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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-KSB



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|x | ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------



For the fiscal year ended December 31, 2004



| ̈ | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------



For the transition period from to



Commission file number 0-22405



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Information Analysis Incorporated

(Name of small business issuer in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Virginia                                                       |  | 54-1167364                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|11240 Waples Mill Road, Suite 201, Fairfax, Virginia           |  | 22030                               
|(Address of principal executive offices)                       |  | (Zip Code)                          



Issuers
telephone number (703) 383-3000



---



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



None



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



Common Stock, $0.01 par value

(Title of class)



---



Check whether the Issuer (1) filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the past 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.    x  Yes ̈No



Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained in this form, and no disclosure will 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-KSB or any amendment to
this Form 10-KSB.  x



State issuers revenues for its most recent fiscal year. $ 9,308,909



State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked price of such
common equity, as of a specified date within the past 60 days. (See definition of affiliate in Rule 12b-2 of the Exchange Act.) $3,147,908 as of March 21, 2005



State the number of shares outstanding of each of the issuers classes of common equity, as of the latest practicable date. 10,283,515 shares
Common Stock, $0.01 par value, as of March 21, 2005



DOCUMENTS INCORPORATED BY REFERENCE



None.



Transitional Small Business Disclosure Format (check
one):    Yes ̈;    No  x



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|Information Analysis Incorporated |  | 2004 Report on Form 10-KSB



TABLE OF CONTENTS



|              |  |                                                            |  |                                                                                                                 |  |   
|------------- |  | ---------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------- |  | --
|PART I        |  |                                                            |  |                                                                                                                
|              |  |                                                            | 
|              |  | Item 1.                                                    |  | Description of Business                                                                                         |  | 1 
|              |  |                                                            | 
|              |  | Item 2.                                                    |  | Description of Property                                                                                         |  | 4 
|              |  |                                                            | 
|              |  | Item 3.                                                    |  | Legal Proceedings                                                                                               |  | 4 
|              |  |                                                            | 
|              |  | Item 4.                                                    |  | Submission of Matters to a Vote of Security Holders                                                             |  | 4 
|              |  |                                                           
|PART II       |  |                                                            |  |                                                                                                                
|              |  |                                                            | 
|              |  | Item 5.                                                    |  | Market for Common Equity and Related Stockholder Matters                                                        |  | 4 
|              |  |                                                            | 
|              |  | Item 6.                                                    |  | Managements Discussion and Analysis or Plan of Operation                                                       |  | 5 
|              |  |                                                            | 
|              |  | Item 7.                                                    |  | Financial Statements and Supplementary Data (See Consolidated Financial Statements included herein on page F-1) |  | 7 
|              |  |                                                            | 
|              |  | Item 8.                                                    |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                            |  | 7 
|              |  |                                                            | 
|              |  | Item 8A.                                                   |  | Controls and Procedures                                                                                         |  | 7 
|              |  |                                                            | 
|              |  | Item 8B                                                    |  | Other Information                                                                                               |  | 7 
|              |  |                                                           
|PART III      |  |                                                            |  |                                                                                                                
|              |  |                                                            | 
|              |  | Item 9.                                                    |  | Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act |  | 7 
|              |  |                                                            | 
|              |  | Item 10.                                                   |  | Executive Compensation                                                                                          |  | 9 
|              |  |                                                            | 
|              |  | Item 11.                                                   |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters                  |  | 10
|              |  |                                                            | 
|              |  | Item 12.                                                   |  | Certain Relationships and Related Transactions                                                                  |  | 11
|              |  |                                                            | 
|              |  | Item 13.                                                   |  | Exhibits and Reports on Form 8-K                                                                                |  | 11
|              |  |                                                            | 
|              |  | Item 14.                                                   |  | Principal Accountant Fees and Services                                                                          |  | 11
|              |  |                                                           
|SIGNATURES    |  |                                                            |  | 12                                                                                                             
|              | 
|EXHIBIT INDEX |  | 13                                                        
|              |  |                                                           
|PART F/S      |  |                                                            |  |                                                                                                                
|              |  |                                                           
|              |  | Independent Auditors Report                               |  | F-1                                                                                                            
|              |  | Consolidated Balance Sheet                                 |  | F-2                                                                                                            
|              |  | Consolidated Statements of Operations                      |  | F-3                                                                                                            
|              |  | Consolidated Statements of Changes in Stockholders Equity |  | F-4                                                                                                            
|              |  | Consolidated Statements of Cash Flows                      |  | F-5                                                                                                            
|              |  | Notes to Consolidated Financial Statements                 |  | F-6                                                                                                            



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|Information Analysis Incorporated |  | 2004 Report on Form 10-KSB



This Form 10-KSB contains forward-looking statements. These statements are based on certain
assumptions and involve risks and uncertainties. Actual future results may vary materially from those discussed herein. Any statements that are not historical facts should be forward-looking statements. These forward-looking statements are subject
to the safe harbor created by the Private Securities Litigation Reform act of 1995. IAI does not undertake any obligation to publicly release the result of any revision which may be made to any forward-looking statements after the date of such
statements or to reflect the occurrence of anticipated or unanticipated events.



PART I



Item 1. Description of Business



Overview of Market



Founded in 1979,
Information Analysis Incorporated is in the business of modernizing client information systems. Since its inception, we have performed software development and conversion projects for over 100 commercial and government clients including Computer
Sciences Corporation, IBM, Computer Associates, MCI, Sprint, Citibank, U.S. Customs Service, U.S. Department of Agriculture, U.S. Department of Energy, U.S. Army, U.S. Air Force, Veterans Administration, and the Federal Deposit Insurance
Corporation. Today, we primarily apply our technology, services and experience to legacy software migration and modernization and to developing web-based solutions for agencies of the federal government.



The migration and modernization market is complex and diverse as to the
multiple requirements clients possess to upgrade their older systems. In the early 1990s, many organizations tried to convert or re-engineer their mainframe legacy systems to PC client server environments. Many of these attempts failed because
the technology for client servers lacked sufficient hardware performance and capacity. The available software languages and tools were also immature. By the mid 1990s, organizations did establish mid-level server technology (UNIX) to off-load
and decentralize some of their decision support or departmental systems, and they connected local area networks of PCs to provide better user interfaces. However, many large legacy systems remained in use because of the enormous cost to re-engineer
these systems.



Currently, the options available to modernize
these systems are many. Performance and capacity of client server systems, both UNIX and .NET, rival the traditional mainframe systems. There is a plethora of software that can interface with legacy systems via PC interfaces. New software
development languages also allow users to warehouse and data-mine information from legacy databases. Finally, the arrival of the internet and intranet technology offers a different approach for collecting and processing large volumes of user
transactions, processes which are the forte of older legacy systems.



Companies are being driven for various reasons to address the upgrading of their legacy systems. The Y2K experience has impressed on them the difficulty of finding and retaining staff with outdated technical skills, much of which are
practiced by senior programmers in their fifties. Hardware platforms such as Unisys and Honeywell are reaching the horizon of their usefulness, and older programming and data base languages are poorly supported by their providers. Additionally,
maintenance costs are skyrocketing as vendors squeeze the most out of clients before the life-cycles of hardware and software expire. In addition, the internet has added a new level of pressure to compete in the electronic marketplace with their
sector rivals. The next ten years should see an upsurge of movement and change as organizations revamp their older legacy systems.



The web solutions market is the fastest growing segment of the computer consulting business as individuals, small companies, large companies, and
governmental agencies rush to establish a presence on the Internet. The range of products and services involved in this sector is extensive and therefore, require some specialization for a small company such as IAI to make an impact. Most small web
companies are involved in building web-sites and typically have many short duration projects. More complex web applications generally require knowledge of clients back-end systems based on mainframe or mid-level computers. Few small companies
have the expertise to develop these more sophisticated web applications. These types of applications, however, should become more prominent in the future as web-based solutions continue to evolve thereby resulting in increasing opportunities for
those with the requisite skill sets and experience.



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|Information Analysis Incorporated |  | 2004 Report on Form 10-KSB



The commercial and government sectors of the market can be quite different in their requirements for
web-based applications as many companies are generally interested in cataloging and selling items whereas government agencies wish to disseminate data to the citizenry. There is some overlap in common functionality when web applications are designed
for procurement transactions or customer relations. What distinguishes the government requirements is that most government processes are based on forms. Many government agencies rely on thousands of internal and external forms to conduct their
business. Any company that wishes to develop governmental web applications must address the forms issue. Adobe FormFlow and Adobe ReachForm (previously known under the JetForm and Accellio brand names), the electronic forms products resold and
supported by IAI, are the predominant forms software in the federal government.



Description of Business and Strategy



Since the mid-1990s we have migrated clients from older computer languages generally associated with legacy computer systems to more modern languages used with current-day computer system platforms. In fixing their legacy systems to
comply with Y2K dates impacts, many organizations became aware of the evolving obsolescence of these systems and are now beginning to fund their modernization. In addition, as part of this modernization, many organizations wish to extend these
legacy systems to interface with web-based applications. Our strategy has been to develop and/or acquire tools that will facilitate the modernization process and differentiate the Companys offerings in the marketplace.



In 2004, we aligned with Micro Focus, an established company in the legacy
COBOL environment, to participate in an effort intended to promote, quickly and cost-effectively, the conversion of large legacy mainframe systems to PC server platforms. Micro Focus has developed a suite of products that simplify the conversion
process and enable the entry screens to be internet accessible. The convergence of these tools with the recent advancements in hardware performance of PC servers has finally permitted users to substantially reduce their annual mainframe hardware
maintenance costs. As an authorized reseller and installer of the tools, we can derive revenue from software sales and installation services as well as garner supplementary programming services that typically occur with each engagement.



Over the last six months we have successfully completed two engagements in
the Department of Defense that have proven the viability and efficacy of these tools. In addition, Micro Focus has provided us with dozens of qualified leads, both commercial and government, that both companies are working on as a team. In addition,
we have joined the Mainframe Migration Alliance (MMA) composed of companies such as Microsoft and Micro Focus. This alliance is expected to bring us increased market exposure and additional sales leads. We expect this strategy to be a major
contributor to our growth and profitability over the next three years



Previously, we have developed a series of workbench tools called ICONS. These tools, used in conjunction with our methodology, enhance a programmers ability to convert code to new platforms and/or computer languages. ICONS can be used
with a variety of languages such as DATACOM COBOL and IDEAL, and Unisys COBOL. ICONS will facilitate our ability to provide systems modernization services to companies that seek to migrate from mainframe legacy systems to modern environments,
including current computer languages, data bases, and mainframe, midrange, client servers, intranet and internet platforms. A number of leads derived from Micro Focus and Microsoft require use of our ICONS tools as a precursor to implementing the
Micro Focus solution.



We have structured our company to
address the wide range of requirements that we envision the market will demand. We believe that the Micro Focus tool suite and the suite of ICONS tools will give us a competitive edge in performing certain conversions and migrations faster and more
economically than many other vendors. The diverse capabilities of our staff in mainframe technology and client server implementations help to assure that our staff can analyze the original systems properly to conduct accurate and thorough
conversions.



