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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, 2003



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)



5904 Richmond
Highway, Suite 300

Alexandria, Virginia 22303

(Address of principal executive offices)



Registrants telephone number including area code

(703) 329-9400



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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              
|Series A Preferred, par value $0.02 per share |  | American Stock Exchange              



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



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



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



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



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



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



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PART I



|Item |  | 1.    Business
|---- |  | --------------



Introduction



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



Name Change



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



Operations



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



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



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



Analex Segment



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



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



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



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



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



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



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



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



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



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



Advanced Biosystems Segment



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



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



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



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



Government Procurement and Significant Customers



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



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



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



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



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



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



Government Contracts



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



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



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



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



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Contract Backlog



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



Competition



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



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



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



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



Employees



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



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General Information



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



Recent Developments



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



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



Available Information



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



Item 2.    Properties



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



Item
3.    Legal Proceedings



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



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



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



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



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



|                                          |  |           |  |         |  |                                  
|----------------------------------------- |  | --------- |  | ------- |  | ---------------------------------
|                                          |  | For       |  | Against |  | Abstentions and Brokers Non-votes
|The Pequot Transaction                    |  | 9,187,864 |  | 120,112 |  | 21,082                           
|Amendment to Certificate of Incorporation |  | 9,156,644 |  | 151,038 |  | 21,376                           



PART II



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



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



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



|                                  |  |      |      |     |   |     
|--------------------------------- |  | ---- | ---- | --- | - | ----
|Year Ended December 31, 2003      |  | High |      | Low
|First Quarter (1/1 to 3/31/03)    |  | $    | 3.89 |     | $ | 2.10
|Second Quarter (4/1 to 6/30/03)   |  |      | 3.18 |     |   | 2.40
|Third Quarter (7/1 to 9/30/03)    |  |      | 4.23 |     |   | 2.69
|Fourth Quarter (10/1 to 12/31/03) |  |      | 4.22 |     |   | 2.92
|                                  |  |     
|Year Ended December 31, 2002      |  |      |      |    
|First Quarter (1/1 to 3/31/02)    |  |      | 2.45 |     |   | 1.60
|Second Quarter (4/1 to 6/30/02)   |  |      | 2.85 |     |   | 1.73
|Third Quarter (7/1 to 9/30/02)    |  |      | 2.88 |     |   | 2.09
|Fourth Quarter (10/1 to 12/31/02) |  |      | 2.65 |     |   | 2.30
|                                  |  |     
|Year Ended December 31, 2001      |  |      |      |    
|First Quarter (1/1 to 3/31/01)    |  |      | 1.44 |     |   | 0.81
|Second Quarter (4/1 to 6/30/01)   |  |      | 1.40 |     |   | 1.00
|Third Quarter (7/1 to 9/30/01)    |  |      | 2.50 |     |   | 1.06
|Fourth Quarter (10/1 to 12/31/01) |  |      | 4.55 |     |   | 1.40



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



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Pequot Transaction



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



| |  |  | issue and sell to Pequot 6,726,457 shares of the Companys Series A Convertible Preferred Stock (the Series A Preferred Stock) for a purchase price of $2.23 per
share of Series A Preferred Stock (the Series A Purchase Price), representing an aggregate consideration of approximately $15,000,000;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | in connection with the issuance and sale of the Series A Preferred Stock, issue warrants (the Preferred Warrants) exercisable to purchase the Companys common
stock, par value $.02 per share (the Common Stock), at a ratio of one share of Common Stock for every five shares of Common Stock issued or issuable upon conversion of the Series A Preferred Stock;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | issue and sell to Pequot $10,000,000 in aggregate principal amount of the Companys Secured Subordinated Convertible Promissory Notes (the Convertible Notes); and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | in connection with the issuance and sale of the Convertible Notes, issue warrants (the Note Warrants, and together with the Preferred Warrants, the Warrants)
exercisable to purchase Common Stock at a ratio of one share of Common Stock for every five shares of Common Stock issued or issuable upon conversion of the Convertible Notes.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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



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



Series A Preferred Stock



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



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



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



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



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



Convertible Notes



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



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



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



10



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##### Table of Contents

Warrants



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



Item 6.    Selected Consolidated Financial Data



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





|                                                       |  |                                                     |        |                     |   |                     |  |   |                           |   |                                     |   |       |                     |   |        |                     |  |   |        |   |  |   |        |  
|------------------------------------------------------ |  | --------------------------------------------------- | ------ | ------------------- | - | ------------------- |  | - | ------------------------- | - | ----------------------------------- | - | ----- | ------------------- | - | ------ | ------------------- |  | - | ------ | - |  | - | ------ | -
|                                                       |  | Year Ended 12/31/03                                 |        | Year Ended 12/31/02 |   | Year Ended 12/31/01 |  |   | Six Months Ended 12/31/00 |   | Unaudited Six Months Ended 12/31/99 |   |       | Fiscal Year 6/30/00 |   |        | Fiscal Year 6/30/99 | 
|                                                       |  | (In thousands of dollars, except per share amounts) |       
|Total Revenues(1)                                      |  | $                                                   | 66,126 |                     | $ | 59,317              |  | $ | 21,936                    |   |                                     | $ | 8,943 |                     | $ | 10,267 |                     |  | $ | 19,901 |   |  | $ | 20,333 |  
|Operating Income (Loss)                                |  |                                                     | 3,587  |                     |   | 3,524               |  |   | 432                       |   |                                     |   | 190   |                     |   | (481   | )                   |  |   | (421   | ) |  |   | 63     |  
|Interest Expense, net of Interest income               |  |                                                     | 520    |                     |   | 1,018               |  |   | 217                       |   |                                     |   | 112   |                     |   | 167    |                     |  |   | 324    |   |  |   | 78     |  
|Income (Loss) Before income taxes                      |  |                                                     | 3,067  |                     |   | 2,506               |  |   | 216                       |   |                                     |   | 85    |                     |   | (631   | )                   |  |   | (724   | ) |  |   | 48     |  
|Net Income (Loss)                                      |  |                                                     | 2,746  |                     |   | 2,357               |  |   | 196                       |   |                                     |   | 85    |                     |   | (631   | )                   |  |   | (745   | ) |  |   | 34     |  
|Dividends and Accretion of Convertible Preferred Stock |  |                                                     | 293    |                     |   |                    |  |   |                          |   |                                     |   |      |                     |   |       |                     |  |   |       |   |  |   |       |  
|Net Income Available to Common Shareholders            |  |                                                     | 2,453  |                     |   | 2,357               |  |   | 196                       |   |                                     |   | 85    |                     |   | (631   | )                   |  |   | (745   | ) |  |   | 34     |  
|Income (Loss) per share(1)                             |  |                                                     |        |                     |   |                     |  |   |                           |   |                                     |   |       |                     |   |        |                     |  |   |        |   |  |   |        |  
|Basic                                                  |  |                                                     | 0.16   |                     |   | 0.16                |  |   | 0.03                      |   |                                     |   | .01   |                     |   | (.24   | )                   |  |   | (.23   | ) |  |   | .02    |  
|Diluted                                                |  |                                                     | 0.14   |                     |   | 0.14                |  |   | 0.02                      |   |                                     |   | .01   |                     |   | (.24   | )                   |  |   | (.23   | ) |  |   | .01    |  
|At Period End:                                         |  |                                                     |        |                     |   |                     |  |   |                           |   |                                     |   |       |                     |   |        |                     |  |   |        |   |  |   |        |  
|Total Assets                                           |  |                                                     | 43,632 |                     |   | 30,784              |  |   | 25,625                    |   |                                     |   | 5,784 |                     |   | 6,127  |                     |  |   | 5,951  |   |  |   | 6,690  |  
|Long-term Liabilities                                  |  |                                                     | 5,476  |                     |   | 4,430               |  |   | 5,064                     |   |                                     |   | 412   |                     |   | 1,040  |                     |  |   | 702    |   |  |   | 2,160  |  
|Working Capital (Deficit)                              |  |                                                     | 17,103 |                     |   | 676                 |  |   | (702                      | ) |                                     |   | 266   |                     |   | (1,454 | )                   |  |   | (13    | ) |  |   | (67    | )
|Shareholders Equity (Deficit)                         |  |                                                     | 29,729 |                     |   | 13,902              |  |   | 11,175                    |   |                                     |   | 2,002 |                     |   | (80    | )                   |  |   | 1,535  |   |  |   | 456    |  

---

|(1) |  | See Item 7 Managements Discussion and Analysis of Financial Condition and Results of Operations 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.



Overview



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



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##### Table of Contents

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



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



|                        |  |             |   |  |      |   |  |      |  
|----------------------- |  | ----------- | - |  | ---- | - |  | ---- | -
|                        |  | Fiscal Year |  
|                        |  | 2003        |   |  | 2002 |   |  | 2001 |  
|Prime contract revenues |  | 57          | % |  | 44   | % |  | 43   | %
|Subcontract revenues    |  | 43          | % |  | 56   | % |  | 57   | %
|                        |  |             |   |  |      |   |  |      |  
|Total revenues          |  | 100         | % |  | 100  | % |  | 100  | %
|                        |  |             |   |  |      |   |  |      |  



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



Percent of Revenues by Segment



|                          |  |      |   |  |      |   |  |      |  
|------------------------- |  | ---- | - |  | ---- | - |  | ---- | -
|                          |  | 2003 |   |  | 2002 |   |  | 2001 |  
|Analex Segment            |  |      |   |  |      |   |  |      |  
|Homeland Security Group   |  | 41   | % |  | 42   | % |  | 57   | %
|Systems Engineering Group |  | 53   | % |  | 47   | % |  | 21   | %
|ABS Segment               |  | 6    | % |  | 11   | % |  | 22   | %
|                          |  |      |   |  |      |   |  |      |  
|Total                     |  | 100  | % |  | 100  | % |  | 100  | %
|                          |  |      |   |  |      |   |  |      |  



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



| |  |  | Cost-plus-fees contracts provide for payment of allowable incurred costs, to the extent prescribed in the contract, plus a profit component. These contracts establish a ceiling
amount that the contractor may not exceed without the approval of the contracting officer. If our costs exceed the ceiling or are not allowable under the terms of the contract or applicable regulations, we may not be able to recover those costs.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

| |  |  | Time-and-materials contracts provide for acquiring services on the basis of director labor hours at specified fixed hourly rates. Profit margins on time-and-materials contracts
fluctuate based on the difference between negotiated billing rates and actual labor and overhead costs directly charged or allocated to such contracts. We assume the risk that costs of performance may exceed the negotiated hourly rates.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



|                   |  |             |   |  |      |   |  |      |  
|------------------ |  | ----------- | - |  | ---- | - |  | ---- | -
|                   |  | Fiscal Year |  
|                   |  | 2003        |   |  | 2002 |   |  | 2001 |  
|Cost plus fees     |  | 51          | % |  | 59   | % |  | 25   | %
|Time and materials |  | 33          | % |  | 34   | % |  | 75   | %
|Fixed price        |  | 16          | % |  | 7    | % |  | 0    | %
|                   |  |             |   |  |      |   |  |      |  
|Total              |  | 100         | % |  | 100  | % |  | 100  | %
|                   |  |             |   |  |      |   |  |      |  



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



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



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



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



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



13



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##### Table of Contents

Critical Accounting Policies



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



Revenues



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



Long-Lived Assets



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



Contingencies



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





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##### Table of Contents

Results of Operations

Comparison of Year Ended December 31, 2003 to

the Year Ended December 31, 2002



|                                            |  |                          |            |   |      |      |   |  |   |            |   |  |      |  
|------------------------------------------- |  | ------------------------ | ---------- | - | ---- | ---- | - |  | - | ---------- | - |  | ---- | -
|                                            |  | Years Ended December 31, |           
|                                            |  | 2003                     |            |   | 2002 |     
|Revenues                                    |  | $                        | 66,126,300 |   |      | 100  | % |  | $ | 59,317,000 |   |  | 100  | %
|Operating costs and expenses:               |  |                          |            |   |      |      |   |  |   |            |   |  |      |  
|Costs of revenues                           |  |                          | 55,770,400 |   |      | 84.3 |   |  |   | 50,436,700 |   |  | 85.0 |  
|Selling, general and administrative         |  |                          | 6,318,000  |   |      | 9.6  |   |  |   | 5,048,700  |   |  | 8.5  |  
|Amortization of other intangible assets     |  |                          | 450,800    |   |      | .7   |   |  |   | 307,600    |   |  | .5   |  
|                                            |  |                          |            |   |      |      |   |  |   |            |   |  |      |  
|Total operating costs and expenses          |  |                          | 62,539,200 |   |      | 94.6 |   |  |   | 55,793,000 |   |  | 94.1 |  
|Operating income                            |  |                          | 3,587,100  |   |      | 5.4  |   |  |   | 3,524,000  |   |  | 5.9  |  
|Interest expense                            |  |                          | (519,800   | ) |      | .8   |   |  |   | (1,018,300 | ) |  | 1.7  |  
|                                            |  |                          |            |   |      |      |   |  |   |            |   |  |      |  
|Income before income taxes                  |  |                          | 3,067,300  |   |      | 4.6  |   |  |   | 2,505,700  |   |  | 4.2  |  
|Provision for income taxes                  |  |                          | 320,900    |   |      | .5   |   |  |   | 149,100    |   |  | .3   |  
|                                            |  |                          |            |   |      |      |   |  |   |            |   |  |      |  
|Net income                                  |  |                          | 2,746,400  |   |      | 4.2  |   |  |   | 2,356,600  |   |  | 4.0  |  
|Dividends on convertible preferred stock    |  |                          | (56,700    | ) |      | .1   |   |  |   |           |   |  |     |  
|Accretion of convertible preferred stock    |  |                          | (236,300   | ) |      | .4   |   |  |   |           |   |  |     |  
|                                            |  |                          |            |   |      |      |   |  |   |            |   |  |      |  
|Net income available to common shareholders |  | $                        | 2,453,400  |   |      | 3.7  | % |  | $ | 2,356,600  |   |  | 4.0  | %
|                                            |  |                          |            |   |      |      |   |  |   |            |   |  |      |  



Revenues by Segment



|                          |  |      |            |      |   |           
|------------------------- |  | ---- | ---------- | ---- | - | ----------
|                          |  | 2003 |            | 2002
|Analex Segment            |  |      |            |      |   |           
|Homeland Security Group   |  | $    | 27,006,600 |      | $ | 24,900,400
|Systems Engineering Group |  | $    | 35,320,100 |      | $ | 27,613,600
|ABS Segment               |  | $    | 3,799,600  |      | $ | 6,803,000 
|                          |  |      |            |      |   |           
|Total                     |  | $    | 66,126,300 |      | $ | 59,317,000
|                          |  |      |            |      |   |           



Percentage Revenue
Growth Year Over Year by Segment



|                          |  |               |   
|------------------------- |  | ------------- | --
|                          |  | 2003 vs. 2002 |   
|Analex Segment            |  |               |   
|Homeland Security Group   |  | 8             | % 
|Systems Engineering Group |  | 28            | % 
|ABS Segment               |  | (44           | )%
|                          |  |               |   
|Total                     |  | 11.5          | % 
|                          |  |               |   



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



15



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##### Table of Contents

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



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



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



Operating Income by Segment



|                          |  |      |           |   |      |   |           |  
|------------------------- |  | ---- | --------- | - | ---- | - | --------- | -
|                          |  | 2003 |           |   | 2002 |  
|Analex Segment            |  |      |           |   |      |   |           |  
|Homeland Security Group   |  | $    | 3,115,400 |   |      | $ | 2,795,800 |  
|Systems Engineering Group |  |      | 1,065,600 |   |      |   | 670,600   |  
|ABS Segment               |  |      | (143,100  | ) |      |   | 365,200   |  
|Amortization              |  |      | (450,800  | ) |      |   | (307,600  | )
|                          |  |      |           |   |      |   |           |  
|Total Operating Income    |  | $    | 3,587,100 |   |      | $ | 3,524,000 |  
|                          |  |      |           |   |      |   |           |  



Percentage of
Operating Income by Segment



|                          |  |      |    |  |      |   
|------------------------- |  | ---- | -- |  | ---- | --
|                          |  | 2003 |    |  | 2002 |   
|Analex Segment            |  |      |    |  |      |   
|Homeland Security Group   |  | 87   | %  |  | 79   | % 
|Systems Engineering Group |  | 30   | %  |  | 19   | % 
|ABS Segment               |  | (4   | )% |  | 10   | % 
|Amortization              |  | (13  | )% |  | (9   | )%
|                          |  |      |    |  |      |   
|Total                     |  | 100  | %  |  | 100  | % 
|                          |  |      |    |  |      |   



Percentage Growth of
Operating Income Year Over Year by Segment



|                          |  |               |   
|------------------------- |  | ------------- | --
|                          |  | 2003 vs. 2002 |   
|Analex Segment            |  |               |   
|Homeland Security Group   |  | 11            | % 
|Systems Engineering Group |  | 59            | % 
|ABS Segment               |  | (139          | )%
|                          |  |               |   
|Total                     |  | 2             | % 
|                          |  |               |   



16



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##### Table of Contents

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



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



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



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



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



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



17



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##### Table of Contents

Results of Operations

Comparison of Year Ended December 31, 2002 to

the Year Ended December 31, 2001



|                                            |  |      |            |   |      |      |   |  |   |            |   |  |      |  
|------------------------------------------- |  | ---- | ---------- | - | ---- | ---- | - |  | - | ---------- | - |  | ---- | -
|                                            |  | 2002 |            |   | 2001 |     
|Revenues                                    |  | $    | 59,317,000 |   |      | 100  | % |  | $ | 21,936,000 |   |  | 100  | %
|Operating costs and expenses:               |  |      |            |   |      |      |   |  |   |            |   |  |      |  
|Costs of revenues                           |  |      | 50,436,700 |   |      | 85.0 |   |  |   | 18,157,800 |   |  | 82.8 |  
|Selling, general and administrative         |  |      | 5,048,700  |   |      | 8.5  |   |  |   | 2,967,600  |   |  | 13.5 |  
|Amortization of other intangible assets     |  |      | 307,600    |   |      | .5   |   |  |   | 378,400    |   |  | 1.7  |  
|                                            |  |      |            |   |      |      |   |  |   |            |   |  |      |  
|Total operating costs and expenses          |  |      | 55,793,000 |   |      | 94.1 |   |  |   | 21,503,800 |   |  | 98.0 |  
|Operating income                            |  |      | 3,524,000  |   |      | 5.9  |   |  |   | 432,200    |   |  | 2.0  |  
|Interest expense                            |  |      | (1,018,300 | ) |      | 1.7  |   |  |   | (216,600   | ) |  | 1.0  |  
|                                            |  |      |            |   |      |      |   |  |   |            |   |  |      |  
|Income before income taxes                  |  |      | 2,505,700  |   |      | 4.2  |   |  |   | 215,600    |   |  | .9   |  
|Provision for income taxes                  |  |      | 149,100    |   |      | .3   |   |  |   | 19,600     |   |  | .1   |  
|                                            |  |      |            |   |      |      |   |  |   |            |   |  |      |  
|Net income                                  |  |      | 2,356,600  |   |      | 4.0  |   |  |   | 196,000    |   |  | .9   |  
|Dividends on convertible preferred stock    |  |      |           |   |      |     |   |  |   |           |   |  |     |  
|Accretion of convertible preferred stock    |  |      |           |   |      |     |   |  |   |           |   |  |     |  
|Net income available to common shareholders |  | $    | 2,356,600  |   |      | 4.0  | % |  | $ | 196,000    |   |  | .9   | %
|                                            |  |      |            |   |      |      |   |  |   |            |   |  |      |  



