UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the quarterly period ended June 30, 2004March 31, 2005

For the period from            to            

Commission file number 0-5404

ANALEX CORPORATION

(Exact name of registrant as specified in its charter)

5904 Richmond Highway

Suite 300

Alexandria, Virginia 22303

(Address of principal executive offices)

Registrant’s Telephone number including area code

(703) 329-9400

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

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

As of August 11, 2004, 15,292,512April 26, 2005, 15,506,419 shares of the common stockCommon Stock of the registrant were outstanding.

ANALEX CORPORATION

TABLE OF CONTENTS

ANALEX CORPORATION

CONSOLIDATED BALANCE SHEETS

JUNE 30, 2004MARCH 31, 2005 AND DECEMBER 31, 20032004

See Notes to Consolidated Financial Statements

3

ANALEX CORPORATION

CONSOLIDATED BALANCE SHEETS

JUNE 30, 2004MARCH 31, 2005 AND DECEMBER 31, 20032004

See Notes to Consolidated Financial Statements

4

ANALEX CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE AND SIX MONTHS ENDED JUNE 30,MARCH 31, 2005 AND 2004 AND 2003

See Notes to Consolidated Financial Statements

5

ANALEX CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIXTHREE MONTHS ENDED JUNE 30,MARCH 31, 2005 AND 2004 AND 2003

See Notes to Consolidated Financial Statements

6

ANALEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1.Business Groups

Analex Corporation (the(“Analex” or the “Company”) providesis a provider of mission-critical professional services to federal government clients. The Company specializes in providing information technology, and systems engineering, security services toand intelligence services in support of the United States governmentU.S. Government. Analex focuses on developing innovative technical approaches for the intelligence community, analyzing and supporting defense systems, and designing, developing and testing aerospace systems. The Company provides its services through its two groups:strategic business units: the Homeland Security Group, supporting intelligence systems; and the Systems Engineering Group, supporting the development of space-based systems, the operation of terrestrial assets, and the launch of unmanned rockets by NASA under the Company’s Expendable Launch Vehicle Integrated Support (“ELVIS”) contract. In addition, its discontinued subsidiary, Advanced Biosystems, Inc. (“ABS”), is engaged in biomedical research for broad spectrum defenses against toxic agents capable of being used as bioterrorist weapons, such as anthrax and smallpox. During the second quarter of 2004, the Company decided to divest ABS. Therefore, the results of operations of ABS are reported as discontinued operations for all periods presented herein (see note 12).

The Homeland Security Group accounted for approximately 48%61.5% of the Company’s 20042005 year-to-date revenue. This group provides engineering, scientific and information technology services and solutions to assist in the development, implementation and support of intelligence systems. Analex provides these services to the intelligence community, including the National Reconnaissance Office, the Missile Defense Agency, the National Security Agency, the Department of Defense, and major aerospace contractors, such as Lockheed Martin and Northrop Grumman.

The Systems Engineering Group accounted for approximately 52%38.5% of the Company’s 20042005 year-to-date revenues.revenue. This group provides engineering and information technology services and solutions to assist in the development of space-based systems and support operations of terrestrial assets. Capabilities include expendable launch vehicle engineering, space systems development, and ground support for space operations.

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

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

2.Basis of Presentation

The interim consolidated financial statements for the Company are unaudited, but in the opinion of management, reflect all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of results for such periods. The results of operations for any interim period are not necessarily indicative of results for the full year. The balance sheet at December 31, 20032004 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. These unaudited consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 20032004 (“20032004 Form 10-K”) filed with the Securities and Exchange Commission on March 30, 2004.

The Company pursues acquisitions to complement its business. In accordance with the provisions of Statement of Financial Accounting Standards No. 141,Business Combinations, the direct costs associated with these acquisitions are accounted for as additional purchase consideration. Costs associated with transactions for which we discontinue our pursuit are expensed in the period in which the transaction is abandoned.28, 2005.

