations does not meet certain specified levels or if the
cash dividend payment on the Series A Preferred Stock or the Series B Preferred Stock will result in an event of default under our credit facility, dividends will be paid in additional shares of Series A Preferred Stock or Series B Preferred Stock,
as the case may be, causing our Investors ownership interest to be even higher. There are also no restrictions, in the form of a standstill agreement or otherwise, on the ability of the Investors or its affiliates to purchase additional
securities of our Company and thereby further consolidate their ownership interest.



A substantial number of shares are eligible for sale in the near future, which could cause our Common Stock price to decline significantly.



Future sales of our Common Stock in the public market could lower our stock price and impair our ability to raise funds in
any new stock offerings. As of December 31, 2005, we had approximately 16.3 million outstanding shares of Common Stock that were subject to dilution by:



| |  |  | 6,726,457 shares of Common Stock that are issuable upon conversion of 6,726,457 shares of Series A Preferred Stock;
| | - |  | -------------------------------------------------------------------------------------------------------------------



| |  |  | 3,321,707 shares of Common Stock that are issuable upon conversion of 3,321,707 shares of Series A Convertible Note;
| | - |  | --------------------------------------------------------------------------------------------------------------------



| |  |  | 13,214,283 shares of Common Stock that are issuable upon conversion of 10,571,427 shares of Series B Preferred Stock;
| | - |  | ---------------------------------------------------------------------------------------------------------------------



| |  |  | 4,652,487 shares of Common Stock that are issuable upon the exercise of the Common Stock Warrants; and
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | 3,802,771 shares of Common Stock issuable upon the exercise of the outstanding vested stock options and/or warrants.
| | - |  | --------------------------------------------------------------------------------------------------------------------



Sales of a substantial amount of Common Stock in the public market, or the perception that
these sales may occur, could adversely affect the market price of our Common Stock prevailing from time to time in the public market and could impair our ability to raise funds in additional stock offerings.



The price of our Common Stock could be volatile.



Our Common Stock is listed on the American Stock Exchange and has
experienced, and may experience in the future, significant price and volume fluctuations which could adversely affect the market price of our Common Stock without regard to our operating performance. In addition, the trading price of our Common
Stock could be subject to significant fluctuations in response to actual or anticipated variations in our quarterly



20



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operating results announcements by us or our competitors, factors affecting the defense, intelligence and/or aerospace industries generally, changes in
national or regional economic conditions, changes in securities analysts estimates for our competitors or industrys future performance or general market conditions. The market price of our Common Stock could also be affected by
general market price declines or market volatility in the future or future declines or volatility in the prices of stocks for companies in our industry.



As a result of the preferential rights of Series A and Series B Preferred Stock, holders of Common Stock may receive no payment at all upon a
liquidation of our Company.



Upon any liquidation,
dissolution or winding up of our Company, holders of Series A Preferred Stock and Series B Preferred Stock are entitled to receive, out of our assets available for stockholder distributions and prior to distributions to junior securities (including
our Common Stock), an amount equal to, in the case of Series A Preferred Stock, the Series A Preferred Stock purchase price plus any accrued but unpaid dividends, and in the case of Series B Preferred Stock, the Series B Preferred Stock purchase
price plus any accrued but unpaid dividends. No distribution upon liquidation may be made to the holders of Common Stock until the holders of the Series A Preferred Stock and Series B Preferred Stock have been paid their liquidation preferences. As
a result, it is possible that, upon liquidation, all amounts available for the holders of our equity would be paid to the holders of the Series A Preferred Stock and Series B Preferred Stock, and that the holders of Common Stock would not receive
any payment.



Item 2.    Properties



As of December 31, 2005, we own real property with approximately
4,300 square feet. This property, the former corporate headquarters of BAI, is located in Upper Marlboro, Maryland. This property is currently under contract for sale, although there is no assurance that the sale will close. We also leased a total
of approximately 153,000 square feet of office space, including approximately 28,500 square feet at our new corporate headquarters located at 2677 Prosperity Ave., Suite 400, Fairfax, VA 22031. In addition to our headquarters and operations in
Virginia, we lease facilities in Maryland, Florida, Colorado, Ohio, Nevada and California. These leases expire at various dates through 2012. (See Note 12 of the Notes to Consolidated Financial Statements.)



Item 3.    Legal Proceedings



We were 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 our ELVIS contract with NASA. We entered into a Settlement Agreement dated
July 22, 2004 with Swales. Under the terms of the Settlement Agreement, we 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 we received payment. Legal fees are expected to be approximately $290,000. We have received an opinion from legal counsel 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, we established a receivable of approximately $1.0 million related to the expected reimbursement of these costs. In May 2005, we
received oral customer feedback that the costs were allowable and allocable to the contract, but the reasonableness of these costs still needed to be assessed by NASA. Based on the opinion of legal counsel and managements assessment
of relevant facts, we believed and continue to believe that the costs incurred are allowable, allocable and reasonable. During the quarter ended December 31, 2005, we met with NASA procurement personnel who indicated to us that prior NASA
communications with respect to allowability and allocability should not be relied upon. While we continue to believe that the full amount is allowable, allocable and reasonable, and therefore should be recoverable under the ELVIS contract with NASA,
we have concluded that a reserve of $500,000 is appropriate as of December 31, 2005. We intend to continue to use all reasonable efforts to recover the full amount of our costs from NASA.



21



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On April 29, 2005 we were served with a compliant filed by H&K Strategic Business Solutions, LLC
(HKSBS) in Virginia Circuit Court alleging breach of contract relating to a Corporate Acquisition Agreement between the parties, dated February 10, 2004 that we terminated on February 14, 2005. Under the complaint, HKSBS is
seeking damages of $830,000 together with legal fees and expenses. We believe the complaint is without merit, however, we cannot predict the outcome of the proceeding at this time. We have filed a counter-claim against HKSBS seeking reimbursement of
prior retainer payments made to HKSBS of approximately $110,000, plus certain legal fees. This matter is scheduled for trial on March 20 and 21, 2006. In the event that HKSBS prevails, we could be held liable for up to the full amount of the
damages sought; and that result could have a material adverse effect on our operating results and cash flows.



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



We held our Annual Meeting of Stockholders on May 19, 2005. Results of the meeting can be found in Item 4 of our Form 10-Q for the fiscal
quarter ended June 30, 2005, filed with the Securities and Exchange Commission on August 2, 2005, and the same is being incorporated by reference herein.



PART II



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



Our Common Stock is listed on the
American Stock Exchange and trades under the symbol NLX.



The range of the high and low sales prices for the Common Stock, as reported on the American Stock Exchange, for each quarterly period during 2005 and 2004 are shown below. The prices presented below reflect inter-dealer prices without
retail mark-ups, mark-downs or commissions, and may not reflect actual transactions.



|                                  |  |      |  |     
|--------------------------------- |  | ---- |  | ----
|Year Ended December 31, 2005      |  | High |  | Low 
|First Quarter (1/1 to 3/31/05)    |  | 4.49 |  | 3.25
|Second Quarter (4/1 to 6/30/05)   |  | 3.80 |  | 3.01
|Third Quarter (7/1 to 9/30/05)    |  | 3.93 |  | 2.96
|Fourth Quarter (10/1 to 12/31/05) |  | 3.20 |  | 2.86
|                                  |  |     
|Year Ended December 31, 2004      |  | High |  | Low 
|First Quarter (1/1 to 3/31/04)    |  | 4.70 |  | 3.19
|Second Quarter (4/1 to 6/30/04)   |  | 5.35 |  | 2.90
|Third Quarter (7/1 to 9/30/04)    |  | 3.50 |  | 2.60
|Fourth Quarter (10/1 to 12/31/04) |  | 5.00 |  | 3.08



As of March 7,
2006, there were approximately 2,400 shareholders of record of our common stock. No cash dividends were paid to common shareholders during 2005 or during the past three fiscal years, and no dividends are expected to be declared during 2006 for
common shareholders. Our ability to pay dividends on our common stock requires the consent of the holders of the Series A Preferred Stock and Series B Preferred Stock and Bank of America, N.A., as required under our credit agreement with them.



22



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Item 6.    Selected Consolidated Financial Data



The following selected consolidated financial data as of December 31,
2005, 2004, 2003, 2002 and 2001 have been taken from our consolidated financial statements. This data should be read in conjunction with Managements Discussion and Analysis of Financial Condition and Results of Operations, and the
consolidated financial statements and the related notes thereto included elsewhere in this Report.



|                                                               |  |                                                     |         |   |                   |   |        |                   |  |   |                   |   |  |                   |        |   |  |   |        |  
|-------------------------------------------------------------- |  | --------------------------------------------------- | ------- | - | ----------------- | - | ------ | ----------------- |  | - | ----------------- | - |  | ----------------- | ------ | - |  | - | ------ | -
|                                                               |  | YearEnded12/31/05                                   |         |   | YearEnded12/31/04 |   |        | YearEnded12/31/03 |  |   | YearEnded12/31/02 |   |  | YearEnded12/31/01 |       
|                                                               |  | (In thousands of dollars, except per share amounts) |        
|Total revenue                                                  |  | $                                                   | 141,162 |   |                   | $ | 94,417 |                   |  | $ | 62,327            |   |  | $                 | 52,514 |   |  | $ | 17,184 |  
|Operating income                                               |  |                                                     | 9,002   |   |                   |   | 6,306  |                   |  |   | 3,562             |   |  |                   | 3,159  |   |  |   | 318    |  
|Interest expense, net of interest income                       |  |                                                     | (3,846  | ) |                   |   | (8,922 | )                 |  |   | (520              | ) |  |                   | (1,018 | ) |  |   | (217   | )
|Income (loss) from continuing operations                       |  |                                                     | 1,907   |   |                   |   | (3,809 | )                 |  |   | 2,731             |   |  |                   | 2,132  |   |  |   | 82     |  
|Income from discontinued operations, net of income taxes       |  |                                                     |        |   |                   |   | 8      |                   |  |   | 16                |   |  |                   | 225    |   |  |   | 114    |  
|Loss on disposal of discontinued operations, net of income tax |  |                                                     | (113    | ) |                   |   | (545   | )                 |  |   |                  |   |  |                   |       |   |  |   |       |  
|Dividends on Series A Convertible Preferred Stock              |  |                                                     | (900    | ) |                   |   | (903   | )                 |  |   | (57               | ) |  |                   |       |   |  |   |       |  
|Dividends on Series B-1 Convertible Preferred Stock            |  |                                                     | (720    | ) |                   |   | (211   | )                 |  |   |                  |   |  |                   |       |   |  |   |       |  
|Dividends on Series B-2 Convertible Preferred Stock            |  |                                                     | (1,125  | ) |                   |   |       |                   |  |   |                  |   |  |                   |       |   |  |   |       |  
|Accretion of convertible preferred stock                       |  |                                                     | (5,706  | ) |                   |   | (3,750 | )                 |  |   | (236              | ) |  |                   |       |   |  |   |       |  
|                                                               |  |                                                     |         |   |                   |   |        |                   |  |   |                   |   |  |                   |        |   |  |   |        |  
|Net income available to common shareholders                    |  | $                                                   | (6,657  | ) |                   | $ | (9,210 | )                 |  | $ | 2,454             |   |  | $                 | 2,357  |   |  | $ | 196    |  
|                                                               |  |                                                     |         |   |                   |   |        |                   |  |   |                   |   |  |                   |        |   |  |   |        |  
|Net income (loss) available to common shareholders per share:  |  |                                                     |         |   |                   |   |        |                   |  |   |                   |   |  |                   |        |   |  |   |        |  
|Continuing operations:                                         |  |                                                     |         |   |                   |   |        |                   |  |   |                   |   |  |                   |        |   |  |   |        |  
|Basic                                                          |  | $                                                   | (0.41   | ) |                   | $ | (0.60  | )                 |  | $ | 0.16              |   |  | $                 | 0.15   |   |  | $ | 0.01   |  
|                                                               |  |                                                     |         |   |                   |   |        |                   |  |   |                   |   |  |                   |        |   |  |   |        |  
|Diluted                                                        |  | $                                                   | (0.41   | ) |                   | $ | (0.60  | )                 |  | $ | 0.14              |   |  | $                 | 0.13   |   |  | $ | 0.01   |  
|                                                               |  |                                                     |         |   |                   |   |        |                   |  |   |                   |   |  |                   |        |   |  |   |        |  
|Discontinued operations:                                       |  |                                                     |         |   |                   |   |        |                   |  |   |                   |   |  |                   |        |   |  |   |        |  
|Basic                                                          |  | $                                                   | (0.01   | ) |                   | $ | (0.04  | )                 |  | $ | 0.00              |   |  | $                 | 0.01   |   |  | $ | 0.02   |  
|                                                               |  |                                                     |         |   |                   |   |        |                   |  |   |                   |   |  |                   |        |   |  |   |        |  
|Diluted                                                        |  | $                                                   | (0.01   | ) |                   | $ | (0.04  | )                 |  | $ | 0.00              |   |  | $                 | 0.01   |   |  | $ | 0.01   |  
|                                                               |  |                                                     |         |   |                   |   |        |                   |  |   |                   |   |  |                   |        |   |  |   |        |  
|Net income (loss) available to common shareholders:            |  |                                                     |         |   |                   |   |        |                   |  |   |                   |   |  |                   |        |   |  |   |        |  
|Basic                                                          |  | $                                                   | (0.42   | ) |                   | $ | (0.64  | )                 |  | $ | 0.16              |   |  | $                 | 0.16   |   |  | $ | 0.03   |  
|                                                               |  |                                                     |         |   |                   |   |        |                   |  |   |                   |   |  |                   |        |   |  |   |        |  
|Diluted                                                        |  | $                                                   | (0.42   | ) |                   | $ | (0.64  | )                 |  | $ | 0.14              |   |  | $                 | 0.14   |   |  | $ | 0.02   |  
|                                                               |  |                                                     |         |   |                   |   |        |                   |  |   |                   |   |  |                   |        |   |  |   |        |  
|At period end:                                                 |  |                                                     |         |   |                   |   |        |                   |  |   |                   |   |  |                   |        |   |  |   |        |  
|Total assets                                                   |  |                                                     | 131,092 |   |                   |   | 74,922 |                   |  |   | 43,632            |   |  |                   | 30,784 |   |  |   | 25,625 |  
|Long-term liabilities                                          |  |                                                     | 38,938  |   |                   |   | 12,767 |                   |  |   | 5,476             |   |  |                   | 4,430  |   |  |   | 5,064  |  
|Working capital                                                |  |                                                     | 22,439  |   |                   |   | 10,219 |                   |  |   | 17,185            |   |  |                   | 676    |   |  |   | (43    | )
|Shareholders equity                                           |  |                                                     | 38,961  |   |                   |   | 32,966 |                   |  |   | 29,493            |   |  |                   | 13,902 |   |  |   | 11,175 |  



See Item 7
Managements Discussion and Analysis for an explanation of events that materially affect comparability.



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



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



FORWARD-LOOKING STATEMENTS



Certain matters contained in the following 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



23



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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 in an adverse manner from those anticipated in these forward-looking statements for many reasons, and as a result of many factors,
including those identified in the Risk Factors section of this Form 10-K



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



INTRODUCTION



This managements discussion and analysis of financial condition and
results of operations is intended to provide readers with an understanding of our past performance, financial condition and future prospects. We will discuss and provide our analysis of the following:



| |  |  | Overview of business
| | - |  | --------------------



| |  |  | Selected key metrics evaluated by management
| | - |  | --------------------------------------------



| |  |  | Results of operations and related information
| | - |  | ---------------------------------------------



| |  |  | Liquidity and capital resources
| | - |  | -------------------------------



| |  |  | New accounting pronouncements
| | - |  | -----------------------------



OVERVIEW OF BUSINESS



We are a leading provider of mission-critical professional services to the U.S. government. We specialize in providing intelligence, systems engineering
and security services in support of our nations security. Analex focuses on developing innovative technical approaches for the intelligence community, analyzing and supporting defense systems, designing, developing and testing aerospace
systems and providing a full range of security support services to the U.S. government. We specialize in the following professional services:



Information Technology Services.Our information technology services focus on design, development, test, integration and support of software and
networks for mission critical systems. We develop radar, modeling and simulation and system software, all in support of collecting, testing, and analyzing data from various intelligence systems. We also provide the military with program management,
systems engineering and software development services, including the development of command, control, communications, computers and intelligence (C4I) programs.



Aerospace Engineering Services.Our aerospace engineering services focus on engineering associated with the
development, support and operations of space launch vehicles and facilities as well as independent verification and validation services. We provide services in the design and testing of expendable launch vehicles for the Department of Defense
(DoD) and intelligence community. Our highly specialized expertise includes test, analysis and independent validation and verification support in areas such as structural dynamics, trajectory and performance, thermal system performance,
and range safety. Our solutions enable the simulation of a realistic operational environment so that satellites and related systems can be tested prior to deployment. We also perform verification and validation of test results to ensure the
reliability of the data.



24



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Security and Intelligence Support Services.Our security and intelligence support services focus
on analysis support and threat assessments, counterintelligence, information, network and facilities security, technology protection and security education and training.



Our principal customer is the U.S. government. Revenue generated from contracts to federal government agencies and their
prime contractors represented approximately 99%, 100% and 99% of our total revenue for the years ended December 31, 2005, 2004 and 2003, respectively. Our principal U.S. government customer is the DoD, which, directly or through its prime
contractors, accounted for approximately 69%, 55%, and 42%, of our revenue for the years ended December 31, 2005, 2004, and 2003, respectively. NASA is also a significant customer, generating 30%, 44%, and 57% of our revenue for the years ended
December 31, 2005, 2004 and 2003, respectively. For fiscal years ended December 31, 2005, 2004 and 2003, approximately 11%, 16% and 17%, respectively, of our revenue and 44%, 62% and 72%, respectively, of our operating income came from one
prime contract with an agency within the Department of Defense. For fiscal years ended December 31, 2005, 2004 and 2003 approximately 20%, 28% and 30%, respectively, of our revenue came from one prime contract with NASA, which will continue
until September 2011, if the remaining contract option is exercised in 2008. We expect that federal government contracts will continue to be the source of substantially all of our revenue for the foreseeable future.



We provide our services through one reportable segment, comprised of two
strategic business units, our Homeland Security Group (HSG) and our Systems Engineering Group (SEG). HSG accounted for approximately 69.9% of our revenue for the year ended December 31, 2005. HSG provides information
technology services, aerospace engineering services and security and intelligence support services to the agencies within the intelligence community such as the National Reconnaissance Office (NRO), the Missile Defense Agency and the
National Security Agency. HSG also provides services to the DoD, and major aerospace contractors, such as Lockheed Martin and Northrop Grumman. We expect that our Homeland Security Group will continue to benefit from the countrys shifting
priorities towards national defense and homeland security and emphasis on enhanced intelligence capabilities.



SEG accounted for approximately 30.1% of our revenue for the year ended December 31, 2005. SEG provides aerospace engineering services and
information technology services, including program management support, primarily to NASA and major aerospace contractors in support of the development of space-based systems. SEG also supports the operation of terrestrial assets and the launch of
unmanned rockets by NASA under our Expendable Launch Vehicle Integrated Support (ELVIS) contract. Specific capabilities of the Systems Engineering Group include expendable launch vehicle engineering, space systems development, and ground
support for space operations.



On April 1, 2005, we
acquired ComGlobal Systems, Incorporated (ComGlobal). ComGlobal, a software engineering and information technology firm, specializes in C4I programs for the military. Its largest customer is the U.S. Navys Tomahawk Cruise Missile
Program. ComGlobal is a wholly-owned subsidiary of Analex and is reported as a part of our Homeland Security Group.



On May 28, 2004, we acquired Beta Analytics, Inc. (BAI). 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. BAI is a wholly-owned subsidiary of Analex
and is reported as a part of our Homeland Security Group.



During the second quarter of 2004, we concluded that our then wholly-owned subsidiary, Advanced Biosystems, Inc. (ABS), did not fit with our long-term strategic plan and decided to divest ABS. ABS was engaged in biomedical
research for broad-spectrum defenses against toxic agents capable of being used as bioterrorist weapons, such as anthrax and smallpox. We disposed of ABS on November 16, 2004. Therefore, the



25



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results of operations of ABS are reported as discontinued operations, net of applicable income taxes, for all periods presented. Historically, we reported
ABS as a separate business segment.



We generate a majority of
our revenue as a prime contractor to the federal government. Our objective is to focus on retaining and increasing the percentage of our business as a prime contractor because we believe it provides us with stronger client relationships. The
following table summarizes our revenue as a prime contractor and as subcontractor as a percentage of our total revenue for the years ended December 31,:



|                       |  |      |   |  |      |   |  |      |  
|---------------------- |  | ---- | - |  | ---- | - |  | ---- | -
|                       |  | 2005 |   |  | 2004 |   |  | 2003 |  
|Prime contract revenue |  | 73   | % |  | 68   | % |  | 57   | %
|Subcontract revenue    |  | 27   | % |  | 32   | % |  | 43   | %
|                       |  |      |   |  |      |   |  |      |  
|Total revenue          |  | 100  | % |  | 100  | % |  | 100  | %
|                       |  |      |   |  |      |   |  |      |  



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



SELECTED KEY METRICS EVALUATED BY MANAGEMENT



We manage and assess the performance of our business by evaluating a variety of metrics. Selected key metrics are discussed below.



Revenue Growth



Our revenue growth during 2005 was driven primarily by strategic acquisitions. Our total revenue growth rate was 49.5% for 2005, compared to 51.5% for
2004. Organic growth decelerated in 2005 as certain customers experienced funding reductions to help offset the cost of the continuing war in Iraq. We have recently begun to make incremental investments in a centralized business development team and
new processes that we believe will improve future organic revenue growth.



Contract Backlog



Future growth is dependent upon the strength of our target markets, our ability to identify opportunities, and our ability to successfully bid and win new contracts. Our success can be measured in part based upon the growth of our backlog.
The following table summarizes our contract backlog as of December 31,:



|                        |  |      |       |      |   |       |  |   |      
|----------------------- |  | ---- | ----- | ---- | - | ----- |  | - | -----
|                        |  | 2005 |       | 2004 |   | 2003 
|Funded backlog          |  | $    | 50.8  |      | $ | 57.0  |  | $ | 19.3 
|Unfunded contract value |  |      | 240.9 |      |   | 135.0 |  |   | 151.7
|                        |  |      |       |      |   |       |  |   |      
|Total estimated backlog |  | $    | 291.7 |      | $ | 192.0 |  | $ | 171.0
|                        |  |      |       |      |   |       |  |   |      



Our total backlog of
over $291.7 million as of December 31, 2005 represented a 52% increase over the backlog as of December 31, 2004. We currently expect to recognize revenue during fiscal 2006 from approximately 41% of our total backlog as of
December 31, 2005.



Contract mix



Contract profit margins are generally affected by the type of contracts
we have. We can typically earn higher profits on fixed-price and time-and-material contracts than cost-plus-fee contracts. Thus, an important part



26



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of growing our operating income is to increase the amount of services delivered under fixed-price and time and material contracts. The following table
summarizes our historical contract mix, measured as a percentage of total revenue, for the years ended December 31,:



|                  |  |      |   |  |      |   |  |      |  
|----------------- |  | ---- | - |  | ---- | - |  | ---- | -
|                  |  | 2005 |   |  | 2004 |   |  | 2003 |  
|Cost-plus-fee     |  | 42   | % |  | 42   | % |  | 51   | %
|Time and material |  | 34   | % |  | 39   | % |  | 33   | %
|Fixed-price       |  | 24   | % |  | 19   | % |  | 16   | %
|                  |  |      |   |  |      |   |  |      |  
|Total             |  | 100  | % |  | 100  | % |  | 100  | %
|                  |  |      |   |  |      |   |  |      |  



While our government
clients typically determine what type of contract will be awarded to us, where we have the opportunity to influence the type of contract awarded, we will pursue time-and-material and fixed-price contracts for the reasons discussed above.



