UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended ~~June 30, 2005~~March 31, 2006

¨	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission file number 0-5404

ANALEX CORPORATION

(Exact name of registrant as specified in its charter)


Delaware		71-0869563
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

~~5904 Richmond Highway~~2677 Prosperity Avenue Suite ~~300~~400 ~~Alexandria,~~Fairfax, Virginia		~~22303~~22031
(Address of principal executive offices)		(Zip Code)

(703) ~~329-9400~~852-4000

Registrant’s telephone number including area code

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 a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12-b2 of the Exchange Act).

Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer x

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


Title of Class		Number of shares outstanding on ~~July 29, 2005~~March 3, 2006
Common Stock, $0.02 par value per share		~~16,046,625~~16,680,150

ANALEX CORPORATION

TABLE OF CONTENTS


				Page No.
Part I Financial Information:

	Item 1.	Financial Statements -– Unaudited	3

		Condensed Consolidated Balance Sheets as of ~~June 30, 2005~~March 31, 2006 and December 31, ~~2004~~2005	3

		Condensed Consolidated Statements of Operations for the Three ~~and Six~~ Months Ended ~~June 30,~~March 31, 2006 and 2005 ~~and 2004~~	4

		Condensed Consolidated Statements of Cash Flows for the ~~Six~~Three Months Ended ~~June 30,~~March 31, 2006 and 2005 ~~and 2004~~	5

		Notes to Condensed Consolidated Financial Statements	6

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1517

	Item 3.	Quantitative and Qualitative Disclosure about Market Risk	2224

	Item 4.	Controls and Procedures	2224

Part II Other Information:

	Item 1.	Legal Proceedings	2225

	Item 4.1A.	~~Submission of Matters to a Vote of Security Holders~~Risk Factors	2325

	Item 6.	Exhibits and Reports on Form 8-K	2325

SIGNATURES			2527

~~Part 1.Financial Statements~~Item 1.Financial Statements-Unaudited

ANALEX CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

As of ~~June 30, 2005~~March 31, 2006 and December 31, ~~2004~~2005

Unaudited

June 30,
2005
December 31,
2004

ASSETS
Current assets

Cash and cash equivalents
   $ 3,097,200 $ 1,034,200
Accounts receivable, net
   24,061,700 18,350,400
Deferred tax asset
   457,700 —
Prepaid expenses and other
   4,143,100 4,037,800
Raw material inventory
   400,300 —


Total current assets
   32,160,000 23,422,400
Fixed assets, net
   2,402,700 1,434,700
Goodwill
   78,027,500 43,175,200
Contract rights and other intangible assets, net
   12,326,200 6,363,500
Other assets
   716,000 526,300


Total assets
   $ 125,632,400 $ 74,922,100


LIABILITIES, CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS’ EQUITY
Current liabilities

Accounts payable
   $ 957,400 $ 1,486,100
Notes payable – line of credit
   21,590,800 6,590,100
Notes payable – other
   538,100 904,200
Deferred tax liability
   1,633,800 927,400
Other current liabilities
   15,260,000 8,919,500


Total current liabilities
   39,980,100 18,827,300


Notes payable – other
   137,300 329,600
Deferred tax liability
   4,400,500 2,123,500
Deferred rent
   42,300 —
Series A convertible note
   5,593,600 4,689,500


Total liabilities
   50,153,800 25,969,900


Commitments and contingencies
   —   —
Series A Convertible Preferred Stock; 6,726,457 shares issued and outstanding at June 30, 2005 and December 31, 2004
   5,861,300 3,986,300
Series B-1 Convertible Preferred Stock; 3,428,571 shares issued and outstanding at June 30, 2005 and December 31, 2004
   12,000,000 12,000,000
Series B-2 Convertible Preferred Stock; 7,142,856 shares issued and outstanding at June 30, 2005; 0 shares issued and outstanding at December 31, 2004
   15,234,500 —
Shareholders’ equity

Common stock; $0.02 par; authorized 65,000,000 shares; issued and outstanding June 30, 2005, 16,046,625 shares and December 31, 2004, 15,421,619 shares
   320,900 308,400
Additional paid-in capital
   49,578,400 40,070,300
Warrants outstanding
   9,228,300 6,803,300
Accumulated deficit
   (16,744,800 ) (14,216,100 )