3.Acquisition of Beta Analytics, Inc.

Analex acquired Beta Analytics, Incorporated (“BAI”) on May 28, 2004. Under the terms of a Stock Purchase Agreement, dated May 6, 2004, Analex acquired all of the issued and outstanding stock of BAI for approximately (i) $27.7 million in cash, and (ii) 1,832,460 unregistered shares of Analex common stock. These shares wereCommon Stock. The Common Stock was valued at $3.332 per share. This value$3.80, which was determined basedthe closing price on the average closing stock price of the Company’s common stock for the five daysday prior to the announcement of the acquisition. Analex financed the cash portion of the consideration for the acquisition through its cash on hand, senior debt from Bank of America, N.A. and new debt in the initial principal amount of $12 millionSeries B Senior Subordinated Notes (see note 9).

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

The acquisition of BAI, which was valued at approximately $35.2$37.9 million, including the assumption of BAI’s debt of $1.7 million, was accounted for using the purchase method of accounting. Under the purchase method of accounting, the purchase price is allocated to the underlying tangible and intangible assets acquired and liabilities assumed based on their respective fair market values, with the excess recorded as goodwill. The Stock Purchase Agreement contains certain financial statements asrepresentations which will survive 24-months after the closing date. In addition, an escrow account containing $1 million cash and 523,560 shares of June 30, 2004 reflect preliminary estimatesAnalex Common Stock was established with proceeds of the fair market value forsale to secure the purchased

intangible assets. The allocationindemnification obligations of the purchase price is summarized as follows:sellers of BAI, should a claim arise.

The unaudited pro forma financial information reflects the results of the Company for the three and six months ended June 30,March 31, 2004, as if BAI had been acquired on April 1, 2004 and January 1, 2004, respectively. These2004. This combined results areresult is not necessarily indicative of future operating results of the Company.

4.Debt

The Company has a credit agreement with Bank of America, N.A. (“the Credit Facility”). On May 28, 2004, in connection with the acquisition of BAI, the Credit Facility was amended and restated to provide a $20,000,000 revolving credit facility, and the remaining outstanding balance on the Company’s term loan of $1,750,000 was consolidated into the Credit Facility. An uncommitted annual

guidance facility not to exceed an additional $20,000,000 is available to fund future acquisitions upon application by the Company and approval by Bank of America. The Credit Facility has an annual renewal occurring April 30a maturity date of each year. InterestMay 31, 2007. On behalf of the Company, Bank of America may issue Letters of Credit secured by the Credit Facility. As of March 31, 2005, the Company has one Letter of Credit outstanding in the amount of $100,000. The interest rate on the Credit Facility is set at the LIBOR Rate plus an applicable margin as specified in a pricing grid. As of June 30, 2004,March 31, 2005, the Credit Facility outstanding balance was $8,254,700. The$3,881,800, and the interest rate at June 30, 2004 was 3.84% for the Credit Facility.5.35%.

The Credit Facility contains financial covenants setting forth maximum ratios for total funded debt to EBITDA and minimum ratios for fixed charge coverage. As of June 30, 2004,March 31, 2005, the Company was in compliance with these covenants. The Credit Facility also restricts the Company’s ability to dispose of properties other than ABS, incur additional indebtedness, pay dividends (except to holders of the Series A and Series B Preferred Stock) or other distributions, create liens on assets, enter into sale and leaseback transactions, make investments, loans or advances, engage in mergers or consolidations, and engage in transactions with affiliates. The Credit Facility is secured by the accounts receivable and other assets of the Company.