Earnings Before Interest, Taxes, Depreciation and Amortization
(EBITDA)



We believe EBITDA is useful in
evaluating our results because it excludes certain non-cash expenses that are not directly related to our core operating performance. EBITDA is calculated by adding net interest expense, income taxes, discontinued operations, depreciation and
amortization to net income. EBITDA for the years ended December 31, 2005, 2004 and 2003 was $13.1 million, $8.0 million and $4.1 million, respectively. EBITDA, as a percentage of revenue, the years ended December 31, 2005, 2004 and 2003
was 9.3%, 8.5% and 6.6%, respectively.



EBITDA, or earnings
before interest, taxes, depreciation and amortization, is 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 should not be considered as a
substitute either for net income, as an indicator of our operating performance, or for cash flow, as measures of our liquidity. In addition, because all companies do not calculate EBITDA identically, our presentation of EBITDA may not be comparable
to other similarly titled measures of other companies.



Days Sales Outstanding



Days sales
outstanding, or DSO, is a measure of how efficiently we manage the billing and collection of our accounts receivable, our most significant working capital requirement. For the fiscal quarter ended December 31, 2005 our DSO was 75 days. This
represents an increase over the approximately 60 days we have historically experienced. Timing issues related to certain contract actions arising during the fourth quarter are primarily responsible for this increase. We believe these contract
actions have been addressed and expect our DSO to trend more towards historical levels.



27



---

RESULTS OF OPERATIONS AND RELATED INFORMATION



The following table sets forth some items from our consolidated statements of operations, and these items expressed as a
percentage of revenue, for the periods indicated.



|                                                                 |  |                         |         |   |              |       |    |      |   |        |              |  |       |          |  |         |   
|---------------------------------------------------------------- |  | ----------------------- | ------- | - | ------------ | ----- | -- | ---- | - | ------ | ------------ |  | ----- | -------- |  | ------- | --
|                                                                 |  | Year Ended December 31, |        
|                                                                 |  | 2005                    |         |   | % of Revenue |       |    | 2004 |   |        | % of Revenue |  |       | % Change | 
|                                                                 |  | (in thousands)          |        
|Revenue                                                          |  | $                       | 141,162 |   |              | 100.0 | %  |      | $ | 94,417 |              |  | 100.0 | %        |  | 49.5    | % 
|Operating cost and expenses                                      |  |                         |         |   |              |       |    |      |   |        |              |  |       |          |  |         |   
|Cost of revenue                                                  |  |                         | 112,374 |   |              | 79.6  |    |      |   | 75,605 |              |  | 80.1  |          |  | 48.6    |   
|Selling, general and administrative                              |  |                         | 15,681  |   |              | 11.1  |    |      |   | 10,777 |              |  | 11.4  |          |  | 45.5    |   
|Depreciation and amortization                                    |  |                         | 732     |   |              | 0.5   |    |      |   | 308    |              |  | 0.3   |          |  | 137.7   |   
|Amortization of intangible assets                                |  |                         | 3,373   |   |              | 2.4   |    |      |   | 1,421  |              |  | 1.5   |          |  | 137.4   |   
|                                                                 |  |                         |         |   |              |       |    |      |   |        |              |  |       |          |  |         |   
|Total operating cost and expenses                                |  |                         | 132,160 |   |              | 93.6  |    |      |   | 88,111 |              |  | 93.3  |          |  | 50.0    |   
|                                                                 |  |                         |         |   |              |       |    |      |   |        |              |  |       |          |  |         |   
|Operating income                                                 |  |                         | 9,002   |   |              | 6.4   |    |      |   | 6,306  |              |  | 6.7   |          |  | 42.8    |   
|Interest expense, net                                            |  |                         | (3,846  | ) |              | (2.7  | )  |      |   | (8,922 | )            |  | (9.4  | )        |  | (56.9   | ) 
|                                                                 |  |                         |         |   |              |       |    |      |   |        |              |  |       |          |  |         |   
|Income (loss) from continuing operations before income taxes     |  |                         | 5,156   |   |              | 3.7   |    |      |   | (2,616 | )            |  | (2.7  | )        |  | 297.1   |   
|Provision for income taxes                                       |  |                         | 3,249   |   |              | 2.3   |    |      |   | 1,193  |              |  | 1.3   |          |  | 172.3   |   
|                                                                 |  |                         |         |   |              |       |    |      |   |        |              |  |       |          |  |         |   
|Income (loss) from continuing operations                         |  |                         | 1,907   |   |              | 1.4   |    |      |   | (3,809 | )            |  | (4.0  | )        |  | 150.1   |   
|Income from discontinued operations, net of tax                  |  |                         |        |   |              |      |    |      |   | 8      |              |  |      |          |  | (100.0  | ) 
|Loss on disposal of discontinued operations, net of income taxes |  |                         | (113    | ) |              | (0.1  | )  |      |   | (545   | )            |  | (0.6  | )        |  | (79.3   | ) 
|                                                                 |  |                         |         |   |              |       |    |      |   |        |              |  |       |          |  |         |   
|Net income (loss)                                                |  |                         | 1,794   |   |              | 1.3   |    |      |   | (4,346 | )            |  | (4.6  | )        |  | (141.3  | ) 
|                                                                 |  |                         |         |   |              |       |    |      |   |        |              |  |       |          |  |         |   
|Dividends on convertible preferred stock                         |  |                         | (2,745  | ) |              | (2.0  | )  |      |   | (1,114 | )            |  | (1.2  | )        |  | 146.4   |   
|Accretion of convertible preferred stock                         |  |                         | (5,706  | ) |              | (4.0  | )  |      |   | (3,750 | )            |  | (4.0  | )        |  | 52.2    |   
|                                                                 |  |                         |         |   |              |       |    |      |   |        |              |  |       |          |  |         |   
|Net loss available to common shareholders                        |  | $                       | (6,657  | ) |              | (4.7  | )% |      | $ | (9,210 | )            |  | (9.8  | )        |  | (27.7   | )%
|                                                                 |  |                         |         |   |              |       |    |      |   |        |              |  |       |          |  |         |   
|                                                                 | 
|                                                                 |  | Year Ended December 31, |        
|                                                                 |  | 2004                    |         |   | % of Revenue |       |    | 2003 |   |        | % of Revenue |  |       | % Change | 
|                                                                 |  | (in thousands)          |        
|Revenue                                                          |  | $                       | 94,417  |   |              | 100.0 | %  |      | $ | 62,327 |              |  | 100.0 | %        |  | 51.5    | % 
|Operating cost and expenses                                      |  |                         |         |   |              |       |    |      |   |        |              |  |       |          |  |         |   
|Cost of revenue                                                  |  |                         | 75,605  |   |              | 80.1  |    |      |   | 52,437 |              |  | 84.1  |          |  | 44.2    |   
|Selling, general and administrative                              |  |                         | 10,777  |   |              | 11.4  |    |      |   | 5,787  |              |  | 9.3   |          |  | 86.2    |   
|Depreciation and amortization                                    |  |                         | 308     |   |              | 0.3   |    |      |   | 90     |              |  | 0.2   |          |  | 242.2   |   
|Amortization of intangible assets                                |  |                         | 1,421   |   |              | 1.5   |    |      |   | 451    |              |  | 0.7   |          |  | 215.1   |   
|                                                                 |  |                         |         |   |              |       |    |      |   |        |              |  |       |          |  |         |   
|Total operating cost and expenses                                |  |                         | 88,111  |   |              | 93.3  |    |      |   | 58,765 |              |  | 94.3  |          |  | 49.9    |   
|                                                                 |  |                         |         |   |              |       |    |      |   |        |              |  |       |          |  |         |   
|Operating income                                                 |  |                         | 6,306   |   |              | 6.7   |    |      |   | 3,562  |              |  | 5.7   |          |  | 77.0    |   
|Interest expense, net                                            |  |                         | (8,922  | ) |              | (9.4  | )  |      |   | (520   | )            |  | (0.8  | )        |  | 1,615.8 |   
|                                                                 |  |                         |         |   |              |       |    |      |   |        |              |  |       |          |  |         |   
|(Loss) income from continuing operations before income taxes     |  |                         | (2,616  | ) |              | (2.7  | )  |      |   | 3,042  |              |  | 4.9   |          |  | (186.0  | ) 
|Provision for income taxes                                       |  |                         | 1,193   |   |              | 1.3   |    |      |   | 311    |              |  | 0.5   |          |  | 283.6   |   
|                                                                 |  |                         |         |   |              |       |    |      |   |        |              |  |       |          |  |         |   
|(Loss) income from continuing operations                         |  |                         | (3,809  | ) |              | (4.0  | )  |      |   | 2,731  |              |  | 4.4   |          |  | (239.5  | ) 
|Income from discontinued operations, net of tax                  |  |                         | 8       |   |              |      |    |      |   | 15     |              |  |      |          |  | (50.0   | ) 
|Loss on disposal of discontinued operations, net of income taxes |  |                         | (545    | ) |              | (0.6  | )  |      |   |       |              |  |      |          |  | NM      |   
|                                                                 |  |                         |         |   |              |       |    |      |   |        |              |  |       |          |  |         |   
|Net (loss) income                                                |  |                         | (4,346  | ) |              | (4.6  | )  |      |   | 2,746  |              |  | 4.4   |          |  | (258.2  | ) 
|                                                                 |  |                         |         |   |              |       |    |      |   |        |              |  |       |          |  |         |   
|Dividends on convertible preferred stock                         |  |                         | (1,114  | ) |              | (1.2  | )  |      |   | (57    | )            |  | (0.1  | )        |  | 1,854.4 |   
|Accretion of convertible preferred stock                         |  |                         | (3,750  | ) |              | (4.0  | )  |      |   | (236   | )            |  | (0.4  | )        |  | 1,489.0 |   
|                                                                 |  |                         |         |   |              |       |    |      |   |        |              |  |       |          |  |         |   
|Net loss (income) available to common shareholders               |  | $                       | (9,210  | ) |              | (9.8  | )  |      | $ | 2,453  |              |  | 3.9   | %        |  | (475.3  | )%
|                                                                 |  |                         |         |   |              |       |    |      |   |        |              |  |       |          |  |         |   

---

NM  not meaningful



28



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Revenue



Our revenue for the year ended December 31, 2005 was $141.2 million, an increase of $46.7 million, or 49.5%, from the
prior year.



Our Homeland Security Group provided $98.7
million, or 69.9%, of our revenue for the year ended December 31, 2005. This represented an 87.7% increase from the prior year. Contributing to this increase were the effects of our acquisition of BAI in May 2004, our acquisition of ComGlobal
in April 2005 and increased independent verification and validation services provided in support of launches of expendable launch vehicles by the United States Air Force and the NRO. In addition, we provided increased information and technology
asset protection solutions to various agencies within the United States Government including the Missile Defense Agency (MDA) and Counterintelligence Field Activity (CIFA).



Our Systems Engineering Group provided $42.5 million, or 30.1%, of our
revenue for the year ended December 31, 2005. Systems Engineering Group revenue increased approximately 1.3% for the year ended December 31, 2005 compared to the prior year. This increase is attributable to an increase in NASA directed
purchasing and a 7.2% increase in revenue from our ELVIS contract. These increases were offset by the expected continued step-down of our Microgravity Research Development and Operations subcontract (MRDOC).



Our revenue for the year ended December 31, 2004 was $94.4 million, an
increase of $32.1 million, or 51.5%, from the same period in the prior year.



The Homeland Security Group provided $52.5 million, or 55.6%, of our revenue for the year ended December 31, 2004. This represented a 93.9% increase from the prior year. Contributing to this increase was the
effect of our acquisition of BAI in May 2004 and also increased independent verification and validation services provided in support of launches of expendable launch vehicles by the United States Air Force and the NRO.



The Systems Engineering Group provided $41.9 million, or 44.4%, of our
revenue for the year ended December 31, 2004. This represented a 19.1% increase from the prior year. This increase was attributable to growth in our services rendered in connection with our ELVIS and Glenn Engineering & Support
Services (GESS) contracts (both with NASA), which amounted to an aggregate increase of approximately $7.7 million. This increase was offset by a decline of $1.1 million due to the expected continued step-down of our MRDOC contract. The
GESS contract is scheduled to end in April 2006, and we plan to participate in a recompetition for the award of a follow-on contract in 2006.



Cost of Revenue



Cost of revenue for the year ended December 31, 2005 was $112.3 million, an increase of $36.8 million, or 48.6%, from the prior year. This increase
resulted from our acquisitions of BAI and ComGlobal. Cost of revenue, as a percentage of revenue for the year ended December 31, 2005 was 79.6%, compared to 80.1% for the prior year. The decrease in cost of revenue, as a percentage of revenue,
for year ended December 31, 2005 was attributable to a more profitable contract mix from our acquired companies offset by an increase in personnel fringe benefit costs in 2005 compared to the prior year.



Cost of revenue for the year ended December 31, 2004 was $75.6 million,
an increase of $23.2 million, or 44.2%, from the prior year. Cost of revenue, as a percentage of revenue for the year ended December 31, 2004 was 80.1%, compared to 84.1% for the prior year. The decrease in cost of revenue, as a percentage of
revenue, for year ended December 31, 2004 was attributable to the improved profitability of our contract base, which decreases cost of revenue in relation to revenue.



29



---

Selling, General and Administrative Expenses (SG&A)



SG&A for the year ended December 31, 2005 was $15.7 million, an
increase of $4.9 million, or 45.5%, from the prior year. The increase resulted primarily from our acquisitions of BAI and ComGlobal. In addition, we incurred approximately $1.3 million of what we believe were one-time expenses in 2005. These
expenses related to transition costs to fill senior executive positions, due diligence costs for an acquisition we did not close, and recording a reserve against a NASA receivable (refer to Item 3. Legal Proceedings in this Form 10-K for a full
description). SG&A as a percentage of revenue was 11.1% for the year ended December 31, 2005 compared to 11.4% for the prior year. As we acquire and integrate companies, we expect to leverage our central corporate services, reducing the
ratio of SG&A to revenue. For 2005, the $1.3 million of one time expenses increased SG&A as a percentage of revenue approximately 0.9 percentage points.



SG&A for the year ended December 31, 2004 was $10.8 million, an increase of $5.0 million, or 86.2%, from the prior year. SG&A as a
percentage of revenue was 11.4% for the year ended December 31, 2004 compared to 9.3% for the prior year. The increase in our SG&A expense as a percentage of revenue for the year ended December 31, 2004 was attributable to
acquisition-related integration costs, investments to support growth and enhance our central infrastructure and new expenditures to comply with public-company reporting requirements, including the Sarbanes-Oxley Act of 2002.



Depreciation and Amortization of Intangible Assets



Depreciation expense for the year ended December 31, 2005 was $0.7
million, an increase of $0.4 million or 137.7% from the prior year. We acquired $1.1 million of fixed assets with the ComGlobal acquisition in April 2005 and $0.7 million of fixed assets with the BAI acquisition in May 2004. The increased
depreciation expense resulted from depreciation of these acquired fixed assets.



Intangible amortization expense for the year ended December 31, 2005 was $3.4 million, an increase of $2.0 million, or 137.4%, from the prior year. This increase was attributable to the additional amortization
expense associated with the $7.4 million of identifiable intangible assets resulting from the April 2005 acquisition of ComGlobal and the $6.1 million of identifiable intangible assets resulting from the May 2004 acquisition of BAI.



Depreciation expense for the year ended December 31, 2004 was $0.3
million, an increase of $0.2 million or 242.2% from the prior year. This increase resulted from the depreciation expense associated with the $0.7 million of fixed assets we acquired as part of the BAI acquisition in May 2004.



Intangible amortization expense for the year ended December 31, 2004 was
$1.4 million, an increase of $1.0 million, or 215.1%, from the prior year. This increase was attributable to the additional amortization expense associated with the $6.1 million of identifiable intangible assets resulting from the May 2004
acquisition of BAI.



Operating Income



Operating income for the year ended December 31, 2005 was $9.0
million, an increase of $2.7 million, or 42.8%, from the prior year. Operating margin for the year ended December 31, 2005 was 6.4% compared to 6.7% for the prior year. The decrease in our operating margin resulted primarily from the increased
amortization expense associated with acquisition related identifiable intangible assets.



Operating income for the year ended December 31, 2004 was $6.3 million, an increase of $2.7 million, or 77.0%, from the prior year. Operating margin for the year ended December 31, 2004 was 6.7% compared to
5.7% for the prior year. The increase in our operating margin was attributable to improved contract profitability, offset by increased SG&A expenses as described above and increased amortization expense associated with our BAI acquisition.



30



---

Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA)



EBITDA, as defined below, for the year ended
December 31, 2005 was $13.1 million after adding depreciation and amortization of $0.7 million and intangible amortization of $3.4 million to operating income of $9.0 million. This was an increase of $5.1 million, or 63.1% from the prior year.
EBITDA, as a percent of revenue, was 9.3% compared to 8.5% for the prior year. The increase in EBITDA margin for the year ended December 31, 2005 was attributable to higher contract profitability and improved SG&A leverage despite the $1.3
million of one-time expenses described above.



EBITDA for the
year ended December 31, 2004 was $8.0 million after adding depreciation and amortization of $0.3 million and intangible amortization of $1.4 million to operating income of $6.3 million. This was an increase of $3.9 million, or 95.1% from the
prior year. For the year ended December 31, 2004 EBITDA, as a percent of revenue, was 8.5% compared to 6.6% for the prior year. The increase in EBITDA margin for year ended December 31, 2004 was attributable to improved contract
profitability offset by the higher SG&A expenses described above.



EBITDA, or earnings before interest, taxes, depreciation and amortization, is 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 we believe is useful to investors in evaluating our results because it excludes certain non-cash expenses that are not directly related to our core operating performance. EBITDA is calculated by adding 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 our operating performance, or for cash flow, as measures of our
liquidity. In addition, because all companies do not calculate EBITDA identically, our presentation of EBITDA may not be comparable to other similarly titled measures of other companies.



Net Interest Expense



Net interest expense for the year ended December 31, 2005 was $3.8 million, a decrease of $5.1 million, or 56.9%, from the prior year. For year
ended December 31, 2004, we recorded $5.8 million of interest expense incurred on our Series B Senior Subordinated Notes. We did not record any interest expense on our Series B Senior Subordinated Notes during the year ended December 31,
2005 because in September 2004, we converted these notes into our Series B-1 Convertible Preferred Stock. The elimination of the interest on our Series B Note was partially offset by increased interest expense associated with the $22 million
borrowed on our Credit Facility in connection with our acquisition of ComGlobal.



Net interest expense for the year ended December 31, 2004 was $8.9 million, an increase of $8.4 million from the same period in the prior year. For the year ended December 31, 2004, we recorded $5.8 million
of interest expense incurred on our Series B Senior Subordinated Notes, which originated in May 2004 and were converted into Series B-1 Convertible Preferred Stock in September 2004. We also recorded a full year of interest on our Series A
Convertible Notes, which originated in December 2003.



31



---

Provision for Income Taxes



The provision for income taxes for the year ended December 31, 2005 was $3.2 million, an increase of $2.1 million, or
172.3%, from the prior year. The provision for income taxes for the year ended December 31, 2004 was $1.2 million, an increase of $0.9 million, or 283.6%, from the prior year. Our effective tax rate, or the ratio of income tax expense reported
in relation to income from continuing operations before income taxes, is impacted significantly by the non-tax deductible interest and accretion expense associated with our convertible notes and preferred stock issued since 2003.



LIQUIDITY AND CAPITAL RESOURCES



Our primary liquidity needs are to finance the costs of operations pending
the billing and collection of accounts receivable, to acquire capital assets, to pay the interest on our credit facility and convertible note, to make quarterly dividend payments on our convertible preferred stock and to make selective strategic
acquisitions.



Cash Flow



For the year ended December 31, 2005, net cash provided by operating
activities was $3.4 million, compared to $2.1 million for the same period in the prior year. For the year ended December 31, 2004, net cash provided by operating activities was $2.1 million, compared to $2.7 million for the same period in the
prior year.



Cash flow from operating activities begins with
net income from continuing operations, which is adjusted by adding back non-cash charges (such as depreciation, amortization and bad debt expense) and then adjusted for the changes in working capital accounts. Accounts receivable represents one of
our largest components of working capital. Our operating cash flow is primarily affected by the overall profitability of our contracts, our ability to invoice and collect from our clients in a timely manner and our ability to manage our vendor
payments. For the year ended December 31, 2005, compared to 2004, our operating income grew, increasing the amount of operating cash flow. This operating income growth was offset by increases in our working capital resulting from an increase in
our fourth-quarter DSO. This increase resulted from the fact it took an extended period of time to resolve certain contract actions with three customers during the fourth quarter. The collection of approximately $5.0 million of accounts receivable
was delayed as a result. We believe these contract actions have been addressed and expect our DSO to trend more towards historical levels. For the year ended December 31, 2004, compared to 2003, our operating income grew, improving our
operating cash flow. This operating income growth was offset by increased use of cash by our discontinued operation.



Cash used in investing activities for the years ended December 31, 2005, 2004 and 2003 was $46.7 million, $27.6 million and $1.0 million,
respectively. Cash provided by financing activities for the years ended December 31, 2005, 2004 and 2003 was $45.9 million, $12.4 million and $12.2 million, respectively. Our cash flows from investing and financing activities were primarily
attributable to our BAI acquisition in May 2004 and our ComGlobal acquisition in April 2005.



In May 2004, we issued our Series B-1 Notes, receiving $12 million in proceeds. We used these proceeds, in conjunction with financing proceeds of $10 million we received in December 2003, to fund the cash portion of
the purchase of BAI. The total purchase price of BAI, including transaction related costs, was $37.9 million.



In April 2005, we received proceeds of $25 million when we issued our Series B-2 Convertible Preferred Stock. In addition, we borrowed $22 million from
our Senior Revolving Credit Facility. We used these proceeds to purchase ComGlobal. The purchase price of ComGlobal, including transaction related costs, was $47.9 million. See Note 9 to the Notes to Consolidated Financial Statements for the details
and a summary of changes in our financing instruments issued in connection with our 2004 and 2005 acquisition activity.



32



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Credit Facility and Borrowing Capacity



We have a long-standing relationship with Bank of America, N.A. (the
Bank). Part of our relationship with the Bank includes a revolving line of credit (the Credit Facility) used for senior acquisition financing and working capital requirements. On April 1, 2005, in connection with the
acquisition of ComGlobal, the Credit Facility was amended and restated to increase the amount of the facility from $20 million to $40 million, subject to a borrowing base determined based on our outstanding accounts receivable balance and certain
financial covenants setting forth maximum ratios for total funded debt to EBITDA and minimum ratios for fixed charge coverage. As of December 31, 2005 we were in compliance with these covenants. The Credit Facility has a maturity date of
May 31, 2008. Interest on the Credit Facility is at the LIBOR Rate plus an applicable margin as specified the agreement. As of December 31, 2005, the outstanding balance of the Credit Facility was $27.6 million. The interest rate at
December 31, 2005 was 7.39%. Borrowing availability under our Credit Facility continues to be sufficient to fund normal operations. Available borrowing capacity on our Credit Facility at December 31, 2005 was approximately $4.2 million.