Our modernization methodology has developed over
the past several years through the completion of successful conversion projects. Senior members of our professional staff can perform both technical and business requirements analyses, and prepare general and detail design documentation, develop
project plans including milestones, staffing, deliverables, and schedules. The actual work can be performed at client sites or at our premises, which has mainframe and client server facilities for the use of our personnel.



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Our strategy to exploit the conversion and modernization market is also based on forming partnerships
with large IT consulting firms who currently maintain the legacy systems for large government agencies and Fortune 1000 companies. These firms have established relationships with these clients, who rely on their advice in selecting tools and
services to modernize legacy systems. We have been successful in forming their partnerships with firms such as IBM, EDS, Northrup Grumman, Unisys, SI International, and Oracle. These partnerships have resulted in significant contracts in the past
and are important in procuring future business for us.



In
addition to gaining new business, we will focus on retaining and growing existing contracts.



We are also using the experience we have acquired as an Adobe Capture, FormFlow, Capture Enterprise and ReachForm reseller to help secure engagements for web-based applications requiring forms. The Adobe products have
evolved over the years into robust tools that can form the backbone of applications, especially those requiring forms. We have used this expertise to penetrate a number of federal government clients and build sophisticated web applications. Our
knowledge of legacy system languages has been instrumental in connecting these web applications to legacy databases residing on mainframe computers. Our company has built a core group of professionals that can build this practice over the coming
years.



Concentrating on the niche of electronic forms-related
web applications through our relationship with Adobe products, we have developed a cadre of professionals that can quickly and efficiently develop web applications. We will focus on federal government clients during 2005 and leverage the
companys outstanding reputation with federal clients to penetrate these agencies. We will be able to reference successful projects completed or in development for the Department of Veterans Affairs (VA), Federal Mediation and Conciliation
Service (FMCS), U.S. Department of Agriculture (USDA), Immigration and Naturalization Service (INS), General Services Administration (GSA), Army Reserve, and U.S. Air Force Logistics Command (AFLC).



Competition



The competition in the conversion and modernization market is very strong. Many software professional services companies
have had some involvement in this area and profess proficiency in performing these projects. We also face competition from other companies which purport to substantially automate the process through software tools including Alydaar, Crystal Systems
Solutions and Sapiens International. Off the shelf software for enterprise resource planning, such as SAP and Baan, provides an additional source of competition, although, to date, the cost and lengthy installation time for enterprise
resource planning software has slowed its implementation in the market place. No matter what type of solution is offered, many of our competitors have greater name recognition than our company, a larger, more established customer base, and
significantly greater financial and market resources.



Patents and
Proprietary Rights



We depend upon a combination of
trade secret and copyright laws, nondisclosure and other contractual provisions and technical measures to protect its proprietary rights in its methodologies, databases and software. We have not filed any patent applications covering our
methodologies and software. We distribute ICONS under agreements that grant customers non-exclusive licenses and contain terms and conditions restricting the disclosure and use of our databases or software and prohibiting the unauthorized
reproduction or transfer of its products. In addition, we attempt to protect the secrecy of our proprietary databases and other trade secrets and proprietary information through agreements with employees and consultants.



We also seek to protect the source code of ICONS as trade secrets and under
copyright law. The copyright protection accorded to databases, however, is fairly limited. While the arrangement and selection of data can be protected, the actual data is not, and others are free to create software performing the same function. We
believe, however, that the creation of competing databases would be very time consuming and costly.



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|Information Analysis Incorporated |  | 2004 Report on Form 10-KSB



Backlog



As of December 31, 2004, we estimated our backlog at approximately $22.6 million, of which over $4.7 million was funded. Of the entire backlog, we believe
approximately 37% will be completed by December 31, 2005. This backlog consists of outstanding contracts and general commitments from current clients. We regularly provide services to certain clients on an as-needed basis without regard to a
specific contract. General commitments represent those services which we anticipate providing to such clients during a twelve-month period.



Employees



As of December 31, 2004, we employed 33 full-time and 7 part-time individuals. In addition, we maintained independent contractor relationships with 24
individuals for professional information technology services. Approximately 80% of our professional employees have at least four years of related experience. For computer related services, we believe that the diverse professional opportunities and
interaction among its employees contribute to maintaining a stable professional staff with limited turnover.



Item 2. Description of Property



Our offices are located at 11240 Waples Mill Road, Fairfax, VA 22030. We hold a lease for 4,434 square feet. This lease expires on March 31, 2007.



Item 3. Legal Proceedings



We are
not aware of any legal proceedings against it at this time.



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



| | (a) | On November 16, 2004, IAI held its Annual Meeting of Stockholders.
| | --- | ------------------------------------------------------------------



| | (b) | The vote for the election of Directors was as follows:
| | --- | ------------------------------------------------------



|      |  |             |  |                |  |                
|----- |  | ----------- |  | -------------- |  | ---------------
|(i)   |  | Rosenberg  |  | 9,633,129 FOR, |  | 63,255 WITHHELD
|(ii)  |  | May -       |  | 9,623,129 FOR, |  | 73,255 WITHHELD
|(iii) |  | Wachtel -   |  | 9,632,129 FOR, |  | 64,255 WITHHELD
|(iv)  |  | Wester -    |  | 9,633,129 FOR, |  | 63,255 WITHHELD



| | (c) | The vote for ratification of the selection of Rubino & McGeehin, Chtd. as our Independent Auditors for 2004 was as follows:
| | --- | ---------------------------------------------------------------------------------------------------------------------------



| |  |                |  |                 |  |              
| |  | -------------- |  | --------------- |  | -------------
| |  | 9,678,834 FOR, |  | 15,800 AGAINST, |  | 1,750 ABSTAIN



PART II



Item 5. Market for Common Equity and Related Stockholder Matters



The Companys Common Stock (symbol: IAIC) has been traded on over the counter bulletin board (OTCBB) since July 29, 1999. The following table sets forth, for the fiscal periods indicated, the high and low bid
prices of the Common Stock, as reported:



|     |  |                                                   |      |                                                   |   |         |  |          |      |         |   |         |  |         |      |          |   |      |  |   |      |  |   |     
|---- |  | ------------------------------------------------- | ---- | ------------------------------------------------- | - | ------- |  | -------- | ---- | ------- | - | ------- |  | ------- | ---- | -------- | - | ---- |  | - | ---- |  | - | ----
|     |  | Fiscal Year Ended December 31, 2004Quarter Ended: |      | Fiscal Year Ended December 31, 2003Quarter Ended:
|     |  | 3/31/04                                           |      | 6/30/04                                           |   | 9/30/04 |  | 12/31/04 |      | 3/31/03 |   | 6/30/03 |  | 9/30/03 |      | 12/31/03
|High |  | $                                                 | 0.38 |                                                   | $ | 0.53    |  | $        | 0.48 |         | $ | 0.43    |  | $       | 0.18 |          | $ | 0.40 |  | $ | 0.20 |  | $ | 0.34
|Low  |  | $                                                 | 0.21 |                                                   | $ | 0.33    |  | $        | 0.23 |         | $ | 0.22    |  | $       | 0.08 |          | $ | 0.13 |  | $ | 0.13 |  | $ | 0.13



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|Information Analysis Incorporated |  | 2004 Report on Form 10-KSB



The quotations on which the above data are based reflect inter-dealer prices without adjustment for
retail mark-up, mark-down or commission, and may not represent actual transactions.



As of December 31, 2004, the Company had 119 stockholders of record. The Company has never paid a cash dividend on its Common Stock. The Company does not anticipate the payment of cash dividends to the holders of
Common Stock in the foreseeable future.



Recent Sales of Unregistered
Securities:



None.



Item 6. Managements Discussion and Analysis or Plan of Operation



Overview



During
2004 our sales and marketing organizations were focused to capitalize on our services and tools to address the legacy modernization/conversion market, provide legacy and post-conversion database support and develop and support database-backed web
portals and other web-based solutions.



In 2004 we had net
income from operations of $606,424. Our accumulated stockholders equity is now $132,992. Our expenses related to sales, marketing, and administrative infrastructure increased in 2004, but declined as a percentage of revenue. As we continue to
build backlog, management believes the companys economic prospects will improve.



Results of Operations



The following table sets forth,
for the periods indicated, selected information from our Consolidated Statements of Operations, expressed as a percentage of revenue:



|                                                       |  |                   |    |  |                   |   
|------------------------------------------------------ |  | ----------------- | -- |  | ----------------- | --
|                                                       |  | Years Ended       |   
|                                                       |  | December 31, 2004 |    |  | December 31, 2003 |   
|Revenue                                                |  | 100.0             | %  |  | 100.0             | % 
|Cost of Goods Sold                                     |  | 78.8              | %  |  | 80.3              | % 
|                                                       |  |                   |    |  |                   |   
|Gross Profit                                           |  | 21.2              | %  |  | 19.7              | % 
|Operating Expenses Selling, general and administrative |  | (17.8             | )% |  | (23.5             | )%
|Other operating income                                 |  | 3.1               | %  |  | 0.0               | % 
|                                                       |  |                   |    |  |                   |   
|Income (loss) from operations                          |  | 6.5               | %  |  | (3.8              | )%
|Other expense                                          |  | (0.4              | )% |  | (0.5              | )%
|                                                       |  |                   |    |  |                   |   
|Income (loss) before income taxes                      |  | 6.1               | %  |  | (4.3              | )%
|Provision for income taxes                             |  | 0.0               | %  |  | 0.0               | % 
|                                                       |  |                   |    |  |                   |   
|Net income (loss)                                      |  | 6.1               | %  |  | (4.3              | )%
|                                                       |  |                   |    |  |                   |   



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|Information Analysis Incorporated |  | 2004 Report on Form 10-KSB



2004 Compared to 2003



Revenue. Revenue for the 2004 fiscal year increased $3.9 million, or 73.4%, to $9.3 million from $5.4 million in fiscal year 2003.
Revenue from professional services increased $3.6 million, or 73.1%, to $8.6 million in fiscal year 2004 from $5.0 million in fiscal year 2003. Revenue from software sales increased $0.3 million, or 77.2%, to $0.7 million in 2004 from $0.4 million
in fiscal year 2003.



Gross Profit. Gross profit was $2.0 million in
2004 versus $1.1 million in 2003, or 21.2% of revenue in 2004 compared to 19.7% of revenue in 2003. Professional services gross margin was $1.7 million, or 19.9% of revenue in 2004, compared to $1.0 million, 20.6% of revenue in 2003. The decrease in
professional services gross margin was attributable to contracts which primarily involve the use of consultants versus employees for professional services and increases in price competition for new contracts. Software sales gross margin was 37.6% of
revenue in 2004, up from 8.0% in 2003. The increase in software sales gross margin was due to an increase in sales of the Companys ICONS software tools versus the prior year, and some increase in margins on the Companys resale of Adobe
forms-related software and maintenance in 2004. IAIs partnership with Adobe improved as the Company may now purchase its software and maintenance packages directly from Adobe instead of through a designated third party. Also, the ICONS suite
of conversion tools became fully amortized on September 30, 2004, versus a full year of amortization expense in 2003.