Total shareholders’ equity
   42,382,800 32,965,900


Total liabilities, convertible preferred stock and shareholders’ equity
   $ 125,632,400 $ 74,922,100


	March 31, 2006			December 31, 2005
ASSETS
Current assets
Cash and cash equivalents	$	2,250,400		$	3,459,200
Accounts receivable, net		33,454,400			31,067,500
Prepaid expenses and other current assets		5,208,100			4,445,500
Property held for sale		—			430,600

Total current assets		40,912,900			39,402,800

Property and equipment, net		2,838,500			2,726,000
Contract rights and other intangible assets, net		9,490,400			10,404,800
Goodwill		77,887,000			77,887,000
Other assets		681,600			671,700

Total assets	$	131,810,400		$	131,092,300

LIABILITIES, CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	2,406,300		$	1,877,300
Notes payable		285,400			387,500
Deferred tax liability, net		589,000			780,300
Other current liabilities		16,091,400			13,918,600

Total current liabilities		19,372,100			16,963,700

Notes payable – line of credit		26,638,600			27,631,400
Series A convertible note		6,949,700			6,497,700
Deferred tax liability		2,501,300			3,677,200
Other long-term liabilities		1,290,900			1,131,500

Total long-term liabilities		37,380,500			38,937,800

Total liabilities		56,752,600			55,901,500

Commitments and contingencies (Note 12)		—			—

Convertible preferred stock; 17,297,884 shares issued and outstanding at March 31, 2006 and December 31, 2005		37,775,300			36,229,600

Shareholders’ equity
Common stock; $0.02 par; authorized 65,000,000 shares; issued and outstanding March 31, 2006, 16,680,150 shares and December 31, 2005, 16,340,445 shares		333,600			326,800
Additional paid-in capital		50,563,000			50,279,000
Warrants outstanding		9,228,300			9,228,300
Accumulated deficit		(22,842,400	)		(20,872,900	)

Total shareholders’ equity		37,282,500			38,961,200

Total liabilities, convertible preferred stock and shareholders’ equity	$	131,810,400		$	131,092,300

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

ANALEX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three ~~and Six~~ Months Ended ~~June 30,~~March 31, 2006 and 2005 ~~and 2004~~

Unaudited

Three Months Ended
June 30,

Six Months Ended
June 30,

   2005
2004
2005
2004

Revenue
   $ 38,148,600 $ 22,215,200 $ 66,586,800 $ 38,846,600
Operating costs and expenses

Cost of revenue
   30,975,300 17,357,200 54,687,900 31,408,600
Selling, general and administrative
   3,418,500 2,552,500 5,609,700 4,353,900
Amortization of intangible assets
   989,100 277,300 1,479,600 426,500


Total operating costs and expenses
   35,382,900 20,187,000 61,777,200 36,189,000


Operating income
   2,765,700 2,028,200 4,809,600 2,657,600


Other income (expense)

Interest income
   2,500 29,600 4,800 42,900
Interest expense
   (998,700 ) (1,698,900 ) (1,764,100 ) (2,400,000 )


Income from continuing operations before income taxes
   1,769,500 358,900 3,050,300 300,500
Provision for income taxes
   1,286,800 459,500 1,901,600 384,700


Income (loss) from continuing operations
   482,700 (100,600 ) 1,148,700 (84,200 )
Income (loss) from discontinued operations, net of income taxes
   6,700 (50,700 ) 30,300 (79,200 )
Loss on disposal of discontinued operations, net of income taxes
   —   (521,800 ) —   (521,800 )


Net income (loss)
   489,400 (673,100 ) 1,179,000 (685,200 )


Dividends on convertible preferred stock
   (781,900 ) (225,000 ) (1,181,300 ) (450,000 )
Accretion of convertible preferred stock
   (1,588,800 ) (939,100 ) (2,526,300 ) (1,876,600 )


Net loss available to common shareholders
   $ (1,881,300 ) $ (1,837,200 ) $ (2,528,600 ) $ (3,011,800 )


Net loss available to common shareholders per share:

Continuing operations

Basic
   $ (0.12 ) $ (0.09 ) $ (0.16 ) $ (0.18 )


Diluted
   $ (0.12 ) $ (0.09 ) $ (0.16 ) $ (0.18 )


Discontinued operations

Basic
   $ 0.00 $ (0.04 ) $ 0.00 $ (0.04 )


Diluted
   $ 0.00 $ (0.04 ) $ 0.00 $ (0.04 )