The Credit Facility also restricts our ability to dispose of
properties, 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 certain leaseback transactions, make investments, loans or advances,
engage in mergers or consolidations, and engage in transactions with affiliates. The Credit Facility is generally secured by all assets of our business.



Private Stock Offering



In March 2005, our Board of Directors, including its compensation committee, comprised solely of independent directors, approved the sale of up to 300,000
shares of unregistered Common Stock to certain employees of ComGlobal as an inducement material to their employment with us. In April 2005, all of the approved shares of our unregistered Common Stock were sold to 22 employees of ComGlobal. We
received $840,000 from the sale of such shares. The sale was made in an exempt offering under Rule 506 of the Securities Act of 1933, as amended. We recognized $105,000 of stock compensation expense related to this transaction.



Guarantees and Commitments



Pursuant to the November 2, 2001 acquisition of the former Analex, we
issued 3,572,143 shares of our 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 we guarantee 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 December 31, 2005, the maximum amount payable under the terms of the guaranteed shares was approximately $1.6
million. As the fair market value of our Common Stock as of December 31, 2005 was in excess of the maximum guaranteed share price of $2.20 per share, we did not accrue any amounts under the guarantee.



On November 2, 2001, we issued promissory notes to certain Analex
sellers totaling approximately $0.8 million with a five-year term, bearing interest at 6%. As of September 30, 2005 the outstanding balance of the promissory notes was approximately $0.3 million. We also entered into non-competition agreements
with former employees totaling $0.4 million, on a discounted basis, payable over various periods with a current balance of $52,000 at December 31, 2005.



In August 2005, we entered into a lease agreement for approximately 28,500 square feet to be used as our new corporate headquarters. The lease commenced
on January 1, 2006 and has a term of seven years with one optional renewal period of five years. Future minimum lease payments over the seven-year lease term will be approximately $5.6 million.



33



---

NEW ACCOUNTING PRONOUNCEMENTS



In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123(R) Share-Based
Payment, which replaces SFAS No. 123 Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25Accounting for Stock Issued to Employees. SFAS No. 123(R) requires compensation costs related to
share-based payment transactions to be recognized in the financial statements. With limited exceptions, the amount of compensation cost is measured based on the grant-date fair value of the equity or liability instruments issued. SFAS
No. 123(R) requires liability awards to be re-measured each reporting period and compensation costs to be recognized over the period that an employee provides service in exchange for the award. SFAS No. 123(R) is effective as of the
beginning of the first fiscal year that begins after June 15, 2005. We will adopt the provisions of SFAS No. 123(R) during the first quarter of 2006.



SFAS No. 123(R) permits companies to adopt its requirements using either the modified prospective method or the modified retrospective method.
Under the modified prospective method, compensation cost is recognized beginning with the effective date for all share-based payments granted after the effective date and for all awards granted to employees prior to the effective date of SFAS
No. 123(R) that remain unvested on the effective date. The modified retrospective method includes the requirements of the modified prospective method, but also permits entities to restate either all prior periods presented or prior interim
periods of the year of adoption for the impact of adopting this standard. It is anticipated we will apply the modified prospective method upon adoption. We expect that the initial adoption of SFAS 123(R) will not have a material impact on our
Consolidated Statements of Operations. SFAS No. 123(R) also requires the benefits of tax deductions in excess of recognized compensation costs to be reported as financing cash flow, rather than as an operating cash flow as required under
current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. We believe this reclassification will not have a material impact on our Consolidated Statements of Cash Flows.



|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 expenditures exposes the Company to variability in interest payments due to changes in interest rates. The Company does not currently use interest rate swaps or other means to reduce the interest rate exposure on these variable rate
obligations. The Company does not hold any derivatives.



Contractual
Obligations



Preferred Stock



Holders of a majority of the outstanding shares of Series A Preferred Stock
may require the Company to redeem their Series A Preferred Stock together with accrued but unpaid dividends in four equal quarterly installments any time on or after September 15, 2008, which is also the Series B Redemption Date. Holders of
two-thirds of the Series B Preferred Stock may also require the Company to redeem their Series B Preferred Stock together with accrued but unpaid dividends in four equal quarterly installments any time on or after September 15, 2008, the Series
B Redemption Date. However, since the Company has up to sixty (60) days from the Series B Redemption Date to make the first quarterly installment, the Companys obligation to pay for the

redemption price of both the Series A and Series B Preferred Stock is not triggered until November 15, 2008, at the earliest. The table below summarizes this
possible future contractual obligation.



|                         |  |                               |  |                          |           |                      |   |           
|------------------------ |  | ----------------------------- |  | ------------------------ | --------- | -------------------- | - | ----------
|Financing Instrument     |  | Redemption Payment Period     |  | QuarterlyRedemptionPrice |           | TotalRedemptionPrice
|Series A Preferred Stock |  | November 15, 2008August 2009 |  | $                        | 3,750,000 |                      | $ | 15,000,000
|Series B Preferred Stock |  | November 15, 2008August 2009 |  | $                        | 9,250,000 |                      | $ | 37,000,000



34



---

Debt, leases and other non-cancelable obligations



The Company has contractual obligations to pay long-term debt, leases and other non-cancelable obligations. The following
table aggregates the amounts of these obligations as of December 31, 2005:



|                              |  |                   |            |                 |   |                       |  |       |         |  |   |           
|----------------------------- |  | ----------------- | ---------- | --------------- | - | --------------------- |  | ----- | ------- |  | - | ----------
|Year                          |  | Long-termdebt (1) |            | OperatingLeases |   | Non-CompeteAgreements |  | Total
|2006                          |  | $                 | 387,500    |                 | $ | 2,919,600             |  | $     | 156,500 |  | $ | 3,463,600 
|2007                          |  |                   | 10,000,000 |                 |   | 1,521,900             |  |       |        |  |   | 11,521,900
|2008                          |  |                   |           |                 |   | 1,393,300             |  |       |        |  |   | 1,393,300 
|2009                          |  |                   |           |                 |   | 1,192,900             |  |       |        |  |   | 1,192,900 
|2010                          |  |                   |           |                 |   | 985,600               |  |       |        |  |   | 985,600   
|2011                          |  |                   |           |                 |   | 1,006,600             |  |       |        |  |   | 1,006,600 
|2012                          |  |                   |           |                 |   | 1,028,300             |  |       |        |  |   | 1,028,300 
|                              |  |                   |            |                 |   |                       |  |       |         |  |   |           
|Total contractual obligations |  | $                 | 10,387,500 |                 | $ | 10,048,200            |  | $     | 156,500 |  | $ | 20,592,200
|                              |  |                   |            |                 |   |                       |  |       |         |  |   |           

---

|(1) |  | Does not include line of credit.
|--- |  | --------------------------------



Payments for long-term debt do not include interest payments. Lease commitments could require higher payments than shown in the table due to escalation
provisions that are tied to various measures of inflation. The lease commitments reflect only existing commitments and do not include future requirements necessary to replace existing leases. In addition to the contractual obligations included
above, the Company also has routine purchase order commitments for materials and supplies that are entered into in the normal course of business and are not in excess of current requirements.



Pursuant to the November 2, 2001 acquisition of Analex, the Company
issued 3,572,143 shares of the Companys Common Stock to the shareholders representing all of the outstanding equity of Analex (the Sellers). Of the 3,572,143 shares, 857,143 shares are subject to a provision by which the Company
guarantees for a five-year period to reimburse the Sellers the difference between the price at which they sell such shares and a guaranteed sales price ranging from $1.60 to $2.20 per share (Guaranteed Shares), if such shares are sold
within such period and if certain other conditions are satisfied. As of December 31, 2005, the maximum that the Company would be required to pay under the terms of the guarantee was $1,628,600. This amount is calculated by multiplying the
number of shares subject to the guarantee by their associated guaranteed purchase price, assuming the Companys Common Stock has no fair market value. As of December 31, 2005, there were 214,286 shares with an associated purchase price
guarantee of $1.60 per share, 214,286 shares with an associated guaranteed purchase price of $1.80 per share, and 214,286 shares with an associated guaranteed purchase price of $2.00 per share, and 214,286 shares with an associated guaranteed
purchase price of $2.20 per share. As the fair market value of the Companys Common Stock was in excess of the guaranteed share prices as of December 31, 2005, no amounts were accrued under the guarantee.



|Item 7A. | Quantitative and Qualitative Disclosure about Market Risk
|-------- | ---------------------------------------------------------



Market Risks and Hedging Activities



The Companys outstanding bank debt bears interest at variable interest rates tied to LIBOR. The use of variable-rate debt to finance operations and
capital expenditures exposes the Company to variability in interest payments due to changes in interest rates. The Company does not currently use interest rate swaps or other means to reduce the interest rate exposure on these variable rate
obligations. The Company does not hold any derivatives.



35



---

|Item 8. | Financial Statements and Supplementary Data
|------- | -------------------------------------------



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



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



None.



|Item 9A. | Controls and Procedures
|-------- | -----------------------



The Company has established and maintains disclosure controls and procedures that are designed to ensure that material information required to be
disclosed by the Company in the reports that it files under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and
forms, and that such information is accumulated and communicated to the Companys management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.



Under the supervision and with the participation of the
Companys management, including its Chief Executive Officer and Chief Financial Officer, the Company carried out an evaluation of the effectiveness of the design and operation of disclosure controls and procedures as of the end of the period
covered in this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective, at the reasonable assurance level, as of December 31, 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 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.



|Item 9B. | Other Information
|-------- | -----------------



None.



PART III



|Item 10. | Directors and Executive Officers of the Registrant
|-------- | --------------------------------------------------



|Item 11. | Executive Compensation
|-------- | ----------------------



|Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters
|-------- | -----------------------------------------------------------------------------------------------



|Item 13. | Certain Relationships and Related Transaction
|-------- | ---------------------------------------------



|Item 14. | Principal Accountant Fees and Services
|-------- | --------------------------------------



The information required by Items 10, 11, 12, 13 and 14 of Part III of Form 10-K have been omitted in reliance on General Instruction G(3) to Form 10-K
and are incorporated herein by reference to the Companys definitive proxy statement to be filed with the SEC pursuant to Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended.



36



---

PART IV



|Item 15. | Exhibits, Financial Statement Schedules, and Reports on Form 8-K
|-------- | ----------------------------------------------------------------



(a)  (1)    Financial Statements



|                                                                                                    |  |    
|--------------------------------------------------------------------------------------------------- |  | ---
|Report of Independent Registered Public Accounting Firm                                             |  | F-1
|                                                                                                    | 
|Consolidated Balance Sheets as of December 31, 2005 and 2004                                        |  | F-2
|                                                                                                    | 
|Consolidated Statements of Operations for the years endedDecember 31, 2005, 2004 and 2003           |  | F-3
|                                                                                                    | 
|Consolidated Statements of Shareholders Equity for the years endedDecember 31, 2005, 2004 and 2003 |  | F-4
|                                                                                                    | 
|Consolidated Statements of Cash Flows for the years endedDecember 31, 2005, 2004 and 2003           |  | F-5
|                                                                                                    | 
|Notes to Consolidated Financial Statements                                                          |  | F-6



(a)  (2)    Financial Statement Schedules



All schedules are omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the
consolidated financial statements and notes thereto.



(a)  (3)    Exhibits



|             |  |                                                                                                                                                                                                                                                                                                       
|------------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitIndex |  |                                                                                                                                                                                                                                                                                                       
|             | 
|2.1          |  | Agreement and Plan of Merger by and among Analex Corporation, certain Sellers, Analex Corporation Employee Stock Ownership Plan and Trust, Hadron, Inc. and Hadron Acquisition Corp., as of
October 31, 2001 (previously filed).                                                                      
|             | 
|2.2          |  | Agreement and Plan of Merger by and among Analex Corporation, Alpha-N Acquisition Corporation, ComGlobal Systems , Incorporated and Stockholders of ComGlobal, dated April 1, 2005 (incorporated
by reference to the Companys Current Report on Form 8-K filed with the Commission on April 6, 2005).
|             | 
|3.1          |  | Certificate of Incorporation (incorporated by reference to the Companys Form 10-Q for the fiscal quarter ended June 30, 2002 and filed with the Commission on August 14,
2002).                                                                                                                      
|             | 
|3.1.1        |  | Certificate of Amendment of Certificate of Incorporation, dated November 19, 2001 (incorporated by reference to the Companys form 10-Q for the fiscal quarter ended June 30, 2002 and filed
with the Commission on August 14, 2002).                                                                 
|             | 
|3.1.2        |  | Certificate of Amendment of Certificate of Incorporation, dated June 25, 2002 (incorporated by reference to the Companys Form 10-Q for the fiscal quarter ended June 30, 2002 and filed with
the Commission on August 14, 2002).                                                                     
|             | 
|3.1.3        |  | Certificate of Amendment, dated December 9, 2003, to Certificate of Incorporation (incorporated by reference to the Companys registration statement on a Form S-3 filed with the Commission
on January 8, 2004).                                                                                     
|             | 
|3.1.4        |  | Certificate of Designations, Powers, Preferences and Rights of Series A Convertible Preferred Stock (incorporated by reference to the Companys registration statement on a Form S-3 filed
with the Commission on January 8, 2004).                                                                   



37



---

|             |  |                                                                                                                                                                                                                                                                                    
|------------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitIndex |  |                                                                                                                                                                                                                                                                                    
|             | 
|3.1.5        |  | Amendment to Certificate of Designations, Powers, Preferences and Rights of Series A Convertible Preferred Stock (incorporated by reference to Annex B of the Companys Definitive Proxy
Statement on Schedule 14A filed with the Commission on August 9, 2004).                   
|             | 
|3.1.6        |  | Certificate of Designations, Powers, Preferences and Rights of Series B Convertible Preferred Stock (incorporated by reference to Annex C of the Companys Definitive Proxy Statement on
Schedule 14A filed with the Commission on August 9, 2004).                                
|             | 
|3.2          |  | Amended and Restated Bylaws (incorporated by reference to the Companys registration statement on a Form S-3 filed with the Commission on January 8, 2004).                                                                                                                        
|             | 
|3.2.1        |  | Amendment No. 1 to Amended and Restated Bylaws (incorporated by reference to the Companys Amendment No. 1 to the Form S-3 registration statement filed with the Commission on March 10,
2004).                                                                                    
|             | 
|3.2.2        |  | Amendment No. 2 to Amended and Restated Bylaws (incorporated by reference to the Companys Form 8-K filed with the Commission on June 15, 2004).                                                                                                                                   
|             | 
|3.2.3        |  | Amendment No. 3 to Amended and Restated By-Laws (incorporated by reference to the Companys Current Report on Form 8-K filed with the Commission on April 12, 2005).                                                                                                               
|             | 
|4.1          |  | Form of Secured Subordinated Convertible Promissory Note (incorporated by reference to the Companys Current Report on Form 8-K filed with the Commission on July 21,
2003).                                                                                                       
|             | 
|4.2          |  | Form of Common Stock Purchase Warrant issued to the Pequot Funds, General Electric Pension Trust and New York Life Capital Partners (incorporated by reference to Annex E of the Companys
Definitive Proxy Statement on Schedule 14A filed with the Commission on August 9, 2004).
|             | 
|10.1.1       |  | Analex Corporation Employee Stock Purchase Plan (incorporated by reference to Annex O of the Companys Definitive Proxy Statement on Schedule 14A filed with the Commission on August 9,
2004).                                                                                    
|             | 
|10.1.2       |  | Analex Corporation Amended and Restated Employee Stock Purchase Plan (incorporated by reference to Annex E of the Companys Definitive Proxy Statement on Schedule 14A filed with the
Commission on April 13, 2005).                                                               
|             | 
|10.1.3       |  | Analex Corporation 2000 Stock Incentive Plan (incorporated by reference to the Form 8-K dated February 22, 2006, filed with the Commission on February 28, 2006).                                                                                                                  
|             | 
|10.1.4       |  | Form of Stock Appreciation Right Agreement under the 2000 Stock Incentive Plan (incorporated by reference to the Form 8-K dated February 22, 2006, filed with the Commission on February 28,
2006).                                                                                
|             | 
|10.1.5       |  | Form of Option Exchange and Stock Appreciation Right Agreement under the 2000 Stock Incentive Plan (incorporated by reference to the Form 8-K dated February 22, 2006, filed with the
Commission on February 28, 2006).                                                            
|             | 
|10.1.6       |  | Analex Corporation 2002 Stock Incentive Plan (incorporated by reference to the Form 8-K dated February 22, 2006, filed with the Commission on February 28, 2006).                                                                                                                  
|             | 
|10.1.7       |  | Form of Stock Appreciation Right Agreement under the 2002 Stock Incentive Plan (incorporated by reference to the Form 8-K dated February 22, 2006, filed with the Commission on February 28,
2006).                                                                                
|             | 
|10.1.8       |  | Form of Option Exchange and Stock Appreciation Right Agreement under the 2002 Stock Incentive Plan (incorporated by reference to the Form 8-K dated February 22, 2006, filed with the
Commission on February 28, 2006).                                                            
|             | 
|10.1.9       |  | Restricted Stock Award Agreement with C. Wayne Grubbs, dated February 22, 2006 (incorporated by reference to the Form 8-K dated February 22, 2006, filed with the Commission on February 28,
2006).                                                                                



38



---

|             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|------------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitIndex |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|             | 
|10.1.10      |  | Restricted Stock Award Agreement with V. Joseph Broadwater dated February 22, 2006 (incorporated by reference to the Form 8-K dated February 22, 2006, filed with the Commission on February
28, 2006).                                                                                                                                                                                                                                                                                                   
|             | 
|10.1.11      |  | Restricted Stock Award Agreement with Stephen C. Matthews, dated February 22, 2006 (incorporated by reference to the Form 8-K dated February 22, 2006, filed with the Commission on February
28, 2006).                                                                                                                                                                                                                                                                                                   
|             | 
|10.2         |  | Form of Employment Agreement between the Company and Sterling E. Phillips, Jr. dated January 16, 2001 (incorporated by reference to the exhibits filed with the Companys Quarterly Report
on Form 10-Q for the quarter ended June 30, 2001 filed with the Commission on August 14, 2001).                                                                                                                                                                                                                
|             | 
|10.2.1       |  | Promissory Note between Peter C. Belford, Sr. and Hadron, Inc. dated November 5, 2001, pursuant to the Agreement and Plan of Merger between Hadron, Inc. and Analex Corporation (incorporated
by reference to the exhibits filed with the Companys Form 10-K for the year ended December 31, 2001 filed with the Commission on March 26, 2002).                                                                                                                                                          
|             | 
|10.2.2       |  | Promissory Note between Lese Ann Kodger and Hadron, Inc. dated November 5, 2001, pursuant to the Agreement and Plan of Merger between Hadron, Inc. and Analex Corporation (incorporated by
reference to the exhibits filed with the Companys Form 10-K for the year ended December 31, 2001 filed with the Commission on March 26, 2002).                                                                                                                                                                
|             | 
|10.2.3       |  | Promissory Note between Alex Patterson and Hadron, Inc. dated November 5, 2001, pursuant to the Agreement and Plan of Merger between Hadron, Inc. and Analex Corporation (incorporated by
reference to the exhibits filed with the Companys Form 10-K for the year ended December 31, 2001 filed with the Commission on March 26, 2002, Exhibit No. 10.26).                                                                                                                                              
|             | 
|10.2.4       |  | Employment Termination Agreement by and between Analex Corporation and Jon M. Stout (incorporated by reference to the Companys Current Report on Form 8-K dated July 18, 2003 and filed
July 21, 2003).                                                                                                                                                                                                                                                                                                  
|             | 
|10.2.5       |  | Confidentiality and Non-Competition Agreement by and between Analex Corporation and Jon M. Stout (incorporated by reference to the Companys Current Report on Form 8-K dated July
21, 2003).                                                                                                                                                                                                                                                                                                             
|             | 
|10.3         |  | Amended and Restated Credit Agreement by and between Analex Corporation and Bank of America, N.A. dated May 28, 2004 (incorporated by reference to Annex I of the Companys Definitive
Proxy Statement on Schedule 14A filed with the Commission on August 9, 2004).                                                                                                                                                                                                                                      
|             | 
|10.3.1       |  | Amended and Restated Intercreditor and Subordination Agreement by and among Bank of America, N.A., Pequot Private Equity Fund III, L.P., Pequot Offshore Private Equity Partners III, L.P.,
General Electric Pension Trust, New York Life Capital Partnership, II, L.P., Analex Corporation and the subsidiaries of Analex Corporation, dated May 28, 2004 (incorporated by reference to Annex J of the Companys Definitive Proxy Statement on
Schedule 14A filed with the Commission on August 9, 2004).
|             | 
|10.3.2       |  | Junior Intercreditor and Subordination Agreement by and among, Pequot Private Equity Fund III, L.P., Pequot Offshore Private Equity Partners III, L.P., General Electric Pension Trust, New
York Life Capital Partnership, II, L.P., Analex Corporation and the subsidiaries of Analex Corporation, dated May 28, 2004 (incorporated by reference to Annex K of the Companys Definitive Proxy Statement on Schedule 14A filed with the
Commission on August 9, 2004).                                    
|             | 
|10.3.3       |  | Security Agreement between Hadron, Inc. and Bank of America, N.A. dated November 2, 2001 (incorporated by reference to the exhibits filed with the Companys Form 10-K for the year ended
December 31, 2001 filed with the Commission on March 26, 2002).                                                                                                                                                                                                                                                 
|             | 
|10.3.4       |  | Pledge Agreement between Hadron, Inc. and Bank of America, N.A. dated November 2, 2001 (incorporated by reference to the exhibits filed with the Companys Form 10-K for the year ended
December 31, 2001 filed with the Commission on March 26, 2002).                                                                                                                                                                                                                                                   



39



---

|             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|------------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitIndex |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|             | 
|10.3.5       |  | First Amendment to Pledge Agreement between Analex Corporation and Bank of America, N.A. dated May 28, 2004 (incorporated by reference to the exhibits filed with the Companys Form 10-K
for the year ended December 31, 2004 filed with the Commission on March 24, 2005).                                                                                                                                                                                                                                                                                              
|             | 
|10.3.6       |  | Amended and Restated Revolving Credit Facility Note between Analex Corporation and Bank of America, N.A. dated May 28, 2004 (incorporated by reference to the exhibits filed with the
Companys Form 10-K for the year ended December 31, 2004 filed with the Commission on March 24, 2005).                                                                                                                                                                                                                                                                              
|             | 
|10.3.7       |  | Amended and Restated Continuing and Unconditional Guaranty between Bank of America, N.A. and Subsidiaries of the Company dated May 28, 2004 (incorporated by reference to the exhibits filed
with the Companys Form 10-K for the year ended December 31, 2004 filed with the Commission on March 24, 2005).                                                                                                                                                                                                                                                              
|             | 
|10.3.8       |  | First Amendment to the Amended and Restated Credit Agreement by and among Analex Corporation, Subsidiaries of Analex Corporation and Bank of American, N.A., dated April 1, 2005 (incorporated
by reference to the Companys Current Report on Form 8-K filed with the Commission on April 6, 2005).                                                                                                                                                                                                                                                                      
|             | 
|10.3.9       |  | Second Amendment to Pledge Agreement by and between Analex Corporation and Bank of America, N.A, dated April 1, 2005 (incorporated by reference to the Companys Current Report on Form
8-K filed with the Commission on April 6, 2005).                                                                                                                                                                                                                                                                                                                                  
|             | 
|10.3.10      |  | Second Amendment and Restated Continuing and Unconditional Guaranty between Bank of America, N.A. and subsidiaries of Analex Corporation, dated April 1, 2005 (incorporated by reference to the
Companys Current Report on Form 8-K filed with the Commission on April 6, 2005).                                                                                                                                                                                                                                                                                         
|             | 
|10.3.11      |  | First Amendment to Amended and Restate Revolving Credit Facility Note executed by Analex Corporation in favor of Bank of American, N.A., dated April 1, 2005 (incorporated by reference to the
Companys Current Report on Form 8-K filed with the Commission on April 6, 2005).                                                                                                                                                                                                                                                                                          
|             | 
|10.4         |  | Expendable Launch Vehicle Integrated Support (ELVIS) contract by and between the Registrant and The National Aeronautics and Space Administration (NASA) (incorporated by reference to the
Companys Form 10-Q for the fiscal quarter ended June 30, 2002 and filed with the Commission on August 14, 2002).                                                                                                                                                                                                                                                              
|             | 
|10.5         |  | Subordinated Note and Series A Convertible Preferred Stock Purchase Agreement dated July 18, 2003, by and among the Company, Pequot Private Equity Fund III, L.P. and Pequot Offshore Private
Equity Partners III, L.P. (incorporated by reference to the Companys Current Report on Form 8-K filed with the Commission on July 21, 2003).                                                                                                                                                                                                                               
|             | 
|10.6         |  | Securities Repurchase Agreement, dated as of July 18, 2003, by and among Analex Corporation, Jon M. Stout, Patricia Stout, Shawna Stout, Marcus Stout, Stout Dynastic Trust and S Co, LLC
(incorporated by reference to the Companys Current Report on Form 8-K dated July 18, 2003 and filed July 21, 2003).                                                                                                                                                                                                                                                            
|             | 
|10.6.1       |  | Series B Convertible Preferred Stock Purchase Agreement by and among Pequot Private Equity Fund III, L.P., Pequot Offshore Private Equity Partners III, L.P., General Electric Pension Trust,
New York Life Capital Partnership, II, L.P., Analex Corporation and the subsidiaries of Analex Corporation, dated May 28, 2004 (incorporated by reference to Annex A of the Companys Definitive Proxy Statement on Schedule 14A filed with the
Commission on August 9, 2004).                                                                                              
|             | 
|10.6.2       |  | Amended and Restated Stockholders Voting Agreement, dated May 28, 2004, by and among Analex Corporation, Pequot Private Equity Fund III, L.P., Pequot Offshore Private Equity Partners
III, L.P., General Electric Pension Trust, New York Life Capital Partnership, II, L.P., Sterling E. Phillips, Jr., J. Richard Knop, C.W. Gilluly, Peter C. Belford, Sr., Arthur A. Hutchins, Joseph H. Saul, DRG Irrevocable Trust
(incorporated by reference to Annex H of the Companys Definitive Proxy Statement on Schedule 14A filed with the Commission on August 9, 2004).