Selling, General and Administrative (SG&A). SG&A expense for 2004 increased 31.2% to $1.7 million, or 17.8% of revenue, from $1.3 million, or 23.5% of
revenue, in 2003. The increase in SG&A is due to a return to full-time hours for selected administrative employees, an increase in the use of recruiters for hiring, particularly for contracts where personnel with security clearances are needed,
the payment of bonuses, increases in commissions (for increases in sales), and the depreciation associated with upgrading the computers and tools necessary to perform both contract and administrative functions.



Liquidity and Capital Resources



Our profits in 2004, when combined with our beginning cash and cash
equivalents balance and borrowings under our revolving line of credit were sufficient to provide financing for our operations. For 2004, net cash used by operating, investing and financing activities was $202,004, which when subtracted from a
beginning balance of $317,921 yielded cash and cash equivalents of $115,917 at year end.



We have a revolving line of credit with a bank providing for demand or short-term borrowings of up to $500,000. The line of credit is callable on demand, and next expires on June 16, 2005. Management believes the line
of credit will be renewed at substantially equivalent terms.



We have outstanding convertible notes in the amount of $125,000. These notes originally came due on September 30, 2004. All of the note holders offered, and we accepted, a one-year extension of the maturity of the notes. We believe that we
will be able to retire the notes on the due date if the conversion privilege has not yet been exercised.



We are in negotiations with various organizations to obtain a new line of credit. The current line of credit, or a similar new credit facility, when
coupled with funds generated from operations, assuming the operations are cash flow positive, should be sufficient to meet our operating cash requirements. We, however, may periodically be required to delay timely payments of its accounts payable.
Cash flow from operations may not be sufficient to provide additional working capital necessary to repay approximately $168,000 of past due payables.



We cannot be certain that there will not be a need for additional cash resources at some point in fiscal 2005. Accordingly, we may from time to time
consider additional equity offerings to finance business expansion. We are uncertain that we will be able to raise additional capital.



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|Information Analysis Incorporated |  | 2004 Report on Form 10-KSB



Item 7. Financial Statements



See
Consolidated Financial Statements included herein beginning on page F-1.



Item 8. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure



None



Item 8A. Controls and Procedures



The Companys management, under the supervision of and with the participation of the Companys principal executive and principal financial officers, and people performing similar functions, has evaluated the effectiveness of the
Companys disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of the end of the period reported in this annual report (the Evaluation Date). Based upon this evaluation,
management has concluded that, as of the Evaluation Date, the disclosure controls and procedures are effective in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and forms.



There have been no significant changes in the Companys internal controls or in other factors that could significantly affect these controls
subsequent to the date of their evaluation, nor were there any significant deficiencies or material weaknesses in the Companys internal controls. Accordingly, no corrective actions were required or undertaken.



Item 8B. Other Information



None



PART III



Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act



Directors and Executive Officers



The executive officers and directors of the Company are:



|                    |  |       |  |                                                             
|------------------- |  | ----- |  | ------------------------------------------------------------
|NAME                |  | SINCE |  | OFFICE HELD WITH COMPANY                                    
|Sandor Rosenberg    |  | 1979  |  | Chairman of the Board, Chief Executive Officer              
|Richard S. DeRose   |  | 1991  |  | Executive Vice President, Chief Financial Officer, Secretary
|Stanley A. Reese    |  | 1993  |  | Senior Vice President, Chief Operating Officer              
|Charles A. May, Jr. |  | 1997  |  | Director                                                    
|Bonnie K. Wachtel   |  | 1992  |  | Director                                                    
|James D. Wester     |  | 1985  |  | Director                                                    



Directors serve until
the next annual meeting of shareholders or until successors have been elected and qualified. Officers serve at the discretion of the Board of Directors.



Sandor Rosenberg, 58, is the founder of the Company and has been Chairman of the Board and Chief Executive Officer of the Company since 1979. Mr. Rosenberg holds a
BS degree in Aerospace Engineering from Rensselaer Polytechnic Institute, and has done graduate studies in Operations Research at George Washington University.



Richard S. DeRose, 66, has been Executive Vice President since 1991. From 1979 to 1991 he served as the President and CEO of DHD, Inc. and was a founder of the
company. Prior to DHD, Mr. DeRose held several management positions in the information technology and telecommunications industries at RCA, Burroughs, and MCI. Mr. DeRose holds a BS degree in Science from the US Naval Academy and an MS degree in
Computer Systems Management from the US Naval Postgraduate School, Monterey.



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|Information Analysis Incorporated |  | 2004 Report on Form 10-KSB



Stanley A. Reese, 48, joined the Company in 1993. Mr. Reese has been Senior Vice President since 1997 and
Chief Operating Officer since March 1999. From 1992 to 1993, he served as Vice President, Technical Services at Tomco Systems, Inc. Prior to Tomco Systems, he served as Senior Program manager at ICF Information Technology, Inc. Mr. Reese has over 18
years experience managing and marketing large scale mainframe and PC-based applications. Mr. Reese holds a BA in History from George Mason University.



Charles A. May, Jr., 67, is a consultant focusing on national security and defense conversion issues. In 1992, he retired as a Lt. General from the Air Force where
he last served as Assistant Vice Chief of Staff, Headquarters, US Air Force, Washington, D.C. He is a graduate of the US Air Force Academy, where he once served as an Associate Professor of Political Science. General May has also graduated from the
NATO Defense College and has completed the University of Pittsburghs Management Program for Executives.



Bonnie K. Wachtel, 49, has served as vice president and general counsel of Wachtel & Co., Inc., a Washington, D.C.-based brokerage and investment banking firm, since 1984. Ms. Wachtel holds BA and MBA
degrees from the University of Chicago and a JD from the University of Virginia. Ms. Wachtel is a Certified Financial Analyst. She is a director of Integral Systems, Inc., a provider of computer systems and software for the satellite communications
market; and VSE Corporation, a provider of technical services to the federal government.



James D. Wester, 66, has been a computer services marketing consultant for more than 16 years. Since 1984, he has been president of Results, Inc., a computer services marketing firm. Mr. Wester holds a BME
degree from Auburn University and an MBA from George Washington University.



There are no family relationships between any directors or executive officers of the Company.



Audit Committee Financial Expert



Our Board of Directors has determined that it has one financial expert, Bonnie K. Wachtel, serving on its audit committee. Ms. Wachtel was educated as a
business executive in graduating with her MBA from University of Chicago, and she is a principal and vice president of Wachtel & Co., Inc., where she is a financial analyst. Ms. Wachtel has been determined to be independent within the meaning of
the Exchange Act.



Compliance with Section 16(a) of the Exchange Act



Section 16(a) (Section 16(a)) of the
Securities Exchange Act of 1934, as amended (the Exchange Act), requires executive officers and directors and persons who beneficially own more than ten percent (10%) of the Companys Common Stock to file initial reports of
ownership and reports of changes in ownership with the Securities and Exchange Commission (the Commission) and any national securities exchange on which the Companys securities are registered. Executive officers, Directors and
greater than ten percent (10%) beneficial owners are required by the Commissions regulations to furnish the Company with copies of all Section 16(a) forms they file.



Based solely on a review of the copies of such forms furnished to the Company, no executive officer, Director or 10%
beneficial owner failed to file on a timely basis the forms required under Section 16(a) of the Exchange Act.



8



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|Information Analysis Incorporated |  | 2004 Report on Form 10-KSB



Code of Ethics



We have adopted a written code of ethics that applies to our principal executive officer, principal financial officer,
principal accounting officer or controller, and persons performing similar functions. The code of ethics is available for viewing on the Companys primary web site, located at http://infoa.com/investors.html. We will provide a copy of
its code of ethics to any person without charge upon written request addressed to Information Analysis Incorporated, Attn: Richard DeRose, 11240 Waples Mill Road, Suite 201, Fairfax, Virginia 22030.



Item 10. Executive Compensation



The Summary Compensation Table below sets forth individual compensation information for the Chief Executive Officer and the other executive officers serving as executive officers as of December 31, 2004 (collectively Named Executive
Officers):



Summary Compensation Table



|                                                                       |  |              |  |                     |                      |                               |          |                                   |           
|---------------------------------------------------------------------- |  | ------------ |  | ------------------- | -------------------- | ----------------------------- | -------- | --------------------------------- | ----------
|                                                                       |  |              |  | Annual Compensation |                      | Long Term Compensation Awards
|Name and Principal Position                                            |  | Year         |  | Salary              |                      | Bonus                         |          | Securities Underlying Options (#)
|Sandor Rosenberg Chairman of the Board and Chief Executive Officer     |  | 200420032002 |  | $$$                 | 114,98793,994125,000 |                               | 16,000 |                                   |        
|Richard S. DeRose Executive Vice President and Chief Financial Officer |  | 200420032002 |  | $$$                 | 114,98793,994125,000 |                               | 16,000 |                                   |  50,000 
|Stanley A. Reese Senior Vice President and Chief Operating Officer     |  | 200420032002 |  | $$$                 | 114,98795,076125,000 |                               | 16,000 |                                   |  50,000 



No Named Executive
Officer has received any perquisite or benefit, securities, or property that exceeded the lesser of $50,000 or 10% of the total annual salary and bonus reported for such executive officer.



No executive officers were awarded options or stock appreciation rights
during the year ended December 31, 2004 (table omitted).



The
following table depicts option exercise activity in the last fiscal year and fiscal year-end option values with respect to each of the Named Executive Officers. The value of unexercised in-the-money options at December 31, 2004 equals the market
value of the underlying common stock at December 31, 2004 minus the option exercise price. The fair market value of the Companys common stock at December 31, 2004 was $0.40.



Aggregate Option Exercises in Last Fiscal Year and FY-End Option Values



|                  |  |                               |             |               |               |                                                                 |             |                                                         |               |  |   |        |  |   |      
|----------------- |  | ----------------------------- | ----------- | ------------- | ------------- | --------------------------------------------------------------- | ----------- | ------------------------------------------------------- | ------------- |  | - | ------ |  | - | -----
|Name              |  | SharesAcquired onExercise (#) |             | ValueRealized |               | Number of SecuritiesUnderlying UnexercisedOptions at 12/31/2004 |             | Value of Unexercised In-the-Money Options at 12/31/2004
|                  |  |                               | Exercisable |               | Unexercisable |                                                                 | Exercisable |                                                         | Unexercisable
|Richard S. DeRose |  |                              |             | $             |              |                                                                 | 192,900     |                                                         | 25,000        |  | $ | 4,500  |  | $ | 4,500
|Stanley A. Reese  |  |                              |             | $             |              |                                                                 | 203,750     |                                                         | 25,000        |  | $ | 14,500 |  | $ | 4,500



Compensation of Directors



Standard Arrangements. Directors of the Company who are not executive
officers of the Company may receive a stipend of $500 per quarter plus reimbursement of reasonable expenses incurred in attending meetings. Each director received cash stipends totaling $2,000 for serving for the 2004 fiscal year, and no stipend for
the fiscal year ending December 31, 2003.