Revenues by Segment



|                          |  |      |            |      |   |           
|------------------------- |  | ---- | ---------- | ---- | - | ----------
|                          |  | 2002 |            | 2001
|Analex Segment            |  |      |            |      |   |           
|Homeland Security Group   |  | $    | 24,900,400 |      | $ | 12,516,400
|Systems Engineering Group |  | $    | 27,613,600 |      | $ | 4,658,300 
|ABS Segment               |  | $    | 6,803,000  |      | $ | 4,761,300 
|                          |  |      |            |      |   |           
|Total                     |  | $    | 59,317,000 |      | $ | 21,936,000
|                          |  |      |            |      |   |           



Percentage Revenue
Growth Year Over Year by Segment



|                          |  |               |  
|------------------------- |  | ------------- | -
|                          |  | 2002 vs. 2001 |  
|Analex Segment            |  |               |  
|Homeland Security Group   |  | 99            | %
|Systems Engineering Group |  | 493           | %
|ABS Segment               |  | 43            | %
|                          |  |               |  
|Total                     |  | 170           | %
|                          |  |               |  



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



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##### Table of Contents

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



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



Operating Income by Segment



|                          |  |      |           |   |      |   |          |  
|------------------------- |  | ---- | --------- | - | ---- | - | -------- | -
|                          |  | 2002 |           |   | 2001 |  
|Analex Segment            |  |      |           |   |      |   |          |  
|Homeland Security Group   |  | $    | 2,795,800 |   |      | $ | 279,800  |  
|Systems Engineering Group |  |      | 670,600   |   |      |   | 344,600  |  
|ABS Segment               |  |      | 365,200   |   |      |   | 186,200  |  
|Amortization              |  |      | (307,600  | ) |      |   | (378,400 | )
|                          |  |      |           |   |      |   |          |  
|Total Operating Income    |  | $    | 3,524,000 |   |      | $ | 432,200  |  
|                          |  |      |           |   |      |   |          |  



Percentage of
Operating Income by Segment



|                          |  |      |    |  |      |   
|------------------------- |  | ---- | -- |  | ---- | --
|                          |  | 2002 |    |  | 2001 |   
|Analex Segment            |  |      |    |  |      |   
|Homeland Security Group   |  | 79   | %  |  | 65   | % 
|Systems Engineering Group |  | 20   | %  |  | 80   | % 
|ABS Segment               |  | 10   | %  |  | 43   | % 
|Amortization              |  | (9   | )% |  | (88  | )%
|                          |  |      |    |  |      |   
|Total                     |  | 100  | %  |  | 100  | % 
|                          |  |      |    |  |      |   



Percentage Growth of
Operating Income Year Over Year by Segment



|                          |  |               |  
|------------------------- |  | ------------- | -
|                          |  | 2002 vs. 2001 |  
|Analex Segment            |  |               |  
|Homeland Security Group   |  | 900           | %
|Systems Engineering Group |  | 95            | %
|ABS Segment               |  | 96            | %
|                          |  |               |  
|Total                     |  | 715           | %
|                          |  |               |  



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



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##### Table of Contents

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



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



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



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



Accounting Treatment of The Pequot Transaction



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



Series A Preferred Stock



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



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



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##### Table of Contents

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



Allocation of Series A Preferred Stock Proceeds



|                                                                            |  |   |           
|--------------------------------------------------------------------------- |  | - | ----------
|Proceeds of Series A Preferred Stock                                        |  | $ | 15,000,000
|Allocated relative fair value of preferred stock                            |  | $ | 11,142,400
|Allocated relative fair value of preferred warrants                         |  | $ | 3,857,600 
|                                                                           
|Balance Sheet presentation of Series A Preferred Stock at December 31, 2003
|                                                                            | 
|Allocated relative fair value of preferred stock                            |  | $ | 11,142,400
|Less: discount on preferred stock                                           |  | $ | 10,519,800
|Less: issuance costs of preferred stock                                     |  | $ | 622,600   
|                                                                            |  |   |           
|Net carrying value of preferred stock prior to accretion                    |  | $ |          
|Accretion of preferred stock                                                |  | $ | 236,300   
|                                                                            |  |   |           
|Net carrying value of preferred stock at December 31, 2003                  |  | $ | 236,300   
|                                                                            |  |   |           



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



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



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



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



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##### Table of Contents

Convertible Notes



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



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



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



|                                                                            |  |   |           
|--------------------------------------------------------------------------- |  | - | ----------
|Allocation of Convertible Notes Proceeds                                   
|                                                                            | 
|Proceeds of the convertible notes                                           |  | $ | 10,000,000
|Allocated relative fair value of convertible notes                          |  | $ | 8,094,700 
|Allocated relative fair value of note warrants                              |  | $ | 1,905,300 
|                                                                           
|Balance Sheet presentation of Convertible Debt at December 31, 2003        
|                                                                            | 
|Allocated relative fair value of convertible notes                          |  | $ | 8,094,700 
|Less: discount on convertible notes                                         |  | $ | 5,327,200 
|                                                                            |  |   |           
|Net carrying value of convertible notes prior to amortization and accretion |  | $ | 2,767,500 
|Amortization of discount                                                    |  | $ | 113,900   
|                                                                            |  |   |           
|Net carrying value of convertible notes at December 31, 2003                |  | $ | 2,881,400 
|                                                                            |  |   |           



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



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##### Table of Contents

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



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



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



Stout Repurchase Agreement



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



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



Impact of Pequot Transaction on Shareholders Equity



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



|                                                             |  |   |            |  
|------------------------------------------------------------ |  | - | ---------- | -
|Change to Additional Paid In Capital:                        |  |   |            |  
|Issuance of preferred stock                                  |  |   | 10,519,800 |  
|Issuance of convertible debt                                 |  |   | 5,327,200  |  
|Stout Repurchase Agreement                                   |  |   | (9,018,500 | )
|                                                             |  |   |            |  
|Net change in Additional Paid In Capital                     |  |   | 6,828,500  |  
|                                                             | 
|Warrants:                                                    |  |   |            |  
|Preferred Stock Warrants                                     |  |   | 3,857,600  |  
|Convertible Debt Warrants                                    |  |   | 1,905,300  |  
|                                                             |  |   |            |  
|Net change in Warrants                                       |  |   | 5,762,900  |  
|Net change in Shareholders Equity due to Pequot Transaction |  | $ | 12,591,400 |  
|                                                             |  |   |            |  



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##### Table of Contents

Capital Resources and Liquidity



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



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



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



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



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



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



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



24



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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Contractual Obligations



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



|                              |  |                   |            |                  |   |                        |  |       |           |  |   |           
|----------------------------- |  | ----------------- | ---------- | ---------------- | - | ---------------------- |  | ----- | --------- |  | - | ----------
|Year                          |  | Long-term debt(1) |            | Operating Leases |   | Non-Compete Agreements |  | Total
|2004                          |  | $                 | 1,725,400  |                  | $ | 1,068,900              |  | $     | 461,900   |  | $ | 3,256,200 
|2005                          |  |                   | 1,113,400  |                  |   | 804,600                |  |       | 442,700   |  |   | 2,360,700 
|2006                          |  |                   | 815,100    |                  |   | 77,500                 |  |       | 166,400   |  |   | 1,059,000 
|2007                          |  |                   | 10,000,000 |                  |   |                       |  |       | 13,700    |  |   | 10,013,700
|                              |  |                   |            |                  |   |                        |  |       |           |  |   |           
|Total contractual obligations |  | $                 | 13,653,900 |                  | $ | 1,951,000              |  | $     | 1,084,700 |  | $ | 16,689,600
|                              |  |                   |            |                  |   |                        |  |       |           |  |   |           

---

|(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, if such shares are sold within such period and
if certain other conditions are satisfied. As of December 31, 2003, the maximum that the Company would be required to pay under the terms of the guarantee was $1,628,571. This amount is calculated by multiplying the number of shares subject to the
guarantee by their associated guaranteed purchase price, assuming the Companys common stock has no fair market value. As of December 31, 2003, there were 214,286 shares with an associated purchase price guarantee of $1.60 per share, 214,286
shares with an associated guaranteed purchase price of $1.80 per share, 214,286 shares with an associated guaranteed purchase price of $2.00 per share, and 214,285 shares with an associated guaranteed purchase price of $2.20 per share. As the fair
market value of the Companys common stock was in excess of the guaranteed share prices as of December 31, 2003, no amounts were accrued under the guarantee.



Recently Issued Accounting Standards



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



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



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



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



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



Forward-looking Statements



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



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



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



| |  |  | our ability to accurately estimate our backlog;
| | - |  | -----------------------------------------------



| |  |  | our ability to maintain strong relationships with other contractors;
| | - |  | --------------------------------------------------------------------



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



| |  |  | economic conditions, competitive environment, and timing of awards and contracts;
| | - |  | ---------------------------------------------------------------------------------



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



| |  |  | our ability to raise additional capital to fund acquisitions; and
| | - |  | -----------------------------------------------------------------



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



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



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



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Item 7A.    Quantitative and Qualitative Disclosure about Market Risk



Market Risks and Hedging Activities



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



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



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



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



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



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



Item 8.    Financial Statements and Supplementary Data



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



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



None.



Item 9A.    Controls and Procedures



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



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



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



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



PART III



Item 10.    Directors and Executive Officers of the Registrant



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



|                          |  |     |  |                |  |                                                   
|------------------------- |  | --- |  | -------------- |  | --------------------------------------------------
|Directors                 |  | Age |  | Director Since |  | Office Held with Company                          
|Sterling E. Phillips, Jr. |  | 57  |  | 2001           |  | Chairman of the Board, and Chief Executive Officer
|                          |  |     | 
|Peter C. Belford, Sr.     |  | 57  |  | 2001           |  | Director                                          
|                          |  |     | 
|C. Thomas Faulders, III   |  | 54  |  | 2004           |  | Director                                          
|                          |  |     | 
|Lincoln D. Faurer         |  | 76  |  | 2003           |  | Director                                          
|                          |  |     | 
|Martin M. Hale, Jr.       |  | 32  |  | 2003           |  | Director                                          
|                          |  |     | 
|Gerald A. Poch            |  | 57  |  | 2003           |  | Director                                          
|                          |  |     | 
|Daniel R. Young           |  | 70  |  | 2003           |  | Director                                          



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



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





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



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



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



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



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



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



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



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



| |  |  | appointment, compensation, retention and oversight of the work of the Companys independent auditors;
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | pre-approval of all audit and non-audit related services provided by independent auditors;
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | review of the independent auditors summary of significant accounting, auditing and internal control issues identified during the audit along with managements corrective
action plans;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | review of significant accounting policy changes or applicable new accounting or reporting standards adopted by management;
| | - |  | --------------------------------------------------------------------------------------------------------------------------



| |  |  | receipt, evaluation, and investigation of any complaints regarding Companys accounting, internal accounting controls or auditing matters
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------



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



Compensation of Directors



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



Executive Officers



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



|                    |  |     |  |               |  |                                                                       
|------------------- |  | --- |  | ------------- |  | ----------------------------------------------------------------------
|Name                |  | Age |  | Officer Since |  | Office Held With Company                                              
|                    |  |     | 
|Michael Stolarik    |  | 53  |  | 2004          |  | President and Chief Operating Officer                                 
|                    |  |     | 
|Ronald B. Alexander |  | 56  |  | 2001          |  | Senior Vice President, Chief Financial Officer and Corporate Secretary
|                    |  |     | 
|Stephen C. Dolbey   |  | 57  |  | 2003          |  | Vice President                                                        
|                    |  |     | 
|Charles Floyd       |  | 63  |  | 2003          |  | Vice President                                                        
|                    |  |     | 
|Heinz Wimmer        |  | 59  |  | 2003          |  | Vice President                                                        
|                    |  |     | 
|Julie Holt          |  | 40  |  | 2003          |  | President, Advanced Biosystems, Inc. (subsidiary)                     



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



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



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



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



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



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



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



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



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



Code of Conduct and Ethics



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



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



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##### Table of Contents

Item 11.    Executive Compensation



Summary Compensation Table



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



Summary Compensation Table



|                                                                                            |  |                       |  |                     |                       |                                    |   |                               |  |                       |  |   |                  
|------------------------------------------------------------------------------------------- |  | --------------------- |  | ------------------- | --------------------- | ---------------------------------- | - | ----------------------------- |  | --------------------- |  | - | -----------------
|Name and Principal Position                                                                 |  | Year                  |  | Annual Compensation |                       | Long-TermCompensationAwards        |   | All Other Compensation ($)(2)
|                                                                                            |  | Salary ($)            |  | Bonus ($)           |                       | SecuritiesUnderlyingOptions (#)(1) |  
|Sterling E. Phillips, Jr. Chairman and Chief Executive Officer                              |  | FY 2003FY 2002FY 2001 |  | $                   | 219,774202,435158,414 |                                    | $ | 185,41275,000                |  | 200,000713,079875,725 |  | $ | 16,11711,0975,923
|                                                                                            |  |                       |  |                     |                      
|Ronald B. Alexander Senior Vice President, Chief Financial Officer, and Corporate Secretary |  | FY 2003FY 2002FY 2001 |  | $                   | 172,238163,70516,096  |                                    | $ | 111,24740,000                |  | 200,000175,000       |  | $ | 11,2507,148805   
|                                                                                            |  |                       |  |                     |                      
|Stephen C. Dolbey Vice President                                                            |  | FY 2003FY 2002FY 2001 |  | $                   | 206,866199,47130,600  |                                    | $ | 23,2465,000                  |  | 50,00025,000         |  | $ | 9,1267,97972     
|                                                                                            |  |                       |  |                     |                      
|Heinz L. Wimmer Vice President                                                              |  | FY 2003FY 2002FY 2001 |  | $                   | 163,688154,60121,692  |                                    | $ | 27,564                      |  | 50,00075,000         |  | $ | 7,5726,130646    
|                                                                                            |  |                       |  |                     |                      
|George W. Tonn(3) Former Senior Vice President                                              |  | FY 2003FY 2002FY 2001 |  | $                   | 157,445158,080107,307 |                                    | $ | 31,38525,000                 |  | 175,000             |  | $ | 7,4557,3233,576  
|                                                                                            |  |                       |  |                     |                      
|Charles W. Floyd Vice President                                                             |  | FY 2003FY 2002FY 2001 |  | $                   | 148,63773,487        |                                    | $ | 15,000                      |  | 50,000              |  | $ | 6,4402,677      

---

|(1) |  | Options granted pursuant to the Companys 2002 and 2000 Stock Option Plans. For further information of stock option grants during the year ended December 31, 2003, see
Executive CompensationStock Option Grants below.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Contributions made by the Company under its 401(k) plan.
|--- |  | --------------------------------------------------------

|(3) |  | As of December 2003, Mr. Tonn is no longer with the Company.
|--- |  | ------------------------------------------------------------



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##### Table of Contents

Stock Option Grants



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



Option Grants in Last Fiscal Year



|                          |  |                                                       |  |                                                                                                   |    |  |                               |  |                 |  |    |                |  |    |               
|------------------------- |  | ----------------------------------------------------- |  | ------------------------------------------------------------------------------------------------- | -- |  | ----------------------------- |  | --------------- |  | -- | -------------- |  | -- | --------------
|                          |  | Individual Grants                                     |  | Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation for Option Term(2)
|Name                      |  | Number of Securities Underlying Options Granted(#)(1) |  | % of Total Options Granted to Employees in 2003                                                   |    |  | Exercise or Base Price ($/sh) |  | Expiration Date | 
|                          |  |                                                       |  |                                                                                                   | 5% |  | 10%                          
|Sterling E. Phillips, Jr. |  | 200,000                                               |  | 25                                                                                                | %  |  | 2.42                          |  | 1/29/13         |  | $  | 304,000        |  | $  | 772,000       
|Ronald B. Alexander       |  | 100,000100,000                                        |  | 1313                                                                                              | %% |  | 2.422.54                      |  | 1/29/136/5/13   |  | $$ | 152,000140,000 |  | $$ | 386,000374,000
|Stephen C. Dolbey         |  | 50,000                                                |  | 6                                                                                                 | %  |  | 2.42                          |  | 1/29/13         |  | $  | 76,000         |  | $  | 193,000       
|Heinz L. Wimmer           |  | 50,000                                                |  | 6                                                                                                 | %  |  | 2.42                          |  | 1/29/13         |  | $  | 76,000         |  | $  | 193,000       
|George W. Tonn(3)         |  |                                                      |  |                                                                                                  |    |  |                              |  |                |  |    |               |  |    |              
|Charles W. Floyd          |  | 50,000                                                |  | 6                                                                                                 | %  |  | 2.42                          |  | 1/29/13         |  | $  | 76,000         |  | $  | 193,000       

---

|(1) |  | Options vest one-third upon the date of grant, and one-third each on the first and second anniversaries of the date of grant. The option exercise price is 100% of the fair market
value on the date of grant.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Amounts represent hypothetical gains that could be achieved if exercised at end of the option term. The dollar amounts under these columns assume 5% and 10% compounded annual
appreciation in the Common Stock from the date the respective options were granted. These calculations and assumed realizable values are required to be disclosed under Securities and Exchange Commission rules and, therefore, are not intended to
forecast possible future appreciation of Common Stock or amounts that may be ultimately realized upon exercise. The Company does not believe this method accurately illustrates the potential value of a stock option.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | As of December 2003, Mr. Tonn is no longer with the Company.
|--- |  | ------------------------------------------------------------



Options Exercised and Year End Option Values



The following table sets forth certain information regarding options exercised during the year ended December 31, 2003 and the value of unexercised
options held as of December 31, 2003 by the Named Executive Officers:



Aggregated Options Exercises in Last Fiscal Year and Fiscal Year-End Option Values



|                          |  |                                 |             |                    |               |                                                                   |             |                                                            |               |   |           |  |   |        
|------------------------- |  | ------------------------------- | ----------- | ------------------ | ------------- | ----------------------------------------------------------------- | ----------- | ---------------------------------------------------------- | ------------- | - | --------- |  | - | -------
|Name                      |  | Shares Acquired on Exercise (#) |             | Value Realized ($) |               | Number of Securities Underlying Unexercised Options at FY-End (#) |             | Value of Unexercised In-the-Money Options at FY-End ($)(1)
|                          |  |                                 | Exercisable |                    | Unexercisable |                                                                   | Exercisable |                                                            | Unexercisable
|Sterling E. Phillips, Jr. |  |                                |             |                   |               | 1,417,779                                                         |             | 371,025                                                    |               | $ | 2,759,207 |  | $ | 508,653
|Ronald B. Alexander       |  |                                |             |                   |               | 241,668                                                           |             | 133,332                                                    |               | $ | 496,252   |  | $ | 155,998
|Stephen C. Dolbey         |  |                                |             |                   |               | 33,335                                                            |             | 41,665                                                     |               | $ | 44,669    |  | $ | 53,081 
|Heinz L. Wimmer           |  |                                |             |                   |               | 66,668                                                            |             | 58,332                                                     |               | $ | 93,002    |  | $ | 77,248 
|George W. Tonn(2)         |  |                                |             |                   |               |                                                                  |             |                                                           |               |   |          |  |   |       
|Charles W. Floyd          |  |                                |             |                   |               | 16,668                                                            |             | 33,332                                                     |               | $ | 20,502    |  | $ | 48,331 

---

|(1) |  | Represents the difference between the exercise price of the options and the closing bid price of the Common Stock on December 31, 2003, which was $3.65 per share. Options that have
an exercise price greater than the fiscal year-end market value have not been included in the value calculation.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | As of December 31, 2003, Mr. Tonn is no longer with the Company.
|--- |  | ----------------------------------------------------------------



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EMPLOYMENT AGREEMENTS, TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL ARRANGEMENTS



On January 16, 2001, Mr. Phillips entered into an employment agreement with
the Company pursuant to which he was appointed to the positions of President and Chief Executive Officer. The employment agreement provides for an initial term of one year, continuing on a month to month basis thereafter until terminated by either
the Company or Mr. Phillips by giving thirty (30) days written notice. Pursuant to the employment agreement, Mr. Phillips purchased 66,667 shares of the Companys restricted Common Stock, for $0.75 per share. In addition, under the agreement,
Mr. Phillips was awarded a five-year, non-qualified stock option to purchase 875,725 shares of the Companys Common Stock at the exercise price equal to 100% of the fair market value of the common stock on the grant date, exercisable in
one-third increments over a two-year period. The employment agreement provides for an initial annual base salary of $175,000, subject to subsequent determination by the Compensation Committee of the Board. Mr. Phillips annual salary for the
year ended December 31, 2003 was $220,000. Under the agreement, Mr. Phillips is eligible for an annual bonus upon the successful completion of annual milestones as agreed upon by Mr. Phillips and the Board of Directors at the recommendation of the
Compensation Committee. The amount of the bonus is determined by the Board with the recommendation of the Compensation Committee. If the Company terminates Mr. Phillips employment without Cause (as defined in the agreement), Mr.
Phillips is entitled to receive, on a bi-weekly basis within 12 months after the date of termination, the sum of (i) his base salary through the date of termination to the extent not already paid, (ii) any compensation he has previously deferred,
(iii) any accrued vacation pay, to the extent not already paid, and (iv) the base salary that would have been payable for the twelve month period immediately following such termination. If Mr. Phillips employment is terminated for
Cause (as defined in the agreement) or he voluntarily leaves employment with the Company, he is not entitled to any remuneration past the date of termination. The employment agreement provides for reimbursement of Mr. Phillips
reasonable expenses incurred in connection with his duties and medical and other customary benefits.