40



---

|             |  |                                                                                                                                                                                                                                                                                                                                                                                                                  
|------------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitIndex |  |                                                                                                                                                                                                                                                                                                                                                                                                                  
|             | 
|10.6.3       |  | Registration Rights Agreement, dated May 28, 2004, by and between Analex Corporation and Pequot Private Equity Fund III, L.P. and Pequot Offshore Private Equity Partners III, L.P., General
Electric Pension Trust, New York Life Capital Partnership, II, L.P., (incorporated by reference to Annex G of the Companys Definitive Proxy Statement on Schedule 14A filed with the Commission on August 9, 2004).
|             | 
|10.7         |  | Stock Purchase Agreement by and among Analex Corporation, Beta Analytics, Inc. and other parties named in the agreement, dated May 6, 2004 (incorporated by reference to the registrants
Form 10-Q for the fiscal quarter ended March 31, 2004).                                                                                                                                                                
|             | 
|10.8         |  | Written Incentive Stock Option Agreement, dated September 1, 2005, by and between Analex Corporation and C. Wayne Grubbs (incorporated by reference to the Companys Current Report on
Form 8-K filed with the Commission on September 7, 2005).                                                                                                                                                                 
|             | 
|10.9         |  | Written Non-Qualified Stock Option Agreement, dated September 1, 2005, by and between Analex Corporation and C. Wayne Grubbs (incorporated by reference to the Companys Current Report on
Form 8-K filed with the Commission on September 7, 2005).                                                                                                                                                             
|             | 
|14           |  | Code of Conduct and Ethics (incorporated by reference to the Companys Form 10-K filed for the fiscal year ended December 31, 2003.).                                                                                                                                                                                                                                                                            
|             | 
|21*          |  | Subsidiaries of the Company                                                                                                                                                                                                                                                                                                                                                                                      
|             | 
|23*          |  | Consent of Independent Registered Public Accounting Firm.                                                                                                                                                                                                                                                                                                                                                        
|             | 
|31.1*        |  | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                          
|             | 
|31.2*        |  | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                          
|             | 
|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



On November 3, 2005, the Company filed a Form 8-K to include its financial results for the fiscal quarter ended September 30, 2005.



41



---

SIGNATURES



Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.



|                     |  |                                                                                              |  |                    |  |     |  |                                                                                                       
|-------------------- |  | -------------------------------------------------------------------------------------------- |  | ------------------ |  | --- |  | ------------------------------------------------------------------------------------------------------
|Date:  March 8, 2006 |  |                                                                                              |  | ANALEX CORPORATION
|                     |  |                                                                                              |  |                   
|By:                  |  | /s/    STERLING E. PHILLIPS,
JR.                                                             |  |                    |  | By: |  | /s/    C. WAYNE GRUBBS                                                                                
|                     |  | Sterling E. Phillips, Jr. Chairman and Chief Executive Officer (Principal Executive Officer) |  |                    |  |     |  | C. Wayne Grubbs Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)



Pursuant to the
requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated.



|                                                          |  |          |  |              
|--------------------------------------------------------- |  | -------- |  | -------------
|Signature                                                 |  | Title    |  | Date         
|                                                          |  |         
|/S/    PETER C. BELFORD,
JR.Peter C. Belford,
Jr.         |  | Director |  | March 3, 2006
|                                                          |  |         
|/S/    C. THOMAS FAULDERS,
IIIC. Thomas Faulders, III     |  | Director |  | March 2, 2006
|                                                          |  |         
|/S/    LINCOLN D.
FAURERLincoln D. Faurer                 |  | Director |  | March 2, 2006
|                                                          |  |         
|/s/    MARTIN HALE,
JR.Martin Hale,
Jr.                   |  | Director |  | March 2, 2006
|                                                          |  |         
|/S/    THOMAS L.
HEWITTThomas L.
Hewitt                   |  | Director |  | March 3, 2006
|                                                          |  |         
|/s/    DANIEL P. MARCHDaniel P. March                     |  | Director |  | March 2, 2006
|                                                          |  |         
|/s/    STERLING E. PHILLIPS,
JR.Sterling E. Phillips,
Jr. |  | Chairman |  | March 7, 2006
|                                                          |  |         
|/s/    GERALD POCHGerald Poch                             |  | Director |  | March 2, 2006
|                                                          |  |         
|/s/    DANIEL R. YOUNGDaniel R. Young                     |  | Director |  | March 2, 2006



42



---

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



Board of Directors and Shareholders

Analex Corporation



We have audited the accompanying consolidated balance sheets of Analex Corporation and subsidiaries as of December 31, 2005 and 2004 and the related
consolidated statements of operations, shareholders equity, and cash flows for each of the three years in the period ended December 31, 2005. These financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on our audits.



We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for
the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis
for our opinion.



In our opinion, the consolidated financial
statements referred to above present fairly, in all material respects, the consolidated financial position of Analex Corporation and subsidiaries at December 31, 2005 and 2004, and the consolidated results of their operations and their cash
flows for each of the three years in the period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States.



/s/  ERNST & YOUNG LLP



McLean, Virginia

February 22, 2006



F-1



---

ANALEX CORPORATION



CONSOLIDATED
BALANCE SHEETS

AS OF DECEMBER 31, 2005 AND 2004



|                                                                                                                                                            |  |      |             |   |      |   |             |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ----------- | - | ---- | - | ----------- | -
|                                                                                                                                                            |  | 2005 |             |   | 2004 |  
|ASSETS                                                                                                                                                      |  |      |             |   |      |   |             |  
|Current assets                                                                                                                                              |  |      |             |   |      |   |             |  
|Cash and cash equivalents                                                                                                                                   |  | $    | 3,459,200   |   |      | $ | 1,034,200   |  
|Accounts receivable, net                                                                                                                                    |  |      | 31,067,500  |   |      |   | 18,350,400  |  
|Prepaid expenses and other                                                                                                                                  |  |      | 4,192,000   |   |      |   | 4,037,800   |  
|Inventory                                                                                                                                                   |  |      | 253,500     |   |      |   |            |  
|Property held for sale                                                                                                                                      |  |      | 430,600     |   |      |   |            |  
|                                                                                                                                                            |  |      |             |   |      |   |             |  
|Total current assets                                                                                                                                        |  |      | 39,402,800  |   |      |   | 23,422,400  |  
|                                                                                                                                                            |  |      |             |   |      |   |             |  
|Property and equipment, net                                                                                                                                 |  |      | 2,726,000   |   |      |   | 1,434,700   |  
|Contract rights and other intangible assets, net                                                                                                            |  |      | 10,404,800  |   |      |   | 6,363,500   |  
|Goodwill                                                                                                                                                    |  |      | 77,887,000  |   |      |   | 43,175,200  |  
|Other assets                                                                                                                                                |  |      | 671,700     |   |      |   | 526,300     |  
|                                                                                                                                                            |  |      |             |   |      |   |             |  
|Total assets                                                                                                                                                |  | $    | 131,092,300 |   |      | $ | 74,922,100  |  
|                                                                                                                                                            |  |      |             |   |      |   |             |  
|LIABILITIES, CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS EQUITY                                                                                           |  |      |             |   |      |   |             |  
|Current liabilities                                                                                                                                         |  |      |             |   |      |   |             |  
|Accounts payable                                                                                                                                            |  | $    | 1,877,300   |   |      | $ | 2,452,100   |  
|Notes payableother                                                                                                                                         |  |      | 387,500     |   |      |   | 904,200     |  
|Deferred tax liability, net                                                                                                                                 |  |      | 780,300     |   |      |   | 927,400     |  
|Other current liabilities                                                                                                                                   |  |      | 13,918,600  |   |      |   | 8,919,500   |  
|                                                                                                                                                            |  |      |             |   |      |   |             |  
|Total current liabilities                                                                                                                                   |  |      | 16,963,700  |   |      |   | 13,203,200  |  
|                                                                                                                                                            |  |      |             |   |      |   |             |  
|Notes payableline of credit                                                                                                                                |  |      | 27,631,400  |   |      |   | 5,624,100   |  
|Notes payableother                                                                                                                                         |  |      |            |   |      |   | 329,600     |  
|Series A convertible note                                                                                                                                   |  |      | 6,497,700   |   |      |   | 4,689,500   |  
|Deferred tax liability, net                                                                                                                                 |  |      | 3,677,200   |   |      |   | 2,123,500   |  
|Other long term liabilities                                                                                                                                 |  |      | 1,131,500   |   |      |   |            |  
|                                                                                                                                                            |  |      |             |   |      |   |             |  
|Total long-term liabilities                                                                                                                                 |  |      | 38,937,800  |   |      |   | 12,766,700  |  
|                                                                                                                                                            |  |      |             |   |      |   |             |  
|Total liabilities                                                                                                                                           |  |      | 55,901,500  |   |      |   | 25,969,900  |  
|                                                                                                                                                            |  |      |             |   |      |   |             |  
|Commitments and contingencies (Note 12)                                                                                                                     |  |      |            |   |      |   |            |  
|Series A convertible preferred stock; 6,726,457 shares issued and outstanding at December 31, 2005 and December 31,
2004                                    |  |      | 7,736,300   |   |      |   | 3,986,300   |  
|Series B-1 convertible preferred stock; 3,428,571 shares issued and outstanding at December 31, 2005 and December 31,
2004                                  |  |      | 12,000,000  |   |      |   | 12,000,000  |  
|Series B-2 convertible preferred stock; 7,142,856 shares issued and outstanding at December 31, 2005; 0 shares issued and outstanding at
December 31, 2004  |  |      | 16,493,300  |   |      |   |            |  
|                                                                                                                                                            |  |     
|Shareholders equity                                                                                                                                        |  |      |             |   |      |   |             |  
|Common stock; $0.02 par; authorized 65,000,000 shares; issued and outstanding December 31, 2005, 16,340,445 shares and December 31,
2004, 15,422,110 shares |  |      | 326,800     |   |      |   | 308,400     |  
|Additional paid-in capital                                                                                                                                  |  |      | 50,279,000  |   |      |   | 40,070,300  |  
|Warrants outstanding                                                                                                                                        |  |      | 9,228,300   |   |      |   | 6,803,300   |  
|Accumulated deficit                                                                                                                                         |  |      | (20,872,900 | ) |      |   | (14,216,100 | )
|                                                                                                                                                            |  |      |             |   |      |   |             |  
|Total shareholders equity                                                                                                                                  |  |      | 38,961,200  |   |      |   | 32,965,900  |  
|                                                                                                                                                            |  |      |             |   |      |   |             |  
|Total liabilities, convertible preferred stock and shareholders equity                                                                                     |  | $    | 131,092,300 |   |      | $ | 74,922,100  |  
|                                                                                                                                                            |  |      |             |   |      |   |             |  



The accompanying notes
are an integral part of these consolidated financial statements



F-2



---

ANALEX CORPORATION



CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003



|                                                                 |  |      |             |   |      |   |            |      |  |   |            |  
|---------------------------------------------------------------- |  | ---- | ----------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                                                 |  | 2005 |             |   | 2004 |   |            | 2003 | 
|Revenue                                                          |  | $    | 141,161,800 |   |      | $ | 94,416,700 |      |  | $ | 62,326,700 |  
|Operating cost and expenses                                      |  |      |             |   |      |   |            |      |  |   |            |  
|Cost of revenue                                                  |  |      | 112,373,600 |   |      |   | 75,605,000 |      |  |   | 52,436,500 |  
|Selling, general and administrative                              |  |      | 15,681,500  |   |      |   | 10,776,800 |      |  |   | 5,787,500  |  
|Depreciation and amortization                                    |  |      | 731,700     |   |      |   | 308,100    |      |  |   | 90,000     |  
|Amortization of intangible assets                                |  |      | 3,372,700   |   |      |   | 1,420,900  |      |  |   | 450,800    |  
|                                                                 |  |      |             |   |      |   |            |      |  |   |            |  
|Total operating costs and expenses                               |  |      | 132,159,500 |   |      |   | 88,110,800 |      |  |   | 58,764,800 |  
|                                                                 |  |      |             |   |      |   |            |      |  |   |            |  
|Operating income                                                 |  |      | 9,002,300   |   |      |   | 6,305,900  |      |  |   | 3,561,900  |  
|                                                                 |  |      |             |   |      |   |            |      |  |   |            |  
|Interest income                                                  |  |      | 9,300       |   |      |   | 80,300     |      |  |   |           |  
|Interest expense                                                 |  |      | (3,855,900  | ) |      |   | (9,002,200 | )    |  |   | (519,800   | )
|                                                                 |  |      |             |   |      |   |            |      |  |   |            |  
|Income (loss) from continuing operations before income taxes     |  |      | 5,155,700   |   |      |   | (2,616,000 | )    |  |   | 3,042,100  |  
|Provision for income taxes                                       |  |      | 3,248,800   |   |      |   | 1,193,400  |      |  |   | 311,200    |  
|                                                                 |  |      |             |   |      |   |            |      |  |   |            |  
|Income (loss) from continuing operations                         |  |      | 1,906,900   |   |      |   | (3,809,400 | )    |  |   | 2,730,900  |  
|Income from discontinued operations, net of income taxes         |  |      |            |   |      |   | 8,200      |      |  |   | 15,500     |  
|Loss on disposal of discontinued operations, net of income taxes |  |      | (113,200    | ) |      |   | (545,000   | )    |  |   |           |  
|                                                                 |  |      |             |   |      |   |            |      |  |   |            |  
|Net income (loss)                                                |  |      | 1,793,700   |   |      |   | (4,346,200 | )    |  |   | 2,746,400  |  
|                                                                 |  |      |             |   |      |   |            |      |  |   |            |  
|Dividends on Series A convertible preferred stock                |  |      | (900,000    | ) |      |   | (902,400   | )    |  |   | (56,700    | )
|Dividends on Series B-1 convertible preferred stock              |  |      | (720,000    | ) |      |   | (211,100   | )    |  |   |           |  
|Dividends on Series B-2 convertible preferred stock              |  |      | (1,125,000  | ) |      |   |           |      |  |   |           |  
|Accretion of convertible preferred stock                         |  |      | (5,705,500  | ) |      |   | (3,750,000 | )    |  |   | (236,300   | )
|                                                                 |  |      |             |   |      |   |            |      |  |   |            |  
|Net (loss) income available to common shareholders               |  | $    | (6,656,800  | ) |      | $ | (9,209,700 | )    |  | $ | 2,453,400  |  
|                                                                 |  |      |             |   |      |   |            |      |  |   |            |  
|Net (loss) income available to common shareholders per share:    |  |      |             |   |      |   |            |      |  |   |            |  
|Continuing operations                                            |  |      |             |   |      |   |            |      |  |   |            |  
|Basic                                                            |  | $    | (0.41       | ) |      | $ | (0.60      | )    |  | $ | 0.16       |  
|                                                                 |  |      |             |   |      |   |            |      |  |   |            |  
|Diluted                                                          |  | $    | (0.41       | ) |      | $ | (0.60      | )    |  | $ | 0.14       |  
|                                                                 |  |      |             |   |      |   |            |      |  |   |            |  
|Discontinued operations                                          |  |      |             |   |      |   |            |      |  |   |            |  
|Basic                                                            |  | $    | (0.01       | ) |      | $ | (0.04      | )    |  | $ | 0.00       |  
|                                                                 |  |      |             |   |      |   |            |      |  |   |            |  
|Diluted                                                          |  | $    | (0.01       | ) |      | $ | (0.04      | )    |  | $ | 0.00       |  
|                                                                 |  |      |             |   |      |   |            |      |  |   |            |  
|Net (loss) income available to common shareholders:              |  |      |             |   |      |   |            |      |  |   |            |  
|Basic                                                            |  | $    | (0.42       | ) |      | $ | (0.64      | )    |  | $ | 0.16       |  
|                                                                 |  |      |             |   |      |   |            |      |  |   |            |  
|Diluted                                                          |  | $    | (0.42       | ) |      | $ | (0.64      | )    |  | $ | 0.14       |  
|                                                                 |  |      |             |   |      |   |            |      |  |   |            |  
|Weighted average number of shares:                               |  |      |             |   |      |   |            |      |  |   |            |  
|Basic                                                            |  |      | 15,931,936  |   |      |   | 14,435,676 |      |  |   | 14,878,312 |  
|                                                                 |  |      |             |   |      |   |            |      |  |   |            |  
|Diluted                                                          |  |      | 15,931,936  |   |      |   | 14,435,676 |      |  |   | 17,670,001 |  
|                                                                 |  |      |             |   |      |   |            |      |  |   |            |  



The accompanying notes
are an integral part of these consolidated financial statements