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|Information Analysis Incorporated |  | 2004 Report on Form 10-KSB



Employment Contracts and Termination of Employment and Change-in-Control Arrangements



On June 18, 1997, the Company agreed in writing to provide to Richard S.
DeRose, Executive Vice President, Chief Financial Officer, and Secretary, twelve months severance pay of his base salary, payable in normal payroll increments, in the event of the termination of his employment other than for cause. In the event of a
change of control or the sale or transfer of substantially all of the Companys assets, the Company agreed that in the event of Mr. DeRoses termination, substantial reduction of duties, or requirement to be based at a location outside of
a 30-mile radius of Fairfax, Virginia, he will receive a twelve month severance payment of base salary, payable in lump sum or monthly, at the Companys discretion.



Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters



Securities authorized for issuance under equity compensation plans



The following table contains information regarding securities authorized and available for issuance under our equity compensation plans for certain
employees, directors, and consultants.



Equity Compensation
Plan Information



|                                                           |  |                                                                                            |  |                                                                           |      |                                                            |        
|---------------------------------------------------------- |  | ------------------------------------------------------------------------------------------ |  | ------------------------------------------------------------------------- | ---- | ---------------------------------------------------------- | -------
|Plan Category                                              |  | Number of securities to be issued upon exercise ofoutstanding options,warrants, and rights |  | Weighted averageexercise price ofoutstanding options,warrants, and rights |      | Number of securitiesremaining available forfuture issuance
|Equity compensation plans approved by security holders     |  | 1,900,350                                                                                  |  | $                                                                         | 0.88 |                                                            | 164,300
|Equity compensation plans not approved by security holders |  | 0                                                                                          |  |                                                                           |      |                                                            |        
|Total                                                      |  | 1,900,350                                                                                  |  | $                                                                         | 0.88 |                                                            | 164,300



The following table
sets forth, as of March 21, 2005, the number of shares and percentage of the our Common Stock owned by all persons known by us to own beneficially more than 5% of our Common Stock, by each director, by each executive officer named in the Summary
Compensation Table, and by all directors and executive officers as a group. This information has been obtained in part from such persons and in part from our records. Each person has sole voting and investment power with respect to the shares
indicated except for shares which may be acquired upon exercise of options and as otherwise noted.



|                                                |  |                             |      |  |           |  
|----------------------------------------------- |  | --------------------------- | ---- |  | --------- | -
|NAME AND ADDRESS OF BENEFICIAL OWNER
(1)        |  | SHARESBENEFICIALLYOWNED (2) |      |  | % OFCLASS |  
|Sandor Rosenberg, Chairman, CEO, and Director   |  | 1,832,800                   | (3)  |  | 17.7      | %
|Richard S. DeRose, Executive Vice President     |  | 390,900                     | (4)  |  | 3.7       | %
|Stanley A. Reese, Senior Vice President         |  | 225,750                     | (5)  |  | 2.2       | %
|Charles A. May, Jr., Director                   |  | 66,000                      | (6)  |  | *         |  
|Bonnie K. Wachtel, Director                     |  | 232,800                     | (7)  |  | 2.2       | %
|James D. Wester, Director                       |  | 429,355                     | (8)  |  | 4.1       | %
|Kenneth Parsons                                 |  | 712,500                     | (9)  |  | 6.5       | %
|Traditions LP                                   |  | 1,000,000                   |      |  | 9.7       | %
|                                                |  |                            
|All directors and executive officers as a group |  | 3,177,605                   | (10) |  | 28.2      | %

---

|* | less than 1%
|- | ------------

|(1) | The address of all beneficial holders is care of the Company, except Ms. Wachtel, whose address of record is 1101 14thSt. NW, Washington, DC 20001.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | All shares are held outright by the individuals listed. References to options and conversion privileges include all options and conversion privileges exercisable within 60 days of
March 21, 2005.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Includes 80,000 shares issuable upon conversion of a convertible note.
|--- | ----------------------------------------------------------------------

|(4) | Includes 192,900 options.
|--- | -------------------------



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|Information Analysis Incorporated |  | 2004 Report on Form 10-KSB



|(5) | Includes 203,750 options.
|--- | -------------------------

|(6) | Includes 26,000 options 40,000 shares issuable upon conversion of a convertible note.
|--- | -------------------------------------------------------------------------------------

|(7) | Includes 23,000 options and 100,000 shares issuable upon conversion of a convertible note.
|--- | ------------------------------------------------------------------------------------------

| | for which Wachtel & Co., Inc is the beneficial owner. Ms. Wachtel disclaims ownership of these shares.
| | ------------------------------------------------------------------------------------------------------

|(8) | Includes 200,000 options and 100,000 shares issuable upon conversion of a convertible note.
|--- | -------------------------------------------------------------------------------------------

|(9) | Includes 712,500 options.
|--- | -------------------------

|(10) | Includes 595,650 options and 320,000 shares issuable upon conversion of convertible notes.
|---- | ------------------------------------------------------------------------------------------



Item 12. Certain Relationships and Related Transactions



None.



Item 13. Exhibits



|        |  |                                                                                                                                                                                                                                                                                                                                                |  |           
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------
|(a) (1) |  | Financial Statements:                                                                                                                                                                                                                                                                                                                          |  |           
|        |  | Report of Independent Registered Public Accounting Firm                                                                                                                                                                                                                                                                                        |  | F-1       
|        |  | Consolidated Balance Sheet                                                                                                                                                                                                                                                                                                                     |  | F-2       
|        |  | Consolidated Statements of Operations and Comprehensive Income                                                                                                                                                                                                                                                                                 |  | F-3       
|        |  | Consolidated Statements of Changes in Stockholders Equity                                                                                                                                                                                                                                                                                     |  | F-4       
|        |  | Consolidated Statements of Cash Flows                                                                                                                                                                                                                                                                                                          |  | F-5       
|        |  | Notes to Consolidated Financial Statements                                                                                                                                                                                                                                                                                                     |  | F-6 - F-17
|        |  |                                                                                                                                                                                                                                                                                                                                               
|(a) (2) |  | Exhibits:                                                                                                                                                                                                                                                                                                                                      |  |           
|        |  | See Exhibit Index on page 13.                                                                                                                                                                                                                                                                                                                  |  |           
|        | 
|(b)     |  | On November 21, 2003, the Company filed a press release, Information Analysis Inc. Reports Third Quarter Results, on Form 8-K. Attached as an exhibit were condensed
consolidated financial statements including Balance Sheet as of September 30, 2003 and Income Statements for the three months and nine months ended September 30, 2003.



Item 14. Principal Accountant Fees and Services



The following table is a summary of the aggregate fees billed in each of the last two fiscal years for professional services rendered by the principal accountant.



|                                                                                                                           |  |                 |        |                 |   |       
|-------------------------------------------------------------------------------------------------------------------------- |  | --------------- | ------ | --------------- | - | ------
|Fee Category                                                                                                               |  | Fiscal 2004Fees |        | Fiscal 2003Fees
|Audit Fees                                                                                                                 |  | $               | 45,500 |                 | $ | 38,500
|Audit-Related Fees -   Out of Pocket Expenses                                                                              |  |                 | 1,249  |                 |   | 636   
|Tax Fees                                                                                                                   |  |                 | 2,939  |                 |   | 3,505 
|Other Fees                                                                                                                 |  |                 |        |                 |   |       
|-   Audit of Information Analysis Incorporated Profit Sharing Plan for the year ended December 31, 2003                    |  |                 | 8,500  |                 |   |       
|-   General consulting and related research pertaining to SBA qualifications, pension and benefit plans, and stock
options |  |                 | 1,345  |                 |   |       
|-   Audit of Information Analysis Incorporated Profit Sharing Plan for the years ended December 31, 2000, 2001 and
2002    |  |                 |        |                 |   | 12,500
|-   Research tax loss carry forward rules                                                                                  |  |                 |        |                 |   | 1,425 
|                                                                                                                           |  |                 |        |                 |   |       
|Total Fees and Services                                                                                                    |  | $               | 59,533 |                 | $ | 56,566
|                                                                                                                           |  |                 |        |                 |   |       



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|Information Analysis Incorporated |  | 2004 Report on Form 10-KSB



The Audit Committee directly engages the Independent Certified Public Accountants as it relates to the audit of the
Companys fiscal year and the reviews of its fiscal quarters and the associated fees. The percentages of services other than Audit Fees that were approved by the audit committee in 2004 and 2003 are 39.4% and 30.8% respectively.



Signatures



In accordance with Section 13 or
15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



INFORMATION ANALYSIS INCORPORATEDBy:

/s/ Sandor RosenbergSandor Rosenberg, PresidentMarch 28, 2005




In accordance with the Exchange
Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.



|                                       |  |                                                              |  |               
|-------------------------------------- |  | ------------------------------------------------------------ |  | --------------
|Signature                              |  | Title                                                        |  | Date          
|/s/ Sandor RosenbergSandor Rosenberg   |  | Chairman of the Board, Chief Executive Officer and
President |  | March 28, 2005
|                                       |  |                                                             
|/s/ Charles A. May, Jr.Charles A. May  |  | Director                                                     |  | March 28, 2005
|                                       |  |                                                             
|/s/ Bonnie K. WachtelBonnie K. Wachtel |  | Director                                                     |  | March 28, 2005
|                                       |  |                                                             
|/s/ James D. WesterJames D. Wester     |  | Director                                                     |  | March 28, 2005
|                                       |  |                                                             
|/s/ Richard S. DeRoseRichard S. DeRose |  | Chief Financial Officer, Secretary and
Treasurer             |  | March 28, 2005
|                                       |  |                                                             
|/s/ Matthew T. SandsMatthew T. Sands   |  | Controller                                                   |  | March 28, 2005



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|Information Analysis Incorporated |  | 2004 Report on Form 10-KSB