Mr. Jon M. Stout, former Chairman of the Board, had an employment agreement with the Company pursuant to which he was paid $140,000 during the year ended
December 31, 2003. Pursuant to an Employment Termination Agreement dated December 9, 2003, Mr. Stout received a lump sum payment of $280,000 from the Company in consideration of the termination of his employment agreement. In addition, the Company
entered into a Non-Competition Agreement with Mr. Stout in December 2003. As long as Mr. Stout is in compliance with the Non-Competition Agreement, the Company will pay him $50,000 every three months, during the term of the agreement, for an
aggregate consideration of $600,000.



COMPENSATION COMMITTEE
REPORT ON EXECUTIVE COMPENSATION



The responsibility of
the Compensation Committee is to administer the Companys executive compensation programs, to monitor corporate performance and its relationship to compensation of executive officers and to make appropriate recommendations concerning matters of
executive compensation. This report sets forth the major components of executive compensation and the basis by which 2003 compensation determinations were made with respect to the executive officers of the Company.



Compensation Policy and Guidelines



The main objective of the Company is to maintain and increase the
profitability of its operations and to maximize value for stockholders, employees and clients. The goals of the Companys compensation policy are to align executive compensation with the Companys long-term business objectives and
performance, to enable the Company to attract and retain high-quality executive officers and employees who will contribute to the long-term success of the Company and to reward such executive officers and employees for their successful efforts in
attaining objectives beneficial to the growth and profitability of the Company.



In order to achieve the Companys goals, the Compensation Committee has developed the following principles that serve as guidance for compensation decisions for all employees: (i) to attract and retain the most



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highly qualified management and employee team, (ii) to pay competitively with prevailing industry standards, (iii) to emphasize sustained performance by
aligning monetary rewards with stockholder interests, (iv) to emphasize performance-related contributions as the basis of pay decisions, and (v) to provide incentive bonus awards for management based upon attaining revenue and profitability goals.
To implement these policies, the Compensation Committee has designed a compensation program consisting of base salary, an annual incentive bonus plan, stock options and other employment benefits.



Compensation Program Elements



The Companys compensation levels and benefits are reviewed on an
annual basis to determine whether they are competitive and reasonable in light of the overall performance of the Company and the Companys ability to attract and retain talented executives. The Companys focus is on growth and
profitability.



Base
Salary.    Salary levels are primarily determined by the Compensation Committee in consideration of the performance of the individual executive, the financial performance of the Company and the prevailing industry standards
for similar executives of similar companies. The Companys philosophy regarding base salaries is conservative, using published industry reports and surveys on executive compensation. Approximately 47% of the Companys business is in
information technology, 47% in engineering and 6% in bio-medical fields. The Company therefore compares itself for this purpose with other small public technology service providers and/or government contracting firms that are primarily in the
business of providing information technology or engineering services to the government. The Compensation Committee has not evaluated corporate performance of these firms other than to develop a general sense that they are successful growing firms.
Periodic increases in base salary relate to individual contribution evaluated against pre-established objectives.



Stock Options.    The Company believes the compensation program should provide employees with an opportunity to increase their
ownership and potentially gain financially from Company stock price increases. By this approach, the interests of stockholders, executives and employees are closely aligned. Through the Companys 2002 Stock Option Plan, executives and employees
are eligible to receive stock options, giving them the right to purchase shares of Common Stock of the Company at a specified price in the future. The Compensation Committee believes the use of stock options as the basis for long-term incentive
compensation meets the Compensation Committees defined compensation strategy and the team-based operations approach that the Company has adopted.



In considering the award of stock options, management and the Compensation Committee consider several factors: individual performance versus assigned
objectives; profit contribution; criticality of the individual to the future success of the Company, and overall contribution to the Companys success. Management recommends option grants to the Compensation Committee and the Compensation
Committee revises and approves the final grants. As part of the process, the Compensation Committee also reviews the current stock and option holdings of the nominees, their total compensation and the history of option grants to each individual
under consideration.



Bonus and Incentive
Programs.    The Companys executive officers and operating managers participate in an incentive compensation program which awards cash bonuses of specific amounts based on attaining or exceeding specific revenue and
profitability targets established at the beginning of fiscal year 2003. These targets may include revenue, new business, divisional EBITDA, or corporate EBITDA. Underachievement of the target by a specified percentage will generate no bonus, and
overachievement of the target by a specified percentage will generate a defined multiple of the bonus up to a maximum amount specified.



For instance, the Company did not pay any cash bonuses to executive officers in 2001. In 2002 however, due to the improved financial performance of the
Company and the individual performance of the executive officers receiving bonuses, the Company paid an aggregate of $603,100 in cash bonuses to its executive officers. In 2003, the Company paid an aggregate of $542,400 in cash bonuses to its
executive officers.



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Executive officers are entitled to additional cash bonuses based upon performance at the discretion of
the Compensation Committee and in some cases, the Chief Executive Officer. The cash bonuses paid to the Named Executive Officers in 2003 are set forth in the Executive CompensationSummary Compensation Table.



Severance Compensation.    To retain highly
qualified executive officers, the Company from time to time enters into severance agreements with certain of its officers. The determination of whether the Company would benefit from a severance agreement with a particular officer is subjective,
based upon such officers experience and value to the Company.



Other Benefits.    The Companys philosophy is to provide adequate health and welfare oriented benefits to executives and employees, but to maintain a highly conservative posture relative to executive
benefits.



2003 Compensation for the President and Chief Executive Officer



During 2003, Mr. Phillips was paid an annual base salary
of $220,000 and received a bonus of $185,412 based upon the Companys performance against annual budgetary targets established by the Board. Mr. Phillips was eligible for the bonus because the Company has achieved an EBITDA target established
by the Compensation Committee at the beginning of fiscal year 2003. Underachievement of the target by a specified percentage will generate no bonus, and overachievement of the target by a specified percentage will generate a defined multiple of the
bonus up to a maximum amount specified.



In addition,
consistent with the Compensation Committees goal of increasing employee ownership of Common Stock, described above, Mr. Phillips was awarded options to purchase 200,000 shares of Common Stock in 2003. The options vest over a two year period,
with one-third vesting on the date of grant and one-third vesting on each of the first and second anniversaries of the date of grant. The options expire five years from the grant date, and have an exercise price equal to the fair market value of the
Common Stock on the grant date. It is the Compensation Committees view that the award of these stock options continues to be an effective way of tying Mr. Phillips financial interests to those of the Companys stockholders, since
the value of these stock options is directly linked to increases in stockholder value.



Summary



The Compensation Committee believes
the total compensation program for executives of the Company, including the Chief Executive Officer, is appropriate and competitive with the total compensation programs provided by similar companies in the industry with which the Company competes.
The Compensation Committee believes its compensation practices are directly tied to stockholder returns and linked to the achievement of annual and longer-term financial and operating results of the Company on behalf of the Companys
stockholders.



The material in this report is not
soliciting material, is not deemed filed with the SEC, and is not incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Exchange Act of 1934, as amended, except to the extent that
the Company specifically incorporates it by reference into such filing.



Submitted by the Compensation Committee



Peter C. Belford

Lincoln D. Faurer



Compensation Committee Interlocks and Insider Participation



From January 2003 through March 2003, the members of the Compensation
Committee were Peter C. Belford and Shawna L. Stout. Lincoln D. Faurer joined the Compensation Committee in April 2003. In



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December 2003, Gerald Poch replaced Shawna Stout, and in February 2004, Thomas Faulders replaced Peter Belford. None of the members of the Compensation
Committee during the year ended December 31, 2003 was, during such year or prior thereto, an officer or employee of the Company or any of its subsidiaries, except that Mr. Belford was an officer of the former Analex Corporation, until it was
acquired by the Company in November 2001. During the year ended December 31, 2003, no executive officer of the Company served as a director or member of the compensation committee (or other board committee performing similar functions, or in the
absence of such committee, the entire board of directors) of another entity, one of whose executive officers served as a director or member of the Compensation Committee of the Company.



During the year ended December 31, 2003, Mr. Belford was paid $150,008 pursuant to a promissory note issued to him in
connection with the November 2001 acquisition of the former Analex Corporation. In July 2002, pursuant to the terms of the merger agreement for the Analex acquisition, the Company issued a promissory note in the principal amount of $200,000 to Mr.
Belford with respect to the award of the NASA Expendable Launch Vehicle Integrated Support (ELVIS) contract to the Company. This note has a three-year term, is payable in twelve quarterly payments, and bears an interest rate equal to the prime rate
plus one percent, adjustable on an annual basis on the anniversary date of the note. In 2003, the Company paid Mr. Belford $75,521 under this note.



Ms. Stouts father, Jon M. Stout, has an employment agreement with the Company pursuant to which he was paid $140,000 during the year ended December
31, 2003. Pursuant to an Employment Termination Agreement dated December 9, 2003, Mr. Stout received a lump sum payment of $280,000 from the Company in consideration of the termination of his employment agreement. In addition, the Company entered
into a Non-Competition Agreement with Mr. Stout in December 2003. As long as Mr. Stout is in compliance with the Non-Competition Agreement, the Company will pay him $50,000 every three months, during the term of the agreement, for an aggregate
consideration of $600,000.



Common Stock Performance Graph



The following graph compares the cumulative, five-year stockholder
returns on the Companys Common Stock with the cumulative returns of the (i) American Stock Exchange Market Index, (ii) the Media General Other Business Services Index, comprised of the common stock of approximately 200 companies, excluding the
Company, in diversified business service industries, and (iii) the Media General Information Technology Services Index, comprised of approximately 43 companies, excluding the Company, providing computer and information technology consulting,
development and implementation services. The graph assumes the value of the investment in the Companys Common Stock and each index was $100 on July 1, 1998.



LOGO



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##### Table of Contents

Fiscal Year Ending(1)



|                                                     |  |        |  |        |  |                         |  |        |  |        |  |       
|---------------------------------------------------- |  | ------ |  | ------ |  | ----------------------- |  | ------ |  | ------ |  | ------
|Company                                              |  | 1999   |  | 2000   |  | 6 months ended 12/31/00 |  | 2001   |  | 2002   |  | 2003  
|Analex Corporation                                   |  | 100.00 |  | 58.34  |  | 77.09                   |  | 116.67 |  | 156.68 |  | 243.36
|Medial General Information Technology Services Index |  | 100.00 |  | 72.41  |  | 69.91                   |  | 74.69  |  | 40.61  |  | 57.53 
|AMEX Market Index                                    |  | 100.00 |  | 114.99 |  | 106.59                  |  | 101.68 |  | 97.62  |  | 132.87

---

|(1) |  | The Company changed its fiscal year during 2001 from June 30 to December 31. Therefore, fiscal year 2001 represents the period January 1, 2001 through December 31, 2001; fiscal year
2000 represents the period July 1, 1999 through June 30, 2000; and fiscal year 1999 represents the period July 1, 1998 through June 30, 1999.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Item 12.    Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters



The following table sets
forth information as of March 15, 2004 regarding the beneficial ownership of the Companys Common Stock of (i) each person known to the Company to be the beneficial owner, within the meaning of Section 13(d) of the Securities Exchange Act of
1934, as amended (the Exchange Act), of more than 5% of the outstanding shares of Common Stock, (ii) each director of the Company, (iii) each executive officer of the Company named in the Summary Compensation Table (see Executive
Compensation) and (iv) all current executive officers and directors of the Company as a group. Unless otherwise indicated, the address of each named beneficial owner is c/o Analex Corporation, 5904 Richmond Highway, Suite 300, Alexandria,
Virginia 22303. Except to the extent indicated in the footnotes, each of the beneficial owners named below has sole voting and investment power with respect to the shares listed. The percentages shown below are calculated in accordance with
Securities and Exchange Commission rules and are based on 13,036,175 shares of Common Stock outstanding as of March 15, 2004.



|                                                                                                       |  |                  |        |  |                  |  
|------------------------------------------------------------------------------------------------------ |  | ---------------- | ------ |  | ---------------- | -
|Name and Address                                                                                       |  | Number of Shares |        |  | Percent of Class |  
|Pequot Capital Management, Inc. 500 Nyala Farm Road Westport, CT 06880                                 |  | 12,057,796       | (1)(2) |  | 48.1             | %
|J. Richard Knop Windsor Group One Discovery Square, Suite 700 12919 Sunset Hills Road Reston, VA 20190 |  | 1,074,982        | (1)(3) |  | 8.0              | %
|Peter C. Belford, Sr.                                                                                  |  | 1,038,733        | (1)    |  | 8.0              | %
|C. W. Gilluly, Ed.D. 415 First Street, S.E. Washington, D.C. 20003                                     |  | 818,751          | (1)(4) |  | 6.3              | %
|Lese Ann Kodger P.O. Box 45515 Westlake, OH 44145                                                      |  | 806,093          | (1)    |  | 6.2              | %
|Gerald R. McNichols, Sc.D.                                                                             |  | 742,984          | (1)(5) |  | 5.7              | %
|DRG Irrevocable Trust                                                                                  |  | 700,000          | (6)    |  | 5.4              | %
|DSG Irrevocable Trust                                                                                  |  | 700,000          | (7)    |  | 5.4              | %
|RSSJ Associates, LLC                                                                                   |  | 716,014          | (8)    |  | 5.5              | %
|Martin M. Hale, Jr.                                                                                    |  | 12,061,128       | (1)(9) |  | 48.1             | %



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|                                                                     |  |                  |         |  |                  |  
|-------------------------------------------------------------------- |  | ---------------- | ------- |  | ---------------- | -
|Name and Address                                                     |  | Number of Shares |         |  | Percent of Class |  
|Gerald A. Poch                                                       |  | 12,061,128       | (1)(10) |  | 48.1             | %
|Thomas Faulders                                                      |  | 1,666            | (11)    |  | *                |  
|Lincoln D. Faurer                                                    |  | 4,999            | (12)    |  | *                |  
|Daniel R. Young                                                      |  | 24,999           | (13)    |  | *                |  
|Sterling E. Phillips, Jr.                                            |  | 1,828,905        | (1)(14) |  | 12.4             | %
|Ronald B. Alexander                                                  |  | 281,112          | (15)    |  | 2.1              | %
|Michael Stolarik                                                     |  | 100,000          | (16)    |  | *                |  
|George W. Tonn(17)                                                   |  | 218,393          |         |  | 1.7              | %
|Heinz L. Wimmer                                                      |  | 114,741          | (18)    |  | *                |  
|Charles W. Floyd                                                     |  | 33,715           | (19)    |  | *                |  
|Stephen C. Dolbey                                                    |  | 71,574           | (20)    |  | *                |  
|Stockholders Agreement Voting Group                                 |  | 19,009,983       | (1)(2)  |  | 70.8             | %
|All current directors and executive officers as a group (13 persons) |  | 15,564,904       | (21)    |  | 56.8             | %