Net loss available to common shareholders:

Basic
   $ (0.12 ) $ (0.13 ) $ (0.16 ) $ (0.22 )


Diluted
   $ (0.12 ) $ (0.13 ) $ (0.16 ) $ (0.22 )


Weighted average number of shares:

Basic
   15,821,971 14,049,715 15,623,730 13,547,203


Diluted
   15,821,971 14,049,715 15,623,730 13,547,203


	March 31, 2006			March 31, 2005
Revenue	$	35,531,200		$	26,580,100
Operating costs and expenses
Cost of revenue		29,036,600			21,604,700
Selling, general and administrative		3,021,900			2,436,700
Amortization of intangible assets		914,400			490,000
Depreciation		246,700			79,400

Total operating costs and expenses		33,219,600			24,610,800

Operating income		2,311,600			1,969,300
Interest expense, net		(1,186,600	)		(763,000	)

Income from continuing operations before income taxes		1,125,000			1,206,300
Provision for income taxes		(609,100	)		(586,500	)

Net income from continuing operations		515,900			619,800
(Loss) income from discontinued operations, including disposal, net of income taxes		(159,700	)		69,900

Net income		356,200			689,700
Dividends on convertible preferred stock		(780,000	)		(399,500	)
Accretion of convertible preferred stock		(1,545,700	)		(937,500	)

Net loss attributable to common shareholders	$	(1,969,500	)	$	(647,300	)

Net loss attributable to common shareholders per share:
Continuing operations
Basic and diluted	$	(0.11	)	$	(0.04	)

Discontinued operations
Basic and diluted	$	(0.01	)	$	0.00

Net loss attributable to common shareholders:
Basic and diluted	$	(0.12	)	$	(0.04	)

Weighted average number of shares:
Basic and diluted		16,619,505			15,423,286

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

ANALEX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the ~~Six~~Three Months Ended ~~June 30,~~March 31, 2006 and 2005 ~~and 2004~~

Unaudited

June 30,
2005

June 30,
2004

Reconciliation of net income (loss) to cash provided by (used in) operating activities

Net income (loss)
   $ 1,179,000 $ (685,200 )
Net income (loss) from discontinued operations
   30,300 (79,200 )


Net income (loss) from continuing operations
   1,148,700 (606,000 )
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities

Depreciation
   276,400 96,300
Amortization of intangible assets
   1,479,600 426,500
Amortization of debt discounts
   904,000 —
Amortization of deferred financing costs
   90,700 1,762,400
Loss on disposal of discontinued operations
   —   521,800
Deferred tax benefit
   —   (556,100 )
Changes in operating assets and liabilities

Accounts receivable
   2,761,600 (5,101,100 )
Prepaid expenses and other
   1,956,800 962,600
Inventory
   58,700 —
Other assets
   (1,164,500 ) (168,900 )
Accounts payable
   (760,100 ) (88,100 )
Other current liabilities
   1,488,300 1,956,000
Other long-term liabilities
   1,100 (10,200 )


Net cash provided by (used in) continued operating activities
   8,241,300 (804,800 )
Net cash provided by (used in) discontinued operating activities
   30,300 (295,900 )


Net cash provided by (used in) operating activities
   8,271,600 (1,100,700 )


Cash flows from investing activities

Purchase of fixed assets
   (218,400 ) (144,600 )
Cash paid for BAI, net of cash acquired
   —   (27,049,200 )
Cash paid for ComGlobal, net of cash acquired
   (45,391,500 ) —


Net cash used in investing activities
   (45,609,900 ) (27,193,800 )


Cash flows from financing activities

Proceeds from net borrowings on bank and other loans
   14,442,300 3,411,400
Proceeds from stock sale of common stock
   945,000 —
Proceeds from stock options and warrants exercised
   422,000 305,800
Proceeds from employee stock purchase plan
   196,300 126,700
Proceeds from issuance of Series B-1 Senior Subordinated Notes and Warrants
   —   12,000,000
Proceeds from issuance of Series B-2 Preferred Stock and Warrants
   24,965,400 —
Payments of dividends on preferred stock
   (1,569,700 ) (450,000 )


Net cash provided by financing activities
   39,401,300 15,393,900


Net increase (decrease) in cash and cash equivalents
   2,063,000 (12,900,600 )
Cash and cash equivalents at beginning of period
   1,034,200 14,177,500