F-3



---

ANALEX CORPORATION



CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND
2003



|                                                                                               |  |                           |  |              |            |        |            |   |        |   |         |                          |  |   |                     |   |                      |   |           |                                   |   |        |                    |  |   |         |   |  |   |             |   |  |   |            |  
|---------------------------------------------------------------------------------------------- |  | ------------------------- |  | ------------ | ---------- | ------ | ---------- | - | ------ | - | ------- | ------------------------ |  | - | ------------------- | - | -------------------- | - | --------- | --------------------------------- | - | ------ | ------------------ |  | - | ------- | - |  | - | ----------- | - |  | - | ---------- | -
|                                                                                               |  | CumulativePreferred Stock |  | Common Stock |            |        |            |   |        |   |         |                          |  |   |                     |   |                      |   |           |                                   |   |       
|                                                                                               |  | Shares                    |  | Amount       |            | Shares |            |   | Amount |   |         | AdditionalPaid inCapital |  |   | WarrantsOutstanding |   | DeferredCompensation |   |           | AccumulatedOtherComprehensiveLoss |   |        | AccumulatedDeficit |  |   | Total   |  
|BalanceJanuary 1, 2003                                                                        |  |                          |  | $            |           |        | 14,427,080 |   |        | $ | 288,500 |                          |  | $ | 21,171,400          |   |                      | $ |          |                                   | $ | (7,700 | )                  |  | $ | (90,600 | ) |  | $ | (7,459,800  | ) |  | $ | 13,901,800 |  
|Amortization of deferred stock compensation                                                    |  |                          |  |              |           |        |           |   |        |   |        |                          |  |   |                    |   |                      |   |          |                                   |   | 7,700  |                    |  |   |        |   |  |   |            |   |  |   | 7,700      |  
|Issuance of preferred warrants and beneficial conversion charge on convertible preferred stock |  | 6,726,457                 |  |              |           |        |           |   |        |   |        |                          |  |   | 10,519,800          |   |                      |   | 3,857,600 |                                   |   |       |                    |  |   |        |   |  |   |            |   |  |   | 14,377,400 |  
|Accretion of discount on cumulative preferred stock                                            |  |                          |  |              | 236,300    |        |           |   |        |   |        |                          |  |   |                    |   |                      |   |          |                                   |   |       |                    |  |   |        |   |  |   | (236,300    | ) |  |   | (236,300   | )
|Dividends on convertible preferred stock                                                       |  |                          |  |              |           |        |           |   |        |   |        |                          |  |   |                    |   |                      |   |          |                                   |   |       |                    |  |   |        |   |  |   | (56,700     | ) |  |   | (56,700    | )
|Repurchase and retirement of common shares                                                     |  |                          |  |              |           |        | (2,625,451 | ) |        |   | (52,500 | )                        |  |   | (9,018,500          | ) |                      |   |          |                                   |   |       |                    |  |   |        |   |  |   |            |   |  |   | (9,071,000 | )
|Issuance of note warrants and beneficial conversion charge on convertible notes                |  |                          |  |              |           |        |           |   |        |   |        |                          |  |   | 5,327,200           |   |                      |   | 1,905,300 |                                   |   |       |                    |  |   |        |   |  |   |            |   |  |   | 7,232,500  |  
|Shares issued pursuant to the Employee Stock Purchase Plan                                     |  |                          |  |              |           |        | 86,892     |   |        |   | 1,700   |                          |  |   | 189,000             |   |                      |   |          |                                   |   |       |                    |  |   |        |   |  |   |            |   |  |   | 190,700    |  
|Exercise of options and warrants                                                               |  |                          |  |              |           |        | 1,148,145  |   |        |   | 23,000  |                          |  |   | 311,800             |   |                      |   |          |                                   |   |       |                    |  |   |        |   |  |   |            |   |  |   | 334,800    |  
|Other                                                                                          |  |                          |  |              |           |        |           |   |        |   |        |                          |  |   | 18,400              |   |                      |   |          |                                   |   |       |                    |  |   |        |   |  |   |            |   |  |   | 18,400     |  
|Unrealized gain on derivative contract                                                         |  |                          |  |              |           |        |           |   |        |   |        |                          |  |   |                    |   |                      |   |          |                                   |   |       |                    |  |   | 46,800  |   |  |   |            |   |  |   | 46,800     |  
|Net income                                                                                     |  |                          |  |              |           |        |           |   |        |   |        |                          |  |   |                    |   |                      |   |          |                                   |   |       |                    |  |   |        |   |  |   | 2,746,400   |   |  |   | 2,746,400  |  
|                                                                                               |  |                           |  |              |            |        |            |   |        |   |         |                          |  |   |                     |   |                      |   |           |                                   |   |        |                    |  |   |         |   |  |   |             |   |  |   |            |  
|Total comprehensive income                                                                     |  |                          |  |              |           |        |           |   |        |   |        |                          |  |   |                    |   |                      |   |          |                                   |   |       |                    |  |   |        |   |  |   |            |   |  |   | 2,793,200  |  
|                                                                                               |  |                           |  |              |            |        |            |   |        |   |         |                          |  |   |                     |   |                      |   |           |                                   |   |        |                    |  |   |         |   |  |   |             |   |  |   |            |  
|BalanceDecember 31, 2003                                                                      |  | 6,726,457                 |  |              | 236,300    |        | 13,036,666 |   |        |   | 260,700 |                          |  |   | 28,519,100          |   |                      |   | 5,762,900 |                                   |   |       |                    |  |   | (43,800 | ) |  |   | (5,006,400  | ) |  |   | 29,492,500 |  
|Issuance of note warrants and beneficial conversion charge on convertible notes                |  |                          |  |              |           |        |           |   |        |   |        |                          |  |   | 3,720,000           |   |                      |   | 720,000   |                                   |   |       |                    |  |   |        |   |  |   |            |   |  |   | 4,440,000  |  
|Issuance of preferred warrants and convertible preferred stock                                 |  | 3,428,571                 |  |              | 12,000,000 |        |           |   |        |   |        |                          |  |   | 320,400             |   |                      |   | 320,400   |                                   |   |       |                    |  |   |        |   |  |   |            |   |  |   | 640,800    |  
|Accretion of discount on cumulative preferred stock                                            |  |                          |  |              | 3,750,000  |        |           |   |        |   |        |                          |  |   |                    |   |                      |   |          |                                   |   |       |                    |  |   |        |   |  |   | (3,750,000  | ) |  |   | (3,750,000 | )
|Dividends on convertible preferred stock                                                       |  |                          |  |              |           |        |           |   |        |   |        |                          |  |   |                    |   |                      |   |          |                                   |   |       |                    |  |   |        |   |  |   | (1,113,500  | ) |  |   | (1,113,500 | )
|Issuance costs of fully discounted cumulative preferred stock                                  |  |                          |  |              |           |        |           |   |        |   |        |                          |  |   | (79,800             | ) |                      |   |          |                                   |   |       |                    |  |   |        |   |  |   |            |   |  |   | (79,800    | )
|Shares issued pursuant to the Employee Stock Purchase Plan                                     |  |                          |  |              |           |        | 107,370    |   |        |   | 2,100   |                          |  |   | 315,600             |   |                      |   |          |                                   |   |       |                    |  |   |        |   |  |   |            |   |  |   | 317,700    |  
|Exercise of options and warrants                                                               |  |                          |  |              |           |        | 445,614    |   |        |   | 8,900   |                          |  |   | 348,400             |   |                      |   |          |                                   |   |       |                    |  |   |        |   |  |   |            |   |  |   | 357,300    |  
|Issuance of common stock to sellers of Beta Analytics International                            |  |                          |  |              |           |        | 1,832,460  |   |        |   | 36,700  |                          |  |   | 6,926,600           |   |                      |   |          |                                   |   |       |                    |  |   |        |   |  |   |            |   |  |   | 6,963,300  |  
|Unrealized gain on derivative contract                                                         |  |                          |  |              |           |        |           |   |        |   |        |                          |  |   |                    |   |                      |   |          |                                   |   |       |                    |  |   | 43,800  |   |  |   |            |   |  |   | 43,800     |  
|Net loss                                                                                       |  |                          |  |              |           |        |           |   |        |   |        |                          |  |   |                    |   |                      |   |          |                                   |   |       |                    |  |   |        |   |  |   | (4,346,200  | ) |  |   | (4,346,200 | )
|                                                                                               |  |                           |  |              |            |        |            |   |        |   |         |                          |  |   |                     |   |                      |   |           |                                   |   |        |                    |  |   |         |   |  |   |             |   |  |   |            |  
|Total comprehensive loss                                                                       |  |                          |  |              |           |        |           |   |        |   |        |                          |  |   |                    |   |                      |   |          |                                   |   |       |                    |  |   |        |   |  |   |            |   |  |   | (4,302,400 | )
|                                                                                               |  |                           |  |              |            |        |            |   |        |   |         |                          |  |   |                     |   |                      |   |           |                                   |   |        |                    |  |   |         |   |  |   |             |   |  |   |            |  
|BalanceDecember 31, 2004                                                                      |  | 10,155,028                |  |              | 15,986,300 |        | 15,422,110 |   |        |   | 308,400 |                          |  |   | 40,070,300          |   |                      |   | 6,803,300 |                                   |   |       |                    |  |   |        |   |  |   | (14,216,100 | ) |  |   | 32,965,900 |  
|Issuance of preferred warrants and convertible preferred stock                                 |  | 7,142,856                 |  |              | 14,537,800 |        |           |   |        |   |        |                          |  |   | 7,960,700           |   |                      |   | 2,425,000 |                                   |   |       |                    |  |   |        |   |  |   |            |   |  |   | 10,385,700 |  
|Accretion of discount on cumulative preferred stock                                            |  |                          |  |              | 5,705,500  |        |           |   |        |   |        |                          |  |   |                    |   |                      |   |          |                                   |   |       |                    |  |   |        |   |  |   | (5,705,500  | ) |  |   | (5,705,500 | )
|Dividends on convertible preferred stock                                                       |  |                          |  |              |           |        |           |   |        |   |        |                          |  |   |                    |   |                      |   |          |                                   |   |       |                    |  |   |        |   |  |   | (2,745,000  | ) |  |   | (2,745,000 | )
|Shares issued pursuant to the Employee Stock Purchase Plan                                     |  |                          |  |              |           |        | 144,669    |   |        |   | 2,900   |                          |  |   | 433,000             |   |                      |   |          |                                   |   |       |                    |  |   |        |   |  |   |            |   |  |   | 435,900    |  
|Exercise of options and warrants                                                               |  |                          |  |              |           |        | 473,666    |   |        |   | 9,500   |                          |  |   | 858,500             |   |                      |   |          |                                   |   |       |                    |  |   |        |   |  |   |            |   |  |   | 868,000    |  
|Tax effect of options exercised                                                                |  |                          |  |              |           |        |           |   |        |   |        |                          |  |   | 17,500              |   |                      |   |          |                                   |   |       |                    |  |   |        |   |  |   |            |   |  |   | 17,500     |  
|Issuance of common stock to employees of ComGlobal Systems, Incorporated                       |  |                           |  |              |           |        | 300,000    |   |        |   | 6,000   |                          |  |   | 939,000             |   |                      |   |          |                                   |   |       |                    |  |   |        |   |  |   |            |   |  |   | 945,000    |  
|Net income                                                                                     |  |                          |  |              |           |        |           |   |        |   |        |                          |  |   |                    |   |                      |   |          |                                   |   |       |                    |  |   |        |   |  |   | 1,793,700   |   |  |   | 1,793,700  |  
|                                                                                               |  |                           |  |              |            |        |            |   |        |   |         |                          |  |   |                     |   |                      |   |           |                                   |   |        |                    |  |   |         |   |  |   |             |   |  |   |            |  
|Total comprehensive income                                                                     |  |                          |  |              |           |        |           |   |        |   |        |                          |  |   |                    |   |                      |   |          |                                   |   |       |                    |  |   |        |   |  |   |            |   |  |   | 1,793,700  |  
|                                                                                               |  |                           |  |              |            |        |            |   |        |   |         |                          |  |   |                     |   |                      |   |           |                                   |   |        |                    |  |   |         |   |  |   |             |   |  |   |            |  
|BalanceDecember 31, 2005                                                                      |  | 17,297,884                |  | $            | 36,229,600 |        | 16,340,445 |   |        | $ | 326,800 |                          |  | $ | 50,279,000          |   |                      | $ | 9,228,300 |                                   | $ |       |                    |  | $ |        |   |  | $ | (20,872,900 | ) |  | $ | 38,961,200 |  
|                                                                                               |  |                           |  |              |            |        |            |   |        |   |         |                          |  |   |                     |   |                      |   |           |                                   |   |        |                    |  |   |         |   |  |   |             |   |  |   |            |  



The accompanying notes
are an integral part of these consolidated financial statements



F-4



---

ANALEX CORPORATION



CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003



|                                                                                          |  |      |             |   |      |   |             |      |  |   |            |  
|----------------------------------------------------------------------------------------- |  | ---- | ----------- | - | ---- | - | ----------- | ---- |  | - | ---------- | -
|                                                                                          |  | 2005 |             |   | 2004 |   |             | 2003 | 
|Reconciliation of net income (loss) to cash provided by operating activities              |  |      |             |   |      |   |             |      |  |   |            |  
|Net income (loss)                                                                         |  | $    | 1,793,700   |   |      | $ | (4,346,200  | )    |  | $ | 2,746,400  |  
|Net loss (income) from discontinued operations                                            |  |      | 113,200     |   |      |   | 536,800     |      |  |   | (15,500    | )
|                                                                                          |  |      |             |   |      |   |             |      |  |   |            |  
|Net income (loss) from continuing operations                                              |  |      | 1,906,900   |   |      |   | (3,809,400  | )    |  |   | 2,730,900  |  
|Adjustments to reconcile net income (loss) to net cash provided by operating activities   |  |      |             |   |      |   |             |      |  |   |            |  
|Depreciation                                                                              |  |      | 731,700     |   |      |   | 308,100     |      |  |   | 90,000     |  
|Amortization of intangible assets                                                         |  |      | 3,372,700   |   |      |   | 1,420,900   |      |  |   | 450,800    |  
|Amortization of debt discounts                                                            |  |      | 1,808,200   |   |      |   | 6,888,900   |      |  |   | 140,400    |  
|Amortization of deferred financing costs                                                  |  |      | 188,900     |   |      |   | 779,700     |      |  |   |           |  
|Stock-based compensation expense                                                          |  |      | 105,000     |   |      |   |            |      |  |   | 122,000    |  
|Loss on disposal of fixed assets                                                          |  |      | 5,700       |   |      |   |            |      |  |   |           |  
|Loss on impairment of assets held for sale                                                |  |      | 66,000      |   |      |   |            |      |  |   |           |  
|Tax benefit on exercise of stock options                                                  |  |      | 17,500      |   |      |   |            |      |  |   |           |  
|Changes in operating assets and liabilities, net of effect of acquisition                 |  |      |             |   |      |   |             |      |  |   |            |  
|Accounts receivable                                                                       |  |      | (4,441,400  | ) |      |   | (3,754,100  | )    |  |   | 1,026,400  |  
|Prepaid expenses and other                                                                |  |      | 1,907,900   |   |      |   | (2,608,100  | )    |  |   | (213,100   | )
|Inventory                                                                                 |  |      | 205,500     |   |      |   |            |      |  |   |           |  
|Other assets                                                                              |  |      | (155,300    | ) |      |   | (363,000    | )    |  |   | (406,300   | )
|Accounts payable                                                                          |  |      | (806,200    | ) |      |   | 482,200     |      |  |   | (1,827,300 | )
|Other current liabilities                                                                 |  |      | (658,000    | ) |      |   | 2,129,100   |      |  |   | 83,900     |  
|Deferred tax liability                                                                    |  |      | (866,300    | ) |      |   | 789,700     |      |  |   | 103,000    |  
|Other long-term liabilities                                                               |  |      | (12,300     | ) |      |   | 4,400       |      |  |   |           |  
|                                                                                          |  |      |             |   |      |   |             |      |  |   |            |  
|Net cash flow provided by operating activities                                            |  |      | 3,376,500   |   |      |   | 2,268,400   |      |  |   | 2,300,700  |  
|                                                                                          |  |      |             |   |      |   |             |      |  |   |            |  
|Cash flows from investing activities                                                      |  |      |             |   |      |   |             |      |  |   |            |  
|Purchase of property and equipment                                                        |  |      | (1,191,200  | ) |      |   | (496,300    | )    |  |   | (435,100   | )
|Purchase of intangible assets                                                             |  |      |            |   |      |   |            |      |  |   | (600,000   | )
|Proceeds from sale of property and equipment                                              |  |      | 809,100     |   |      |   |            |      |  |   |           |  
|Cash paid for BAI, net of cash acquired                                                   |  |      |            |   |      |   | (27,132,600 | )    |  |   |           |  
|Cash paid for ComGlobal, net of cash acquired                                             |  |      | (46,300,400 | ) |      |   |            |      |  |   |           |  
|                                                                                          |  |      |             |   |      |   |             |      |  |   |            |  
|Net cash used in investing activities                                                     |  |      | (46,682,500 | ) |      |   | (27,628,900 | )    |  |   | (1,035,100 | )
|                                                                                          |  |      |             |   |      |   |             |      |  |   |            |  
|Cash flows from financing activities                                                      |  |      |             |   |      |   |             |      |  |   |            |  
|Proceeds from net borrowings on bank and other loans                                      |  |      | 21,146,000  |   |      |   | 1,385,400   |      |  |   | (3,500,300 | )
|Proceeds from sale of common stock                                                        |  |      | 840,000     |   |      |   |            |      |  |   |           |  
|Proceeds from stock options and warrants exercised                                        |  |      | 868,000     |   |      |   | 353,700     |      |  |   | 334,800    |  
|Proceeds from employee stock purchase plan                                                |  |      | 435,900     |   |      |   | 321,400     |      |  |   | 190,700    |  
|Proceeds from issuance of Series A Convertible Notes and Warrants                         |  |      |            |   |      |   |            |      |  |   | 10,000,000 |  
|Proceeds from sale of ABS                                                                 |  |      | 115,700     |   |      |   |            |      |  |   |           |  
|Net proceeds from issuance of Series A Preferred Stock and Warrants                       |  |      |            |   |      |   |            |      |  |   | 14,377,300 |  
|Net proceeds from issuance of Series B Senior Subordinated Notes and Warrants             |  |      |            |   |      |   | 11,325,100  |      |  |   |           |  
|Net proceeds from issuance of Series B-2 Preferred Stock and Warrants                     |  |      | 24,923,400  |   |      |   |            |      |  |   |           |  
|Issuance costs related to financing instruments                                           |  |      | (125,600    | ) |      |   | (79,900     | )    |  |   |           |  
|Repurchase of stock, stock options and warrants                                           |  |      |            |   |      |   |            |      |  |   | (9,166,800 | )
|Payments of dividends on preferred stock                                                  |  |      | (2,243,500  | ) |      |   | (890,500    | )    |  |   |           |  
|                                                                                          |  |      |             |   |      |   |             |      |  |   |            |  
|Net cash provided by financing activities                                                 |  |      | 45,959,900  |   |      |   | 12,415,200  |      |  |   | 12,235,700 |  
|                                                                                          |  |      |             |   |      |   |             |      |  |   |            |  
|Net cash flow from discontinued operations, including disposal of discontinued operations |  |      | (228,900    | ) |      |   | (198,000    | )    |  |   | 374,400    |  
|                                                                                          |  |      |             |   |      |   |             |      |  |   |            |  
|Net increase (decrease) in cash and cash equivalents                                      |  |      | 2,425,000   |   |      |   | (13,143,300 | )    |  |   | 13,875,700 |  
|Cash and cash equivalents at beginning of period                                          |  |      | 1,034,200   |   |      |   | 14,177,500  |      |  |   | 301,800    |  
|                                                                                          |  |      |             |   |      |   |             |      |  |   |            |  
|Cash and cash equivalents at end of period                                                |  | $    | 3,459,200   |   |      | $ | 1,034,200   |      |  | $ | 14,177,500 |  
|                                                                                          |  |      |             |   |      |   |             |      |  |   |            |  
|Supplemental disclosure of cash flow information:                                         |  |      |             |   |      |   |             |      |  |   |            |  
|Cash paid for interest                                                                    |  |      | 1,920,200   |   |      |   | 1,233,100   |      |  |   | 519,800    |  
|Cash paid for income taxes, net of refund                                                 |  |      | 3,787,100   |   |      |   | 1,339,000   |      |  |   | 255,000    |  
|Supplemental disclosure of non-cash investing and financing activities:                   |  |      |             |   |      |   |             |      |  |   |            |  
|Issuance of common stock in acquisition                                                   |  |      |            |   |      |   | 6,963,300   |      |  |   |           |  



The accompanying notes
are an integral part of these consolidated financial statements



F-5



---

ANALEX CORPORATION



NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS



1.    Business Overview



Analex Corporation (Analex or the Company) is a provider of mission-critical professional services
to federal government clients. The Company is a leading provider of services in support of our nations security. The Company specializes in providing intelligence, systems engineering and security services in support of the nations
security. Analex focuses on developing innovative technical approaches for the intelligence community, analyzing and supporting defense systems, designing, developing and testing aerospace systems and providing a full range of security support
services to the U.S. government. The Company specializes in the following professional services:



| |  |  | Information Technology Services.Information technology services focus on design, development, test, integration and support of software and networks for business and mission
critical systems. The Company develops radar, modeling and simulation and system software, all in support of collecting, testing, and analyzing data from various intelligence systems. The Company also provides the military with program management,
systems engineering and software development and development of command, control, communications, computers and intelligence (C4I) programs.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Aerospace Engineering Services.Aerospace engineering services focus on engineering associated with the development, support and operations of space launch vehicles and
facilities as well as independent verification and validation services. The Company provides services in the design and testing of expendable launch vehicles for the Department of Defense and intelligence community. The Companys highly
specialized expertise includes test, analysis and independent validation and verification support in areas such as structural dynamics, trajectory and performance, thermal system performance, and range safety. The Companys solutions enable the
simulation of a realistic operational environment so that satellites and related systems can be tested prior to deployment. The Company also performs verification and validation of test results to ensure the reliability of the data.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Security and Intelligence Support Services.The Companys security and intelligence support services focus on analysis support and threat assessments,
counterintelligence, information, network and facilities security, technology protection and security education and training.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



These services are provided through the Companys two strategic business units, Homeland Security Group and Systems Engineering Group.



The Homeland Security Group provides information technology services,
aerospace engineering services and security and intelligence support services. The Homeland Security Group 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 provides aerospace engineering and information technology services. Capabilities include expendable launch vehicle
engineering, space systems development, and ground support for space operations. The System Engineering Group provides these services to NASA.



On April 1, 2005, the Company acquired ComGlobal Systems, Inc, (ComGlobal) in a transaction valued at approximately $47.0 million.
ComGlobal is a software engineering and information technology firm, specializes in C4I programs for the military. Its largest customer is the U.S. Navys Tomahawk Cruise Missile Program. ComGlobal is now a wholly-owned subsidiary of Analex and
reported as a part of the Companys Homeland Security Group.



On May 28, 2004, the Company acquired Beta Analytics, Incorporated (BAI) in a transaction valued at approximately $37.9 million, including the assumption $1.7 million of BAIs debt. The Company acquired all of



F-6



---

ANALEX CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



the issued and outstanding stock of BAI for $27.7 million in cash and 1,832,460 unregistered shares of Analex Common Stock.



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.



2.    Summary of Significant Accounting Policies



A.    Principles of Consolidation



The consolidated financial statements include the accounts of Analex
Corporation and its three wholly owned subsidiaries, SyCom, ComGlobal and BAI. The results of operations of ABS, a former wholly owned subsidiary which the Company disposed of on November 16, 2004, are presented as discontinued operations for
all periods presented herein (see Note 19). All significant intercompany transactions have been eliminated from the consolidated financial statements.



B.    Revenue



The Company recognizes revenue when persuasive evidence of an arrangement exists, services have been rendered or goods delivered, the contract price is
fixed or determinable, and collectibility is reasonably assured.



The Companys contracts with customers are typically cost-plus-fee, time and material, or fixed-price contracts. Revenue results from work performed on these contracts by the Companys employees and from pass-through of costs for
material and work performed by subcontractors. Revenue on cost-type contracts is recorded as allowable contract costs are incurred and fees earned. Revenue for time and material contracts is recorded on the basis of allowable contract labor hours
worked times the contract defined billing rates, plus the cost of materials used in performance of the contract. Profits on time and materials contracts result from the difference between the cost of services performed and the contract defined
billing rates for these services. Revenue on certain fixed-price service contracts is recorded each period based on a monthly amount for services rendered. Revenue on other fixed-price contracts is recorded as costs are incurred, using the
percentage-of-completion method of accounting. Profits on fixed-price contracts result from the difference between the incurred costs and the revenue earned. In the normal course of business, the Company may be party to claims and disputes resulting
from modifications and change orders and other contract matters. Claims for additional contract compensation are recognized when realization is probable and estimable. When the Company has a contract where multiple units of accounting exist, the
Company will apply the appropriate revenue recognition methodology to each separate unit of accounting, as necessary. The Company has contracts containing performance based incentive fees, which are not finalized until the end of predetermined time
periods. The Company accrues revenue on these incentive fees based on the amount the Company expects to be awarded. The Companys estimates are based on, among other things, discussions with the client, actual contract performance to date and
historical contract performance trends.



Contract revenue
recognition inherently involves estimation. Examples of estimates include the contemplated level of effort to accomplish the tasks under contract, the cost of the effort, and an ongoing assessment of the Companys progress toward completing the
contract. From time to time, as part of the Companys standard management processes, facts develop that require revision to its estimated total costs or revenue. To the extent that a revised estimate affects contract profit or revenue
previously recognized, the Company records the cumulative effect of the revision in the period in which the facts requiring the revision become known. The full amount of an anticipated loss on any type of contract is recognized in the period in
which it becomes probable and can be reasonably estimated.



F-7



---

ANALEX CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



From time to time, the Company may proceed with work based on client direction prior to the
completion and signing of formal contract documents. The Company has a formal review process for approving any such work. Revenue associated with such work is recognized only when it can be reliably estimated and realization is probable. The Company
bases its estimates on previous experiences with the client, communications with the client regarding funding status, and its knowledge of available funding for the contract or program. This type of revenue is not material to the Company for the
years ended December 31, 2005, 2004 and 2003, respectively.



Disputes occasionally arise in the normal course of the Companys business due to events such as delays, changes in contract specifications, and questions of cost allowability or collectibility. Such matters, whether claims or
unapproved change orders in the process of negotiation, are recorded at the lesser of their estimated net realizable value or actual costs incurred, and only when realization is probable and can be reliably estimated. Claims against the Company are
recognized where a loss is considered probable and can be reasonably estimated in amount.



C.    Cash Equivalents



Cash equivalents represent amounts invested in highly liquid short-term investments with original maturities of three months or less.



D.    Use of Estimates



The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. On an ongoing basis, the Company evaluates its estimates, including those related to revenue recognition, doubtful accounts receivable, goodwill and other intangible assets, and other
contingent liabilities. The Company determines its estimates on historical experience and various other factors that are deemed reasonable at the time the estimates are made.