---

*  Less than 1%

|(1) |  | The parties to the Stockholders Agreement are Pequot, Lese Ann Kodger, Sterling E. Phillips, Jr., Peter C. Beford, Sr., J. Richard Knop, Gerald R. McNichols, C. W. Gilluly and
Alex Patterson. Each such person may be deemed to share voting power over, and to beneficially own, all shares beneficially owned by all parties to the Stockholders Agreement.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Consists of 6,726,457 shares issuable upon conversion of the Series A Preferred Stock, 3,321,707 shares issuable upon conversion of the Convertible Notes, and 2,009,632 shares
issuable upon exercise of the Warrants, held of record by Pequot Private Equity Fund III, L.P. and Pequot Offshore Private Equity Partners III, L.P. Pequot Capital Management, Inc., the investment manager/advisor of Pequot, exercises sole voting and
investment power for all shares held of record by Pequot. Both Gerald A. Poch and Martin A. Hale, a Managing Director and Principal of Pequot Capital Management, Inc., respectively (both of whom are General Partners of Pequot), who serve as
Directors of the Company, may be deemed to beneficially own the securities held of record by Pequot. Mr. Poch and Mr. Hale disclaim beneficial ownership of these shares except to the extent of their pecuniary interests therein. The sold director and
controlling shareholder of Pequot Capital Management, Inc. is Arthur J. Samberg.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Includes warrants exercisable to purchase 322,947 shares.
|--- |  | ---------------------------------------------------------

|(4) |  | Includes 1,667 shares which may be acquired upon the exercise of options. Includes 110,239 shares held by AMASYS Corporation. Mr. Gilluly is the President and CEO of AMASYS
Corporation.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) |  | Includes 14,164 shares which may be acquired upon the exercise of options.
|--- |  | --------------------------------------------------------------------------

|(6) |  | Mr. Chand N. Gupta is the trustee, and may therefore be deemed to beneficially own the shares held of record by DRG Irrevocable trust.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------

|(7) |  | Mr. Ram N. Gupta is the trustee, and may therefore be deemed to beneficially own the shares held of record by DSG Irrevocable Trust.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------

|(8) |  | Dr. Jai Gupta is the Managing Member of RSSJ Associates, LLC and is therefore deemed to beneficially own the shares held of record by RSSJ Associates, LLC.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------

|(9) |  | Includes 3,332 shares which may be acquired upon the exercise of options.
|--- |  | -------------------------------------------------------------------------

|(10) |  | Includes 3,332 shares which may be acquired upon the exercise of options.
|---- |  | -------------------------------------------------------------------------

|(11) |  | Includes 1,666 shares which may be acquired upon the exercise of options.
|---- |  | -------------------------------------------------------------------------

|(12) |  | Includes 4,999 shares which may be acquired upon the exercise of options.
|---- |  | -------------------------------------------------------------------------

|(13) |  | Includes 4,999 shares which may be acquired upon the exercise of options.
|---- |  | -------------------------------------------------------------------------

|(14) |  | Includes 1,722,138 shares which may be acquired upon the exercise of options.
|---- |  | -----------------------------------------------------------------------------

|(15) |  | Includes 274,999 shares which may be acquired upon the exercise of options.
|---- |  | ---------------------------------------------------------------------------

|(16) |  | Includes 100,000 shares which may be acquired upon the exercise of options.
|---- |  | ---------------------------------------------------------------------------

|(17) |  | As of December 2003, Mr. Tonn is no longer with the Company.
|---- |  | ------------------------------------------------------------

|(18) |  | Includes 108,333 shares which may be acquired upon the exercise of options.
|---- |  | ---------------------------------------------------------------------------

|(19) |  | Includes 33,333 shares which may be acquired upon the exercise of options.
|---- |  | --------------------------------------------------------------------------



42



---

##### Table of Contents

|(20) |  | Includes 58,333 shares which may be acquired the exercise of options.
|---- |  | ---------------------------------------------------------------------

|(21) |  | Includes 2,315,464 shares which may be acquired upon the exercise of options. Certain directors and executive officers are parties to the Stockholders Agreement. Therefore,
the directors and executive officers as a group may be deemed to beneficially own all shares beneficially owned by the Stockholders Agreement voting group, which would result in the directors and executive officers as a group beneficially
owning 19,649,453 shares and 70.8% of the outstanding Common Stock as of March 15, 2004.
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Set forth below is certain information as of December 31, 2003 with respect to compensation plans (including individual compensation arrangements) under
which equity securities of the Company are authorized for issuance.



|                                                       |  |                                                                                   |     |  |                                 |      |                                                                         |        
|------------------------------------------------------ |  | --------------------------------------------------------------------------------- | --- |  | ------------------------------- | ---- | ----------------------------------------------------------------------- | -------
|Plan category                                          |  | Number of securities to be issued upon exercise of outstanding options and rights |     |  | Weighted average exercise price |      | Number of securities remaining available for issuance under the plan(s)
|Equity compensation plans approved by stockholders     |  |                                                                                   |     |  |                                 |      |                                                                         |        
|2002 Stock Option Plan                                 |  | 1,607,579                                                                         |     |  | $                               | 2.36 |                                                                         | 392,421
|2000 Stock Option Plan                                 |  | 519,000                                                                           |     |  | $                               | 1.18 |                                                                         | 81,000 
|1994 Stock Option Plan                                 |  | 178,300                                                                           |     |  | $                               | 1.06 |                                                                         | 466,700
|Equity compensation plans not approved by stockholders |  | 875,725                                                                           | (1) |  | $                               | 1.38 |                                                                         | 0      

---

|(1) |  | These options were granted to Mr. Sterling Phillips in January 2001 in connection with his employment.
|--- |  | ------------------------------------------------------------------------------------------------------



Item 13.    Certain Relationships and Related Transactions



In connection with the Stout Repurchase Agreement between the Company,
former Chairman of the Board, Mr. Jon M. Stout and certain members of Mr. Stouts immediate family, including former Company director, Ms. Shawna Stout, and certain entities controlled by Mr. Stout and his family (the Stout
Parties), the Company purchased from the Stout Parties in December 2003, an aggregate of 2,625,451 shares of Common Stock and warrants and options exercisable to purchase an aggregate of 1,209,088 shares of Common Stock for an aggregate
consideration of $9,166,844.21.



Pursuant to an Employment
Termination Agreement dated December 9, 2003, Mr. Jon M. Stout also received a lump sum payment of $280,000 from the Company in consideration of the termination of his employment agreement. In addition, the Company entered into a Non-Competition
Agreement with Mr. Stout, which provides that for as long as Mr. Stout is in compliance with the Non-Competition Agreement, the Company will pay him $50,000 every three months, during the term of the agreement, for an aggregate consideration of
$600,000.



During the year ended December 31, 2003, Lese Ann
Kodger, a beneficial holder of more than 5% of the Companys Common Stock, Alex Patterson, Ms. Kodgers brother, and Peter C. Belford, a director of the Company, were paid $13,500, $16,500 and $150,008 respectively, pursuant to promissory
notes issued in connection with the November 2001 acquisition of the former Analex Corporation. In July 2002, pursuant to the terms of the merger agreement for the Analex acquisition, the Company issued promissory notes in the principal amounts of
$200,000 and $700,000 to Mr. Belford and Mr. Patterson, respectively, with respect to the award of the NASA Expendable Launch Vehicle Integrated Support (ELVIS) contract to the Company. Each of these notes has a three-year term, is payable in twelve
quarterly payments, and bears an interest rate equal to the prime rate plus one percent, adjustable on an annual basis on the anniversary date of the note. In 2003, the Company paid Mr. Belford and Mr. Patterson $75,521 and $264,323.



43



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##### Table of Contents

Item 14.    Principal Accountant Fees and Services



Our Audit Committee is responsible for appointment of the Companys
independent auditors. The following table sets forth the aggregate fees billed to Analex for the fiscal year ended December 31, 2003 and 2002, by the Companys principal accountants, Ernst & Young LLP.



|                      |  |      |         |      |   |        
|--------------------- |  | ---- | ------- | ---- | - | -------
|                      |  | 2003 |         | 2002
|Audit Fees(1)         |  | $    | 225,928 |      | $ | 105,100
|Audit-Related Fees(2) |  |      |        |      |   | 53,500 
|Tax Compliance        |  |      | 41,000  |      |   | 6,000  
|                      |  |      |         |      |   |        
|Total Fees            |  | $    | 266,928 |      | $ | 164,600
|                      |  |      |         |      |   |        

---

|(1) |  | Audit fees were paid for services in connection with the annual audit and quarterly reviews of consolidated financial statements. Audit fees in 2003 also include fees for services
in connection with the Pequot Transaction and the SEC proxy statement filing.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Audit-related fees in 2002 were paid for services in connection with the acquisition of the former Analex Corporation.
|--- |  | ----------------------------------------------------------------------------------------------------------------------



The audit and non-audit services performed by Ernst & Young LLP in 2003
were pre-approved by the Audit Committee. The Audit Committee has determined that the provision of certain designated audit-related, tax and all other services do not impair the independence of Ernst & Young. The Audit Committee has given
general approval for the Chief Financial Officer or his designee to engage Ernst & Young to provide certain permitted services if the fee for such services is not expected to exceed 5% of the total amount of fees paid by the Company to Ernst
& Young during the fiscal year in which the services are rendered, and that such services have been promptly brought to the attention of the Audit Committee prior to the completion of the audit.



44



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##### Table of Contents

PART IV



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



(a)  (1)    Financial Statements



|                                                                                                    |  |    
|--------------------------------------------------------------------------------------------------- |  | ---
|Report of Independent Auditors                                                                      |  | F-1
|                                                                                                    | 
|Consolidated Balance Sheets as of December 31, 2003 and 2002                                        |  | F-2
|                                                                                                    | 
|Consolidated Statements of Operations for the years endedDecember 31, 2003, 2002 and 2001           |  | F-3
|                                                                                                    | 
|Consolidated Statements of Shareholders Equity for the years endedDecember 31, 2003, 2002 and 2001 |  | F-4
|                                                                                                    | 
|Consolidated Statements of Cash Flows for the years endedDecember 31, 2003, 2002 and 2001           |  | 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).      
|             | 
|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 of, 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).
|             | 
|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).                                                                           



45



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##### Table of Contents

|             |  |                                                                                                                                                                                                                                                                                                                                                             
|------------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitIndex |  |                                                                                                                                                                                                                                                                                                                                                             
|             | 
|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).                                                                                                                                                             
|             | 
|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 (incorporated by reference to the Companys Current Report on Form 8-K filed with the Commission on July 21,
2003).                                                                                                                                                                        
|             | 
|10.1         |  | First Amendment to the Hadron, Inc. 1994 Stock Option Plan, dated as of September 17, 1997 (incorporated by reference to the Companys Form S-8 filed with the Commission on February 7,
2000).                                                                                                                                                             
|             | 
|10.1.1       |  | Hadron, Inc. 1997 Employee Stock Purchase Plan (incorporated by reference to the Companys Proxy Statement dated October 28, 1997).                                                                                                                                                                                                                         
|             | 
|10.1.2       |  | First Amendment to the Hadron, Inc. 1997 Employee Stock Purchase Plan dated as of February 7, 2000 (incorporated by reference to the Companys Form S-8 filed with the Commission on
February 7, 2000).                                                                                                                                                     
|             | 
|10.1.3       |  | Second Amendment to the Hadron, Inc. 1997 Employee Stock Purchase Plan dated as of February 7, 2000 (incorporated by reference to the Companys Form S-8 filed with the Commission on May
8, 2001).                                                                                                                                                         
|             | 
|10.1.4       |  | Hadron, Inc. 2000 Employee Stock Option Plan (incorporated by reference to the Form 10-Q for the period ended June 30, 2003).                                                                                                                                                                                                                               
|             | 
|10.1.5       |  | 2002 Stock Option Plan (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).                                                                                                                                                                                  
|             | 
|10.2         |  | 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         |  | Credit Agreement between Hadron, Inc. and Bank of America, N.A. dated November 2, 2001 (previously filed).                                                                                                                                                                                                                                                  



46



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##### Table of Contents

|             |  |                                                                                                                                                                                                                                                                                                                                                                  
|------------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitIndex |  |                                                                                                                                                                                                                                                                                                                                                                  
|             | 
|10.3.1       |  | 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).                                                                                                        
|             | 
|10.3.2       |  | 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).                                                                                                          
|             | 
|10.3.3       |  | Hadron, Inc. Term Loan Note 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       |  | Hadron, Inc. Revolving Credit Facility Note 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).                                                                               
|             | 
|10.3.5       |  | First Amendment To Credit Agreement between Analex Corporation and Bank of America dated August 1, 2002 (previously filed).                                                                                                                                                                                                                                      
|             | 
|10.3.6       |  | Second Amendment To Credit Agreement between Analex Corporation and Bank of America dated December 20, 2002 (previously filed).                                                                                                                                                                                                                                  
|             | 
|10.3.7       |  | Continuing and Unconditional Guaranty between Bank of America, N.A. and Subsidiaries 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.                                                                                      
|             | 
|10.3.8       |  | Third Amendment to Credit Agreement, dated as of April 30, 2003, by and among Bank of America, N.A., Analex Corporation and certain subsidiaries of Analex Corporation (incorporated by
reference to the Companys Current Report on Form 8-K filed July 21, 2003).                                                                                              
|             | 
|10.3.9       |  | Fourth Amendment to Credit Agreement, dated as of July 18, 2003, by and among Bank of America, N.A., Analex Corporation and certain subsidiaries of Analex Corporation (incorporated by
reference to the Companys Current Report on Form 8-K filed July 21, 2003).                                                                                              
|             | 
|10.3.10      |  | Form of 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., Analex
Corporation and the subsidiaries of Analex Corporation, dated December 9, 2004 (incorporated by reference to the Companys Current report on Form 8-K filed July 21, 2003).
|             | 
|10.4         |  | Amended Stock Purchase Warrant issued to C.W. Gilluly and dated June 2, 1997 (incorporated by reference to the Companys annual Report on Form 10-K for the fiscal year ended June 30,
1999 and filed with the Commission on September 28, 1999.)                                                                                                                
|             | 
|10.4.1       |  | Stock Purchase Warrant for the purchase of 430,000 shares of common stock issued to C.W. Gilluly by the Company dated February 15, 2000 (incorporated by reference to the Companys Form
10-Q for the fiscal quarter ended March 31, 2000 and filed with the Commission on May 15, 2000.)                                                                        
|             | 
|10.4.2       |  | Warrant issued to J. Richard Knop to purchase up to 462,690 shares of Hadron, Inc.s Common Stock (incorporated by reference to the Form 8-K filed with the Commission on April 14,
2000.)                                                                                                                                                                       
|             | 
|10.4.3       |  | Warrant issued to John D. Sanders to purchase up to 81,000 shares of Hadron, Inc.s Common Stock (incorporated by reference to the Form 8-K filed with the Commission on April 14,
2000.)                                                                                                                                                                        
|             | 
|10.4.4       |  | Warrant to Purchase Shares of Common Stock issued to J. Richard Knop in Guarantee of Bank of America Loan 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.)                                                                



47



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##### Table of Contents

|             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                
|------------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitIndex |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                
|             | 
|10.4.5       |  | Warrant to Purchase Shares of Common Stock issued to Gerald McNichols in Guarantee of Bank of America Loan 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.)                                                                                                                                             
|             | 
|10.5         |  | 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).                                                                                                                                   
|             | 
|10.6         |  | 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).                                                                                                   
|             | 
|10.6.1       |  | 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).                                                                                                                                 
|             | 
|10.6.2       |  | Stockholders Voting Agreement, dated July 18, 2003, by and among Analex Corporation, Pequot Private Equity Fund III, L.P., Pequot Offshore Private Equity Partners III, L.P., Sterling E.
Phillips, Jr., J. Richard Knop, C.W. Gilluly, Peter C. Belford, Sr., Lese Ann Kodger, Alexander Patterson and Gerald R. McNicols (incorporated by reference to the Companys Current Report on Form 8-K filed with the Commission on July 21,
2003).
|             | 
|10.6.3       |  | Form of Registration Rights Agreement, dated December 9, 2003, by and between Analex Corporation and 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).                                                                                                                            
|             | 
|14*          |  | Code of Conduct and Ethics                                                                                                                                                                                                                                                                                                                                                                                                                     
|             | 
|21           |  | Subsidiaries of the Company (previously filed).                                                                                                                                                                                                                                                                                                                                                                                                
|             | 
|23*          |  | Consent of Independent Auditors.                                                                                                                                                                                                                                                                                                                                                                                                               
|             | 
|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 October 30, 2003, the Company filed a Form 8-K to include its financial results for the fiscal quarter ended September 30, 2003.



On December 24, 2003, the Company filed a Form 8-K to disclose that (i) as of the closing of the Pequot Transaction on
December 9, 2003, Pequot beneficially owned approximately 48.4% of the outstanding Common Stock and the Voting Stockholders (as defined in a Stockholders Agreement among Pequot and other principal stockholders of the Company), as a group,
beneficially owned approximately 70.7% of the outstanding Common Stock; and (ii) immediately following the closing of the Pequot Transaction, the Board was constituted in accordance with the Stockholders Agreement and consisted of at the time
Mr. Phillips, two directors designated by the Pequot Funds (Gerald A. Poch and Martin M. Hale, Jr.), and three non-employee directors designated by Mr. Phillips (Peter Belford, Sr., Lincoln D. Faurer and Daniel R. Young).



48



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##### Table of Contents

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 29, 2004 |  |                                                                                               |  | ANALEX CORPORATION
|                      |  |                                                                                               |  |                   
|By:                   |  | /s/    STERLING E. PHILLIPS,
JR.                                                              |  |                    |  | By: |  | /s/    RONALD B.
ALEXANDER                                                                                
|                      |  | Sterling E. Phillips, Jr. Chief Executive Officer and President (Principal Executive Officer) |  |                    |  |     |  | Ronald B. Alexander 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,
SR.Peter C. Belford,
Sr.         |  | Director |  | March 29, 2004
|                                                          |  |         
|/s/    C. THOMAS FAULDERS,
IIIC. Thomas Faulders, III     |  | Director |  | March 29, 2004
|                                                          |  |         
|/s/    LINCOLN D.
FAURERLincoln D.
Faurer                 |  | Director |  | March 29, 2004
|                                                          |  |         
|/s/    MARTIN HALE, JR.Martin Hale, Jr.                   |  | Director |  | March 29, 2004
|                                                          |  |         
|/s/    STERLING E. PHILLIPS,
JR.Sterling E. Phillips,
Jr. |  | Chairman |  | March 29, 2004
|                                                          |  |         
|/s/    GERALD
POCHGerald Poch                             |  | Director |  | March 29, 2004
|                                                          |  |         
|/s/    DANIEL R.
YOUNGDaniel R.
Young                     |  | Director |  | March 29, 2004



49



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##### Table of Contents

REPORT OF INDEPENDENT AUDITORS



Board of Directors
and Shareholders

Analex Corporation



We have audited the accompanying consolidated balance sheets of Analex Corporation and subsidiaries as of December 31, 2003 and 2002 and the related
consolidated statements of operations, convertible preferred stock and shareholders equity, and cash flows for each of the three years in the period ended December 31, 2003. 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 auditing standards generally accepted in the 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 examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates made by management, as well as 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, 2003 and 2002, and the consolidated results of their operations and their cash flows for each of the three
years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States.



As discussed in Note 2 to the consolidated financial statements, the Company changed its accounting for goodwill and intangible assets, which was
effective in 2001 for acquisitions subsequent to July 1, 2001, and January 1, 2002 for all acquisitions prior to July 1, 2001.