Exhibit Index



|            |  |                                                                                         |  |                                                                                                                                                                 
|----------- |  | --------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                             |  | Location                                                                                                                                                        
|3.1         |  | Amended and Restated Articles of Incorporation effective March 18, 1997                 |  | Incorporated by reference from the Registrants Form 10-KSB/A for the fiscal year ending December 31, 1996 and filed on July 3, 1997                            
|            |  |                                                                                        
|3.2         |  | Articles of Amendment to the Articles of Incorporation                                  |  | Incorporated by reference from the Registrants Form 10-KSB/A for the fiscal year ending December 31, 1997 and filed on March 30, 1998                          
|            |  |                                                                                        
|3.3         |  | Amended By-Laws of the Company                                                          |  | Incorporated by reference from the Registrants Form S-18 dated November 20, 1986 (Commission File No. 33-9390).                                                
|            |  |                                                                                        
|4.1         |  | Copy of Stock Certificate                                                               |  | Incorporated by reference from the Registrants Form 10-KSB/A for the fiscal year ending December 31, 1997 and filed on March 30, 1998                          
|            |  |                                                                                        
|4.2         |  | Form of Warrant issued in December 1999 and January 2000                                |  | Incorporated by reference from the Registrants Form 10-KSB for the fiscal year ending December 31, 2000 and filed on March 29, 2000                            
|            |  |                                                                                        
|4.3         |  | Common Stock and Warrant Purchase Agreement dated December 1999                         |  | Incorporated by reference from the Registrants Form 10-KSB for the fiscal year ending December 31, 2000 and filed on March 29, 2000                            
|            |  |                                                                                        
|4.4         |  | Form of 12% 3 year convertible note                                                     |  | Incorporated by reference from the Registrants Form 10-QSB for the period ending September 30, 2001 and filed on November 12, 2001                             
|            |  |                                                                                        
|4.5         |  | Form of Warrant issued to trade creditors who exchanged claims for warrants             |  | Incorporated by reference from the Registrants Form 10-QSB for the period ending September 30, 2001 and filed on November 12, 2001                             
|            |  |                                                                                        
|10.1        |  | Office Lease for 18,280 square feet at 11240 Waples Mill Road, Fairfax, Virginia 22030. |  | Incorporated by reference from the Registrants Form 10-KSB/A for the fiscal year ending December 31, 1996 and filed on July 3, 1997                            
|            |  |                                                                                        
|10.2        |  | Companys 401(k) Profit Sharing Plan through Aetna Life Insurance and Annuity Company.  |  | Incorporated by reference from the Registrants Form 10-KSB/A for the fiscal year ending December 31, 1996 and filed on July 3, 1997                            
|            |  |                                                                                        
|10.3        |  | 1986 Stock Option Plan                                                                  |  | Incorporated by reference from the Registrants Form S-8 filed on December 20, 1988                                                                             
|            |  |                                                                                        
|10.4        |  | 1996 Stock Option Plan                                                                  |  | Incorporated by reference from the Registrants Form S-8 filed on June 25, 1996                                                                                 
|            |  |                                                                                        
|10.5        |  | Line of Credit Agreement with First Virginia Bank (Now Branch Bank and Trust)           |  | Incorporated by reference from the Registrants Form 10-KSB for the fiscal year ending December 31, 1995 and filed April 15, 1996 (Commission File No. 33-9390).



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|      |  |                                                                                                                                                   |  |                                                                                                                                
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------
|10.8  |  | Modification of Office Lease to 12,345 square feet at 11240 Waples Mill Road, Fairfax, Virginia 22030                                             |  | Incorporated by reference from the Registrants Form 10-QSB for the period ended March 31, 2001 and filed on May 11, 2001      
|      |  |                                                                                                                                                  
|10.9  |  | Second Modification of Lease, dated February 10, 2004, to 4,434 square feet at 11240 Waples Mill Road, Fairfax, Virginia 22030                    |  | Incorporated by reference from the Registrants Form 10-KSB for the period ended December 31, 2003, and filed on March 30, 2004
|      |  |                                                                                                                                                  
|10.10 |  | Termination and/or change in control arrangement for Richard S. DeRose dated June 18, 1997                                                        |  | Filed with this Form 10-KSB, page 16                                                                                           
|      |  |                                                                                                                                                  
|23.1  |  | Consent of Independent Registered Public Accounting Firm, Rubino & McGeehin, Chartered                                                            |  | Filed with this Form 10-KSB, page 15                                                                                           
|      |  |                                                                                                                                                  
|31.1  |  | Rule 13a-14(a) / 15a-14(a) Certification by Chief Executive Officer                                                                               |  | Filed with this Form 10-KSB, page 17                                                                                           
|      |  |                                                                                                                                                  
|31.2  |  | Rule 13a-14(a) / 15a-14(a) Certification by Chief Financial Officer                                                                               |  | Filed with this Form 10-KSB, page 18                                                                                           
|      |  |                                                                                                                                                  
|32.1  |  | Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |  | Filed with this Form 10-KSB, page 19                                                                                           
|      |  |                                                                                                                                                  
|32.2  |  | Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |  | Filed with this Form 10-KSB, page 20                                                                                           



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|Information Analysis Incorporated |  | 2004 Report on Form 10-KSB



Report of Independent Registered Public Accounting Firm



To the Board of Directors

Information Analysis Incorporated



We have audited the accompanying consolidated balance sheet of Information Analysis Incorporated and subsidiary as of December 31, 2004, and
the related consolidated statements of operations, changes in stockholders equity and cash flows for each of the two years ended December 31, 2004 and 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An audit includes 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 Information Analysis Incorporated and subsidiary as of December 31, 2004, and the consolidated results of their operations and cash flows for each of the two years ended December 31, 2004
and 2003, in conformity with accounting principles generally accepted in the United States of America.



The accompanying consolidated financial statements have been prepared assuming Information Analysis Incorporated and subsidiary will continue as a going concern. As discussed in Note 15, the Company has suffered
recurring losses from operations and has cash flows problems and financing requirements that raise substantial doubt about its ability to continue as a going concern. Managements plans in regards to these matters are described in Note 15. The
financial statements do not include any adjustments that might result from the outcome of this uncertainty.



|                                
|--------------------------------
|/S/ Rubino & McGeehin, Chartered
|                                
|Bethesda, Maryland              
|February 11, 2005               



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|Information Analysis Incorporated |  | 2004 Report on Form 10-KSB



INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARY

CONSOLIDATED BALANCE SHEET



|                                                                                                                     |  |                        |             |  
|-------------------------------------------------------------------------------------------------------------------- |  | ---------------------- | ----------- | -
|                                                                                                                     |  | As ofDecember 31, 2004 |            
|ASSETS                                                                                                               |  |                        |             |  
|Current assets                                                                                                       |  |                        |             |  
|Cash and cash equivalents                                                                                            |  | $                      | 115,917     |  
|Accounts receivable, net of allowance of $129,617                                                                    |  |                        | 2,169,790   |  
|Note receivable                                                                                                      |  |                        | 85,000      |  
|Prepaid expenses                                                                                                     |  |                        | 47,579      |  
|Other receivables                                                                                                    |  |                        | 6,910       |  
|                                                                                                                     |  |                        |             |  
|Total current assets                                                                                                 |  |                        | 2,425,196   |  
|                                                                                                                     | 
|Fixed assets, net of accumulated depreciation and amortization of $402,969                                           |  |                        | 34,551      |  
|Other assets                                                                                                         |  |                        | 7,447       |  
|Investments                                                                                                          |  |                        | 3,000       |  
|                                                                                                                     |  |                        |             |  
|Total assets                                                                                                         |  | $                      | 2,470,194   |  
|                                                                                                                     |  |                        |             |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                 |  |                        |             |  
|Current liabilities                                                                                                  |  |                        |             |  
|Accounts payable                                                                                                     |  | $                      | 1,566,788   |  
|Accrued payroll and related liabilities                                                                              |  |                        | 277,172     |  
|Revolving line of credit                                                                                             |  |                        | 219,650     |  
|Notes payable                                                                                                        |  |                        | 125,000     |  
|Deferred revenue                                                                                                     |  |                        | 83,844      |  
|Other accrued liabilities                                                                                            |  |                        | 64,748      |  
|                                                                                                                     |  |                        |             |  
|Total liabilities                                                                                                    |  |                        | 2,337,202   |  
|                                                                                                                     |  |                        |             |  
|Stockholders equity                                                                                                 |  |                        |             |  
|Common stock, $0.01 par value, 30,000,000 shares authorized, 11,788,126 shares issued, 10,283,515 shares outstanding |  |                        | 117,881     |  
|Additional paid-in capital                                                                                           |  |                        | 14,122,019  |  
|Accumulated deficit                                                                                                  |  |                        | (13,243,595 | )
|Accumulated other comprehensive income (loss)                                                                        |  |                        | (9,000      | )
|Treasury stock, 1,504,611 shares, at cost                                                                            |  |                        | (854,313    | )
|                                                                                                                     |  |                        |             |  
|Total stockholders equity                                                                                           |  |                        | 132,992     |  
|                                                                                                                     |  |                        |             |  
|Total liabilities and stockholders equity                                                                           |  | $                      | 2,470,194   |  
|                                                                                                                     |  |                        |             |  



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



F-2



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##### Table of Contents

|                                  |  |                           
|--------------------------------- |  | --------------------------
|Information Analysis Incorporated |  | 2004 Report on Form 10-KSB



INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS AND

COMPREHENSIVE INCOME



|                                                 |  |                                  |            |   |      |   |            |  
|------------------------------------------------ |  | -------------------------------- | ---------- | - | ---- | - | ---------- | -
|                                                 |  | For the years ended December 31, |           
|                                                 |  | 2004                             |            |   | 2003 |  
|Sales                                            |  |                                  |            |   |      |   |            |  
|Professional fees                                |  | $                                | 8,635,219  |   |      | $ | 4,988,551  |  
|Software sales                                   |  |                                  | 673,690    |   |      |   | 380,086    |  
|                                                 |  |                                  |            |   |      |   |            |  
|Total sales                                      |  |                                  | 9,308,909  |   |      |   | 5,368,637  |  
|                                                 |  |                                  |            |   |      |   |            |  
|Cost of sales                                    |  |                                  |            |   |      |   |            |  
|Cost of professional fees                        |  |                                  | 6,916,594  |   |      |   | 3,962,669  |  
|Cost of software sales                           |  |                                  | 420,202    |   |      |   | 349,587    |  
|                                                 |  |                                  |            |   |      |   |            |  
|Total cost of sales                              |  |                                  | 7,336,796  |   |      |   | 4,312,256  |  
|                                                 |  |                                  |            |   |      |   |            |  
|Gross profit                                     |  |                                  | 1,972,113  |   |      |   | 1,056,381  |  
|                                                 |  |                                 
|Selling, general and administrative expenses     |  |                                  | (1,655,591 | ) |      |   | (1,262,127 | )
|Other operating income                           |  |                                  | 289,902    |   |      |   |           |  
|                                                 |  |                                  |            |   |      |   |            |  
|Income (loss) from operations                    |  |                                  | 606,424    |   |      |   | (205,746   | )
|Other expenses                                   |  |                                  | (34,672    | ) |      |   | (27,885    | )
|                                                 |  |                                  |            |   |      |   |            |  
|Income (loss) before provision for income taxes  |  |                                  | 571,752    |   |      |   | (233,631   | )
|Provision for income taxes                       |  |                                  |           |   |      |   |           |  
|                                                 |  |                                  |            |   |      |   |            |  
|Net income (loss)                                |  |                                  | 571,752    |   |      |   | (233,631   | )
|                                                 |  |                                 
|Unrealized loss on available-for-sale securities |  |                                  | (3,000     | ) |      |   |           |  
|                                                 |  |                                  |            |   |      |   |            |  
|Comprehensive income                             |  | $                                | 568,752    |   |      | $ | (233,631   | )
|                                                 |  |                                  |            |   |      |   |            |  
|Earnings per common share - basic                |  |                                  |            |   |      |   |            |  
|Net income (loss)                                |  | $                                | 0.06       |   |      | $ | (0.02      | )
|                                                 |  |                                  |            |   |      |   |            |  
|Earnings per common share - diluted              |  |                                  |            |   |      |   |            |  
|Net income (loss)                                |  | $                                | 0.05       |   |      | $ | (0.02      | )
|                                                 |  |                                  |            |   |      |   |            |  
|Weighted average common shares outstanding       |  |                                  |            |   |      |   |            |  
|Basic                                            |  |                                  | 10,283,515 |   |      |   | 10,283,515 |  
|                                                 |  |                                  |            |   |      |   |            |  
|Diluted                                          |  |                                  | 11,015,724 |   |      |   | 10,283,515 |  
|                                                 |  |                                  |            |   |      |   |            |  