E.    Accounts Receivable and Allowance for Doubtful Accounts



The Company carries its accounts receivable at their face amounts, less an
allowance for doubtful accounts. The Company maintains an allowance for doubtful accounts receivable that may arise in the normal course of business. Historically, the Company has not had significant write-offs of doubtful accounts receivable
related to work performed for the federal government. However, the Company does perform work on contracts and task orders where on occasion issues arise that lead to accounts receivable not being fully collected. The Companys allowance for
doubtful accounts is established based upon the latest information available to determine whether invoices are ultimately collectible. Whenever judgment is involved in determining the estimates, there is the potential for bad debt expense and the
fair value of accounts receivable to be misstated.



F.    Risks and Uncertainties



Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash-equivalents, and accounts receivable. The Company maintains its cash and cash equivalents principally in one
United States (U.S.) commercial bank.



The
Companys accounts receivable consists principally of accounts receivable from the U.S. Government or prime contractors to agencies and departments of the U.S. government. The Company extends credit in the normal course of operations and does
not require collateral from its customers.



F-8



---

ANALEX CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The Company has historically been, and continues to be, heavily dependent upon direct and indirect
contracts from various U.S. government agencies. Contracts and subcontracts with the U.S. government are subject to audit by audit agencies of the government. Such audits determine, among other things, whether an adjustment of invoices rendered to
the government is appropriate under the underlying terms of the contracts. All U.S. government contracts contain clauses that allow for the termination of contracts at the convenience of the government.



G.    Property and Equipment



Building, furniture, equipment and leasehold improvements are stated at cost
less accumulated depreciation. Building, furniture, equipment and leasehold improvements acquired in a business combination are stated at fair value, as determined using the assistance of an outside valuation firm, less accumulated depreciation. The
Company uses the straight-line method of depreciation and amortization over the estimated useful lives of the assets. The estimated useful life for computers and equipment is three years. The estimated useful life of furniture ranges from five to
ten years and the estimated useful life for buildings is thirty-nine years. Leasehold improvements are amortized over their estimated useful life or the minimum lease term, whichever is shorter.



Real property classified as held for sale is measured at the lower of its
carrying amount or fair value less cost to sell, which is based on comparable sales amounts of similar property. Gains or losses are recognized for subsequent changes to the fair value less cost to sell; however, gains that may be recognized are
limited by cumulative losses previously recognized. Property classified as held for sale is not depreciated.



Maintenance and repairs are charged to expense as incurred, and the cost of additions and betterments are capitalized. When assets are retired or sold,
the cost and related accumulated depreciation are removed from the accounts and the gain or loss is included in operations.



Implementation costs associated with purchased software are capitalized. Such costs are amortized using the straight-line method for a period of three to
five years.



H.    Goodwill and Intangible Assets



Goodwill, which represents the excess of the cost of an
acquired entity over the net fair value of assets acquired and liabilities assumed, is assessed for impairment annually. Impairment is the excess of the carrying value assigned to goodwill over its respective fair value. The Company uses a two-step
approach to determine impairment. The Company performs step 1 by comparing the reporting units fair value to its carrying value. If the fair value of the reporting unit exceeds its carrying value, no further calculation is necessary. A
reporting unit with a carrying value in excess of its fair value constitutes a step 1 failure and leads to a step 2 evaluation to determine the goodwill write off. If a step 1 failure occurs, the excess of the carrying value over the fair value does
not equal the amount of the goodwill write off. Step 2 requires the calculation of the implied fair value of goodwill by allocating the fair value of the reporting unit to its tangible and intangible assets, other than goodwill, similar to the
purchase price allocation.The remaining unallocated fair value represents the implied fair value of the goodwill. If the implied fair value of goodwill exceeds its carrying amount, there is no impairment. If the carrying value of goodwill
exceeds its implied fair value, an impairment charge is recorded for the difference. Further, when performing step 2 and allocating a reporting units fair value, assets having a higher fair value as compared to book value increase any possible
write off of impaired goodwill. For the year ended December 31, 2005 no condition of impairment existed.



F-9



---

ANALEX CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Intangible assets with finite lives are amortized on a straight-line basis over their useful lives,
determined with the assistance of an outside valuation firm, of 3 to 9 years. Intangible assets are evaluated for impairment whenever events or changes in circumstances indicate that their carrying value may not be recoverable.



I.    Stock-Based Compensation



The Company accounts 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.



|                                                                                                                                                      |  |      |           |   |      |    |           |      |  |   |          
|----------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | --------- | - | ---- | -- | --------- | ---- |  | - | ---------
|                                                                                                                                                      |  | 2005 |           |   | 2004 |    |           | 2003
|Net (loss) income available to common shareholders, as reported                                                                                       |  | ($   | 6,656,800 | ) |      | ($ | 9,209,700 | )    |  | $ | 2,453,400
|Add: Total stock-based employee compensation expense as reported under intrinsic value method (APB No. 25) for all awards, net of related
tax effects |  | $    | 105,000   |   |      | $  |          |      |  | $ | 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     |  | $    | 943,900   |   |      | $  | 549,500   |      |  | $ | 764,400  
|                                                                                                                                                      |  |      |           |   |      |    |           |      |  |   |          
|Pro forma net (loss) income available to common shareholders                                                                                          |  | ($   | 7,495,700 | ) |      | ($ | 9,759,200 | )    |  | $ | 1,695,900
|                                                                                                                                                      |  |      |           |   |      |    |           |      |  |   |          
|(Loss) earnings per share:                                                                                                                            |  |      |           |   |      |    |           |      |  |   |          
|Basic as reported                                                                                                                                     |  | ($   | 0.42      | ) |      | ($ | 0.64      | )    |  | $ | 0.16     
|Diluted as reported                                                                                                                                   |  | ($   | 0.42      | ) |      | ($ | 0.64      | )    |  | $ | 0.14     
|Basic pro forma                                                                                                                                       |  | ($   | 0.47      | ) |      | ($ | 0.68      | )    |  | $ | 0.11     
|Diluted pro forma                                                                                                                                     |  | ($   | 0.47      | ) |      | ($ | 0.68      | )    |  | $ | 0.10     



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 35 to 76%; expected life of the option term of 5
years; and risk-free interest rate of 2.25 to 5.85%.



To
eliminate 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) is effective as of January 1, 2006. The table below summarizes the accelerated vesting of options.



|                  |  |                |      |                       |          |                          |         
|----------------- |  | -------------- | ---- | --------------------- | -------- | ------------------------ | --------
|Number of options |  | Exercise price |      | Original vesting date |          | Accelerated vesting date
|100,000           |  | $              | 3.42 |                       | 02/17/06 |                          | 03/02/05
|66,667            |  | $              | 4.49 |                       | 04/20/06 |                          | 12/21/04
|50,001            |  | $              | 3.88 |                       | 04/08/06 |                          | 01/26/05
|25,000            |  | $              | 3.70 |                       | 02/02/06 |                          | 01/31/05
|6,668             |  | $              | 3.92 |                       | 03/01/06 |                          | 01/19/05
|3,334             |  | $              | 4.04 |                       | 03/01/06 |                          | 12/21/04
|1,667             |  | $              | 3.80 |                       | 02/25/06 |                          | 01/26/05
|1,667             |  | $              | 3.30 |                       | 07/06/06 |                          | 11/30/05



Compensation expense
for other stock based awards is measured using the intrinsic value of the award at the awards grant date. In March 2005, the Companys Board of Directors, including its compensation committee, approved the sale of up to 300,000
unregistered shares of the Companys common stock to 22 employees of ComGlobal. In April 2005, the Company sold all 300,000 unregistered shares. The Company recorded $105,000 of compensation expense related to this award as of December 31,
2005.



F-10



---

ANALEX CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



J.    Impairment of Long-Lived Assets



Whenever events or changes in circumstances indicate that the carrying
amount of long-lived assets, and other intangibles, may not be fully recoverable, the Company evaluates the probability that future undiscounted net cash flows, without interest charges, will be less than the carrying amount of the assets. If any
impairment were indicated as a result of this analysis, the Company would recognize a loss based on the amount by which the carrying amount exceeds the estimated discounted future cash flows.



In December 2005, the Company concluded that the carrying value of its land
and building held for sale in Upper Marlboro, Maryland would not be fully recovered. The Company based its conclusion on comparable local sales data and its estimated costs to sell the facility. The Company recorded a $66,000 impairment loss,
included in SG&A for the year ended December 31, 2005. In the event that there are changes in the planned use of the Companys long-term assets or its expected future undiscounted cash flows are reduced significantly, the
Companys assessment of its ability to recover the carrying value of its assets could change.



K.    Income Taxes



The Company utilizes the asset and liability method of accounting for income taxes. Under this method, deferred income taxes are recognized for the tax consequences of temporary differences between the financial
statement carrying amounts and the tax bases of existing assets and liabilities, less valuation allowances, if required. Enacted statutory tax rates are used to compute the tax consequences of these temporary differences.



L.    Inventory



The Companys inventory consists of finished computer component parts.
These parts are used in products sold to selected customers. Inventory is stated at the lower of cost or market determined based on the specific identification method.



M.    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. The Company reports the results of discontinued operations and any disposal gains or losses, net of applicable income taxes,
separately from the results of continuing operations for each year presented in these financial statements.



N.    Financial Statement Reclassification



Certain amounts in the prior year financial statements and related notes have been reclassified to conform to the 2005 presentation.



O.    Recently Issued Accounting Standards



In December 2004, the Financial Accounting Standards Board
(FASB) issued SFAS No. 123(R)Share-Based Payment,which will replace SFAS No. 123Accounting for Stock-Based Compensation, and supersede APB Opinion No. 25Accounting for Stock Issued to
Employees.SFAS No. 123(R) requires compensation costs related to share-based payment transactions to be recognized in the financial statements. With limited exceptions, the amount of compensation cost is measured based on the grant-date
fair value of the equity or liability instruments issued. SFAS No. 123(R) requires liability awards to be re-measured each reporting period and



F-11



---

ANALEX CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



compensation costs to be recognized over the period that an employee provides service in exchange for the award. SFAS No. 123(R) will become effective
as of the beginning of the Companys first quarter of 2006.



SFAS No. 123(R) permits companies to adopt its requirements using either the modified prospective method or the modified retrospective method. Under the modified prospective method, compensation cost is recognized beginning with the
effective date for all share-based payments granted after the effective date and for all awards granted to employees prior to the effective date of SFAS No. 123(R) that remain unvested on the effective date. The modified retrospective method
includes the requirements of the modified prospective method, but also permits entities to restate either all prior periods presented or prior interim periods of the year of adoption for the impact of adopting this standard. It is anticipated the
Company will apply the modified prospective method upon adoption. The Company expects that the initial adoption of SFAS 123(R) as of January 1, 2006 will not have a material impact on its Consolidated Statements of Operations. However, the impact on
future periods may be material. SFAS No. 123(R) also requires the benefits of tax deductions in excess of recognized compensation costs to be reported as financing cash flow, rather than as an operating cash flow as required under current
literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. The Company believes this reclassification will not have a material impact on its Consolidated Statements of Cash
Flows.



3.    Accounts Receivable



The components of accounts receivable as of December 31, are as
follows:



|                                             |  |      |            |   |      |   |            |  
|-------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | -
|                                             |  | 2005 |            |   | 2004 |  
|Trade accounts receivable                    |  |      |            |   |      |   |            |  
|U.S. Government:                             |  |      |            |   |      |   |            |  
|Amounts billed                               |  | $    | 23,599,400 |   |      | $ | 14,397,600 |  
|Recoverable costs and profitnot billed      |  |      | 7,853,600  |   |      |   | 4,378,300  |  
|                                             |  |      |            |   |      |   |            |  
|Subtotal                                     |  |      | 31,453,000 |   |      |   | 18,775,900 |  
|Commercial, state and local governments:     |  |      |            |   |      |   |            |  
|Amounts billed                               |  |      | 306,400    |   |      |   | 14,000     |  
|Recoverable costs and profitnot billed      |  |      | 52,900     |   |      |   |           |  
|                                             |  |      |            |   |      |   |            |  
|Subtotal                                     |  |      | 359,300    |   |      |   | 14,000     |  
|Total trade accounts receivable              |  |      | 31,812,300 |   |      |   | 18,789,900 |  
|Total employee accounts receivable and other |  |      | 136,800    |   |      |   | 276,400    |  
|Less: Allowance for doubtful accounts        |  |      | (881,600   | ) |      |   | (715,900   | )
|                                             |  |      |            |   |      |   |            |  
|Total trade accounts receivable, net         |  | $    | 31,067,500 |   |      | $ | 18,350,400 |  
|                                             |  |      |            |   |      |   |            |  



The following table
summarizes activity in the allowance for doubtful accounts for years ended December 31:



|                  |  |      |         |   |      |   |          |      |  |   |          |  
|----------------- |  | ---- | ------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                  |  | 2005 |         |   | 2004 |   |          | 2003 | 
|Beginning balance |  | $    | 715,900 |   |      | $ | 345,400  |      |  | $ | 852,200  |  
|Additions         |  |      | 226,100 |   |      |   | 664,000  |      |  |   | 49,600   |  
|Write-offs        |  |      | (60,400 | ) |      |   | (293,500 | )    |  |   | (556,400 | )
|                  |  |      |         |   |      |   |          |      |  |   |          |  
|Ending balance    |  | $    | 881,600 |   |      | $ | 715,900  |      |  | $ | 345,400  |  
|                  |  |      |         |   |      |   |          |      |  |   |          |  



Unbilled accounts
receivable can be invoiced upon completion of contractual billing cycles, attaining certain milestones under fixed-price contracts, attaining a stipulated level of effort on cost-type contracts for government



F-12



---

ANALEX CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



agencies, upon completion of federal government overhead audits or upon final approval of design plans for engineering services.



4.    Property and Equipment



The components of property and equipment as of December 31 are as
follows:



|                                          |  |      |            |   |      |   |           |  
|----------------------------------------- |  | ---- | ---------- | - | ---- | - | --------- | -
|                                          |  | 2005 |            |   | 2004 |  
|Computer hardware and software            |  | $    | 1,880,500  |   |      | $ | 1,324,700 |  
|Leasehold improvements                    |  |      | 1,221,200  |   |      |   | 128,100   |  
|Office equipment                          |  |      | 1,159,300  |   |      |   | 425,800   |  
|Building                                  |  |      |           |   |      |   | 391,000   |  
|Land                                      |  |      |           |   |      |   | 83,800    |  
|Vehicle                                   |  |      |           |   |      |   | 13,200    |  
|                                          |  |      |            |   |      |   |           |  
|Total property and equipment              |  |      | 4,261,000  |   |      |   | 2,366,600 |  
|Accumulated depreciation and amortization |  |      | (1,535,000 | ) |      |   | (931,900  | )
|                                          |  |      |            |   |      |   |           |  
|Total property and equipment, net         |  | $    | 2,726,000  |   |      | $ | 1,434,700 |  
|                                          |  |      |            |   |      |   |           |  



Depreciation expense
for 2005, 2004, and 2003 was $731,700, $308,100 and $90,000, respectively.



Property held for sale at December 31, 2005 consisted primarily of land and a building owned by the Company in Upper Marlboro, Maryland. This property was used by the Companys BAI wholly-owned subsidiary
until December 2005, when that operation was relocated to the Companys new Corporate headquarters in Fairfax, Virginia. The Company has listed the land and building for sale and anticipates selling the property during 2006. This property is
currently under a contract for sale, although there is no assurance that the sale will close. The property is reported as a current asset and is valued at $430,600, which is its estimated recoverable value. The property is reported on the
Consolidated Balance Sheet as a current asset and the property is no longer depreciated.



5.    Goodwill, Contract Rights and Other Intangible Assets



The Company has recorded goodwill of $77.9 million and $43.2 million as of
December 31, 2005 and 2004. Goodwill must be reviewed annually for impairment. The Company performed this review as of October 1, 2005 and concluded there was no impairment. Goodwill increased approximately $34.5 million primarily from the
acquisition of ComGlobal in April 2005. As of December 31, 2005, approximately $1.9 million of Goodwill is expected to be deducted for tax purposes.



Identifiable intangible assets, which have finite useful lives, consist of contract rights and non-compete agreements. With the acquisition of ComGlobal
in April 2005, the Company recorded $7.4 million of contract right and non-compete intangible assets. With the acquisition of BAI in May 2004, the Company recorded $6.1 million of contract right and non-compete intangible assets. The estimated
useful lives of the Companys intangible assets range from three to nine years.



F-13



---

ANALEX CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The following table summarizes the gross carrying amounts, accumulated amortization and net carrying
values of the Companys intangible assets as of December 31,



|                                    |  |                     |            |                         |   |            |                   |  |                     |            |                         |   |           |                   |   |            |   |  |   |          
|----------------------------------- |  | ------------------- | ---------- | ----------------------- | - | ---------- | ----------------- |  | ------------------- | ---------- | ----------------------- | - | --------- | ----------------- | - | ---------- | - |  | - | ---------
|                                    |  | 2005                |            | 2004                   
|                                    |  | Gross CarryingValue |            | AccumulatedAmortization |   |            | Net CarryingValue |  | Gross CarryingValue |            | AccumulatedAmortization |   |           | Net CarryingValue
|Amortizable intangible assets       |  |                     |            |                         |   |            |                   |  |                     |            |                         |   |           |                   |   |            |   |  |   |          
|Contract rights                     |  | $                   | 14,346,300 |                         | $ | (4,245,800 | )                 |  | $                   | 10,100,500 |                         | $ | 7,082,300 |                   | $ | (1,184,100 | ) |  | $ | 5,898,200
|Non-compete agreements              |  |                     | 1,105,500  |                         |   | (801,200   | )                 |  |                     | 304,300    |                         |   | 1,495,500 |                   |   | (1,030,200 | ) |  |   | 465,300  
|                                    |  |                     |            |                         |   |            |                   |  |                     |            |                         |   |           |                   |   |            |   |  |   |          
|Total amortizable intangible assets |  | $                   | 15,451,800 |                         | $ | (5,047,000 | )                 |  | $                   | 10,404,800 |                         | $ | 8,577,800 |                   | $ | (2,214,300 | ) |  | $ | 6,363,500
|                                    |  |                     |            |                         |   |            |                   |  |                     |            |                         |   |           |                   |   |            |   |  |   |          



Non-compete agreements
are amortized on a straight-line basis over their contractual lives of three to four years. Contract rights are amortized over five to nine years, which is the life of the related contracts. Amortization expense for contract rights and other
intangibles for the fiscal years ended 2005, 2004, and 2003 were $3.4 million, $1.4 million and $0.5 million, respectively. The weighted average life of the contract rights and non-compete agreements as of December 31, 2005 is 2 years and 2.7
years, respectively. The estimated aggregate amortization expense for each of the five succeeding years is as follows:



|     |  |   |          
|---- |  | - | ---------
|2006 |  | $ | 3,488,000
|2007 |  | $ | 2,661,000
|2008 |  | $ | 2,004,200
|2009 |  | $ | 785,000  
|2010 |  | $ | 588,000  



6.    Other
current liabilities



The components of other current
liabilities as of December 31, are as follows:



|                                |  |      |            |      |   |          
|------------------------------- |  | ---- | ---------- | ---- | - | ---------
|                                |  | 2005 |            | 2004
|Payroll and related taxes       |  | $    | 6,031,800  |      | $ | 4,375,500
|Accrued vacation                |  |      | 3,119,800  |      |   | 2,035,400
|Self-insured medical expenses   |  |      | 890,800    |      |   | 844,400  
|Accrued subcontractor costs     |  |      | 937,300    |      |   | 583,100  
|Dividends payable               |  |      | 781,300    |      |   | 279,800  
|Other                           |  |      | 2,157,600  |      |   | 801,300  
|                                |  |      |            |      |   |          
|Total other current liabilities |  | $    | 13,918,600 |      | $ | 8,919,500
|                                |  |      |            |      |   |          



F-14



---

ANALEX CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



7.    Debt



The components of debt as of December 31, are as follows:



|                                            |  |      |            |      |   |           
|------------------------------------------- |  | ---- | ---------- | ---- | - | ----------
|                                            |  | 2005 |            | 2004
|Current:                                    |  |      |            |      |   |           
|Notes Payable to shareholder                |  | $    | 173,500    |      | $ | 163,400   
|Note Payable                                |  |      | 42,600     |      |   | 294,600   
|Non-compete Agreements                      |  |      | 156,500    |      |   | 446,200   
|Capital leases                              |  |      | 14,900     |      |   |          
|                                            |  |      |            |      |   |           
|Total current debt                          |  | $    | 387,500    |      | $ | 904,200   
|Long-term:                                  |  |      |            |      |   |           
|Line of credit                              |  | $    | 27,631,400 |      | $ | 5,624,100 
|Notes Payable to shareholder                |  |      |           |      |   | 173,500   
|Non-compete Agreements                      |  |      |           |      |   | 156,100   
|Series A Convertible Notes, net of discount |  |      | 6,497,700  |      |   | 4,689,500 
|                                            |  |      |            |      |   |           
|Total long-term debt                        |  |      | 34,129,100 |      |   | 10,643,200
|                                            |  |      |            |      |   |           
|Total debt                                  |  | $    | 34,516,600 |      | $ | 11,547,400
|                                            |  |      |            |      |   |           



The Company has a
credit agreement with Bank of America, N.A. (the Credit Facility). On April 1, 2005, in connection with the acquisition of ComGlobal, the Credit Facility was amended and restated to increase the amount available under the Credit
Facility from $20.0 million to $40.0 million, subject to certain borrowing base and other requirements. As of December 31, 2005, the outstanding balance of the Credit Facility was $27.6 million and the interest rate was 7.39%. The Credit
Facility has a maturity date of May 31, 2008.



On behalf
of the Company, Bank of America may issue Letters of Credit secured by the Credit Facility. As of December 31, 2005, the Company has one letter of credit outstanding in the amount of $100,000.



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 December 31, 2005, the Company was in compliance with these covenants. The Credit Facility also restricts the Companys ability to dispose of properties;
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 certain leaseback transactions; make investments, loans or advances; engage in
mergers or consolidations; and engage in certain transactions with affiliates. The Credit Facility is generally secured by all assets of the Company.



In January 2002, the Company entered into an interest-rate swap agreement, considered a cash flow hedge, 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 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 the year ended December 31, 2004 was $4,302,400 which includes 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s comprehensive income available to common shareholders for the year ended December 31, 2003 was $2,793,200 which includes the net income available to common shareholders of $2,746,400 and other comprehensive income of $46,800
arising from the interest rate swap.



F-15



---

ANALEX CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The Company also has outstanding an aggregate $10.0 million of Series A Convertible Notes issued on
December 9, 2003 (see Note 8).



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 December 31, 2005 and 2004 the outstanding balance of the promissory notes was $173,500 and $336,900,
respectively. In addition, the Company entered into non-competition agreements with former employees totaling $352,000, on a discounted basis. As of December 31, 2005 and 2004 the outstanding balance of the non-competition agreements was
$11,000 and $93,000, respectively.