/s/    ERNST & YOUNG LLP



McLean, Virginia

February 13, 2004



F-1



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##### Table of Contents

ANALEX CORPORATION



CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2003 AND 2002



|                                                                                                                                                          |  |      |            |   |      |   |            |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | -
|                                                                                                                                                          |  | 2003 |            |   | 2002 |  
|ASSETS                                                                                                                                                    |  |      |            |   |      |   |            |  
|Current assets:                                                                                                                                           |  |      |            |   |      |   |            |  
|Cash and cash equivalents                                                                                                                                 |  | $    | 14,177,500 |   |      | $ | 301,800    |  
|Accounts receivable, net                                                                                                                                  |  |      | 10,719,400 |   |      |   | 12,556,100 |  
|Deferred tax asset                                                                                                                                        |  |      | 150,000    |   |      |   |           |  
|Prepaid expenses and other                                                                                                                                |  |      | 483,600    |   |      |   | 270,500    |  
|                                                                                                                                                          |  |      |            |   |      |   |            |  
|Total current assets                                                                                                                                      |  |      | 25,530,500 |   |      |   | 13,128,400 |  
|                                                                                                                                                          |  |      |            |   |      |   |            |  
|Fixed assets, net                                                                                                                                         |  |      | 552,900    |   |      |   | 216,700    |  
|Goodwill                                                                                                                                                  |  |      | 15,281,600 |   |      |   | 15,534,600 |  
|Contract rights and other intangibles, net                                                                                                                |  |      | 1,753,000  |   |      |   | 1,770,200  |  
|Deferred financing costs                                                                                                                                  |  |      | 464,600    |   |      |   | 75,900     |  
|Other                                                                                                                                                     |  |      | 49,500     |   |      |   | 58,400     |  
|                                                                                                                                                          |  |      |            |   |      |   |            |  
|Total other assets                                                                                                                                        |  |      | 18,101,600 |   |      |   | 17,655,800 |  
|                                                                                                                                                          |  |      |            |   |      |   |            |  
|Total assets                                                                                                                                              |  | $    | 43,632,100 |   |      | $ | 30,784,200 |  
|                                                                                                                                                          |  |      |            |   |      |   |            |  
|                                                                                                                                                          |  |     
|LIABILITIES, CONVERTIBLE PREFERRED STOCKAND SHAREHOLDERS EQUITY                                                                                          |  |      |            |   |      |   |            |  
|Current liabilities:                                                                                                                                      |  |      |            |   |      |   |            |  
|Accounts payable                                                                                                                                          |  | $    | 776,200    |   |      | $ | 3,294,700  |  
|Note payableline of credit                                                                                                                               |  |      |           |   |      |   | 2,187,700  |  
|Note payablebank term note                                                                                                                               |  |      | 700,000    |   |      |   | 700,000    |  
|Notes payable other                                                                                                                                      |  |      | 1,487,400  |   |      |   | 1,012,100  |  
|Other current liabilities                                                                                                                                 |  |      | 5,463,500  |   |      |   | 5,258,400  |  
|                                                                                                                                                          |  |      |            |   |      |   |            |  
|Total current liabilities                                                                                                                                 |  |      | 8,427,100  |   |      |   | 12,452,900 |  
|                                                                                                                                                          |  |      |            |   |      |   |            |  
|Note payablebank term note                                                                                                                               |  |      | 1,341,700  |   |      |   | 2,041,700  |  
|Notes payableother                                                                                                                                       |  |      | 1,209,300  |   |      |   | 2,297,200  |  
|Convertible debt                                                                                                                                          |  |      | 2,881,400  |   |      |   |           |  
|Other                                                                                                                                                     |  |      | 43,800     |   |      |   | 90,600     |  
|                                                                                                                                                          |  |      |            |   |      |   |            |  
|Total long-term liabilities                                                                                                                               |  |      | 5,476,200  |   |      |   | 4,429,500  |  
|                                                                                                                                                          |  |      |            |   |      |   |            |  
|Total liabilities                                                                                                                                         |  |      | 13,903,300 |   |      |   | 16,882,400 |  
|                                                                                                                                                          |  |      |            |   |      |   |            |  
|Commitments and contingencies                                                                                                                             |  |      |            |   |      |   |            |  
|Series A convertible preferred stock                                                                                                                      |  |      | 236,300    |   |      |   |           |  
|                                                                                                                                                          |  |      |            |   |      |   |            |  
|Shareholders equity:                                                                                                                                     |  |      |            |   |      |   |            |  
|Common stock $.02 par; authorized 65,000,000 shares; issued and outstandingDecember 31, 2003, 13,036,666 shares and December 31, 2002,
14,427,080 shares |  |      | 260,700    |   |      |   | 288,500    |  
|Additional paid in capital                                                                                                                                |  |      | 28,519,100 |   |      |   | 21,171,400 |  
|Warrants outstanding                                                                                                                                      |  |      | 5,762,900  |   |      |   |           |  
|Deferred compensation                                                                                                                                     |  |      |           |   |      |   | (7,700     | )
|Accumulated other comprehensive loss                                                                                                                      |  |      | (43,800    | ) |      |   | (90,600    | )
|Accumulated deficit                                                                                                                                       |  |      | (5,006,400 | ) |      |   | (7,459,800 | )
|                                                                                                                                                          |  |      |            |   |      |   |            |  
|Total shareholders equity                                                                                                                                |  |      | 29,492,500 |   |      |   | 13,901,800 |  
|                                                                                                                                                          |  |      |            |   |      |   |            |  
|Total liabilities, convertible preferred stock and shareholders equity                                                                                   |  | $    | 43,632,100 |   |      | $ | 30,784,200 |  
|                                                                                                                                                          |  |      |            |   |      |   |            |  



See Notes to
Consolidated Financial Statements



F-2



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##### Table of Contents

ANALEX CORPORATION



CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001



|                                            |  |      |            |   |      |   |            |      |  |   |            |  
|------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                            |  | 2003 |            |   | 2002 |   |            | 2001 | 
|Revenues                                    |  | $    | 66,126,300 |   |      | $ | 59,317,000 |      |  | $ | 21,936,000 |  
|Operating costs and expenses:               |  |      |            |   |      |   |            |      |  |   |            |  
|Costs of revenue                            |  |      | 55,770,400 |   |      |   | 50,436,700 |      |  |   | 18,157,800 |  
|Selling, general and administrative         |  |      | 6,318,000  |   |      |   | 5,048,700  |      |  |   | 2,967,600  |  
|Amortization of intangible assets           |  |      | 450,800    |   |      |   | 307,600    |      |  |   | 378,400    |  
|                                            |  |      |            |   |      |   |            |      |  |   |            |  
|Total operating costs and expenses          |  |      | 62,539,200 |   |      |   | 55,793,000 |      |  |   | 21,503,800 |  
|                                            |  |      |            |   |      |   |            |      |  |   |            |  
|Operating income                            |  |      | 3,587,100  |   |      |   | 3,524,000  |      |  |   | 432,200    |  
|                                            |  |      |            |   |      |   |            |      |  |   |            |  
|Other income (expense):                     |  |      |            |   |      |   |            |      |  |   |            |  
|Interest income                             |  |      |           |   |      |   |           |      |  |   | 8,600      |  
|Interest expense                            |  |      | (519,800   | ) |      |   | (1,018,300 | )    |  |   | (225,200   | )
|                                            |  |      |            |   |      |   |            |      |  |   |            |  
|Total other expense                         |  |      | (519,800   | ) |      |   | (1,018,300 | )    |  |   | (216,600   | )
|                                            |  |      |            |   |      |   |            |      |  |   |            |  
|Income before income taxes                  |  |      | 3,067,300  |   |      |   | 2,505,700  |      |  |   | 215,600    |  
|Provision for income taxes                  |  |      | 320,900    |   |      |   | 149,100    |      |  |   | 19,600     |  
|                                            |  |      |            |   |      |   |            |      |  |   |            |  
|Net income                                  |  |      | 2,746,400  |   |      |   | 2,356,600  |      |  |   | 196,000    |  
|Dividends on convertible preferred stock    |  |      | (56,700    | ) |      |   |           |      |  |   |           |  
|Accretion of convertible preferred stock    |  |      | (236,300   | ) |      |   |           |      |  |   |           |  
|                                            |  |      |            |   |      |   |            |      |  |   |            |  
|Net income available to common shareholders |  | $    | 2,453,400  |   |      | $ | 2,356,600  |      |  | $ | 196,000    |  
|                                            |  |      |            |   |      |   |            |      |  |   |            |  
|Net income per share:                       |  |      |            |   |      |   |            |      |  |   |            |  
|Basic                                       |  | $    | 0.16       |   |      | $ | 0.16       |      |  | $ | 0.03       |  
|                                            |  |      |            |   |      |   |            |      |  |   |            |  
|Diluted                                     |  | $    | 0.14       |   |      | $ | 0.14       |      |  | $ | 0.02       |  
|                                            |  |      |            |   |      |   |            |      |  |   |            |  
|Weighted average number of shares:          |  |      |            |   |      |   |            |      |  |   |            |  
|Basic                                       |  |      | 14,878,312 |   |      |   | 14,412,554 |      |  |   | 7,721,779  |  
|                                            |  |      |            |   |      |   |            |      |  |   |            |  
|Diluted                                     |  |      | 17,670,001 |   |      |   | 17,081,651 |      |  |   | 9,588,029  |  
|                                            |  |      |            |   |      |   |            |      |  |   |            |  







See Notes to Consolidated Financial Statements



F-3



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##### Table of Contents

ANALEX CORPORATION



CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001



|                                                                                               |  |                            |  |                      |         |        |                           |   |        |                      |         |                       |  |   |                                     |   |  |                     |           |  |       |         |   |  |   |         |   |  |   |             |   |  |   |            |  
|---------------------------------------------------------------------------------------------- |  | -------------------------- |  | -------------------- | ------- | ------ | ------------------------- | - | ------ | -------------------- | ------- | --------------------- |  | - | ----------------------------------- | - |  | ------------------- | --------- |  | ----- | ------- | - |  | - | ------- | - |  | - | ----------- | - |  | - | ---------- | -
|                                                                                               |  | ConvertiblePreferred Stock |  | Shareholders Equity |        
|                                                                                               |  |                            |  | Common Stock         |         |        | Additional Paid inCapital |   |        | Warrants Outstanding |         | Deferred Compensation |  |   | Accumulated OtherComprehensive Loss |   |  | Accumulated Deficit |           |  | Total |        
|                                                                                               |  | Shares                     |  | Amount               |         | Shares |                           |   | Amount |                      |         |                       |  |   |                                     |  
|BalanceDecember 31, 2000                                                                      |  |                           |  | $                    |        |        | 6,450,913                 |   |        | $                    | 129,000 |                       |  | $ | 11,885,300                          |   |  | $                   |          |  | $     |        |   |  | $ |        |   |  | $ | (10,012,400 | ) |  | $ | 2,001,900  |  
|Shares issued pursuant to sale of common stock                                                 |  |                           |  |                      |        |        | 4,027,727                 |   |        |                      | 80,600  |                       |  |   | 3,837,000                           |   |  |                     |          |  |       |        |   |  |   |        |   |  |   |            |   |  |   | 3,917,600  |  
|Shares and warrants issued pursuant to acquisition of Analex                                   |  |                           |  |                      |        |        | 3,572,143                 |   |        |                      | 71,400  |                       |  |   | 4,687,200                           |   |  |                     |          |  |       |        |   |  |   |        |   |  |   |            |   |  |   | 4,758,600  |  
|Deferred stock compensation                                                                    |  |                           |  |                      |        |        |                          |   |        |                      |        |                       |  |   | 38,800                              |   |  |                     |          |  |       | (38,800 | ) |  |   |        |   |  |   |            |   |  |   |           |  
|Amortizaton of deferred stock compensation                                                     |  |                           |  |                      |        |        |                          |   |        |                      |        |                       |  |   |                                    |   |  |                     |          |  |       | 16,500  |   |  |   |        |   |  |   |            |   |  |   | 16,500     |  
|Shares purchased pursuant to the Employee Stock Purchase Plan                                  |  |                           |  |                      |        |        | 39,964                    |   |        |                      | 800     |                       |  |   | 40,400                              |   |  |                     |          |  |       |        |   |  |   |        |   |  |   |            |   |  |   | 41,200     |  
|Exercise of options and warrants                                                               |  |                           |  |                      |        |        | 285,228                   |   |        |                      | 5,700   |                       |  |   | 237,600                             |   |  |                     |          |  |       |        |   |  |   |        |   |  |   |            |   |  |   | 243,300    |  
|Net income                                                                                     |  |                           |  |                      |        |        |                          |   |        |                      |        |                       |  |   |                                    |   |  |                     |          |  |       |        |   |  |   |        |   |  |   | 196,000     |   |  |   | 196,000    |  
|                                                                                               |  |                            |  |                      |         |        |                           |   |        |                      |         |                       |  |   |                                     |   |  |                     |           |  |       |         |   |  |   |         |   |  |   |             |   |  |   |            |  
|BalanceDecember 31, 2001                                                                      |  |                           |  |                      |        |        | 14,375,975                |   |        |                      | 287,500 |                       |  |   | 20,726,300                          |   |  |                     |          |  |       | (22,300 | ) |  |   |        |   |  |   | (9,816,400  | ) |  |   | 11,175,100 |  
|Amortizaton of deferred stock compensation                                                     |  |                           |  |                      |        |        |                          |   |        |                      |        |                       |  |   |                                    |   |  |                     |          |  |       | 14,600  |   |  |   |        |   |  |   |            |   |  |   | 14,600     |  
|Warrants issued pursuant to bank guarantee                                                     |  |                           |  |                      |        |        |                          |   |        |                      |        |                       |  |   | 345,400                             |   |  |                     |          |  |       |        |   |  |   |        |   |  |   |            |   |  |   | 345,400    |  
|Shares returned and retired in connection with Analex acquisition                              |  |                           |  |                      |        |        | (51,804                   | ) |        |                      | (1,000  | )                     |  |   | (58,000                             | ) |  |                     |          |  |       |        |   |  |   |        |   |  |   |            |   |  |   | (59,000    | )
|Shares purchased pursuant to the Employee Stock Purchase Plan                                  |  |                           |  |                      |        |        | 81,739                    |   |        |                      | 1,600   |                       |  |   | 139,100                             |   |  |                     |          |  |       |        |   |  |   |        |   |  |   |            |   |  |   | 140,700    |  
|Exercise of options and warrants                                                               |  |                           |  |                      |        |        | 21,170                    |   |        |                      | 400     |                       |  |   | 18,600                              |   |  |                     |          |  |       |        |   |  |   |        |   |  |   |            |   |  |   | 19,000     |  
|Unrealized loss on derivative contract                                                         |  |                           |  |                      |        |        |                          |   |        |                      |        |                       |  |   |                                    |   |  |                     |          |  |       |        |   |  |   | (90,600 | ) |  |   |            |   |  |   | (90,600    | )
|Net income                                                                                     |  |                           |  |                      |        |        |                          |   |        |                      |        |                       |  |   |                                    |   |  |                     |          |  |       |        |   |  |   |        |   |  |   | 2,356,600   |   |  |   | 2,356,600  |  
|                                                                                               |  |                            |  |                      |         |        |                           |   |        |                      |         |                       |  |   |                                     |   |  |                     |           |  |       |         |   |  |   |         |   |  |   |             |   |  |   |            |  
|Total comprehensive income                                                                     |  |                            |  |                      |         |        |                           |   |        |                      |         |                       |  |   |                                     |   |  |                     |           |  |       |         |   |  |   |         |   |  |   |             |   |  |   | 2,266,000  |  
|                                                                                               |  |                            |  |                      |         |        |                           |   |        |                      |         |                       |  |   |                                     |   |  |                     |           |  |       |         |   |  |   |         |   |  |   |             |   |  |   |            |  
|BalanceDecember 31, 2002                                                                      |  |                           |  |                      |        |        | 14,427,080                |   |        |                      | 288,500 |                       |  |   | 21,171,400                          |   |  |                     |          |  |       | (7,700  | ) |  |   | (90,600 | ) |  |   | (7,459,800  | ) |  |   | 13,901,800 |  
|Amortizaton 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 convertible preferred stock                                           |  |                           |  |                      | 236,300 |        |                          |   |        |                      |        |                       |  |   |                                    |   |  |                     |          |  |       |        |   |  |   |        |   |  |   | (236,300    | ) |  |   | (236,300   | )
|Dividends on convertible preferred stock                                                       |  |                           |  |                      |        |        |                          |   |        |                      |        |                       |  |   |                                    |   |  |                     |          |  |       |        |   |  |   |        |   |  |   | (56,700     | ) |  |   | (56,700    | )
|Repurchase and retirement of common shares owned by J. Stout                                   |  |                           |  |                      |        |        | (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 purchased 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    |  
|Unrealized gain on derivative contract                                                         |  |                           |  |                      |        |        |                          |   |        |                      |        |                       |  |   |                                    |   |  |                     |          |  |       |        |   |  |   | 46,800  |   |  |   |            |   |  |   | 46,800     |  
|Other                                                                                          |  |                           |  |                      |        |        |                          |   |        |                      |        |                       |  |   | 18,400                              |   |  |                     |          |  |       |        |   |  |   |        |   |  |   |            |   |  |   | 18,400     |  
|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 |  
|                                                                                               |  |                            |  |                      |         |        |                           |   |        |                      |         |                       |  |   |                                     |   |  |                     |           |  |       |         |   |  |   |         |   |  |   |             |   |  |   |            |  



See Notes to
Consolidated Financial Statements



F-4



---

##### Table of Contents

ANALEX CORPORATION



CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001



|                                                                                            |  |      |            |   |      |   |            |      |  |   |            |  
|------------------------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                                                                            |  | 2003 |            |   | 2002 |   |            | 2001 | 
|Cash flows from operating activities:                                                       |  |      |            |   |      |   |            |      |  |   |            |  
|Net income                                                                                  |  | $    | 2,746,400  |   |      | $ | 2,356,600  |      |  | $ | 196,000    |  
|                                                                                            |  |      |            |   |      |   |            |      |  |   |            |  
|Adjustments to reconcile net income to net cash provided by (used in) operating activities: |  |      |            |   |      |   |            |      |  |   |            |  
|Depreciation                                                                                |  |      | 118,500    |   |      |   | 111,400    |      |  |   | 146,200    |  
|Amortization of intangible assets                                                           |  |      | 450,800    |   |      |   | 307,600    |      |  |   | 378,000    |  
|Amortization of debt discount and deferred financing costs                                  |  |      | 140,400    |   |      |   | 345,400    |      |  |   | 37,500     |  
|Stock-based compensation expense                                                            |  |      | 122,000    |   |      |   | 14,600     |      |  |   | 16,500     |  
|Deferred tax benefit                                                                        |  |      | 253,000    |   |      |   |           |      |  |   |           |  
|Write-off of patent related costs                                                           |  |      | 153,200    |   |      |   |           |      |  |   |           |  
|Changes in operating assets and liabilities:                                                |  |      |            |   |      |   |            |      |  |   |            |  
|Accounts receivable                                                                         |  |      | 1,836,700  |   |      |   | (4,278,500 | )    |  |   | (940,700   | )
|Deferred tax asset                                                                          |  |      | (150,000   | ) |      |   |           |      |  |   |           |  
|Prepaid expenses and other                                                                  |  |      | (213,100   | ) |      |   | (47,200    | )    |  |   | (39,100    | )
|Other assets                                                                                |  |      | (406,300   | ) |      |   | 57,600     |      |  |   | (11,300    | )
|Accounts payable                                                                            |  |      | (2,518,500 | ) |      |   | 1,923,300  |      |  |   | 108,600    |  
|Other current liabilities                                                                   |  |      | 148,400    |   |      |   | 478,100    |      |  |   | (327,100   | )
|Other long-term liabilities                                                                 |  |      |           |   |      |   | 30,600     |      |  |   |           |  
|                                                                                            |  |      |            |   |      |   |            |      |  |   |            |  
|Net cash provided by (used in) operating activities                                         |  |      | 2,681,500  |   |      |   | 1,299,500  |      |  |   | (435,400   | )
|                                                                                            |  |      |            |   |      |   |            |      |  |   |            |  
|Cash flows from investing activities:                                                       |  |      |            |   |      |   |            |      |  |   |            |  
|Purchase of Analex, net of cash acquired                                                    |  |      |           |   |      |   |           |      |  |   | (6,167,900 | )
|Property additions                                                                          |  |      | (441,500   | ) |      |   | (67,100    | )    |  |   | (86,000    | )
|Intangible additions                                                                        |  |      | (600,000   | ) |      |   | (172,900   | )    |  |   |           |  
|                                                                                            |  |      |            |   |      |   |            |      |  |   |            |  
|Net cash used in investing activities                                                       |  |      | (1,041,500 | ) |      |   | (240,000   | )    |  |   | (6,253,900 | )
|                                                                                            |  |      |            |   |      |   |            |      |  |   |            |  
|Cash flows from financing activities:                                                       |  |      |            |   |      |   |            |      |  |   |            |  
|Proceeds from borrowings on bank and other loans                                            |  |      | 1,829,000  |   |      |   | 491,200    |      |  |   | 5,500,000  |  
|Proceeds from stock options and warrants exercised                                          |  |      | 334,800    |   |      |   | 19,000     |      |  |   | 243,300    |  
|Proceeds from sale of common stock                                                          |  |      |           |   |      |   |           |      |  |   | 3,917,600  |  
|Proceeds from employee stock purchase plan                                                  |  |      | 190,700    |   |      |   | 140,700    |      |  |   | 41,200     |  
|Proceeds from issuance of convertible debt                                                  |  |      | 10,000,000 |   |      |   |           |      |  |   |           |  
|Proceeds from issuance of convertible preferred stock, net of issuance costs                |  |      | 14,377,300 |   |      |   |           |      |  |   |           |  
|Repurchase of stock, stock options and warrants                                             |  |      | (9,166,800 | ) |      |   |           |      |  |   |           |  
|Payments on bank and other loans                                                            |  |      | (5,329,300 | ) |      |   | (1,491,700 | )    |  |   | (3,164,600 | )
|                                                                                            |  |      |            |   |      |   |            |      |  |   |            |  
|Net cash provided by (used in) financing activities                                         |  |      | 12,235,700 |   |      |   | (840,800   | )    |  |   | 6,537,500  |  
|                                                                                            |  |      |            |   |      |   |            |      |  |   |            |  
|Net increase (decrease) in cash and cash equivalents                                        |  |      | 13,875,700 |   |      |   | 218,700    |      |  |   | (151,800   | )
|Cash and cash equivalents at beginning of year                                              |  |      | 301,800    |   |      |   | 83,100     |      |  |   | 234,900    |  
|                                                                                            |  |      |            |   |      |   |            |      |  |   |            |  
|Cash and cash equivalents at end of year                                                    |  | $    | 14,177,500 |   |      | $ | 301,800    |      |  | $ | 83,100     |  
|                                                                                            |  |      |            |   |      |   |            |      |  |   |            |  