In January 2002, the Company entered into an interest-rate swap agreement with Bank of America whereby its obligation to pay floating-rate LIBOR on debt now totaling $1,450,000, was swapped into a fixed rate obligation at 4.25%. The purpose of the swap was to protect the Company continues to have the obligation to pay the credit performance margin in addition to its swapped 4.25% payment obligation. The total effectivefrom potential rising interest rates on debt with variable interest rate onfeatures. During periods of rising interest rates, the swapped portionCompany will benefit from the protection of the revolving credit facility amountedswap, during periods of declining interest rates the Company will incur additional interest expense due to 6.75% at June 30,the fixed interest rate component of the swap agreement. During the term of the swap agreement, comprehensive income or loss related to the swap agreement was recorded as a current liability with an offset to accumulated other comprehensive income(loss) which is a component of shareholders’ equity. The swap agreement matured on December 1, 2004.

The Company’s comprehensive loss available to common shareholders for the three months ended June 30, 2004 was $1,822,000$4,302,400, which includesincluded the net loss available to common shareholders of $1,837,200$4,346,200 and other comprehensive income of $15,200 arising from the interest rate swap. The Company’s comprehensive loss for the six months ended June 30, 2004 was $2,985,700, which includes the net loss available to common shareholders of $3,011,800 and other comprehensive income of $26,100$43,800, arising from the interest rate swap.

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

5.Earnings Per Share

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

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

6.Stock-based compensation

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

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

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

7.Concentration of Business

Almost all of the Company’s revenues arerevenue is derived either directly from the U.S. government as prime contractor or indirectly as a subcontractor to other government prime contractors. Approximately 47%62% of the Company’s 20042005 year-to-date revenues haverevenue has been derived from various Department of Defense agencies. Approximately 52%38% of the Company’s 20042005 year-to-date revenues haverevenue has been derived, directly or indirectly, from NASA.

8.Pequot TransactionPreferred Stock and Convertible Notes

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

Series A Preferred Stock

The Series A Preferred Stock bears a cumulative annual dividend of 6%, payable quarterly in cash or, if the Company’s available cash for operations does not meet specified levels or such payment would result in an event of default under the Company’s Credit Facility, in additional shares of Series A Preferred Stock. Holders of Series A Preferred Stock are entitled to vote together with all other classes and series of voting stock ofIn December 2003, the Company on all actions to be taken by the stockholders of the Company. In addition, as long as 50% of the Series A Preferred Stock originally issued remains outstanding, the Company may not take numerous actions without obtaining the written consent of the holders of a majority of the Series A Preferred Stock.

The Series A Preferred Stock is convertible into common stock at any time at the election of its holders, initially at a ratio of one share of common stock for every share$15,000,000 of Series A Preferred Stock. The Series A Preferred Stock will automatically convert into Common Stock if, any time following June 9, 2005, the average closing price of the Common Stock over a 20 consecutive trading day period exceeds 2.5 times the conversion price thenaccrues dividends at 6% per annum payable quarterly in effectcash. Dividend expense for the Series A Preferred Stock. In addition, the Series A Preferred Stock held by holders that do not accept an offer by the Company to purchase the Series A Preferred Stock for at least 2.5 times the conversion price then in effect also will automatically convert into Common Stock. The Series A Preferred Stock will also automatically convert into Common Stock uponthree months ended March 31, 2005 was $221,900, compared to $225,000 for the agreementsame period of the holders of a majority of the Series A Preferred Stock.prior year.

Upon issuance of the Series A Preferred Stock, the Company allocated relative fair value of $3,857,600 to the Preferred Warrants and recorded a beneficial conversion charge of $11,142,400. These amounts are being recorded as accretion of Series A Preferred Stock over the period to the earliest redemption date, which is December 9, 2007.September 15, 2008. For the three months and six months ended June 30,March 31, 2005 and 2004, the Company recorded $0.9 million and $1.9$0.9 million, respectively, of accretion related to these charges.