The Companys future
debt maturities at December 31, 2005 are summarized below:



|                            |  |                |            |  
|--------------------------- |  | -------------- | ---------- | -
|Year                        |  | DebtMaturities |           
|2006                        |  | $              | 387,500    |  
|2007                        |  |                | 10,000,000 |  
|2008                        |  |                | 27,631,400 |  
|                            |  |                |            |  
|Total Minimum Debt Payments |  | $              | 38,018,900 |  
|Less: Current Maturities    |  |                | (387,500   | )
|                            |  |                |            |  
|                            |  | $              | 37,631,400 |  
|Less: Unamortized discount  |  |                | (3,502,300 | )
|                            |  |                |            |  
|Total Long-Term Debt        |  | $              | 34,129,100 |  
|                            |  |                |            |  



8.    Convertible Preferred Stock and Convertible Notes



Series A Convertible Preferred Stock and Convertible Notes



In December 2003, the Company issued for $15.0 million, 6,726,457 shares of Series A Convertible Preferred Stock (Series A Preferred Stock)
and 1,345,291 Common Stock Warrants exercisable at $3.28 per share. The Series A Preferred Stock accrues dividends at 6% per annum payable quarterly in cash. Dividend expense for the Series A Preferred Stock for each of the years ended
December 31, 2005, 2004 and 2003 was $0.9 million, $0.9 million, and $0.1 million, respectively.



Upon issuance of the Series A Preferred Stock, the Company allocated relative fair value of approximately $3.9 million to the Common Stock Warrants and
recorded a beneficial conversion charge related to the Series A Preferred Stock of approximately $11.1 million. These amounts are being recorded as accretion of Series A Preferred Stock through the earliest redemption date of December 9, 2007.
For each of the years ended December 31, 2005, 2004 and 2003, the Company recorded $3.8 million, $3.8 million and $0.2 million of accretion related to these charges. The unamortized discount as of December 31, 2005 was $7.3 million.



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 is convertible at a per share conversion price of $2.23. 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 $5.58 (calculated as 2.5 times $2.23, the conversion price in
effect for the Series A Preferred Stock). In addition, the Series A Preferred Stock held by holders that do not accept an offer by the Company to purchase the Series A Preferred Stock for at least 2.5 times



F-16



---

ANALEX CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



the conversion price will automatically convert into Common Stock. The Series A Preferred Stock can also automatically convert into Common Stock upon the
agreement of the holders of a majority of the Series A Preferred Stock.



Holders of the Series A Preferred Stock may require the Company to redeem their shares in four equal quarterly installments any time on or after September 15, 2008, at the Series A Purchase Price of $2.23 per share, as adjusted for
stock splits, stock dividends and similar events, plus accrued but unpaid dividends.



In December 2003, the Company also issued, in aggregate, $10,000,000 principal amount of Series A Secured Subordinated Convertible Promissory Notes (the Series A Convertible Notes) convertible into
3,321,707 shares of Series A Preferred Stock and 664,341 Common Stock Warrants exercisable at $3.28 per share.



Upon issuance of the Series A Convertible Notes, the Company allocated relative fair value of approximately $1.9 million to the Series A Convertible Note
Warrants and recorded a beneficial conversion charge related to the Series A Convertible Notes of approximately $5.3 million. The discount created by these charges is being amortized to interest expense over the life of the Series A Convertible
Notes. For each of the years ended December 31, 2005, 2004 and 2003, the Company recognized $1.8 million, $1.8 million and $0.1 million of amortization of that discount. The unamortized discount as of December 31, 2005 was $3.5 million.



Series B-1 and B-2 Convertible Preferred Stock



In May 2004, the Company issued in aggregate $12.0
million principal amount of convertible secured subordinated promissory notes (Series B-1 Notes) and 857,142 Common Stock Warrants (the Series B-1 Common Stock Warrants) exercisable at $4.32 per share. In September 2004, the
Series B-1 Notes were converted into 3,428,571 shares of Series B Convertible Preferred Stock (Series B-1 Preferred Stock). The Series B-1 Common Stock Warrants will expire on May 28, 2014.



The Series B-1 Preferred Stock is convertible into Common Stock at any time
at the election of its holders at a per share conversion price of $2.80 (the Series B-1 Conversion Price). The Series B-1 Preferred Stock will automatically convert into Common Stock if, any time following March 15, 2006, the
average closing price of the Common Stock over the immediately preceding 20 consecutive trading day period exceeds $8.75 (calculated as 2.5 times the Series B-1 Original Issue Price of $3.50). In addition, any holders that do not accept an offer by
the Company to purchase the Series B-1 Preferred Stock for at least 2.5 times the Series B-1 Original Issue Price will automatically convert into Common Stock. The Series B-1 Preferred Stock will also 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 then outstanding Series B Preferred Stock may require the Company to redeem their shares in four equal quarterly installments any time on or after September 15, 2008 (the fourth
anniversary of the Series B Original Issue Date) at the Series B Original Issue Price, plus accrued but unpaid dividends.



The Company had the option to obtain an additional $25.0 million through the sale of additional Series B Preferred Stock for the purpose of paying for the
cost of a Company acquisition. In April 2005, the Company exercised this option and issued for $25.0 million, an additional 7,142,856 shares of Series B Convertible Preferred Stock (Series B-2 Preferred Stock) and 1,785,713 Common Stock
Warrants (the Series B-2 Common Stock Warrants) exercisable at $4.29 per share. The Series B-2 Common Stock Warrants will expire on April 1, 2015.



F-17



---

ANALEX CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Upon issuance of the Series B-2 Preferred Stock, the Company allocated relative fair value of $2.4
million to the Common Stock Warrants and recorded a beneficial conversion charge related to the Series B-2 Preferred Stock of $8.0 million. These amounts resulted in the recognition of a discount on the Series B-2 Preferred Stock, which is being
recorded as accretion of Series B-2 Preferred Stock through the earliest redemption date of September 15, 2008. For the year ended December 31, 2005 the Company recorded $2.0 million, of accretion related to these charges. The unamortized
discount as of December 31, 2005 was $8.5 million.



The
Series B-2 Preferred Stock is convertible into Common Stock at any time at the election of its holders at a per share conversion price of $2.80 (the Series B-2 Conversion Price). The Series B-2 Preferred Stock will automatically convert
into Common Stock if, any time following March 15, 2006, the average closing price of the Common Stock over the immediately preceding 20 consecutive trading day period exceeds $8.75 (calculated as 2.5 times the Series B-2 Original Issue Price
of $3.50). In addition, any holders that do not accept an offer by the Company to purchase the Series B-2 Preferred Stock for at least 2.5 times the Series B-2 Original Issue Price of $3.50 will automatically convert into Common Stock. The Series
B-2 Preferred Stock will also automatically convert into Common Stock upon the agreement of the holders of 75% of the then outstanding Series B-2 Preferred Stock.



Holders of Series B Preferred Stock will be 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 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.



All Series B Convertible Preferred Stock accrues dividends at 6% per
annum payable quarterly in cash. Dividend expense for the Series B Convertible Preferred Stock for the years ended December 31, 2005 and 2004 was $1.8 million and $0.2 million, respectively.



Summary of Charges



The following table provides the face value and carrying value of the the
Series A, Series B-1 and B-2 Preferred Stock as of December 31, 2005 and 2004 and the remaining period of amortization as of December 31, 2005.



|                           |  |            |            |                |   |                               |  |                |           |                               |   |                                |  |   |            |  |           
|-------------------------- |  | ---------- | ---------- | -------------- | - | ----------------------------- |  | -------------- | --------- | ----------------------------- | - | ------------------------------ |  | - | ---------- |  | ----------
|                           |  |            |            | 2005           |   | 2004                          |  |               
|                           |  | Face Value |            | Carrying Value |   | RemainingAmount tobe Accreted |  | Carrying Value |           | RemainingAmount to beAccreted |   | RemainingPeriod ofAmortization
|Series A Preferred Stock   |  | $          | 15,000,000 |                | $ | 7,736,300                     |  | $              | 7,263,700 |                               | $ | 3,986,300                      |  | $ | 11,013,700 |  | 2.00 years
|Series B-1 Preferred Stock |  | $          | 12,000,000 |                | $ | 12,000,000                    |  |                |          |                               | $ | 12,000,000                     |  |   |           |  |          
|Series B-2 Preferred Stock |  | $          | 25,000,000 |                | $ | 16,493,300                    |  | $              | 8,506,700 |                               |   |                               |  |   |           |  | 2.75 years



F-18



---

ANALEX CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The following table provides the face value and carrying value of the Series A convertible debt as of
December 31, and remaining period of amortization as of December 31, 2005:



|                          |  |            |            |                                    |   |                               |  |                                    |           |                               |   |                                |  |   |           |  |           
|------------------------- |  | ---------- | ---------- | ---------------------------------- | - | ----------------------------- |  | ---------------------------------- | --------- | ----------------------------- | - | ------------------------------ |  | - | --------- |  | ----------
|                          |  |            |            | 2005                               |   | 2004                          |  |                                   
|                          |  | Face Value |            | Carrying ValueAt December 31, 2005 |   | RemainingAmount tobe Accreted |  | Carrying ValueAt December 31, 2005 |           | RemainingAmount tobe Accreted |   | RemainingPeriod ofAmortization
|Series A Convertible Note |  | $          | 10,000,000 |                                    | $ | 6,497,700                     |  | $                                  | 3,502,300 |                               | $ | 4,689,500                      |  | $ | 5,310,500 |  | 2.00 years



9.    Acquisitions



ComGlobal Systems, Incorporated



Analex
acquired ComGlobal on April 1, 2005. Under the terms of the Agreement and Plan of Merger dated April 1, 2005, by and among Analex, Alpha-N Acquisition Corp., a wholly-owned subsidiary of Analex (Merger Sub) and ComGlobal, along
with certain designated ComGlobal stockholder representatives, Analex acquired ComGlobal by merging the Merger Sub with and into ComGlobal, with ComGlobal as the surviving corporation (the Merger). As a result of the Merger, ComGlobal
has become a wholly-owned subsidiary of Analex.



The financial
consideration for the acquisition of the ComGlobal business was $47 million in cash, with no assumption of debt. Analex funded the transaction with a combination of senior debt from Bank of America, N.A. in the amount of $22 million and through the
issuance of additional Series B Convertible Preferred Stock (Series B-2) in the amount of $25 million (see Note 8). Any remaining purchase price consideration to be recorded against goodwill is still preliminary, pending resolution of
the HKSBS matter (see Note 12). The Agreement and Plan of Merger contains certain financial representations, secured by $8.0 million in escrow, which is scheduled to be released to the former shareholders of ComGlobal, net of any indemnification
obligations, starting in December 2006 and continuing through April 2010.



The allocation of the $47 million purchase price was as follows:



|                                            |  |   |            |  
|------------------------------------------- |  | - | ---------- | -
|Cash purchase price                         |  | $ | 47,000,000 |  
|Transaction fees                            |  |   | 909,000    |  
|                                            |  |   |            |  
|                                            |  |   | 47,909,000 |  
|Cash                                        |  |   | 1,608,500  |  
|Accounts receivable                         |  |   | 8,275,600  |  
|Prepaid expenses and other                  |  |   | 2,062,100  |  
|Inventory                                   |  |   | 459,000    |  
|Property and equipment                      |  |   | 1,025,700  |  
|Contract rights and other intangible assets |  |   | 7,414,000  |  
|Other assets                                |  |   | 53,400     |  
|Accounts payable                            |  |   | (231,400   | )
|Other current liabilities                   |  |   | (5,240,600 | )
|Other long-term liabilities                 |  |   | (41,300    | )
|Net deferred tax liability                  |  |   | (2,272,900 | )
|                                            |  |   |            |  
|Goodwill                                    |  | $ | 34,796,900 |  
|                                            |  |   |            |  



ComGlobals
results of operations, since the April 1, 2005 closing date, are included as part of the Companys Consolidated Statements of Operations for the year ended December 31, 2005, reported herein. The



F-19



---

ANALEX CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



following table provides the unaudited pro forma results of the Company for the years ended December 31, 2005 and 2004 as if ComGlobal had been acquired
on January 1, 2005 and 2004, respectively. These combined results are not necessarily indicative of future operating results of the Company.



|                                                                  |  |                          |             |   |      |   |             |  
|----------------------------------------------------------------- |  | ------------------------ | ----------- | - | ---- | - | ----------- | -
|                                                                  |  | Years Ended December 31, |            
|                                                                  |  | 2005                     |             |   | 2004 |  
|Revenue                                                           |  | $                        | 150,755,600 |   |      | $ | 133,955,300 |  
|Income from continuing operations                                 |  |                          | 1,674,200   |   |      |   | 1,176,200   |  
|Net income (loss)                                                 |  |                          | 1,578,100   |   |      |   | (4,543,800  | )
|Net loss available to common shareholders                         |  |                          | (7,968,000  | ) |      |   | (13,503,700 | )
|Basic and diluted loss per share available to common shareholders |  | $                        | (0.50       | ) |      | $ | (0.94       | )



Beta Analytics,
Inc.



Analex acquired 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, valued
at $3.80 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 the Series B Senior Subordinated Notes, subsequently converted to the Series B-1
Preferred Stock (see Note 8).



The total cost of the
acquisition of BAI was approximately $37.9 million, including the assumption of BAIs debt of $1.7 million. The Stock Purchase Agreement contains certain financial representations, which will survive until May 28, 2006.



10.    Earnings Per Share



The following table sets forth the computation of basic and diluted earnings
per share for the years ended December 31:



|                                                                              |  |      |            |   |      |   |            |      |  |   |           
|----------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | ---- |  | - | ----------
|                                                                              |  | 2005 |            |   | 2004 |   |            | 2003
|Net (loss) income from continuing operations available to common shareholders |  | $    | (6,543,600 | ) |      | $ | (8,672,900 | )    |  | $ | 2,437,900 
|Income from discontinued operations, net of income taxes                      |  |      |           |   |      |   | 8,200      |      |  |   | 15,500    
|Loss on disposal of discontinued operations, net of income taxes              |  |      | (113,200   | ) |      |   | (545,000   | )    |  |   |          
|Net (loss) income available to common shareholders                            |  | $    | (6,656,800 | ) |      | $ | (9,209,700 | )    |  | $ | 2,453,400 
|Weighted average shares outstanding                                           |  |      | 15,931,936 |   |      |   | 14,435,676 |      |  |   | 14,878,312
|Less: dilutive effect of outstanding warrants and stock options               |  |      |            |   |      |   |            |      |  |   |           
|Warrants                                                                      |  |      |           |   |      |   |           |      |  |   | 1,551,000 
|Employee Stock Options                                                        |  |      |           |   |      |   |           |      |  |   | 1,240,689 
|Diluted weighted average shares outstanding                                   |  |      | 15,931,936 |   |      |   | 14,435,676 |      |  |   | 17,670,001
|Net (loss) income available to common shareholders per share:                 |  |      |            |   |      |   |            |      |  |   |           
|Continuing operations:                                                        |  |      |            |   |      |   |            |      |  |   |           
|Basic                                                                         |  | $    | (0.41      | ) |      | $ | (0.60      | )    |  | $ | 0.16      
|Diluted                                                                       |  | $    | (0.41      | ) |      | $ | (0.60      | )    |  | $ | 0.14      
|Discontinued operations:                                                      |  |      |            |   |      |   |            |      |  |   |           
|Basic                                                                         |  | $    | (0.01      | ) |      | $ | (0.04      | )    |  | $ | 0.00      
|Diluted                                                                       |  | $    | (0.01      | ) |      | $ | (0.04      | )    |  | $ | 0.00      
|Net income (loss) available to common shareholders:                           |  |      |            |   |      |   |            |      |  |   |           
|Basic                                                                         |  | $    | (0.42      | ) |      | $ | (0.64      | )    |  | $ | 0.16      
|Diluted                                                                       |  | $    | (0.42      | ) |      | $ | (0.64      | )    |  | $ | 0.14      



F-20



---

ANALEX CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Shares issuable upon the exercise of stock options or warrants or upon conversion of convertible
preferred stock and convertible debt have been excluded from the computation to the extent that their inclusion would be anti-dilutive. As of December 31, 2005, shares issuable upon conversion or exercise of such instruments are as follows:



|                                                  |  |                                                  |  |                             |  |                                    |           
|------------------------------------------------- |  | ------------------------------------------------ |  | --------------------------- |  | ---------------------------------- | ----------
|Instrument                                        |  | Common shares issuableupon conversion orexercise |  | Conversion orexercise price |  | Proceeds fromconversion orexercise
|Series A Convertible Preferred Stock              |  | 6,726,457                                        |  | $2.23                       |  | $                                  |          
|Series A Common Stock Warrants                    |  | 1,345,291                                        |  | 3.28                        |  |                                    | 4,412,556 
|Series A Convertible Notes                        |  | 3,321,707                                        |  | 3.01                        |  |                                    |          
|Series A Convertible Note Warrants                |  | 664,341                                          |  | 3.28                        |  |                                    | 2,179,038 
|Series B-1 Convertible Preferred Stock            |  | 4,285,714                                        |  | 2.80                        |  |                                    |          
|Series B-1 Common Stock Warrants                  |  | 857,142                                          |  | 4.32                        |  |                                    | 3,702,853 
|Series B-2 Convertible Preferred Stock            |  | 8,928,569                                        |  | 2.80                        |  |                                    |          
|Series B-2 Common Stock Warrants                  |  | 1,785,713                                        |  | 4.29                        |  |                                    | 7,660,709 
|Options issued under Incentive Stock Option Plans |  | 981,858                                          |  | 0.69  1.99                 |  |                                    | 1,317,576 
|Options issued under Incentive Stock Option Plans |  | 1,148,413                                        |  | 2.20  2.49                 |  |                                    | 2,606,882 
|Options issued under Incentive Stock Option Plans |  | 1,672,500                                        |  | 2.79  4.49                 |  |                                    | 5,911,175 
|                                                  |  |                                                  |  |                             |  |                                    |           
|Total                                             |  | 31,717,705                                       |  |                             |  | $                                  | 27,790,789
|                                                  |  |                                                  |  |                             |  |                                    |           



As of
December 31, 2004, shares issuable upon conversion or exercise of such instruments are as follows:



|                                                  |  |                                                 |  |                             |       |                                    |   |           
|------------------------------------------------- |  | ----------------------------------------------- |  | --------------------------- | ----- | ---------------------------------- | - | ----------
|Instrument                                        |  | Common sharesissuable uponconversion orexercise |  | Conversion orexercise price |       | Proceeds fromconversion orexercise
|Series A Convertible Preferred Stock              |  | 6,726,457                                       |  | $                           | 2.23  |                                    | $ |          
|Series A Common Stock Warrants                    |  | 1,345,291                                       |  |                             | 3.28  |                                    |   | 4,412,554 
|Series A Convertible Notes                        |  | 3,321,707                                       |  |                             | 3.01  |                                    |   |          
|Series A Convertible Note Warrants                |  | 664,341                                         |  |                             | 3.28  |                                    |   | 2,179,038 
|Series B Preferred Stock                          |  | 4,285,714                                       |  |                             | 2.80  |                                    |   |          
|Series B Senior Subordinated Notes Warrants       |  | 857,142                                         |  |                             | 4.32  |                                    |   | 3,702,853 
|Warrants issued under 2000 financing agreement    |  | 32,500                                          |  |                             | 0.75  |                                    |   | 24,375    
|Options issued under Incentive Stock Option Plans |  | 1,153,225                                       |  | 0.50  $                    | 1.375 |                                    |   | 1,517,517 
|Options issued under Incentive Stock Option Plans |  | 1,456,546                                       |  | 1.60  $                    | 2.55  |                                    |   | 3,352,330 
|Options issued under Incentive Stock Option Plans |  | 972,500                                         |  | 2.79  $                    | 4.49  |                                    |   | 3,677,425 
|                                                  |  |                                                 |  |                             |       |                                    |   |           
|Total                                             |  | 20,815,423                                      |  |                             |       |                                    | $ | 18,866,092
|                                                  |  |                                                 |  |                             |       |                                    |   |           



11.    Income
Taxes



The provision for income taxes for the years ended
December 31, 2005, 2004, and 2003 has been limited to state and federal taxes. The provision for income taxes for the year ended December 31, 2003 has to some extent been offset by net operating loss carryforwards.



F-21



---

ANALEX CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The provision for income tax from continuing operations before income tax consisted of the following
for the years ended December 31:



|                                            |  |      |           |   |      |   |           |  |   |          |  
|------------------------------------------- |  | ---- | --------- | - | ---- | - | --------- |  | - | -------- | -
|                                            |  | 2005 |           |   | 2004 |   | 2003      | 
|Current Taxes:                              |  |      |           |   |      |   |           |  |   |          |  
|Federal                                     |  | $    | 3,267,700 |   |      | $ | 230,900   |  | $ | 399,800  |  
|State                                       |  |      | 682,300   |   |      |   | 172,800   |  |   | 61,400   |  
|                                            |  |      |           |   |      |   |           |  |   |          |  
|Total current income tax expense            |  | $    | 3,950,000 |   |      |   | 403,700   |  |   | 461,200  |  
|                                            |  |      |           |   |      |   |           |  |   |          |  
|Deferred Taxes:                             |  |      |           |   |      |   |           |  |   |          |  
|Federal                                     |  |      | (632,000  | ) |      |   | 647,800   |  |   | (128,600 | )
|State                                       |  |      | (69,200   | ) |      |   | 141,900   |  |   | (21,400  | )
|                                            |  |      |           |   |      |   |           |  |   |          |  
|Total deferred income tax (benefit) expense |  |      | (701,200  | ) |      |   | 789,700   |  |   | (150,000 | )
|                                            |  |      |           |   |      |   |           |  |   |          |  
|Total provision for income taxes            |  | $    | 3,248,800 |   |      | $ | 1,193,400 |  | $ | 311,200  |  
|                                            |  |      |           |   |      |   |           |  |   |          |  



The income tax expense
(benefit) from discontinued operations, including disposal of discontinued operations, consisted of the following for the years ended December 31:



|                                           |  |      |         |      |   |          |      |  |   |      
|------------------------------------------ |  | ---- | ------- | ---- | - | -------- | ---- |  | - | -----
|                                           |  | 2005 |         | 2004 |   |          | 2003
|Current Taxes:                             |  |      |         |      |   |          |      |  |   |      
|Federal                                    |  | $    | 164,400 |      | $ | (303,800 | )    |  | $ | 9,000
|State                                      |  |      | 44,000  |      |   | (65,900  | )    |  |   | 700  
|                                           |  |      |         |      |   |          |      |  |   |      
|Total current income tax expense (benefit) |  |      | 208,400 |      |   | (369,700 | )    |  |   | 9,700
|                                           |  |      |         |      |   |          |      |  |   |      
|Deferred Taxes:                            |  |      |         |      |   |          |      |  |   |      
|Federal                                    |  |      | 16,100  |      |   |         |      |  |   |     
|State                                      |  |      | 4,300   |      |   |         |      |  |   |     
|                                           |  |      |         |      |   |          |      |  |   |      
|Total deferred income tax expense          |  |      | 20,400  |      |   |         |      |  |   |     
|                                           |  |      |         |      |   |          |      |  |   |      
|Total income tax expense (benefit)         |  | $    | 228,800 |      | $ | (369,700 | )    |  | $ | 9,700
|                                           |  |      |         |      |   |          |      |  |   |      



The effective income
tax expense from continuing operations before income taxes differs from the income tax computed using the statutory federal income tax rate. The following table summarizes these differences for the years ended December 31:



|                                                  |  |      |   |  |       |    |  |       |  
|------------------------------------------------- |  | ---- | - |  | ----- | -- |  | ----- | -
|                                                  |  | 2005 |   |  | 2004  |    |  | 2003  |  
|Expected federal income tax at the statutory rate |  | 31.8 | % |  | 35.0  | %  |  | 31.3  | %
|State and local taxes net of federal taxes        |  | 5.4  |   |  | (8.7  | )  |  | 3.6   |  
|Nondeductible expenses                            |  | 1.0  |   |  | (2.3  | )  |  | 4.8   |  
|Utilization of NOL carryforward                   |  | 0.0  |   |  | 0.0   |    |  | (25.0 | )
|Beneficial conversion                             |  | 18.9 |   |  | (83.4 | )  |  | 0.0   |  
|Permanent differences                             |  | 3.5  |   |  | 13.8  |    |  | 0.0   |  
|Other                                             |  | 2.4  |   |  | 0.0   |    |  | (4.5  | )
|                                                  |  |      |   |  |       |    |  |       |  
|Tax expense at effective rate                     |  | 63.0 | % |  | (45.6 | )% |  | 10.2  | %
|                                                  |  |      |   |  |       |    |  |       |  



F-22



---

ANALEX CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Deferred income taxes reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting and income tax purposes. Deferred tax assets and liabilities consist primarily of the following, as of December 31,:



|                                   |  |      |            |   |      |   |            |  
|---------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | -
|                                   |  | 2005 |            |   | 2004 |  
|Allowance for doubtful accounts    |  | $    | 380,000    |   |      | $ | 276,100    |  
|Accrued vacation                   |  |      | 1,026,100  |   |      |   | 642,400    |  
|Intangible assets                  |  |      | 385,300    |   |      |   | 71,900     |  
|Depreciation                       |  |      | 3,400      |   |      |   |           |  
|Accrued expenses and reserves      |  |      | 170,100    |   |      |   | 23,500     |  
|Other                              |  |      | 203,600    |   |      |   | 71,600     |  
|                                   |  |      |            |   |      |   |            |  
|Net gross deferred tax assets      |  |      | 2,168,500  |   |      |   | 1,085,500  |  
|Property and equipment             |  |      | (341,900   | ) |      |   | (217,300   | )
|Unbilled receivables               |  |      | (2,304,500 | ) |      |   | (1,688,900 | )
|Customer intangibles               |  |      | (3,776,900 | ) |      |   | (1,980,400 | )
|Prepaid expenses                   |  |      | (202,700   | ) |      |   | (249,800   | )
|                                   |  |      |            |   |      |   |            |  
|Net gross deferred tax liabilities |  |      | (6,626,000 | ) |      |   | (4,136,400 | )
|                                   |  |      |            |   |      |   |            |  
|Net deferred tax liability         |  | $    | (4,457,500 | ) |      | $ | (3,050,900 | )
|                                   |  |      |            |   |      |   |            |  



As of
December 31, 2005 and 2004, the Company had no remaining net operating loss carryforwards for federal income tax purposes.