See Notes to
Consolidated Financial Statements



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##### Table of Contents

ANALEX CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



1.    The Company:



Analex Corporation (Analex or the Company) specializes in providing information technology,
engineering and bio-defense services and solutions in support of our nations security. Analex focuses on developing innovative technical approaches for the intelligence community, analyzing and supporting defense systems, designing, developing
and testing aerospace systems and developing medical defenses and treatments for infectious agents used in biological warfare and terrorism. Analex has three strategic business units. The Homeland Security Group provides information technology
services, systems integration, hardware and software engineering and independent quality assurance in support of the U.S. intelligence community and Department of Defense. The Systems Engineering Group provides engineering, information technology
and program management support to NASA, the Department of Defense, and major aerospace contractors such as Lockheed Martin and Northrop Grumman. Advanced Biosystems, Inc. a wholly owned subsidiary, focuses on development of medical defenses against,
and treatments for, biological warfare agents that threaten military and civilian populations.



Revenues from services performed under direct and indirect long-term contracts and subcontracts with government defense and intelligence agencies comprise
the majority of the Companys business. The majority of the Companys technical and professional services business with governmental departments and agencies is obtained through competitive procurement and through follow-on services
related to existing contracts. In certain instances, however, the Company acquires such service contracts because of special professional competency or proprietary knowledge in specific subject areas.



2.    Summary of significant accounting policies:



A.    Principles of consolidation:



The consolidated financial statements include the accounts of Analex
Corporation and its two active wholly owned subsidiaries, Advanced Biosystems, Inc. (ABS), and SyCom Services, Inc. (SyCom). All significant intercompany transactions have been eliminated.



B.    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. Cash in excess of daily requirements
is invested by the bank in one-day repurchase agreements of securities of U.S. government agencies. To date, the Company has not incurred losses related to cash and cash equivalents.



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



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.



The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires
management to make estimates and assumptions that affect the reported amounts of assets,



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##### Table of Contents

ANALEX CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



liabilities and contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting
periods. Actual results could differ from those estimates.



C.    Cash equivalents:



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



D.    Fixed assets:



Furniture and equipment and leasehold improvements are stated at cost or fair value if acquired in a business combination. The Company uses the
straight-line method of depreciation and amortization over the estimated useful lives of the furniture and equipment (principally three to ten years) and over the lease term for leasehold improvements, if shorter.



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.



Purchased software is capitalized at cost. Such costs are amortized using
the straight-line method for a period of up to five years.



E.    Goodwill and other intangible assets:



On January 1, 2002, the Company adopted the provisions of Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets, (SFAS No. 142).
SFAS No. 142 requires that goodwill and intangible assets with indefinite lives no longer be amortized but reviewed annually (or more frequently if impairment indicators arise) for impairment. Intangible assets that are not deemed to have indefinite
lives will continue to be amortized over their useful lives. In accordance with SFAS No. 142 transitional requirements, with respect to goodwill and intangible assets acquired prior to July 1, 2001, the Company adopted the provisions of SFAS No. 142
effective January 1, 2002, and as a result, amortization of goodwill was discontinued. Goodwill acquired after June 30, 2001 has not been amortized. All goodwill is assigned to the Companys reportable segment Analex.



F.    Accounting for contracts:



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



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##### Table of Contents

ANALEX CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Accounts receivable relating to long-term contracts are classified as current assets although an
indeterminable portion of these amounts is not expected to be realized within one year.



G.    Stock-based compensation:



In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based CompensationTransition and Disclosurean amendment of SFAS No. 123. This statement amends SFAS No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS No.
123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company has chosen to continue to
account for stock-based compensation using the intrinsic value method prescribed in APB Opinion No. 25 and related interpretations. Accordingly, compensation expense for stock options is measured as the excess, if any, of the fair market value of
the Companys stock at the date of the grant over the exercise price of the related option.



|                                                                                                                                                      |  |      |           |      |   |           |  |    |         |  
|----------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | --------- | ---- | - | --------- |  | -- | ------- | -
|                                                                                                                                                      |  | 2003 |           | 2002 |   | 2001      | 
|Net income available to common shareholders as reported                                                                                               |  | $    | 2,453,400 |      | $ | 2,356,600 |  | $  | 196,000 |  
|Add: Total stock-based employee compensation expense as reported under intrinsic value method (APB No. 25) for all awards, net of related tax
effects |  |      | 121,900   |      |   | 14,600    |  |    | 16,500  |  
|Deduct: Total stock-based compensation expense determined under fair value based method (SFAS No. 123) for all awards, net of related tax
effects     |  |      | 1,097,800 |      |   | 947,600   |  |    | 516,000 |  
|                                                                                                                                                      |  |      |           |      |   |           |  |    |         |  
|Pro forma net income (loss)                                                                                                                           |  | $    | 1,477,500 |      | $ | 1,423,600 |  | ($ | 320,600 | )
|                                                                                                                                                      |  |      |           |      |   |           |  |    |         |  
|Earnings (loss) per share:                                                                                                                            |  |      |           |      |   |           |  |    |         |  
|Basic as reported                                                                                                                                     |  | $    | 0.16      |      | $ | 0.16      |  | $  | 0.03    |  
|Diluted as reported                                                                                                                                   |  | $    | 0.14      |      | $ | 0.14      |  | $  | 0.02    |  
|Basic pro forma                                                                                                                                       |  | $    | 0.10      |      | $ | 0.10      |  | $  | (0.03   | )
|Diluted pro forma                                                                                                                                     |  | $    | 0.08      |      | $ | 0.08      |  | $  | (0.03   | )



The fair value of each
option grant is estimated on the date of grant using the Black-Scholes option-pricing fair value model. The following assumptions were used for grants: dividend yield of 0%; expected volatility of 40 to 112%; expected life of the option term of 5
years; and risk-free interest rate of 2.25 to 4.88%.



H.    Long-Lived Assets



In September 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS No. 144). SFAS No. 144
addresses financial accounting and reporting for the impairment and disposal of long-lived assets, including intangible assets with finite lives. The effective date for the Companys implementation of SFAS No. 144 was January 1, 2002. The
Company monitors for triggering events that would indicate the need for impairment analysis.



I.    Derivatives



The Company utilizes an interest rate swap to manage interest rate exposure. The interest rate swap has been designated as a cash flow hedge, wherein the effective portion of the change in value of the derivative
instrument, based on market pricing, is reported as a component of other comprehensive income (loss) and is reclassified into earnings as interest expense in the period when the hedged transaction affects earnings. The ineffective portion of the
change in value of the derivative instrument, if any, is recognized in current earnings during the period of change. The interest rate swap is carried at fair value in other liabilities.



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##### Table of Contents

ANALEX CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



J.    Recently Issued Accounting Standards



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



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



In November 2002, the Financial Accounting Standards Board (FASB) issued Financial Accounting Standards Board Interpretation No. 45 (FIN 45),
Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN 45 requires that upon issuance of certain guarantees, the guarantor must recognize a liability for the
fair value of the obligation it assumes under that guarantee. FIN 45s provisions for initial recognition and measurement are required to be applied on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure
provisions of FIN 45 are effective for financial statements of interim or annual periods that end after December 15, 2002. As the Company has not entered into or modified any guarantees subsequent to December 31, 2002, the implementation of FIN 45
did not impact the Companys financial position or results of operations. The Company has updated its disclosures to comply with the requirements in FIN 45.



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



3.    Pequot Transaction:



On December 9, 2003, the Company consummated the transactions contemplated
by the Subordinated Note and Series A Convertible Preferred Stock Purchase Agreement (the Pequot Purchase Agreement) by and between the Company and Pequot Private Equity Fund III, L.P., a Delaware limited partnership, and Pequot Offshore
Private Equity Partners III, L.P., a Cayman Islands limited partnership (Pequot). On December 9, 2003, the Company:



| |  |  | Issued to Pequot 6,726,457 shares of the Companys Series A Convertible Preferred Stock (the Series A Preferred Stock) for a purchase price of $2.23 per share of
Series A Preferred Stock (the Series A Purchase Price), representing an aggregate consideration of approximately $15,000,000;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In connection with the issuance and sale of the Series A Preferred Stock, issued warrants (the Preferred Warrants) exercisable to purchase the
Companys common stock, par value $.02 per share (the
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

ANALEX CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



| | Common Stock), at a ratio of one share of Common Stock for every five shares of Common Stock issued or issuable upon conversion of the Series A
Preferred Stock;
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Issued to Pequot $10,000,000 in aggregate principal amount of the Companys Secured Subordinated Convertible Promissory Notes (the Convertible Notes); and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In connection with the issuance and sale of the Convertible Notes, issued warrants (the Note Warrants, and together with the Preferred Warrants, the
Warrants) exercisable to purchase Common Stock at a ratio of one share of Common Stock for every five shares of Common Stock issued or issuable upon conversion of the Convertible Notes.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In addition, on December 9, 2003, the Company consummated a Securities
Repurchase Agreement (the Stout Repurchase Agreement) with the Companys former Chairman Jon M. Stout, certain members of Mr. Stouts immediate family including former Company director Shawna Stout, and certain entities
controlled by Mr. Stout and his family (collectively, the Stout Parties), pursuant to which the Company purchased an aggregate of 2,625,451 shares of Common Stock and warrants and options exercisable to purchase an aggregate of 1,209,088
shares of Common Stock from the Stout Parties for aggregate consideration of $9,166,844.



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



Series A Preferred Stock



The Series A Preferred Stock bears a cumulative annual dividend of 6%, payable quarterly in cash or, if the Companys available cash for operations
does not meet specified levels or such payment would result in an event of default under the Companys senior credit facility, in additional shares of Series A Preferred Stock. Holders of Series A Preferred Stock are entitled to vote together
with all other classes and series of voting stock of the Company on all actions to be taken by the stockholders of the Company. In addition, as long as 50% of the Series A Preferred Stock originally issued remains outstanding, the Company may not
take numerous actions without obtaining the written consent of the holders of a majority of the Series A Preferred Stock.



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



The Series A Preferred Stock is convertible into Common Stock at any time at
the election of its holders, initially at a ratio of one share of Common Stock for every share of Series A Preferred Stock. The Series A Preferred Stock will automatically convert into Common Stock if, any time following June 9, 2005, the average
closing price of the Common Stock over a 20 consecutive trading day period exceeds 2.5 times the conversion price then in effect ($2.23 as of December 31, 2003) for the Series A Preferred Stock. In addition, the Series A Preferred Stock held by
holders that do not accept an offer by the Company to purchase the Series A Preferred Stock for at least 2.5 times the conversion price then in effect also will automatically convert into



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##### Table of Contents

ANALEX CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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



Holders of the Series A
Preferred Stock may require the Company to redeem their shares in four equal quarterly installments any time on or after December 9, 2007, at the Series A Purchase Price, as adjusted for stock splits, stock dividends and similar events, plus accrued
but unpaid dividends.



Convertible Notes



The Convertible Notes mature on December 9, 2007. The Convertible Notes bear
interest at an annual rate of 7%, payable quarterly in cash or, if the Companys available cash for operations does not meet specified levels or such payment would result in an event of default under the Companys senior credit facility,
such interest will be accrued and added to the outstanding principal.



The Convertible Notes may not be prepaid prior to June 9, 2005 without the consent of the holders of a majority of the outstanding principal amount of the Convertible Notes. Any subsequent prepayment will be made, at the option of the
Convertible Note holders, either in cash in an amount equal to the outstanding principal plus the net present value of interest to maturity discounted at 7% per annum, or by conversion of the principal into shares of Series A Preferred Stock and the
payment of interest in cash or in shares of Series A Preferred Stock. Holders of the Convertible Notes may convert the outstanding principal and accrued interest on the Notes into Series A Preferred Stock at any time. The conversion price for the
Convertible Notes is $3.01 per share. The Company may cause the automatic conversion of the Convertible Notes into Common Stock if, any time following June 9, 2005, the average closing price for the Common Stock over a 20 consecutive trading day
period exceeds $5.58 per share.



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



Warrants



The Warrants are exercisable at any time before December
9, 2013. The Preferred Warrants are exercisable to purchase one share of Common Stock for every five shares of Common Stock issued or issuable upon conversion of the Series A Preferred Stock. The Note Warrants are exercisable to purchase one share
of Common Stock for every five shares of Common Stock issued or issuable upon conversion of the Convertible Notes. The initial exercise price of the Warrants is $3.28.



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##### Table of Contents

ANALEX CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



4.    Accounts receivable:



The components of accounts receivable are as follows:



|                                         |  |              |            |   |      |   |            |  
|---------------------------------------- |  | ------------ | ---------- | - | ---- | - | ---------- | -
|                                         |  | December 31, |           
|                                         |  | 2003         |            |   | 2002 |  
|Trade accounts receivable:               |  |              |            |   |      |   |            |  
|U.S. Government:                         |  |              |            |   |      |   |            |  
|Amounts billed                           |  | $            | 9,170,900  |   |      | $ | 10,312,900 |  
|Recoverable costs and profitsnot billed |  |              | 1,790,400  |   |      |   | 2,609,200  |  
|                                         |  |              |            |   |      |   |            |  
|Total                                    |  |              | 10,961,300 |   |      |   | 12,922,100 |  
|                                         |  |              |            |   |      |   |            |  
|Commercial, state and local governments: |  |              |            |   |      |   |            |  
|Amounts billed                           |  |              | 103,500    |   |      |   | 334,800    |  
|Recoverable costs and profitsnot billed |  |              |           |   |      |   | 151,400    |  
|                                         |  |              |            |   |      |   |            |  
|Total                                    |  |              | 103,500    |   |      |   | 486,200    |  
|                                         |  |              |            |   |      |   |            |  
|Total accounts receivable                |  |              | 11,064,800 |   |      |   | 13,408,300 |  
|Less: Allowance for doubtful accounts    |  |              | (345,400   | ) |      |   | (852,200   | )
|                                         |  |              |            |   |      |   |            |  
|Total accounts receivable, net           |  | $            | 10,719,400 |   |      | $ | 12,556,100 |  
|                                         |  |              |            |   |      |   |            |  



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



|                  |  |      |          |   |      |   |         |      |  |   |        
|----------------- |  | ---- | -------- | - | ---- | - | ------- | ---- |  | - | -------
|                  |  | 2003 |          |   | 2002 |   |         | 2001
|Beginning balance |  | $    | 852,200  |   |      | $ | 926,400 |      |  | $ | 151,200
|Additions         |  |      | 49,600   |   |      |   |        |      |  |   | 775,200
|Write-offs        |  |      | (556,400 | ) |      |   | (74,200 | )    |  |   |       
|                  |  |      |          |   |      |   |         |      |  |   |        
|Ending balance    |  | $    | 345,400  |   |      | $ | 852,200 |      |  | $ | 926,400
|                  |  |      |          |   |      |   |         |      |  |   |        



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



5.    Fixed assets:



The components of fixed assets are as follows:



|                                          |  |             |           |   |      |   |          |  
|----------------------------------------- |  | ----------- | --------- | - | ---- | - | -------- | -
|                                          |  | December 31 |          
|                                          |  | 2003        |           |   | 2002 |  
|Computer hardware and software            |  | $           | 904,400   |   |      | $ | 515,700  |  
|Leasehold improvements                    |  |             | 68,200    |   |      |   | 36,400   |  
|Laboratory                                |  |             | 141,300   |   |      |   | 141,400  |  
|Office equipment                          |  |             | 159,300   |   |      |   | 125,000  |  
|                                          |  |             |           |   |      |   |          |  
|Total fixed assets                        |  |             | 1,273,200 |   |      |   | 818,500  |  
|Accumulated depreciation and amortization |  |             | (720,300  | ) |      |   | (601,800 | )
|                                          |  |             |           |   |      |   |          |  
|Total fixed assets, net                   |  | $           | 552,900   |   |      | $ | 216,700  |  
|                                          |  |             |           |   |      |   |          |  



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##### Table of Contents

ANALEX CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



6.    Goodwill and other intangible assets:



As discussed in Note 2, the Company adopted SFAS No. 142 in January 2002,
which required the Company to stop amortizing goodwill and certain intangible assets with an indefinite useful life. Instead, SFAS No. 142 requires that goodwill and intangible assets deemed to have an indefinite life be reviewed for impairment upon
adoption of SFAS No. 142 and annually, thereafter. The Companys goodwill balance was approximately $15.3 million and $15.5 million as of December 31, 2003 and 2002, respectively. The decrease of approximately $0.2 million was due to the 2003
realization of net operating losses belonging to the former Analex Corporation. The Company performed its annual impairment test as of October 1, 2003 and concluded that the goodwill was not impaired. The Companys results of operations prior
to 2002 do not reflect the provisions of SFAS No. 142. A reconciliation of previously reported net income with the amounts adjusted for the exclusion of goodwill amortization net of related income tax effects for year ended December 31, 2001 is as
follows:



|                                               |  |      |        
|---------------------------------------------- |  | ---- | -------
|                                               |  | 2001
|Net income attributable to common shareholders |  | $    | 196,000
|Add back goodwill amortization, net of tax     |  |      | 337,000
|                                               |  |      |        
|Adjusted net income to common stockholders     |  | $    | 533,000
|Basic earnings per common share:               |  |      |        
|As reported                                    |  | $    | 0.03   
|Goodwill amortization, net of tax              |  |      | 0.04   
|                                               |  |      |        
|Adjusted basic earnings per common share       |  | $    | 0.07   
|Diluted earnings per common share:             |  |      |        
|As reported                                    |  | $    | 0.02   
|Goodwill amortization, net of tax              |  |      | 0.04   
|                                               |  |      |        
|Adjusted basic earnings per common share       |  | $    | 0.06   