Convertible Notes

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

The Convertible Notes may not be prepaid prior to June 9,March 31, 2005 without the consent of the holders of a majority of the outstanding principal amount of the Convertible Notes. Any subsequent prepayment will be made, at the option of the Convertible Note holders, either in cash in an amount equal to the outstanding principal plus the net present value of interest to maturity discounted at 7% per annum; or by conversion of the principal into shares of Series A Preferred Stock and the payment of interest in cash or in shares of Series A Preferred Stock. Holders of the Convertible Notes may convert the outstanding principal and accrued interest on the Notes into Series A Preferred Stock at any time. The conversion price for the Convertible Notes is $3.01 per share.

The Company’s obligations under the Convertible Notes are secured by a lien on substantially all of the assets of the Company and its subsidiaries and are guaranteed by the Company’s subsidiaries. Such obligations are subordinated to the rights of the Company’s present and future senior secured lenders.was $10.1 million.

Upon issuance of the Series A Convertible Notes, the Company allocated fair value of $1,905,300 to the Series A Note Warrants and recorded a beneficial conversion charge of $5,327,200. The discount created by these charges is being amortized to interest expense over the life of the Series A Convertible Notes. For the three months and six months ended June 30,March 31, 2005 and 2004, the Company recognized $0.5 million and $0.9$0.5 million, respectively, of amortization of that discount. The unamortized discount as of June 30, 2004March 31, 2005 was $4.3 million.

Warrants

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

9.Series B Financing

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

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

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

Senior Subordinated Notes

The Senior Subordinated Notes bear interest at an annual rate of 7%, payable quarterly in cash or, if the Company’s available cash for operations does not meet specified levels or such payment would result in a default under the Company’s Credit Facility, accrued and added to the outstanding principal. Upon a payment default, the interest rate on the Senior Subordinated Notes will be increased to 14% per annum during the term of the default.

The outstanding principal and accrued interest on the Senior Subordinated Notes will be automatically converted into Series B Preferred Stock upon stockholders’ approval at the annual meeting. The per share conversion price of the Senior Subordinated Notes is $3.50 (the “Series B Original Issue Price”).

If the Senior Subordinated Notes have not already converted into Series B Preferred Stock, they will mature on the “Maturity Date” which is 120 days from the date of issuance (the “Series B Issue Date”). In the event that stockholders’ approval is not obtained on or before the Maturity Date, (i) the rate of interest payable on the Senior Subordinated Notes will be increased to 14% per annum and will continue to increase 3% per annum (but in no event shall be increased above the rate of interest lawfully payable) for each calendar quarter thereafter that the Senior Subordinated Notes remain unpaid and (ii) the Company will issue to Investors additional warrants to purchase $3.5 million of the Company’s common stock, exercisable at any time following the stockholders’ approval, at an exercise price equal to the Series B conversion price.

The Company’s obligations under the Senior Subordinated Notes are secured by a second lien on substantially all of the

assets of the Company and its subsidiaries and are guaranteed by the Company’s subsidiaries. These obligations are subordinated only to those under the Credit Facility and are senior to the existing obligations to Pequot under the Convertible Notes. The Company is subject to certain financial and operational covenants.

Upon issuance of the Senior Subordinated Notes, the Company allocated fair value of $720,000 to the Common Stock Warrants based on a preliminary independent valuation, and recorded a beneficial conversion charge of $3,720,000. The discount created by these charges is being amortized to interest expense over the life of the Senior Subordinated Notes. For the three and six months ended June 30, 2004, the Company recognized $0.8 million of amortization of that discount. The unamortized discount as of June 30, 2004 was $3.6$5.2 million.

Series B Preferred Stock

An aggregateIn September 2004, the Company issued $12,000,000 of 3,428,571 shares of Series B Preferred Stock will be issued to the Investors upon stockholders’ approval of the conversion of the $12 million Senior Subordinated Notes into the Series B Preferred Stock. The Series B Preferred Stock will rank senior to the Company’s existing Series A Preferred Stock. Theaccrues dividends at 6% per annum payable quarterly in cash. Dividend expense for Series B Preferred Stock will bear a cumulative annual dividend of 6%, payable quarterly in cash or, iffor the Company’s available cash for operations does not meet specified levels or such payment would result in a default under the Company’s Credit Facility, in additional shares of Series B Preferred Stock.three months ended March 31, 2005 was $177,500.