12.    Commitments and Contingencies



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



F-23



---

ANALEX CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Operating leases



The Company leases real property and personal property under various long-term operating leases and sublease agreements
expiring at various dates through 2012. Certain of the leases contain renewal options and require payment of property taxes, insurance and maintenance costs. The Companys future minimum operating lease commitments inclusive of property taxes,
insurance and maintenance costs at December 31, 2005 are summarized below:



|                              |  |                  |           
|----------------------------- |  | ---------------- | ----------
|Year                          |  | LeaseCommitments
|2006                          |  | $                | 2,919,600 
|2007                          |  |                  | 1,521,900 
|2008                          |  |                  | 1,393,300 
|2009                          |  |                  | 1,192,900 
|2010                          |  |                  | 985,600   
|Thereafter                    |  |                  | 2,034,900 
|                              |  |                  |           
|Total future minimum payments |  | $                | 10,048,200
|                              |  |                  |           



Rent expense, included
in the consolidated statements of operations is as follows:



|     |  |              |          
|---- |  | ------------ | ---------
|Year |  | Rent Expense
|2005 |  | $            | 2,527,700
|2004 |  |              | 1,152,700
|2003 |  |              | 998,500  



In August 2005 the
Company entered into a lease agreement, considered an operating lease, with a property management company to lease approximately 28,500 square feet of office space to be used as the Companys new corporate headquarters. The lease commenced on
January 1, 2006 and the initial term of the lease is seven years with one optional renewal period of five years. The lease agreement included a tenant improvement allowance of approximately $1.1 million, which the Company is amortizing against
rent expense over the seven-year lease term. The Company took occupancy of the new facility in mid December 2005. Future minimum lease payments over the seven-year lease term will be approximately $5.6 million.



U.S. government contract audits



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



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,



F-24



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ANALEX CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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 the Company received payment. Legal fees are expected to be approximately $290,000. The Company has received an opinion from legal counsel
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, the Company established a
receivable of approximately $1.0 million related to the expected reimbursement of these costs. In May 2005, the Company received oral customer feedback that the costs were allowable and allocable to the contract, but the reasonableness of these
costs still needed to be assessed by NASA. Based on the opinion of legal counsel and managements assessment of relevant facts, the Company believed and continues to believe that the costs incurred are allowable, allocable and
reasonable. During the quarter ended December 31, 2005, the Company met with NASA procurement personnel who indicated to us prior NASA communications with respect to allowability and allocability should not be relied upon. While the
Company continues to believe that the full amounts is allowable, allocable and reasonable, and therefore should be recoverable under the ELVIS contract with NASA, the Company has concluded a reserve of $500,000 is appropriate and was therefore
recorded as of December 31, 2005. The Company intends to continue to use all reasonable efforts to recover the full amount of its costs from NASA.



On April 29, 2005 the Company was served with a compliant filed by H&K Strategic Business Solutions, LLC (HKSBS) in Virginia Circuit
Court alleging breach of contract relating to a Corporate Acquisition Agreement between the parties, dated February 10, 2004 that was later terminated by the Company on February 14, 2005. Under the complaint, HKSBS is seeking damages of
$830,000 together with legal fees and expenses. The Company believes the complaint is without merit, however, the Company cannot predict the outcome of the proceeding at this time and has filed a counter-claim against HKSBS seeking reimbursement of
prior retainer payments made to HKSBS of approximately $110,000, plus certain legal fees. This matter is scheduled for trial on March 20 and 21, 2006. In the event that HKSBS prevails, the Company could be held liable for up to the full amount of
the damages sought; and that result could have a material adverse effect on its operating results and cash flows.



13.    Accumulated Other Comprehensive Income



Comprehensive income is composed of net income and other comprehensive income, which arises from the interest rate swap, which ended in December 2004. The
following table outlines the components of other comprehensive (loss) income:



|                          |  |                                             |         |  
|------------------------- |  | ------------------------------------------- | ------- | -
|                          |  | Accumulated othercomprehensive(loss) income |        
|Balance December 31, 2002 |  | $                                           | (90,600 | )
|Net change                |  |                                             | 46,800  |  
|Balance December 31, 2003 |  |                                             | (43,800 | )
|Net change                |  |                                             | 43,800  |  
|Balance December 31, 2004 |  |                                             |        |  
|Net change                |  |                                             |        |  
|Balance December 31, 2005 |  | $                                           |        |  





F-25



---

ANALEX CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



14.    Benefit Plans



Employee savings plan



The Company sponsors defined contribution savings plans under section 401(k) of the Internal Revenue Code. The Companys contributions to the 401(k)
plans are based upon a percentage of employee contributions. The Companys discretionary contributions to the plan were $2.2 million, $1.3 million, and $1.2 million for the years ended December 31, 2005, 2004, and 2003, respectively.



Employee stock purchase plan



In December 1997, shareholders approved the Analex Corporation 1997 Employee
Stock Purchase Plan (the Plan). The number of shares currently reserved for issuance under the Plan is 650,000. The purpose of the Plan is to secure for the Company and its shareholders the benefits of the incentive inherent in the
ownership of Common Stock by present and future employees of the Company. The Plan is intended to comply with the terms of Section 423 of the Internal Revenue Code of 1986, as amended, and Rule 16b-3 of the Securities Exchange Act of 1934. The
Plan is non-compensatory as defined by APB 25. Under the terms of the Plan, individual employees may pay up to $14,000 for the purchase of the Companys common shares, at 95% of the determined market price. In 2005, the Company amended the
Plan, offering individual employees to purchase the Companys common shares at 95% of the determined market price. The previously offered discount in the Plan was 85%. During 2005, 2004, and 2003, employees paid approximately $858,500, $317,800
and $190,700, respectively, for the purchase of Common Stock under the Plan.



Collective Bargaining Agreement



The Company has two collective bargaining agreements (CBA). The CBA with the International Brotherhood of Electrical Workers expires January 31, 2009, and covers 10 employees at John F. Kennedy Space Center, Florida, and
Cape Canaveral Air Force Station, Florida. The CBA with the Teamsters and Warehousemen Union covers 38 employees at Vandenberg Air Force Base and expires October 31, 2008. Both CBAs cover less than 10% of the Companys total workforce.



15.    Stock Incentive Plans



In May 2002, shareholders approved the Analex Corporation 2002 Stock Option
Plan (2002 Stock Option Plan). The 2002 Stock Option Plan currently provides for the issuance of incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986 and non-qualified stock options to
purchase an aggregate of up to 3,000,000 shares of Common Stock. The 2002 Stock Option Plan permits the grant of options to key employees, consultants and directors of the Company. The exercise price of the incentive stock options is required to be
at least equal to 100% of the fair market value of the Companys Common Stock on the date of grant (110% of the fair market value in the case of options granted to employees who are 10% shareholders). The exercise price of the non-qualified
stock options is required to be not less than the par value of a share of the Companys common stock on the date of grant. The term of an incentive or non-qualified stock option may not exceed ten years (five years in the case of an incentive
stock option granted to a 10% shareholder). The vesting for each option holder is set forth in the individual option agreements and is generally a three-year period. The 2002 Stock Option Plan honors all of the stock options outstanding under the
Companys 2000 and 1994 Stock Option Plans, as amended (the Plan). The Company has accelerated vesting of options for certain option holders when the exercise price of the option is more than the fair market value.



The Companys Board of Directors approved amending and restating the
Companys Stock Option Plans (collectively, the Plans). These amendments allow the Plans to issue Stock Only Stock Appreciation Rights (SOSAR). Furthermore, the Board has authorized the Compensation Committee, commencing
January 1, 2006,



F-26



---

ANALEX CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



to permit certain option holders, on an individual basis, the right to exchange previously vested options for SOSARs under the Plan and immediately exercise
such SOSARs. Any exchange of vested options for SOSARs shall be for economic value substantially equivalent to the options upon exercise. The Company shall withhold all amounts required under applicable income tax laws and regulations and deduct an
equivalent number of Company common stock from the number of shares issued to such holder.



Information with respect to incentive and non-qualified stock options issued under all plans for the years ended December 31, are as follows:



|                                                       |  |           |   |       |                                |       |        |           |   |                                |   |        |  |           |                                |  |   |     
|------------------------------------------------------ |  | --------- | - | ----- | ------------------------------ | ----- | ------ | --------- | - | ------------------------------ | - | ------ |  | --------- | ------------------------------ |  | - | ----
|                                                       |  | 2005      |   | 2004  |                                | 2003 
|                                                       |  | Shares    |   |       | Weighted-AverageExercise Price |       | Shares |           |   | Weighted-AverageExercise Price |   | Shares |  |           | Weighted-AverageExercise Price
|Outstanding at beginning of period                     |  | 3,582,200 |   |       | $                              | 2.11  |        | 2,860,800 |   |                                | $ | 1.88   |  | 2,456,100 |                                |  | $ | 1.55
|Granted                                                |  | 970,000   |   |       |                                | 3.42  |        | 920,000   |   |                                |   | 3.82   |  | 809,500   |                                |  |   | 2.51
|Exercised                                              |  | (441,100  | ) |       |                                | 2.02  |        | (122,700  | ) |                                |   | 1.67   |  | (274,500  | )                              |  |   | 0.88
|Expired                                                |  | (308,300  | ) |       |                                | 3.45  |        | (75,900   | ) |                                |   | 2.32   |  | (130,300  | )                              |  |   | 1.70
|                                                       |  |           |   |       |                                |       |        |           |   |                                |   |        |  |           |                                |  |   |     
|Outstanding at end of period                           |  | 3,802,800 |   |       | $                              | 2.59  |        | 3,582,200 |   |                                | $ | 2.37   |  | 2,860,800 |                                |  | $ | 1.88
|Options exercisable at end of period                   |  | 3,797,800 |   |       | $                              | 2.59  |        | 2,814,000 |   |                                | $ | 2.11   |  | 2,070,100 |                                |  | $ | 1.69
|Weighted average exercise price of outstanding options |  | $2.88     |   | $2.39 |                                | $1.88



The weighted average
remaining contractual life of options outstanding at December 31, 2005 was 5.0 years. The range of exercise prices of options outstanding at December 31, 2005 was $0.69 to $4.49.



The following table summarizes information about the stock options
outstanding at December 31, 2005:



|               |  |                 |  |                                                  |      |             |                 |  |                                |  |   |     
|-------------- |  | --------------- |  | ------------------------------------------------ | ---- | ----------- | --------------- |  | ------------------------------ |  | - | ----
|               |  | Outstanding     |  | Weighted-AverageRemainingContractualLife (years) |      | Exercisable
|Exercise Price |  | Number ofShares |  | Weighted-AverageExercise Price                   |      |             | Number ofShares |  | Weighted-AverageExercise Price
|$0.69  1.99   |  | 981,900         |  | $                                                | 1.35 |             | 0.47            |  | 981,900                        |  | $ | 1.35
|2.20  2.49    |  | 1,148,400       |  |                                                  | 2.27 |             | 3.30            |  | 1,148,400                      |  |   | 2.27
|2.79  4.49    |  | 1,672,500       |  |                                                  | 4.58 |             | 8.84            |  | 1,667,500                      |  |   | 4.58
|               |  |                 |  |                                                  |      |             |                 |  |                                |  |   |     
|               |  | 3,802,800       |  |                                                  |      |             |                 |  | 3,797,800                      |  |   |     
|               |  |                 |  |                                                  |      |             |                 |  |                                |  |   |     



16.    Warrants



The Company has issued warrants to certain parties to
purchase its Common Stock in connection with certain debt and equity transactions. The warrants are exercisable at any time at the election of the holders. The range of exercise prices for warrants outstanding at December 31, 2005 was between
$0.02 to $4.32.



F-27



---

ANALEX CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Information with respect to warrants issued is as follows as of December 31:



|                                   |  |           |   |      |       |      |          |           |   |       |   |          |  |            |       |  |   |     
|---------------------------------- |  | --------- | - | ---- | ----- | ---- | -------- | --------- | - | ----- | - | -------- |  | ---------- | ----- |  | - | ----
|                                   |  | 2005      |   | 2004 |       | 2003
|                                   |  | Warrants  |   |      | Price |      | Warrants |           |   | Price |   | Warrants |  |            | Price
|Outstanding at beginning of period |  | 2,899,300 |   |      |       |      |          | 2,365,000 |   |       |   |          |  | 2,475,800  |       |  |   |     
|Granted                            |  | 1,785,700 |   |      | $     | 4.29 |          | 857,200   |   |       | $ | 4.32     |  | 2,009,700  |       |  | $ | 3.28
|Exercised                          |  | (32,500   | ) |      |       | 0.75 |          | (208,100  | ) |       |   | 0.72     |  | (42,500    | )     |  |   | 0.75
|                                   |  |          |   |      |       |      |          |          |   |       |   |          |  | (429,000   | )     |  |   | 0.72
|                                   |  |          |   |      |       |      |          |          |   |       |   |          |  | (400,000   | )     |  |   | 0.25
|                                   |  |          |   |      |       |      |          | (114,800  | ) |       |   | 0.02     |  | (114,800   | )     |  |   | 0.02
|Retired                            |  |          |   |      |       |      |          |          |   |       |   |          |  | (1,134,200 | )     |  |   |     
|                                   |  |           |   |      |       |      |          |           |   |       |   |          |  |            |       |  |   |     
|Outstanding at end of period       |  | 4,652,500 |   |      |       |      |          | 2,899,300 |   |       |   |          |  | 2,365,000  |       |  |   |     
|                                   |  |           |   |      |       |      |          |           |   |       |   |          |  |            |       |  |   |     



17.    Fair
Value of Financial Instruments



Accounts receivable,
accounts payable, accrued expenses and other current assets and liabilities are carried at amounts that reasonably approximate their fair value. The estimated fair value of the Companys variable rate debt approximates its carrying value of
$27,631,400. Based on the contractual rights and preferences of the Companys Convertible Notes and Convertible Preferred Stock, it is impractical to determine the fair value of these instruments due to their unique and individual nature.



18.    Segment Reporting



The Company considers each of its government contracting units to have
similar economic characteristics, provide similar types of services, and have a similar customer base. Accordingly, the Company aggregates the operations of these units into 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 aerospace engineering, information technology, security, intelligence support or technical services to federal government
agencies or major defense contractors.



19.    Discontinued Operations



During the second quarter of 2004, the Company concluded that Advanced Bio-Systems, Inc. (ABS), a then 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. Proceeds from the sale of ABS were two
non-recourse notes for $1 million. The Company collected approximately $0.1 million against these notes during the year ended December 31, 2005. The Company reviewed the future viability of ABS and its underlying credit worthiness and
determined a full reserve against the remaining outstanding notes was still necessary.



Operating results of the discontinued business, which exclude the Companys loss on disposal of ABS, were as follows for the years ended December 31:



|                                                |  |      |   |      |   |           |      |  |   |           |  
|----------------------------------------------- |  | ---- | - | ---- | - | --------- | ---- |  | - | --------- | -
|                                                |  | 2005 |   | 2004 |   |           | 2003 | 
|Revenue                                         |  | $    |  |      | $ | 1,994,400 |      |  | $ | 3,794,600 |  
|Income before tax from discontinued operations  |  |      |  |      |   | 13,400    |      |  |   | 25,200    |  
|Income tax expense                              |  |      |  |      |   | (5,200    | )    |  |   | (9,700    | )
|Income from discontinued operations, net of tax |  | $    |  |      | $ | 8,200     |      |  | $ | 15,500    |  



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.



F-28



---

ANALEX CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



20.    Major Customers



Gross revenue from contracts and subcontracts with U.S. government agencies for the years ended December 31, 2005, 2004
and 2003 were $133.9 million, $94.1 million, and $61.9 million, respectively.



Revenue earned on sales to the Companys major customers are as follows:



|     |  |                       |            |      |   |           
|---- |  | --------------------- | ---------- | ---- | - | ----------
|Year |  | Department of Defense |            | NASA
|2005 |  | $                     | 98,092,800 |      | $ | 41,774,900
|2004 |  | $                     | 52,286,400 |      | $ | 41,775,200
|2003 |  | $                     | 26,402,300 |      | $ | 35,253,100



21.    Selected
quarterly information (unaudited):



The following is a
summary of the quarterly results of operations for the years 2005 and 2004. The Cost of Revenue reported for the fiscal quarters ended March 31, June 30 and September 30, 2005 have been adjusted from amounts originally reported for each respective
period. The Company reclassed certain amounts in these periods to be consistent with amounts reported in the prior years fiscal quarters.



|                                                        |  |                         |            |   |         |   |            |              |  |   |             |   |  |   |            |  
|------------------------------------------------------- |  | ----------------------- | ---------- | - | ------- | - | ---------- | ------------ |  | - | ----------- | - |  | - | ---------- | -
|                                                        |  | Quarters ended in 2005: |           
|                                                        |  | March 31                |            |   | June 30 |   |            | September 30 |  |   | December 31 |  
|Revenue                                                 |  | $                       | 28,438,200 |   |         | $ | 38,148,600 |              |  | $ | 37,858,000  |   |  | $ | 36,717,000 |  
|Cost of Revenue                                         |  |                         | 23,227,600 |   |         |   | 30,403,100 |              |  |   | 29,519,100  |   |  |   | 29,223,800 |  
|Operating Income                                        |  |                         | 2,043,900  |   |         |   | 2,765,700  |              |  |   | 2,140,100   |   |  |   | 2,052,600  |  
|Income from continuing operations                       |  |                         | 666,100    |   |         |   | 482,700    |              |  |   | 311,200     |   |  |   | 446,900    |  
|Income (loss) on disposal of discontinued operations    |  |                         | 23,600     |   |         |   | 6,700      |              |  |   | (135,900    | ) |  |   | (7,600     | )
|Net Income                                              |  |                         | 689,700    |   |         |   | 489,400    |              |  |   | 175,300     |   |  |   | 439,300    |  
|Dividends on convertible preferred stock                |  |                         | (399,500   | ) |         |   | (781,900   | )            |  |   | (783,600    | ) |  |   | (780,000   | )
|Accretion of convertible preferred stock                |  |                         | (937,500   | ) |         |   | (1,588,800 | )            |  |   | (1,588,800  | ) |  |   | (1,590,400 | )
|Net loss available to common shareholders               |  |                         | (647,300   | ) |         |   | (1,881,300 | )            |  |   | (2,197,100  | ) |  |   | (1,931,100 | )
|Net loss per share, basic and diluted                   |  | $                       | (0.04      | ) |         | $ | (0.12      | )            |  | $ | (0.14       | ) |  | $ | (0.12      | )
|Shares used in per share calculation, basic and diluted |  |                         | 15,423,286 |   |         |   | 15,821,971 |              |  |   | 16,146,431  |   |  |   | 16,320,978 |  



|                                                        |  |                         |            |   |         |   |            |              |  |   |             |   |  |   |            |  
|------------------------------------------------------- |  | ----------------------- | ---------- | - | ------- | - | ---------- | ------------ |  | - | ----------- | - |  | - | ---------- | -
|                                                        |  | Quarters ended in 2004: |           
|                                                        |  | March 31                |            |   | June 30 |   |            | September 30 |  |   | December 31 |  
|Revenue                                                 |  | $                       | 16,631,700 |   |         | $ | 22,215,200 |              |  | $ | 27,852,000  |   |  | $ | 27,717,800 |  
|Cost of Revenue                                         |  |                         | 14,004,900 |   |         |   | 17,310,100 |              |  |   | 22,540,300  |   |  |   | 21,749,700 |  
|Operating Income                                        |  |                         | 627,100    |   |         |   | 2,028,200  |              |  |   | 2,042,300   |   |  |   | 1,608,300  |  
|Income (loss) from continuing operations                |  |                         | 16,500     |   |         |   | (100,600   | )            |  |   | (5,040,900  | ) |  |   | 1,315,600  |  
|(Loss) income from discontinued operations              |  |                         | (28,500    | ) |         |   | (50,700    | )            |  |   | 76,100      |   |  |   | 11,400     |  
|(Loss) income on disposal of discontinued operations    |  |                         |           |   |         |   | (521,800   | )            |  |   | 214,700     |   |  |   | (237,900   | )
|Net (loss) income                                       |  |                         | (12,000    | ) |         |   | (673,100   | )            |  |   | (4,750,100  | ) |  |   | 1,089,100  |  
|Dividends on convertible preferred stock                |  |                         | (225,000   | ) |         |   | (225,000   | )            |  |   | (254,600    | ) |  |   | (408,900   | )
|Accretion of convertible preferred stock                |  |                         | (937,500   | ) |         |   | (939,100   | )            |  |   | (937,600    | ) |  |   | (935,800   | )
|Net loss available to common shareholders               |  |                         | (1,174,500 | ) |         |   | (1,837,200 | )            |  |   | (5,942,300  | ) |  |   | (255,600   | )
|Net loss per share, basic and diluted                   |  | $                       | (0.09      | ) |         | $ | (0.13      | )            |  | $ | (0.39       | ) |  | $ | (0.02      | )
|Shares used in per share calculation, basic and diluted |  |                         | 13,044,691 |   |         |   | 14,049,715 |              |  |   | 15,295,773  |   |  |   | 15,333,209 |  



F-29