The gross carrying
amounts and accumulated amortization of the Companys intangible assets as of December 31, 2003 and 2002, were as follows:



|                       |  |                       |           |                          |   |                       |  |                          |           |  |   |        
|---------------------- |  | --------------------- | --------- | ------------------------ | - | --------------------- |  | ------------------------ | --------- |  | - | -------
|                       |  | December 31          
|                       |  | 2003                  |           | 2002                    
|                       |  | Gross Carrying Amount |           | Accumulated Amortization |   | Gross Carrying Amount |  | Accumulated Amortization
|Non-compete agreements |  | $                     | 1,411,800 |                          | $ | 536,300               |  | $                        | 892,000   |  | $ | 283,600
|Contract rights        |  | $                     | 1,053,200 |                          | $ | 175,700               |  | $                        | 1,053,200 |  | $ | 44,600 
|Patents                |  | $                     |          |                          | $ |                      |  | $                        | 153,200   |  | $ |       



F-13



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##### Table of Contents

ANALEX CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Non-compete agreements are amortized on a straight-line basis over their contractual lives of three
to four years. Contract rights are amortized over ten years, which is the life of the related contract. All patent development costs capitalized in prior years, which were included in the ABS segment, have been written off during 2003 due to
uncertainty of future revenues. The write-off is included in selling, general and administrative expense in the accompanying statement of operations. Amortization expense for contract rights and other intangibles for the fiscal years ended 2003 and
2002 was $450,800 and $307,600, respectively. The weighted average life of all intangible assets is 6.17 years as of December 31, 2003. The estimated aggregate amortization expense for each of the five succeeding years is as follows:



|     |  |   |        
|---- |  | - | -------
|2004 |  | $ | 527,700
|2005 |  | $ | 375,800
|2006 |  | $ | 311,600
|2007 |  | $ | 113,200
|2008 |  | $ | 113,200



7.    Debt:



The components of debt are as follows:



|                                                 |  |              |           |      |   |          
|------------------------------------------------ |  | ------------ | --------- | ---- | - | ---------
|                                                 |  | December 31,
|                                                 |  | 2003         |           | 2002
|Current:                                         |  |              |           |      |   |          
|Line of credit                                   |  |              |          |      | $ | 2,187,700
|Bank term note                                   |  |              | 700,000   |      |   | 700,000  
|Notes payable-shareholder                        |  |              | 154,000   |      |   | 145,100  
|Note payable-other                               |  |              | 333,300   |      |   | 333,300  
|Non-compete agreements                           |  |              | 461,900   |      |   | 261,900  
|Note to DOJ                                      |  |              | 538,200   |      |   | 260,500  
|Other                                            |  |              |          |      |   | 11,300   
|                                                 |  |              |           |      |   |          
|Total current debt                               |  |              | 2,187,400 |      |   | 3,899,800
|Long-term:                                       |  |              |           |      |   |          
|Bank term note                                   |  |              | 1,341,700 |      |   | 2,041,700
|Notes payable-shareholder                        |  |              | 336,800   |      |   | 490,900  
|Note payable-other                               |  |              | 250,000   |      |   | 583,300  
|Non-compete agreements                           |  |              | 622,500   |      |   | 534,700  
|Note to DOJ                                      |  |              |          |      |   | 685,900  
|Convertible notes, net of discount of $7,118,600 |  |              | 2,881,400 |      |   |         
|Other                                            |  |              |          |      |   | 2,400    
|                                                 |  |              |           |      |   |          
|Total long-term debt                             |  |              | 5,432,400 |      |   | 4,338,900
|                                                 |  |              |           |      |   |          
|Total debt                                       |  | $            | 7,619,800 |      | $ | 8,238,700
|                                                 |  |              |           |      |   |          



F-14



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##### Table of Contents

ANALEX CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



On December 9, 2003, the Company issued Convertible Notes to Pequot, which mature on December 9, 2007
(see Note 3). The Company allocated the proceeds from the sale of the Convertible Notes between the Convertible Notes and the Note Warrants based on their relative fair values, which resulted in the recording of a discount on the Convertible Notes.
After allocating the Convertible Notes proceeds, the Company calculated the embedded conversion price and used it to measure the intrinsic value of the embedded conversion option. As the embedded conversion price was less than the fair market value
of the Companys common stock as of the date of the transaction, beneficial conversion was recorded. The table below details the accounting treatment of the Convertible Notes.



|                                                                            |  |   |           
|--------------------------------------------------------------------------- |  | - | ----------
|Allocation of Convertible Notes Proceeds                                    |  |   |           
|                                                                            | 
|Proceeds of the convertible notes                                           |  | $ | 10,000,000
|Allocated relative fair value of convertible notes                          |  |   | 8,094,700 
|Allocated relative fair value of note warrants                              |  |   | 1,905,300 
|                                                                            | 
|Balance sheet presentation of Convertible Notes at December 31, 2003        |  |   |           
|                                                                            | 
|Allocated relative fair value of convertible notes                          |  | $ | 8,094,700 
|Less: discount from beneficial conversion                                   |  |   | 5,327,200 
|                                                                            |  |   |           
|Net carrying value of convertible notes prior to amortization and accretion |  | $ | 2,767,500 
|Accretion of discount                                                       |  |   | 113,900   
|                                                                            |  |   |           
|Net carrying value of convertible notes at December 31, 2003                |  | $ | 2,881,400 
|                                                                            |  |   |           



The discount on the
Convertible Notes created as a result of the allocation of fair value to the Note Warrants and the beneficial conversion will be amortized to interest expense over the four-year period to the maturity of the Convertible Notes using the effective
yield method. Issuance costs of $415,000 are recorded as deferred financing costs and will also be amortized to interest expense over the four-year period to the maturity of the Convertible Notes. The Convertible Notes accrue interest at 7% per
annum, which is payable quarterly in cash.



On November 2,
2001, to finance the acquisition of Analex, the Company entered into a Credit Agreement (Agreement) with Bank of America, N.A. The Agreement provides the Company with a $4,000,000 revolving credit facility (the Credit
Facility) through November 2, 2006 and a five-year $3,500,000 term loan (Term Loan). The Credit Facility has an annual renewal occurring April 30 of each year. The principal amount of the Term Loan is amortized in sixty equal
monthly payments of $58,333. In August 2002 the credit limit on the Credit Facility was increased to $8,000,000. Interest on each of the facilities is at the LIBOR Rate plus an applicable margin as specified in a pricing grid. The interest rate at
December 31, 2003 was 3.63% for the Credit Facility and 4.12% for the Term Loan. As of December 31, 2003, $8,000,000 was available under the Credit Facility. The Company is subject to certain financial covenants pursuant to the Agreement, including
a funded debt to EBITDA ratio and a fixed charge coverage ratio. The Company is in compliance with all financial covenants. The Credit Facility and Term Loan are secured by the accounts receivable and other assets of the Company.



The Companys $3.5 million term loan facility from Bank of America
carries interest comprised of two components: floating-rate LIBOR plus a credit performance margin. The Company has entered into an interest-rate swap agreement with Bank of America whereby its obligation to pay floating-rate LIBOR on debt totaling
$2,950,000 was swapped at a fixed rate obligation at 4.25% beginning in January 2002. The Company continues to have the obligation to pay the credit performance margin in addition to its swapped 4.25% payment obligation. The fair value of the swap
of $43,800 is included in other liabilities. The total effective interest rate on the swapped portion of the Term Loan amounted to 7.25% at December 31, 2003.



F-15



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##### Table of Contents

ANALEX CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



In addition, the Company was required by Bank of America to obtain personal guarantees in the amount
of $2,000,000, which the Company procured from two individuals, the Companys former Board member Gerald R. McNichols, and J. Richard Knop. The compensation during the period of guaranty was in the form of cash and warrants. On December 20,
2002, both Mr. McNichols and Mr. Knop were released from the guarantees.



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%. The Company also entered into non-compete agreements with these
sellers for total payments of $540,000 over a three-year period. In addition, the Company entered into non-compete agreements with former employees totaling $352,000, on a discounted basis, payable over various periods.



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



With its purchase of Analex, the Company assumed a note payable to the Department of Justice (DOJ). The agreement provides for quarterly payments of $80,000 consisting of principal and interest at 7%
through February 2006, with a final payment due in May 2006. As required by the terms of the Pequot Transaction, the DOJ note was paid in full with proceeds from the Pequot Transaction. An audit was requested by the DOJ prior to acceptance of the
note repayment. The audit was completed by the government subsequent to year-end, and the payment was accepted.



The Companys future debt maturities at December 31, 2003 are summarized below:



|                            |  |                |            |  
|--------------------------- |  | -------------- | ---------- | -
|Year                        |  | DebtMaturities |           
|2004                        |  | $              | 2,187,300  |  
|2005                        |  |                | 1,555,700  |  
|2006                        |  |                | 981,600    |  
|2007                        |  |                | 10,013,700 |  
|                            |  |                |            |  
|Total Minimum Debt Payments |  | $              | 14,738,300 |  
|Less: Current Maturities    |  |                | (2,187,300 | )
|                            |  |                |            |  
|                            |  |                | 12,551,000 |  
|Less: Unamortized Discount  |  |                | (7,118,600 | )
|                            |  |                |            |  
|Total Long-Term Debt        |  | $              | 5,432,400  |  
|                            |  |                |            |  



F-16



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##### Table of Contents

ANALEX CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



8.    Equity Capital:



The Company allocated the proceeds from the sale of the Series A Preferred Stock between the Series A Preferred Stock and
the Preferred Warrants based on their relative fair values, which resulted in the recording of a discount on the Series A Preferred Stock. In accordance with EITF No. 00-27,Application of Issue No. 98-5 to Certain Convertible Instruments,
after allocating the Series A Preferred Stock proceeds, the Company calculated the embedded conversion price and used it to measure the intrinsic value of the embedded conversion option. The amount of the beneficial conversion was recorded as
additional paid in capital, resulting in a further discount on the Series A Preferred Stock. The table below details the accounting treatment of the Series A Preferred Stock.



|                                                                            |  |   |           
|--------------------------------------------------------------------------- |  | - | ----------
|Allocation of Series A Preferred Stock Proceeds                            
|                                                                            | 
|Proceeds of Series A Preferred Stock                                        |  | $ | 15,000,000
|Allocated relative fair value of preferred stock                            |  |   | 11,142,400
|Allocated relative fair value of preferred warrants                         |  |   | 3,857,600 
|                                                                           
|Balance sheet presentation of Series A Preferred Stock at December 31, 2003
|                                                                            | 
|Allocated relative fair value of preferred stock                            |  | $ | 11,142,400
|Less: discount on preferred stock                                           |  |   | 10,519,800
|Less: issuance costs of preferred stock                                     |  |   | 622,600   
|                                                                            |  |   |           
|Net carrying value of preferred stock prior to accretion                    |  | $ |          
|Accretion of discount on preferred stock                                    |  |   | 236,300   
|                                                                            |  |   |           
|Net carrying value of preferred stock at December 31, 2003                  |  | $ | 236,300   
|                                                                            |  |   |           



The discount on the
Series A Preferred Stock is being accreted to the redemption amount over a four-year period to the earliest redemption date. Accrued dividends at December 31,2003 were $56,700.



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. The agreement phases in portions of the total shares subject to the guarantee over a period of two years following the acquisition in increments of
25% of the total guaranteed shares covered by the agreement. Of the total shares guaranteed, 25% (214,286 shares) are guaranteed from the acquisition date through November 5, 2006, at a price of $1.60. An additional 214,286 shares are guaranteed
beginning November 5, 2002 through November 5, 2006 at a price of $1.80. An additional 214,286 shares are guaranteed beginning May 5, 2003 through November 5, 2006 at a price of $2.00 per share. On November 5, 2003, the final portion of shares
(214,286 additional shares) became guaranteed at a price of $2.20 per share. These shares will be guaranteed through November 5, 2006, resulting in a maximum amount of $1,628,571 payable under the terms of the guaranteed shares as of December 31,
2003. As the fair market value of the Companys common stock was in excess of the guaranteed share prices as of December 31, 2003, no amounts were accrued under the guarantee.



To finance the acquisition of Analex, the Company issued 3,961,060 shares of common stock for aggregate consideration of
approximately $3,868,000 through a private placement consisting of (i) Common Stock at a price of $1.14 per share to purchasers who purchased less than $500,000 worth thereof or (ii) units consisting of Common Stock and warrants to purchase 0.2061
shares of Common Stock at an exercise price of $0.02 per share for each share purchased at a price of $1.14 per unit for purchasers who purchased $500,000 or more of the



F-17



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##### Table of Contents

ANALEX CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Companys equity. Two such purchasers were directors or affiliates of a director. The warrants were exercised concurrent with the stock purchase.



9.    Other current liabilities:



Other current liabilities include the following major
classifications:



|                                |  |              |           |      |   |          
|------------------------------- |  | ------------ | --------- | ---- | - | ---------
|                                |  | December 31,
|                                |  | 2003         |           | 2002
|Payroll and related taxes       |  | $            | 2,786,700 |      | $ | 2,675,200
|Accrued vacation                |  |              | 1,216,900 |      |   | 1,138,000
|Self-insured medical expense    |  |              | 930,300   |      |   | 640,500  
|Accrued subcontractor costs     |  |              | 482,000   |      |   | 30,700   
|Other                           |  |              | 47,600    |      |   | 774,000  
|                                |  |              |           |      |   |          
|Total other current liabilities |  | $            | 5,463,500 |      | $ | 5,258,400
|                                |  |              |           |      |   |          



10.    Acquisitions:



Effective November 2001, the Company acquired Analex, a professional services and program management firm whose principal customers are NASA and the U.S. intelligence community, for approximately $13,898,000. The purchase price was
satisfied with cash payments of $6,510,000, 3,520,339 shares of Common Stock valued at $4,664,000, the issuance of promissory notes of $1,773,000, non-compete agreements of $892,000, and the satisfaction of other certain liabilities of Analex. The
fair value of the assets acquired and liabilities assumed approximated their book value of $6,092,400 and $5,730,000, respectively. The Company incurred financial, legal and accounting costs associated with the Analex purchase of approximately
$570,000.During 2002, certain contingencies were finalized including the settlement of the Analex closing balance sheet requirements and the award of the ELVIS contract.



Non-compete agreements and contractual relationships identified in connection with the acqusition are amortized on a
straight-line basis over their estimated lives ranging from three to ten years.



11.    Net income per share:



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



|                                            |  |      |            |      |   |            |  |   |          
|------------------------------------------- |  | ---- | ---------- | ---- | - | ---------- |  | - | ---------
|                                            |  | 2003 |            | 2002 |   | 2001      
|Numerator:                                  |  |      |            |      |   |            |  |   |          
|Net income available to common shareholders |  | $    | 2,453,400  |      | $ | 2,356,900  |  | $ | 196,000  
|                                            |  |      |            |      |   |            |  |   |          
|Denominator:                                |  |      |            |      |   |            |  |   |          
|Denominator for basic earnings per share:   |  |      |            |      |   |            |  |   |          
|Weighted average shares outstanding         |  |      | 14,878,312 |      |   | 14,412,554 |  |   | 7,721,779
|Effect of dilutive securities:              |  |      |            |      |   |            |  |   |          
|Warrants                                    |  |      | 1,551,031  |      |   | 1,860,811  |  |   | 1,413,289
|Employee stock options                      |  |      | 1,240,658  |      |   | 808,286    |  |   | 452,961  
|                                            |  |      |            |      |   |            |  |   |          
|Denominator for diluted earnings per share  |  |      | 17,670,001 |      |   | 17,081,651 |  |   | 9,588,029
|                                            |  |      |            |      |   |            |  |   |          
|Basic earnings per share                    |  | $    | 0.16       |      | $ | 0.16       |  | $ | 0.03     
|                                            |  |      |            |      |   |            |  |   |          
|Diluted earnings per share                  |  | $    | 0.14       |      | $ | 0.14       |  | $ | 0.02     
|                                            |  |      |            |      |   |            |  |   |          



F-18



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##### Table of Contents

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.



12.    Income taxes:



The provision for income taxes for the years ended December 31, 2003, 2002 and 2001 has been limited to state and federal taxes and has to some extent
been offset by net operating loss carryforwards. The income tax provision (benefit) consisted of the following for the years ended December 31:



|                                  |  |      |          |   |      |   |         |  |   |       
|--------------------------------- |  | ---- | -------- | - | ---- | - | ------- |  | - | ------
|                                  |  | 2003 |          |   | 2002 |   | 2001   
|Current Taxes:                    |  |      |          |   |      |   |         |  |   |       
|Federal                           |  | $    | 408,800  |   |      | $ | 128,900 |  | $ | 19,600
|State                             |  |      | 62,100   |   |      |   | 20,200  |  |   |      
|                                  |  |      |          |   |      |   |         |  |   |       
|Total current income tax expense  |  |      | 470,900  |   |      |   | 149,100 |  |   | 19,600
|                                  |  |      |          |   |      |   |         |  |   |       
|Deferred Taxes:                   |  |      |          |   |      |   |         |  |   |       
|Federal                           |  |      | (128,600 | ) |      |   |        |  |   |      
|State                             |  |      | (21,400  | ) |      |   |        |  |   |      
|                                  |  |      |          |   |      |   |         |  |   |       
|Total deferred income tax benefit |  |      | (150,000 | ) |      |   |        |  |   |      
|                                  |  |      |          |   |      |   |         |  |   |       
|Total provision for income taxes  |  | $    | 320,900  |   |      | $ | 149,100 |  | $ | 19,600
|                                  |  |      |          |   |      |   |         |  |   |       



The tax provision
differs from the amounts computed using the statutory federal income tax rate are as follows for the years ended December 31:



|                                        |  |      |   |  |      |   |  |      |  
|--------------------------------------- |  | ---- | - |  | ---- | - |  | ---- | -
|                                        |  | 2003 |   |  | 2002 |   |  | 2001 |  
|Tax expense at statutory rate-federal   |  | 35   | % |  | 35   | % |  | 35   | %
|State tax expense, net of federal taxes |  | 4    |   |  | 4    |   |  | 13   |  
|Permanent differences                   |  | 5    |   |  | 3    |   |  | 63   |  
|Utilization of NOL carryforward         |  | (28  | ) |  | (36  | ) |  | (102 | )
|Other                                   |  | (5   | ) |  |     |   |  |     |  
|                                        |  |      |   |  |      |   |  |      |  
|Tax expense at effective rate           |  | 12   | % |  | 6    | % |  | 9    | %
|                                        |  |      |   |  |      |   |  |      |  



F-19



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##### Table of Contents

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 (liabilities) at December 31, 2003 and 2002 consist primarily of the following:



|                                |  |      |          |   |      |   |          |  
|------------------------------- |  | ---- | -------- | - | ---- | - | -------- | -
|                                |  | 2003 |          |   | 2002 |  
|Net operating loss carryforward |  | $    | 0        |   |      | $ | 826,100  |  
|Allowance for doubtful accounts |  |      | 103,100  |   |      |   | 328,700  |  
|Accrued vacation                |  |      | 478,600  |   |      |   | 378,900  |  
|Fixed assets                    |  |      | 27,900   |   |      |   | 21,200   |  
|Unbilled receivables            |  |      | (690,600 | ) |      |   | (789,800 | )
|Intangible assets               |  |      | 138,300  |   |      |   |         |  
|Other                           |  |      | 92,700   |   |      |   | 5,600    |  
|                                |  |      |          |   |      |   |          |  
|Gross tax asset                 |  |      | 150,000  |   |      |   | 770,700  |  
|Valuation allowance             |  |      |         |   |      |   | (770,700 | )
|                                |  |      |          |   |      |   |          |  
|Net deferred tax asset          |  | $    | 150,000  |   |      |   |         |  
|                                |  |      |          |   |      |   |          |  



At December 31, 2003,
the Company has no remaining net operating loss carryforwards for federal income tax purposes.