Upon any liquidation, dissolution or winding upSummary of the Company, holders ofCharges

The table below details the Series B Preferred Stock will be entitled to receive, in preference to holders of Series A Preferred Stock and common stock, out of the Company’s assets available for stockholder distributions, an amount per share equal to the Series B Original Issue Price plus any accrued but unpaid dividends thereon. Certain mergers, acquisitions or asset sales involving the Company are treated as a liquidation event unless the holders of 66 ²/3% of the then outstanding Series B Preferred Stock and associated accretion on a quarterly basis for 2005. For the three months ended March 31, 2004, only Series A Preferred Stock voting together as a class elect not to treat such transactions as liquidation events.was outstanding.

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

immediately preceding the Series B Issue Date; provided that if stockholder approval for the conversion of the Senior Subordinated Notes occurs during certain uncured events of default, the Conversion Price will not be subject to the $2.80 floor price under (ii) above.subsequent quarters as interest expense:

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

Holders of two-thirds of the Series B Preferred Stock may require the Company to redeem their shares in four equal quarterly installments any time on or after the fourth anniversary of the Series B Issue Date at the Series B Original Issue Price plus accrued but unpaid dividends.

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

Common Stock Warrants

The Common Stock Warrants issued in connection with the Series B Financing will expire on May 28, 2014. They are not exercisable at the time of issuance. Upon stockholders’ approval at the annual meeting, the Common Stock Warrants will become exercisable at the option of the Investors to purchase one share of common stock for every five shares of common stock issued or issuable upon conversion of the Series B Preferred Stock that is issued or issuable upon the conversion of the principal amount of the Senior Subordinated Notes. The exercise price of the Common Stock Warrants is $4.32 per share.

10.9.Guarantees

Pursuant to the November 2, 2001 acquisition of the former Analex, the Company issued 3,572,143 shares of the Company’s common stockCommon Stock to the shareholders representing all of the outstanding equity of Analex (the “Sellers”). Of the 3,572,143 shares, 857,143 shares are subject to a provision by which the Company guarantees for a five-year period to reimburse the Sellers the difference between the price at which they sell such shares and a guaranteed sales price ranging from $1.60 to $2.20 per share, if such shares are sold within such period and if certain other conditions are satisfied. As of June 30, 2004,March 31, 2005, the maximum amount payable under the terms of the guaranteed shares was $1,628,600. As the fair market value of the Company’s common stockCommon Stock was in excess of the guaranteed share prices as of June 30, 2004,March 31, 2005, no amounts were accrued under the guarantee.

11.10.Segment Reporting

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

12.11.Discontinued Operations

During the second quarter of 2004, the Company concluded that ABS, a wholly owned subsidiary of the Company, did not fit with the Company’s long-term plan and decided to divest ABS. The Company is in the process of disposingdisposed of ABS and intends to conclude either a sale or another form of disposition by December 31,on November 16, 2004. Therefore, the results of operations of

this business are reported as discontinued operations, net of applicable income taxes, for all periods presented in accordance with SFAS 144,Accounting for the Impairment of Disposal of Long-Lived Assets. Proceeds from the sale of ABS were two non-recourse notes for $1 million. The Company has written downreviewed the assetsfuture viability of ABS toand its underlying credit worthiness and determined a full reserve against the fair value of the expected proceeds to be received from the disposition of ABS.notes was necessary.

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

Operating results of the discontinued business are as follows:

The income reflected in discontinued operations is recognition of payments made against the non-recourse notes that were fully reserved. Tax rates vary between discontinued operations and the Company’s effective tax rate due to the non-deductibility of goodwillcertain non-cash amortization expenses for tax purposes.

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