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



F-3



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##### Table of Contents

|                                  |  |                           
|--------------------------------- |  | --------------------------
|Information Analysis Incorporated |  | 2004 Report on Form 10-KSB



INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS
EQUITY



|                                                  |  |                             |  |             |         |                          |   |                    |  |   |                                     |    |  |               |        |   |       |   |          |   |  |   |          |  
|------------------------------------------------- |  | --------------------------- |  | ----------- | ------- | ------------------------ | - | ------------------ |  | - | ----------------------------------- | -- |  | ------------- | ------ | - | ----- | - | -------- | - |  | - | -------- | -
|                                                  |  | Shares ofCommonStock Issued |  | CommonStock |         | AdditionalPaid-inCapital |   | AccumulatedDeficit |  |   | AccumulatedOtherComprehensiveIncome |    |  | TreasuryStock |        |   | Total |  
|Balances, December 31, 2002                       |  | 11,788,126                  |  | $           | 117,881 |                          | $ | 14,122,019         |  | $ | (13,581,716                         | )  |  | $             | (6,000 | ) |       | $ | (854,313 | ) |  | $ | (202,129 | )
|Net loss                                          |  |                            |  |             |        |                          |   |                   |  |   | (233,631                            | )- |  |               |       |   |       |   |         |   |  |   | (233,631 | )
|                                                  |  |                             |  |             |         |                          |   |                    |  |   |                                     |    |  |               |        |   |       |   |          |   |  |   |          |  
|Balances, December 31, 2003                       |  | 11,788,126                  |  |             | 117,881 |                          |   | 14,122,019         |  |   | (13,815,347                         | )  |  |               | (6,000 | ) |       |   | (854,313 | ) |  |   | (435,760 | )
|Net Income                                        |  |                            |  |             |        |                          |   |                   |  |   | 571,752                             |    |  |               |       |   |       |   |         |   |  |   | 571,752  |  
|Unrealized loss on available- for-sale securities |  |                            |  |             |        |                          |   |                   |  |   |                                    |    |  |               | (3,000 | ) |       |   |         |   |  |   | (3,000   | )
|                                                  |  |                             |  |             |         |                          |   |                    |  |   |                                     |    |  |               |        |   |       |   |          |   |  |   |          |  
|Comprehensive income                              |  |                            |  |             |        |                          |   |                   |  |   |                                    |    |  |               |       |   |       |   |         |   |  |   | 568,752  |  
|                                                  |  |                             |  |             |         |                          |   |                    |  |   |                                     |    |  |               |        |   |       |   |          |   |  |   |          |  
|Balances, December 31, 2004                       |  | 11,788,126                  |  | $           | 117,881 |                          | $ | 14,122,019         |  | $ | (13,243,595                         | )  |  | $             | (9,000 | ) |       | $ | (854,313 | ) |  | $ | 132,992  |  
|                                                  |  |                             |  |             |         |                          |   |                    |  |   |                                     |    |  |               |        |   |       |   |          |   |  |   |          |  



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



F-4



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##### Table of Contents

|                                  |  |                           
|--------------------------------- |  | --------------------------
|Information Analysis Incorporated |  | 2004 Report on Form 10-KSB



INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS



|                                                                                         |  |                                 |          |   |      |   |          |  
|---------------------------------------------------------------------------------------- |  | ------------------------------- | -------- | - | ---- | - | -------- | -
|                                                                                         |  | For the years endedDecember 31, |         
|                                                                                         |  | 2004                            |          |   | 2003 |  
|Cash flows from operating activities:                                                    |  |                                 |          |   |      |   |          |  
|Net income (loss)                                                                        |  | $                               | 571,752  |   |      | $ | (233,631 | )
|Adjustments to reconcile net income to net cash provided (used) by operating activities: |  |                                 |          |   |      |   |          |  
|Depreciation and amortization                                                            |  |                                 | 22,159   |   |      |   | 18,828   |  
|Amortization of capitalized software                                                     |  |                                 | 62,583   |   |      |   | 83,448   |  
|Gain on sale of fixed assets                                                             |  |                                 | (1,465   | ) |      |   |         |  
|Changes in operating assets and liabilities                                              |  |                                 |          |   |      |   |          |  
|Accounts receivable                                                                      |  |                                 | (648,927 | ) |      |   | (696,544 | )
|Other receivables and prepaid expenses                                                   |  |                                 | 107,279  |   |      |   | (72,423  | )
|Accounts payable and accrued expenses                                                    |  |                                 | 230,296  |   |      |   | 860,945  |  
|Deferred revenue                                                                         |  |                                 | (52,260  | ) |      |   | (2,013   | )
|                                                                                         |  |                                 |          |   |      |   |          |  
|Net cash provided (used) by operating activities                                         |  |                                 | 291,417  |   |      |   | (41,390  | )
|                                                                                         |  |                                 |          |   |      |   |          |  
|Cash flows from investing activities:                                                    |  |                                 |          |   |      |   |          |  
|Acquisition of furniture and equipment                                                   |  |                                 | (25,519  | ) |      |   | (7,208   | )
|Proceeds from sale of fixed assets                                                       |  |                                 | 1,465    |   |      |   |         |  
|                                                                                         |  |                                 |          |   |      |   |          |  
|Net cash used by investing activities                                                    |  |                                 | (24,054  | ) |      |   | (7,208   | )
|                                                                                         |  |                                 |          |   |      |   |          |  
|Cash flows from financing activities:                                                    |  |                                 |          |   |      |   |          |  
|Net (payments) proceeds under line of credit                                             |  |                                 | (469,367 | ) |      |   | 286,017  |  
|                                                                                         |  |                                 |          |   |      |   |          |  
|Net cash (used) provided by financing activities                                         |  |                                 | (469,367 | ) |      |   | 286,017  |  
|                                                                                         |  |                                 |          |   |      |   |          |  
|Net (decrease) increase in cash and cash equivalents                                     |  |                                 | (202,004 | ) |      |   | 237,419  |  
|Cash and cash equivalents, beginning of the year                                         |  |                                 | 317,921  |   |      |   | 80,502   |  
|                                                                                         |  |                                 |          |   |      |   |          |  
|Cash and cash equivalents, end of the year                                               |  | $                               | 115,917  |   |      | $ | 317,921  |  
|                                                                                         |  |                                 |          |   |      |   |          |  
|Supplemental cash flow information                                                       |  |                                 |          |   |      |   |          |  
|Interest paid                                                                            |  | $                               | 35,462   |   |      | $ | 44,236   |  
|                                                                                         |  |                                 |          |   |      |   |          |  



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



F-5



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##### Table of Contents

|                                  |  |                           
|--------------------------------- |  | --------------------------
|Information Analysis Incorporated |  | 2004 Report on Form 10-KSB



INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|1. | Summary of Significant Accounting Policies
|-- | ------------------------------------------



Operations



Information Analysis Incorporated (the Company) was incorporated under the corporate laws of the Commonwealth of Virginia in 1979 to develop and market
computer applications software systems, programming services, and related software products and automation systems.



Principles of Consolidation



The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, International Software Service Corporation.
Upon consolidation, all material intercompany accounts, transactions and profits are eliminated.



Accounting Estimates



The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from these estimates.



Revenue Recognition



The Company
provides services under various pricing arrangements. Revenue from cost-plus-fixed-fee contracts is recognized on the basis of reimbursable contract costs incurred during the period, plus a percentage of the fixed fee. Revenue from firm-fixed-price
contracts is recognized as work is performed, with costs and estimated profits recorded on the basis of direct and indirect costs incurred. Revenue from time and material contracts is recognized on the basis of hours utilized, plus other
reimbursable contract costs incurred during the period. Contract losses, if any, are accrued when their occurrence becomes known and the amount of the loss is reasonably determinable. Changes in job performance, job conditions and estimated
profitability, including final contract settlements, may result in revisions to costs and income and are recognized in the period in which the revisions are determined.



Revenue from software sales is recognized upon delivery, when collection of the receivable is probable. Maintenance revenue
is recognized ratably over the maintenance period.





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##### Table of Contents

|                                  |  |                           
|--------------------------------- |  | --------------------------
|Information Analysis Incorporated |  | 2004 Report on Form 10-KSB



INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|1. | Summary of Significant Accounting Policies (continued)
|-- | ------------------------------------------------------



Segment Reporting



The Company adopted Statement No. 131, Disclosures about Segments of an Enterprise and Related Information, in 1998, and concluded that it operates
in one business segment, providing products and services to modernize client information systems.



Government Contracts



Company sales to departments or agencies of the United States Government are subject to audit by the Defense Contract Audit Agency (DCAA), which could
result in the renegotiation of amounts previously billed. Audits by DCAA were completed through the year ended December 31, 1997. No amounts were changed as a result of the audits. Since the Company has entered into no cost-plus contracts since
1997, management is of the opinion that any disallowance of costs for subsequent fiscal years by government auditors, other than amounts already provided, will not materially affect the Companys financial statements.



Cash and Cash Equivalents



For the purposes of the statement of cash flows, the Company considers all
highly liquid investments with maturities of ninety days or less at the time of purchase to be cash equivalents. Deposits are maintained with a federally insured bank. Balances at times exceed federally insured limits, but management does not
consider this to be a significant concentration of credit risk.



Fixed Assets



Fixed assets are stated
at cost and are depreciated using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the term of the lease or the estimated life of the improvement, whichever is shorter. Maintenance and
minor repairs are charged to operations as incurred. Gains and losses on dispositions are recorded in current operations.





F-7



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##### Table of Contents

|                                  |  |                           
|--------------------------------- |  | --------------------------
|Information Analysis Incorporated |  | 2004 Report on Form 10-KSB



INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|1. | Summary of Significant Accounting Policies (continued)
|-- | ------------------------------------------------------



Software Development Costs



The Company capitalized costs related to the development of the ICONS software product. In accordance with Statement of Financial Accounting Standards No.
86, capitalization of costs began when technological feasibility was established and ended when the product was available for general release to customers. Amortization was computed and recognized for the product when available for general release
to customers based on the greater of (a) the ratio that current gross revenues for the product bear to the total of current and anticipated future gross revenues for that product or, (b) the straight-line method over the economic life of the
product. Capitalized costs and amortization periods are managements estimates.



Stock-Based Compensation



The Company records compensation expense for all stock-based compensation plans using the intrinsic value method prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees. The Companys annual financial
statements disclose the required pro forma information as if the fair value method prescribed by Financial Accounting Standards Boards Statement No. 123, Accounting for Stock-Based Compensation, had been adopted.