In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some or all of the deferred tax asset will not be realized. Management considers projected future
taxable income, the scheduled reversal of deferred tax liabilities and available tax planning strategies that can be implemented by the Company in making this assessment. Based upon the recent level of taxable income and projections for future
taxable income over the periods in which the deferred tax assets will be realized during 2003, management reversed the valuation allowance recorded as of December 31, 2002. While analyzing the decision to reverse the valuation allowance, portions of
the tax asset relating to the former Analex Corporation were reviewed and certain adjustments were made to goodwill to reflect the benefit provided by the realization of these assets.



13.    Commitments and contingencies:



Operating leases:



The Company leases real property and personal property under various long-term operating leases and sublease agreements expiring at various dates through
2006. 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, 2003 are summarized below:



|                                    |  |                   |          
|----------------------------------- |  | ----------------- | ---------
|Year                                |  | Lease Commitments
|2004                                |  | $                 | 1,053,600
|2005                                |  |                   | 783,400  
|2006                                |  |                   | 56,200   
|                                    |  |                   |          
|Total future minimum lease payments |  | $                 | 1,893,200
|                                    |  |                   |          



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##### Table of Contents

ANALEX CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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



|     |  |              |          
|---- |  | ------------ | ---------
|Year |  | Rent Expense
|2003 |  | $            | 1,064,800
|2002 |  |              | 1,143,100
|2001 |  |              | 572,900  



U.S. government
contract audits:



The Companys revenues and costs
related to contracts with agencies and departments of the U.S. government are subject to audit by the Defense Contract Audit Agency, which has completed the majority of its audits for the Companys fiscal years through fiscal year 2000. It is
the opinion of management that the results of future audits will not have a material effect on the financial condition or results of operations of the Company.



Litigation:



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



14.    Benefit plans:



Employee savings plan:



The Company sponsors a defined contribution savings plan under section 401(k) of the Internal Revenue Code. The Companys contributions to the 401(k) plan are based upon a percentage of employee contributions. The Companys
discretionary contributions to the Plan were $1,108,200, $1,067,200, and $432,000 for 2003, 2002, and 2001, respectively.



Employee stock purchase plan:



In December 1997, shareholders approved the Hadron, Inc. 1997 Employee Stock Purchase Plan (the Plan). The number of shares reserved for
issuance under the Plan is 500,000. 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 $10,000 for the purchase of the Companys common shares, at 85% of the determined market price. During 2003, 2002, and 2001, employees paid approximately $190,700, $141,000, and $41,000, respectively, for the purchase of
common stock under the Plan.



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##### Table of Contents

ANALEX CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Collective Bargaining Agreement:



The company has two collective bargaining agreements (CBA). The
CBA with the International Brotherhood of Electrical Workers expires January 31, 2006, and covers 11 employees at John F. Kennedy Space Center, Florida, and Cape Canaveral Air Force Station, Florida. The CBA with the Teamsters and Warehousemen Union
covers 37 employees at Vandenberg Air Force Base and expires October 31, 2005. Both CBAs cover less than 10% of the Companys total workforce.



15.    Stock option plan:



In May 2002, shareholders approved the Analex Corporation 2002 Stock Option Plan (2002 Stock Option Plan). The 2002 Stock Option Plan 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 2,000,000 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).



Information with respect to incentive and non-qualified stock options issued
under both plans are as follows:



|                                                                 |  |        |           |      |                                  |      |        |  |   |                                  |   |        |   |      |                                  |   |           |   |  |   |     
|---------------------------------------------------------------- |  | ------ | --------- | ---- | -------------------------------- | ---- | ------ |  | - | -------------------------------- | - | ------ | - | ---- | -------------------------------- | - | --------- | - |  | - | ----
|                                                                 |  | 2003   |           | 2002 |                                  | 2001
|                                                                 |  | Shares |           |      | Weighted- Average Exercise Price |      | Shares |  |   | Weighted- Average Exercise Price |   | Shares |   |      | Weighted- Average Exercise Price
|Outstanding at beginning of period                               |  |        | 2,456,100 |      |                                  | $    | 1.55   |  |   | 1,672,500                        |   |        | $ | 1.20 |                                  |   | 479,300   |   |  | $ | 0.98
|Granted                                                          |  |        | 799,500   |      |                                  |      | 2.51   |  |   | 813,100                          |   |        |   | 2.20 |                                  |   | 1,292,800 |   |  |   | 1.29
|Exercised                                                        |  |        | (274,500  | )    |                                  |      | 0.88   |  |   | (21,200                          | ) |        |   | 0.90 |                                  |   | (64,300   | ) |  |   | 1.31
|Expired                                                          |  |        | (130,300  | )    |                                  |      | 1.70   |  |   | (8,300                           | ) |        |   | 1.60 |                                  |   | (35,300   | ) |  |   | 1.01
|Outstanding at end of period                                     |  |        | 2,850,800 |      |                                  |      | 1.88   |  |   | 2,456,100                        |   |        |   | 1.55 |                                  |   | 1,672,500 |   |  |   | 1.20
|Options exercisable at end of period                             |  |        | 2,070,100 |      |                                  | $    | 1.69   |  |   | 1,485,100                        |   |        | $ | 1.38 |                                  |   | 743,300   |   |  | $ | 1.12
|Weighted average fair value of options granted during the period |  | $      | 1.05      |      |                                  |      |        |  | $ | 1.58                             |   |        |   |      |                                  | $ | 1.24      |   |  |   |     



The weighted average
remaining contractual life of options outstanding at December 31, 2003 was 6.7 years. The range of exercise prices of options outstanding at December 31, 2003 was $0.25 to $2.87.



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##### Table of Contents

ANALEX CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The following table summarizes information about the stock options outstanding at December 31, 2003:



|               |  |                  |  |                                  |  |                                                       |  |                  |  |                                 
|-------------- |  | ---------------- |  | -------------------------------- |  | ----------------------------------------------------- |  | ---------------- |  | --------------------------------
|               |  | Outstanding      |  | Exercisable                     
|Exercise Price |  | Number of Shares |  | Weighted- Average Exercise Price |  | Weighted - Average Remaining Contractual Life (years) |  | Number of Shares |  | Weighted - Average ExercisePrice
|$0.25 - 1.00   |  | 101,000          |  | $0.75                            |  | 4.53                                                  |  | 101,000          |  | $0.75                           
|1.02 - 1.99    |  | 1,163,900        |  | 1.34                             |  | 7.21                                                  |  | 1,163,900        |  | 1.34                            
|2.20 - 2.87    |  | 1,585,900        |  | 2.35                             |  | 6.38                                                  |  | 805,200          |  | 2.30                            
|               |  |                  |  |                                  |  |                                                       |  |                  |  |                                 
|               |  | 2,850,800        |  |                                  |  |                                                       |  | 2,070,100        |  |                                 
|               |  |                  |  |                                  |  |                                                       |  |                  |  |                                 



16.    Warrants:



The
Company has issued warrants to certain parties to purchase its Common Stock in connection with certain debt and equity transactions. The range of exercise prices for warrants outstanding at December 31, 2003 was $0.02 to $3.28.



Information with respect to warrants issued is as follows:



|                                   |  |           |  |       |      |          |           |       |   |          |  |           |  |   |     
|---------------------------------- |  | --------- |  | ----- | ---- | -------- | --------- | ----- | - | -------- |  | --------- |  | - | ----
|                                   |  | 2003      |  | 2002  |      | 2001    
|                                   |  | Warrants  |  | Price |      | Warrants |           | Price |   | Warrants |  | Price    
|Outstanding at beginning of period |  | 2,475,800 |  |       |      |          | 2,277,300 |       |   |          |  | 2,467,100 |  |   |     
|Granted                            |  | 2,009,700 |  | $     | 3.28 |          | 198,500   |       | $ | 0.02     |  | 31,100    |  | $ | 0.02
|Exercised                          |  | 42,500    |  |       | 0.75 |          |          |       |   |         |  | 220,900   |  |   | 0.72
|                                   |  | 429,000   |  |       | 0.72 |          |          |       |   |         |  |          |  |   |    
|                                   |  | 400,000   |  |       | 0.25 |          |          |       |   |         |  |          |  |   |    
|                                   |  | 114,800   |  |       | 0.02 |          |          |       |   |         |  |          |  |   |    
|Expired                            |  |          |  |       |      |          |          |       |   |          |  |          |  |   |     
|Retired                            |  | 1,134,200 |  |       |      |          |          |       |   |          |  |          |  |   |     
|                                   |  |           |  |       |      |          |           |       |   |          |  |           |  |   |     
|Outstanding at end of period       |  | 2,365,000 |  |       |      |          | 2,475,800 |       |   |          |  | 2,277,300 |  |   |     
|                                   |  |           |  |       |      |          |           |       |   |          |  |           |  |   |     



17.    Fair
value of financial instruments:



Accounts receivable,
accounts payable, accrued expenses convertible notes, convertible preferred stock, warrants and other current assets and liabilities are carried at amounts which reasonably approximate their fair value. The estimated fair value of the Companys
variable rate debt approximates its carrying value of $291,700.



18.    Statement of cash flowssupplemental disclosures:



During 2003, 2002, and 2001, the Company paid income taxes of $255,000, $208,300, and $23,000, respectively. The Company paid interest of $519,800,
$672,900, and $165,000 during those same periods.



19.    Business segments and major customers:



Business segments:



The
Company has two reportable segments, ABS and Analex. The Homeland Security Group, and the Systems Engineering Group have been aggregated to form the reportable segment Analex. This aggregation is



F-23



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##### Table of Contents

ANALEX CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



due to the fact that both groups perform similar services, operate in similar regulatory environments, and have similar customers. Each of the operating
segments provides engineering, information technology, medical research or technical services to federal government agencies or major defense contractors. The reportable segments are distinguished by their individual clients, prior experience and
technical skills.



Operating results are measured at the net
income/(loss) level for each segment. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. Interest on debt incurred in connection with an acquisition and applicable
associated intangible amortization is charged to the reportable segment.



|                                            |  |             |            |   |      |   |            |  |   |           
|------------------------------------------- |  | ----------- | ---------- | - | ---- | - | ---------- |  | - | ----------
|                                            |  | December 31
|                                            |  | 2003        |            |   | 2002 |   | 2001      
|Revenues:                                   |  |             |            |   |      |   |            |  |   |           
|ABS                                         |  | $           | 3,799,600  |   |      | $ | 6,803,000  |  | $ | 4,761,300 
|Analex                                      |  |             | 62,326,700 |   |      |   | 52,514,000 |  |   | 17,174,700
|                                            |  |             |            |   |      |   |            |  |   |           
|Total revenues                              |  | $           | 66,126,300 |   |      | $ | 59,317,000 |  | $ | 21,936,000
|                                            |  |             |            |   |      |   |            |  |   |           
|Interest expense:                           |  |             |            |   |      |   |            |  |   |           
|ABS                                         |  | $           |           |   |      | $ |           |  | $ |          
|Analex                                      |  |             | 519,800    |   |      |   | 1,018,300  |  |   | 225,200   
|                                            |  |             |            |   |      |   |            |  |   |           
|Total interest expense                      |  | $           | 519,800    |   |      | $ | 1,018,300  |  | $ | 225,200   
|                                            |  |             |            |   |      |   |            |  |   |           
|Depreciation and amortization expense:      |  |             |            |   |      |   |            |  |   |           
|ABS                                         |  | $           | 28,400     |   |      | $ | 31,000     |  | $ | 47,300    
|Analex                                      |  |             | 540,900    |   |      |   | 388,000    |  |   | 476,900   
|                                            |  |             |            |   |      |   |            |  |   |           
|Total depreciation and amortization expense |  | $           | 569,300    |   |      | $ | 419,000    |  | $ | 524,200   
|                                            |  |             |            |   |      |   |            |  |   |           
|Income tax expense:                         |  |             |            |   |      |   |            |  |   |           
|ABS                                         |  | $           |           |   |      | $ |           |  | $ |          
|Analex                                      |  |             | 320,900    |   |      |   | 149,100    |  |   | 19,600    
|                                            |  |             |            |   |      |   |            |  |   |           
|Total income tax expense                    |  | $           | 320,900    |   |      | $ | 149,100    |  | $ | 19,600    
|                                            |  |             |            |   |      |   |            |  |   |           
|Net income (loss):                          |  |             |            |   |      |   |            |  |   |           
|ABS                                         |  | $           | (143,100   | ) |      | $ | 365,200    |  | $ | 186,200   
|Analex                                      |  |             | 2,889,500  |   |      |   | 1,991,400  |  |   | 9,800     
|                                            |  |             |            |   |      |   |            |  |   |           
|Total net income (loss)                     |  | $           | 2,746,400  |   |      | $ | 2,356,600  |  | $ | 196,000   
|                                            |  |             |            |   |      |   |            |  |   |           
|Assets:                                     |  |             |            |   |      |   |            |  |   |           
|ABS                                         |  | $           | 658,300    |   |      | $ | 1,920,800  |  | $ | 1,017,200 
|Analex                                      |  |             | 42,973,800 |   |      |   | 28,863,400 |  |   | 24,607,900
|                                            |  |             |            |   |      |   |            |  |   |           
|Total assets                                |  | $           | 43,632,100 |   |      | $ | 30,784,200 |  | $ | 25,625,100
|                                            |  |             |            |   |      |   |            |  |   |           
|Fixed assets, net:                          |  |             |            |   |      |   |            |  |   |           
|ABS                                         |  | $           | 6,800      |   |      | $ | 83,600     |  | $ | 116,400   
|Analex                                      |  |             | 546,100    |   |      |   | 133,100    |  |   | 144,200   
|                                            |  |             |            |   |      |   |            |  |   |           
|Total fixed assets, net                     |  | $           | 552,900    |   |      | $ | 216,700    |  | $ | 260,600   
|                                            |  |             |            |   |      |   |            |  |   |           
|Costs of revenues:                          |  |             |            |   |      |   |            |  |   |           
|ABS                                         |  | $           | 3,944,000  |   |      | $ | 6,437,900  |  | $ | 4,565,700 
|Analex                                      |  |             | 51,826,400 |   |      |   | 43,998,800 |  |   | 13,592,100
|                                            |  |             |            |   |      |   |            |  |   |           
|Total costs of revenues                     |  | $           | 55,770,400 |   |      | $ | 50,436,700 |  | $ | 18,157,800
|                                            |  |             |            |   |      |   |            |  |   |           



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##### Table of Contents

ANALEX CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Major Customers:



Gross revenue from contracts and subcontracts with U.S. government agencies amounted to $65,672,400, $58,059,000, and
$21,885, in 2003, 2002 and 2001, respectively.



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



|     |  |                       |            |      |   |           
|---- |  | --------------------- | ---------- | ---- | - | ----------
|Year |  | Department of Defense |            | NASA
|2003 |  | $                     | 29,247,300 |      | $ | 35,253,100
|2002 |  |                       | 30,668,000 |      |   | 27,488,400
|2001 |  |                       | 14,019,000 |      |   | 2,412,000 



Selected quarterly information
(Unaudited):



The following is a summary of the quarterly
results of operations for the years 2003 and 2002:



|                                              |  |                |            |           |   |            |  |           |            |  |   |           
|--------------------------------------------- |  | -------------- | ---------- | --------- | - | ---------- |  | --------- | ---------- |  | - | ----------
|                                              |  | Quarter Ended:
|                                              |  | 31-Mar-03      |            | 30-Jun-03 |   | 30-Sep-03  |  | 31-Dec-03
|Revenues                                      |  | $              | 16,631,200 |           | $ | 16,602,900 |  | $         | 16,589,800 |  | $ | 16,302,400
|Costs of Revenues                             |  |                | 13,860,100 |           |   | 13,922,800 |  |           | 14,091,000 |  |   | 13,896,500
|Operating Income                              |  |                | 1,139,900  |           |   | 1,026,700  |  |           | 895,900    |  |   | 524,600   
|Net Income                                    |  |                | 735,400    |           |   | 674,200    |  |           | 581,000    |  |   | 462,800   
|Net Income per share, basic                   |  | $              | 0.05       |           | $ | 0.05       |  | $         | 0.04       |  | $ | 0.03      
|Shares used in per share calculation, basic   |  |                | 14,445,356 |           |   | 14,577,663 |  |           | 14,971,765 |  |   | 14,747,777
|Net Income per share, diluted                 |  | $              | 0.04       |           | $ | 0.04       |  | $         | 0.03       |  | $ | 0.03      
|Shares used in per share calculation, diluted |  |                | 17,565,684 |           |   | 17,169,313 |  |           | 17,811,841 |  |   | 17,319,623
|                                              | 
|                                              |  | Quarter Ended:
|                                              |  | 31-Mar-02      |            | 30-Jun-02 |   | 30-Sep-02  |  | 31-Dec-02
|Revenues                                      |  | $              | 13,035,500 |           | $ | 12,928,200 |  | $         | 16,318,600 |  | $ | 17,034,700
|Costs of Revenues                             |  |                | 11,028,900 |           |   | 11,231,100 |  |           | 13,800,100 |  |   | 14,376,600
|Operating Income                              |  |                | 673,100    |           |   | 450,000    |  |           | 1,193,300  |  |   | 1,207,600 
|Net Income                                    |  |                | 395,200    |           |   | 204,400    |  |           | 914,000    |  |   | 843,000   
|Net Income per share, basic                   |  | $              | 0.03       |           | $ | 0.01       |  | $         | 0.06       |  | $ | 0.06      
|Shares used in per share calculation, basic   |  |                | 14,385,725 |           |   | 14,395,177 |  |           | 14,238,707 |  |   | 14,221,237
|Net Income per share, diluted                 |  | $              | 0.02       |           | $ | 0.01       |  | $         | 0.05       |  | $ | 0.05      
|Shares used in per share calculation, diluted |  |                | 16,796,764 |           |   | 16,997,139 |  |           | 17,013,845 |  |   | 17,077,120



F-25