Earnings Per Share



The Companys earnings per share calculations are based upon the
weighted average of shares of common stock outstanding. The dilutive effect of stock options, warrants and convertible notes are included for purposes of calculating diluted earnings per share, except for periods when the Company reports a net loss,
in which case the inclusion of such equity instruments would be antidilutive.



Recent Accounting Pronouncements



In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123 (revised 2004), Share-Based payment, or SFAS No. 123R, which is a revision of SFAS No. 123, Accounting for Stock-Based
Compensation, or SFAS No. 123. SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values and does not allow the previously
permitted pro forma disclosure as an alternative to financial statement recognition. SFAS No. 123R supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. SFAS No.
123R is scheduled to be effective for the Company beginning January 1, 2006. SFAS No. 123R allows for either prospective recognition of compensation expense or retroactive recognition, which may date back to the original issuance of SFAS No. 123 or
only to interim periods in the year of adoption. The Company is currently evaluating these transition methods.



F-8



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##### Table of Contents

|                                  |  |                           
|--------------------------------- |  | --------------------------
|Information Analysis Incorporated |  | 2004 Report on Form 10-KSB



INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|1. | Summary of Significant Accounting Policies (continued)
|-- | ------------------------------------------------------



The impact of adoption of SFAS No. 123R cannot be predicted at this time because that will depend on the method of adoption elected, the fair value and
number of share-based payments granted in the future. However, had the Company adopted SFAS No. 123R in prior periods, the magnitude of the impact of that standard would have approximated the impact of SFAS No. 123 assuming the application of the
Black-Scholes model as described in the disclosure of pro forma net income (loss) and pro forma income (loss) per share in Note 12.



Income Taxes



Under Financial Accounting Standards Board Statement No. 109, Accounting for Income Taxes, the liability method is used in accounting for income
taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities, and are measured using the enacted tax rates and laws that will be in effect when
the differences are expected to reverse.



Fair Market
Value of Financial Instruments



The Companys
financial instruments include trade receivables, other receivables, notes receivable, accounts payable, and notes payable. Management believes the carrying value of financial instruments approximates their fair market value, unless disclosed
otherwise in the accompanying notes.



Fair Market Value
of Available-for-Sale Securities



The Company
maintains investments in certain available-for-sale securities as defined in Financial Accounting Standards Board Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities. The investments are reported at estimated
fair market value, with unrealized gains and losses excluded from earnings and reported separately as other comprehensive income. Where available-for-sale securities are not traded on a public exchange, the fair market value is determined by
consulting with professional investment managers who are familiar the individual securities.



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##### Table of Contents

|                                  |  |                           
|--------------------------------- |  | --------------------------
|Information Analysis Incorporated |  | 2004 Report on Form 10-KSB



INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|2. | Receivables
|-- | -----------



Accounts receivable at December 31, 2004, consist of the following:



|                                      |  |   |           |  
|------------------------------------- |  | - | --------- | -
|Billed-federal government             |  | $ | 1,948,740 |  
|Billed-commercial and other           |  |   | 337,891   |  
|                                      |  |   |           |  
|Total billed                          |  |   | 2,286,631 |  
|Unbilled                              |  |   | 12,776    |  
|Less: allowance for doubtful accounts |  |   | (129,617  | )
|                                      |  |   |           |  
|Accounts receivable, net              |  | $ | 2,169,790 |  
|                                      |  |   |           |  



Billed receivables
from the federal government include amounts due from both prime contracts and subcontracts where the federal government is the end customer. Unbilled receivables are for services provided through the balance sheet date that are expected to be billed
and collected within one year.



At December 31, 2004, there
are notes receivable from a customer in the amounts of $75,000 and $10,000. The $75,000 note is collateralized by a third partys holdings of 500,000 shares of the Companys stock. The notes bear interest of 7% and are due June 30, 2005.



During the third quarter of fiscal 2004, Information Analysis
Incorporated recovered past due receivables, which had been reserved as uncollectible in 2000, in the amount of $289,902, net of attorneys fees.



|3. | Fixed Assets
|-- | ------------



A summary of fixed assets and equipment at December 31, 2004, consist of the following:



|                                                |  |   |          |  
|----------------------------------------------- |  | - | -------- | -
|Furniture and equipment                         |  | $ | 136,191  |  
|Computer equipment and software                 |  |   | 301,329  |  
|                                                |  |   |          |  
|Subtotal                                        |  |   | 437,520  |  
|Less: accumulated depreciation and amortization |  |   | (402,969 | )
|                                                |  |   |          |  
|Total                                           |  | $ | 34,551   |  
|                                                |  |   |          |  



Depreciation expense
for the years ended December 31, 2004 and 2003, was $22,159 and $18,828 respectively.



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|--------------------------------- |  | --------------------------
|Information Analysis Incorporated |  | 2004 Report on Form 10-KSB



INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|4. | Software Development Costs
|-- | --------------------------



Software development costs as of December 31, 2004, consist of the following:



|                               |  |   |          |  
|------------------------------ |  | - | -------- | -
|Cumulative costs incurred      |  | $ | 764,110  |  
|Accumulated amortization       |  |   | (764,110 | )
|                               |  |   |          |  
|Net software development costs |  | $ |         |  
|                               |  |   |          |  



Amortization expense
for the years ended December 31, 2004 and 2003, was $62,583 and $83,448, respectively.



At December 31, 2004, capitalized software development cost for the ICONS suite of software tools and all development costs related to other products have been fully amortized.



|5. | Investments
|-- | -----------



Investments at December 31, 2004, consist of the following:



|                                                       |  |   |        |  
|------------------------------------------------------ |  | - | ------ | -
|Available-for-sale securities                          |  | $ | 12,000 |  
|Less: unrealized loss on available-for-sale securities |  |   | (9,000 | )
|                                                       |  |   |        |  
|Total investments                                      |  | $ | 3,000  |  
|                                                       |  |   |        |  



|6. | Other Accrued Liabilities
|-- | -------------------------



Other accrued liabilities at December 31, 2004, consist of the following:



|                                |  |   |       
|------------------------------- |  | - | ------
|Interest payable                |  | $ | 3,750 
|Commissions payable             |  |   | 13,105
|Accrued payables                |  |   | 47,893
|                                |  |   |       
|Total other accrued liabilities |  | $ | 64,748
|                                |  |   |       



|7. | Revolving Line of Credit
|-- | ------------------------



At December 31, 2004, the Company had a revolving line of credit with a bank providing for demand or short-term borrowings up to $500,000. The line of
credit is callable on demand, and next expires on June 16, 2005. Draws against this line are limited by varying percentages of the Companys accounts receivable balances, depending on the source of the receivables and their ages. The bank is
granted a security interest in certain assets if there are borrowings under the line of credit. Interest on outstanding amounts is payable monthly at the banks prime rate plus 2.5%, with a floor of 8.00% (8.00% at December 31, 2004). The
lender has a first priority security interest in the Companys receivables and a direct assignment of its U.S. government contracts. The bank



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##### Table of Contents

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|--------------------------------- |  | --------------------------
|Information Analysis Incorporated |  | 2004 Report on Form 10-KSB



INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|7. | Revolving Line of Credit (continued)
|-- | ------------------------------------



automatically executes draws on and payments to the revolving line of credit in an effort to maintain a target balance in the Companys operating
account. There was an outstanding balance of $219,650 on the line at December 31, 2004.



The Company is in negotiations with various organizations to obtain a new line of credit. The current line of credit, coupled with funds generated from operations, assuming the operations are cash flow positive,
should be sufficient to meet the Companys operating cash requirements. The Company, however, is required from time to time to delay timely payments of its accounts payable. The Company cannot be certain that there will not be a need for
additional working capital in the near future, and it is uncertain whether the Company will be able to obtain such additional working capital.



|8. | Commitments and Contingencies
|-- | -----------------------------



Operating Leases



The Company leases facilities under long-term operating lease agreements. Rent expense was $82,520 and $146,506 for the years ended December 31, 2004 and
2003, net of sublease income of $64,231 and $238,793, respectively. The future minimum rental payments to be made under long-term operating leases principally for facilities are as follows:



|                              |  |   |        
|----------------------------- |  | - | -------
|Year ending December 31, 2005 |  | $ | 77,000 
|2006                          |  |   | 79,500 
|2007                          |  |   | 20,000 
|                              |  |   |        
|Total minimum rent payments   |  | $ | 176,500
|                              |  |   |        



The above minimum
lease payments reflect the base rent under the lease agreements. However, these base rents can be adjusted each year to reflect increases in the consumer price index and the Companys proportionate share of real estate tax increases on the
leased property. The leases are secured by security deposits in the amount of $6,947.



There are no aggregate future minimum rentals to be received under non-cancelable subleases as of December 31, 2004.



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##### Table of Contents

|                                  |  |                           
|--------------------------------- |  | --------------------------
|Information Analysis Incorporated |  | 2004 Report on Form 10-KSB



INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|9. | Income Taxes
|-- | ------------



The tax effects of significant temporary differences representing deferred tax assets and deferred tax liabilities at December 31, 2004, are as follows:



|                                          |  |   |            |  
|----------------------------------------- |  | - | ---------- | -
|Deferred tax assets (liabilities):        |  |   |            |  
|Net operating loss carry forward          |  | $ | 6,281,000  |  
|Accrued vacation and officer compensation |  |   | 51,400     |  
|Allowance for bad debts                   |  |   | 49,200     |  
|Intangibles                               |  |   | 3,400      |  
|Fixed assets                              |  |   | (128,600   | )
|                                          |  |   |            |  
|Subtotal                                  |  |   | 6,256,400  |  
|Valuation allowance                       |  |   | (6,256,400 | )
|                                          |  |   |            |  
|Total                                     |  | $ |           |  
|                                          |  |   |            |  



The provision for
income taxes is at an effective rate different from the federal statutory rate due principally to the following:



|                                                                       |  |              |          |   |      |   |          |  
|---------------------------------------------------------------------- |  | ------------ | -------- | - | ---- | - | -------- | -
|                                                                       |  | December 31, |         
|                                                                       |  | 2004         |          |   | 2003 |  
|Income (loss) before taxes                                             |  | $            | 571,752  |   |      | $ | (233,631 | )
|                                                                       |  |              |          |   |      |   |          |  
|Income tax expense (benefit) on above amount at federal statutory rate |  |              | 239,800  |   |      |   | (71,000  | )
|State income tax expense (benefit), net of federal benefit             |  |              | 40,000   |   |      |   | (16,300  | )
|Change in valuation allowance                                          |  |              | (278,000 | ) |      |   | 85,700   |  
|Effect of change in estimates and non-deductible items                 |  |              | (1,800   | ) |      |   | 1,600    |  
|                                                                       |  |              |          |   |      |   |          |  
|Provision for income taxes                                             |  | $            |         |   |      | $ |         |  
|                                                                       |  |              |          |   |      |   |          |  



The Company has
recognized a valuation allowance to the full extent of its net deferred tax assets since the likelihood of realization of the benefit cannot be determined.



The Company has net operating loss carry forwards of approximately $16.5 million, which expire, if unused, in the year 2020. The tax benefits of
approximately $2.3 million of net operating losses related to stock options will be credited to equity if the benefit is realized through utilization of the net operating loss carry forwards.



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##### Table of Contents

|                                  |  |                           
|--------------------------------- |  | --------------------------
|Information Analysis Incorporated |  | 2004 Report on Form 10-KSB



INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|10. | Major Customers
|--- | ---------------



The Companys prime contracts and subcontracts with agencies of the federal government accounted for greater than 89% of the Companys 2004
revenues and for 97% of the Companys 2003 revenues. The Companys subcontracts with one prime contractor accounted for 13% of the Companys 2004 revenue. The Companys prime contracts with three federal government agencies
accounted for 49% of the Companys 2004 revenue.



|11. | Retirement Plans
|--- | ----------------



The Company restated its Cash or Deferred Arrangement Agreement (CODA), which satisfies the requirements of section 401(k) of the Internal Revenue Code,
effective January 1, 2003. This defined contribution retirement plan covers substantially all employees. Participants can elect to have up to the maximum percentage allowable of their salaries reduced and contributed to the plan. The Company may
make matching contributions equal to a discretionary percentage of a discretionary percentage of the participants elective deferrals. In 2004, the Company matched 25% of the first 6% of the participants elective deferrals. The Company
may also make additional contributions to all eligible employees at its discretion, but did not do so in 2004. Expenses for the year ended December 31, 2004 were $31,043. Expenses for the year ended December 31, 2003 were $23,014.



|12. | Stock Options and Warrants
|--- | --------------------------



The Company has a stock option plan, which became effective June 25, 1996. The plan provides for the granting of stock options to employees and directors.
The maximum number of shares for which options may be granted under the plans is 3,075,000. Options expire no later than ten years from the date of grant or when employment ceases, whichever comes first, and vest over periods determined by the Board
of Directors. The average vesting period for options granted in 2004 was eighteen months. The exercise price of each option equals the quoted market price of the Companys stock on the date of grant. The stock option plan is accounted for under
Accounting Principles Board (APB) Opinion No. 25. Accordingly, no compensation has been recognized for the plan. Had compensation cost for the plans been determined based on the estimated fair value of the options at the grant date consistent with
the method of Statement of Financial Accounting Standards (SFAS) No. 123, the Companys net income and earnings would have been:



|                            |  |      |         |      |   |          |  
|--------------------------- |  | ---- | ------- | ---- | - | -------- | -
|                            |  | 2004 |         | 2003 |  
|Net income (loss)           |  |      |         |      |   |          |  
|As reported                 |  | $    | 571,752 |      | $ | (233,631 | )
|Pro forma                   |  | $    | 552,963 |      | $ | (252,917 | )
|Net income (loss) per share |  |      |         |      |   |          |  
|As reported                 |  | $    | 0.06    |      | $ | (0.02    | )
|Pro forma                   |  | $    | 0.05    |      | $ | (0.02    | )



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##### Table of Contents

|                                  |  |                           
|--------------------------------- |  | --------------------------
|Information Analysis Incorporated |  | 2004 Report on Form 10-KSB



INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|12. | Stock Options and Warrants (continued)
|--- | --------------------------------------



The fair value of the options granted in 2004 and 2003 is estimated on the date of the grant using the Black-Scholes options-pricing model assuming the
following:



|                         |  |         |   |  |         |  
|------------------------ |  | ------- | - |  | ------- | -
|                         |  | 2004    |   |  | 2003    |  
|Dividend yield           |  | None    |   |  | None    |  
|Risk-free interest rate  |  | 4.06    | % |  | 1.89    | %
|Expected volatility      |  | 86.6    | % |  | 132.4   | %
|Expected term of options |  | 3 years |   |  | 3 years |  



The effects on 2004
and 2003 pro forma net income and earnings per share of expensing the estimated fair value of stock options are not necessarily representative of the effects on reported net income for future years due to such things as the vesting period of the
stock options and the potential for issuance of additional stock options in future years. The weighted average fair value per option granted in 2004 and 2003, was $0.22 and $0.15, respectively.



The following table summarizes information about stock options outstanding
at December 31, 2004:



|                         |  |                     |  |                              |       |                                         |           |                  |           |                              |   |      
|------------------------ |  | ------------------- |  | ---------------------------- | ----- | --------------------------------------- | --------- | ---------------- | --------- | ---------------------------- | - | -----
|                         |  | Options Outstanding |  | Options Exercisable         
|Range of Exercise Prices |  | Number of Options   |  | WeightedAverageExercisePrice |       | WeightedAverageRemainingContractualLife |           | Number ofOptions |           | WeightedAverageExercisePrice
|Less than $1.00          |  | 1,728,950           |  | $                            | 0.382 |                                         | 3.5 years |                  | 1,586,700 |                              | $ | 0.396
|$1.00 and more           |  | 171,400             |  | $                            | 5.929 |                                         | 2.5 years |                  | 171,400   |                              | $ | 5.929
|                         |  |                     |  |                              |       |                                         |           |                  |           |                              |   |      
|Total                    |  | 1,900,350           |  | $                            | 0.882 |                                         | 3.4 years |                  | 1,758,100 |                              | $ | 0.935
|                         |  |                     |  |                              |       |                                         |           |                  |           |                              |   |      



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##### Table of Contents

|                                  |  |                           
|--------------------------------- |  | --------------------------
|Information Analysis Incorporated |  | 2004 Report on Form 10-KSB



INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Unexercisable options are as follows: 5,000 options at $0.38 per share; 2,000 options at $0.35 per share; 11,500 options at $0.33 per share; 6,000 options
at $0.30 per share; 7,000 options at $0.26 per share; 1,500 options at $0.25 per share; 5,000 options at $0.24 per share; 78,500 options at $0.22 per share, 1,000 options at $0.21 per share; 1,000 options at $0.19 per share; 10,000 options at $0.17
per share; 6,000 options at $0.15 per share; and 7,750 options at $0.13 per share. Transactions involving the plan were as follows:



|12. | Stock Options and Warrants (continued)
|--- | --------------------------------------



|                               |  |              |   |      |                      |      |        |           |   |                      |   |     
|------------------------------ |  | ------------ | - | ---- | -------------------- | ---- | ------ | --------- | - | -------------------- | - | ----
|                               |  | December 31,
|                               |  | 2004         |   | 2003
|                               |  | Shares       |   |      | WeightedAveragePrice |      | Shares |           |   | WeightedAveragePrice
|Outstanding, beginning of year |  | 1,877,050    |   |      | $                    | 0.84 |        | 1,624,050 |   |                      | $ | 0.95
|Granted                        |  | 65,300       |   |      |                      | 1.51 |        | 281,500   |   |                      |   | 0.21
|Exercised                      |  | 0            |   |      |                      |      |        | 0         |   |                      |   |     
|Canceled                       |  | (42,000      | ) |      |                      | 0.16 |        | (28,500   | ) |                      |   | 0.49
|                               |  |              |   |      |                      |      |        |           |   |                      |   |     
|Outstanding, end of year       |  | 1,900,350    |   |      | $                    | 0.88 |        | 1,877,050 |   |                      | $ | 0.84
|                               |  |              |   |      |                      |      |        |           |   |                      |   |     



The Board of
Directors has also granted warrants to directors, employees and others. No warrants were issued in 2004 or 2003. There were no warrants exercised in 2004 or 2003. As of December 31, 2004, outstanding warrants are 223,475, all of which expire within
3 years. The purchase prices for shares issued upon exercise of these warrants range from $0.01 to $6.42 per share. These warrants are exercisable immediately.



|13. | Convertible Notes Payable
|--- | -------------------------



During 2001, the Company issued to accredited investors $125,000 of 3-year 12% convertible notes, having a conversion price of $0.25 per share. Notes
totaling $80,000 were issued to stockholders, officers and directors. These notes matured on September 30, 2004. At managements request, the investors extended the maturity date of the notes one year to September 30, 2005, with all other terms
unchanged.



|14. | Computation Of Earnings Per Share
|--- | ---------------------------------



Earnings per share are presented in accordance with SFAS No. 128, Earnings Per Share. This statement requires dual presentation of basic and
diluted earnings per share on the face of the income statement. Basic earnings per share excludes dilution and is computed by dividing income available to common shareholders by the weighted-average number of shares outstanding for the period.
Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock, except for periods when the Company reports a net loss because the
inclusion of such items would be antidilutive.



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##### Table of Contents

|                                  |  |                           
|--------------------------------- |  | --------------------------
|Information Analysis Incorporated |  | 2004 Report on Form 10-KSB



INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|14. | Computation Of Earnings Per Share (continued)
|--- | ---------------------------------------------



The following is a reconciliation of the amounts used in calculating basic and diluted net income per common share.



|                                                                          |  |            |          |   |        |            |                 |   |       |  
|------------------------------------------------------------------------- |  | ---------- | -------- | - | ------ | ---------- | --------------- | - | ----- | -
|                                                                          |  | Net Income |          |   | Shares |            | Per ShareAmount |  
|Basic net income per common share for the year ended December 31, 2004:   |  |            |          |   |        |            |                 |   |       |  
|Income available to common stockholders                                   |  | $          | 571,752  |   |        | 10,283,515 |                 | $ | 0.06  |  
|Effect of dilutive stock options                                          |  |            |          |   |        | 137,698    |                 |   |      |  
|Effect of dilutive warrants                                               |  |            |          |   |        | 94,511     |                 |   |      |  
|Effect of dilutive convertible notes                                      |  |            | 15,000   |   |        | 500,000    |                 |   |      |  
|Diluted net income per common share for the year ended December 31, 2004: |  | $          | 586,752  |   |        | 11,015,724 |                 | $ | 0.05  |  
|                                                                          |  |            |         
|Basic net loss per common share for the year ended December 31, 2003:     |  |            |          |   |        |            |                 |   |       |  
|Income available to common stockholders                                   |  | $          | (233,631 | ) |        | 10,283,515 |                 | $ | (0.02 | )
|Effect of dilutive stock options, warrants and convertible notes          |  |            |          |   |        |           |                 |   |      |  
|Diluted net loss per common share for the year ended December 31, 2003:   |  | $          | (233,631 | ) |        | 10,283,515 |                 | $ | (0.02 | )



|15. | Going Concern Evaluation
|--- | ------------------------



The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. Although the Company has an accumulated deficit of $13,243,000, it achieved net income of approximately $572,000 for the year ended December 31, 2004, which resulted in positive equity as of year end.
The Companys financial position, however, remains challenged.



The Companys credit facility expires June 16, 2005, and is payable on demand. Should the lender demand payment, or fail to renew the credit facility upon expiration, the Company may not be able to repay the credit facility or borrow
sufficient funds from another financial institution to refinance it. Management expects that the credit facility will continue to be extended under its existing terms.



Management is seeking alternative financing and capital sources to replace the existing credit facility. The Companys
ability to continue operations, however, is contingent upon obtaining new financing and capital, sustaining its return to profitable operations, improving its gross margins, and reducing overhead and general and administrative costs. The financial
statements do not include any adjustments that might result from the outcome of this uncertainty.



F-17