Cash and cash equivalents at end of period
   $ 3,097,200 $ 1,276,900


	March 31, 2006			March 31, 2005
Reconciliation of net income to net cash provided by continuing operating activities
Net income	$	356,200		$	689,700
Net loss (income) from discontinued operations, including disposal		159,700			(69,900	)

Net income from continuing operations		515,900			619,800

Adjustments to reconcile net income to net cash provided by continuing operating activities
Amortization of intangible assets and depreciation expense		1,161,100			572,500
Amortization of debt discounts		452,000			452,000
Amortization of deferred financing costs		49,200			43,100
Stock-based compensation expense		102,800			—
Gain on disposal of property held for sale		(13,200	)		—
Changes in operating assets and liabilities
Accounts receivable		(2,386,900	)		49,700
Prepaid expenses and other current assets		(762,600	)		231,300
Other assets		(59,100	)		(16,400	)
Accounts payable		529,000			(220,200	)
Other current liabilities		1,548,400			1,097,000
Deferred tax liability		(697,600	)		—
Other long-term liabilities		13,400			—

Net cash provided by continuing operating activities		452,400			2,828,800

Cash flows from investing activities
Purchase of fixed assets		(191,400	)		(13,500	)
Proceeds from sale of property held for sale		460,100			—

Net cash provided by (used in) investing activities		268,700			(13,500	)

Cash flows from financing activities
Net payments on bank and other loans		(1,094,900	)		(3,076,600	)
Proceeds from stock options and warrants exercised		—			25,500
Proceeds from employee stock purchase plan		111,100			—
Proceeds from ABS notes receivable		17,600			—
Payments of dividends on preferred stock		(786,400	)		(279,800	)

Net cash used in financing activities		(1,752,600	)		(3,330,900	)

Net operating cash flow from discontinued operations, including disposal		(177,300	)		69,900

Net decrease in cash and cash equivalents		(1,208,800	)		(445,700	)
Cash and cash equivalents at beginning of period		3,459,200			1,034,200

Cash and cash equivalents at end of period	$	2,250,400		$	588,500

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

ANALEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Unaudited

1.Business ~~Groups~~Overview

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

•

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

•

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

•

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

These services are provided through ~~its~~the Company’s two strategic business ~~units: the~~units, 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.

Group.

The Homeland Security Group ~~accounted for approximately 67% of the Company’s 2005 year-to-date revenue. This group~~ provides engineering, scientific, security, intelligence support and information technology services and solutions to assist in the development, implementation and support of intelligence systems. ~~Analex~~The Homeland Security Group provides these services to the intelligence community, including the National Reconnaissance Office, the Missile Defense Agency, the National Security Agency, the ~~Department of Defense,~~DoD, and major aerospace contractors, such as Lockheed Martin and Northrop Grumman.

The Systems Engineering Group ~~accounted for approximately 33% of the Company’s 2005 year-to-date revenue. This group~~ provides engineering and information technology services and solutions to assist in the development of space-based systems and support operations of terrestrial assets. Capabilities include expendable launch vehicle engineering, space systems development, and ground support for space operations.

On April 1, 2005, ~~Analex~~the Company acquired ComGlobal Systems, ~~Incorporated~~Inc, (“ComGlobal”). in a transaction valued at approximately $47.0 million. ComGlobal is ~~reported as~~ a ~~part of the Homeland Security Group. ComGlobal specializes~~software engineering and information technology firm, specializing in ~~command, control, communications, computers and intelligence (C4I)~~C4I programs for the ~~military, and its~~military. ComGlobal’s largest customer is the U.S. Navy’s Tomahawk Cruise Missile Program.

~~On May 28, 2004,~~ ComGlobal is now a wholly-owned subsidiary of Analex ~~acquired Beta Analytics, Inc. (“BAI”). BAI is~~and reported as a part of the Company’s 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,~~ended March 31 2006, the Company concluded that ~~Advanced Biosystems,~~SyCom Systems, Inc. ~~(ABS)~~(“SyCom”), a ~~then wholly owned~~wholly-owned subsidiary of the Company, did not fit with the Company’s long-term strategic plan and ~~decided~~committed to ~~divest ABS.~~a plan to dispose of this subsidiary. SyCom provides staff augmentation services, principally to a single customer and had 32 employees. The Company ~~disposed of ABS~~sold its SyCom Services subsidiary on ~~November 16, 2004 and has presented the~~April 1, 2006. SyCom’s results of operations ~~of ABS~~are presented as a discontinued operation for all periods presented herein.

ANALEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued

Unaudited

2.Basis of Presentation

The interim condensed consolidated financial statements for the Company are unaudited, but in the opinion of management, reflect all adjustments ~~(consisting only of~~(of a normal recurring ~~accruals)~~nature) necessary for a fair presentation of results for such periods. The results of operations for any interim period are not necessarily indicative of results for the full year. The balance sheet at December 31, ~~2004~~2005 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 condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2004~~2005 (“~~2004~~2005 Form 10-K”) filed with the Securities and Exchange Commission on March ~~28, 2005.~~8, 2006. Certain amounts in the prior year financial statements and related notes have been reclassified to conform to the current year presentation.

3.Acquisition of ComGlobal Systems, Incorporated

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

~~ANALEX CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued~~

~~Unaudited~~

ComGlobal is a software engineering and information technology firm primarily serving federal government agencies and organizations. ComGlobal specializes in command, control, communications, computers and intelligence (C4I) programs for the Military. Its largest customer is the U.S. Navy’s Tomahawk Cruise Missile Program. ComGlobal has offices in California, Mississippi, Nevada and Virginia.

The financial consideration for the acquisition of the ComGlobal business was $47 million in cash, with no assumption of debt. Analex funded the transaction with a combination of senior debt from Bank of America, N.A. in the amount of $22 million and through anthe issuance of additional Series B Convertible Preferred Stock (“Series B-2”) in the amount of $25 million (see Note ~~10)~~11).

~~The acquisition of ComGlobal was accounted for using the purchase method of accounting. Under the purchase method of accounting, the~~ Any remaining purchase price consideration to be recorded against goodwill is ~~first allocated to~~still preliminary, pending resolution of the ~~underlying tangible and intangible assets acquired and liabilities assumed based on their respective fair market values, with any excess recorded as goodwill.~~HKSBS matter (see Note 15). The Agreement and Plan of Merger contains certain financial representations, secured by $8.0 million in escrow, which ~~will survive after~~is scheduled to be released to the ~~closing date.~~former shareholders of ComGlobal, net of any indemnification obligations, starting in December 2006 and continuing through April 2010.

4.Sale of Property Held for Sale

~~ComGlobal’s results~~In March 2006, the Company sold land and a building it owned in Upper Marlboro, Maryland for cash proceeds of ~~operations are included as part~~$460,100. The Company recognized a gain of ~~Analex’s unaudited Consolidated Statement of Operations for~~$13,200 on the ~~three months ended June 30, 2005, reported herein. The following table provides~~sale. This property was the ~~unaudited pro forma results~~former corporate headquarters of the Company for the three and six months ended June 30, 2004 as if ComGlobal had been acquired on January 1, 2004 and also for the six months ended June 30, 2005, as if ComGlobal had been acquired on January 1, 2005. These combined result are not necessarily indicative of future operating results of the Company.

   Pro Forma
Three Months Ended
June 30, 2004

Pro Forma
Six Months Ended
June 30, 2004

Three Months
Ended
June 30, 2005

Pro Forma
Six Months Ended
June 30, 2005

Revenue
   $ 33,396,900 $ 59,794,000 $ 38,148,600 $ 76,297,200
Income from continuing operations
   1,215,200 1,337,600 482,700 642,100
Net (loss) income
   (364,400 ) (487,800 ) 489,400 672,400
Net loss available to common shareholders
   (2,624,000 ) (5,005,400 ) (1,881,300 ) (4,130,800 )
Basic earnings per share available to common shareholders
   $ (0.19 ) $ (0.37 ) $ (0.12 ) $ (0.26 )


Diluted earnings per share available to common shareholders
   $ (0.19 ) $ (0.37 ) $ (0.12 ) $ (0.26 )

4.~~Acquisition of~~Company’s Beta Analytics ~~Inc.~~

Analex acquired BAI on May 28, 2004. Under the terms of a Stock Purchase Agreement, dated May 6, 2004, Analex acquired all of the issued and outstanding stock of BAI for approximately (i) $27.7 million in cash, and (ii) 1,832,460 unregistered shares of Analex Common Stock. The Common Stock was valued at $3.80, which was the closing price on the day prior to the announcement of the acquisition. Analex financed the cash portion of the consideration for the acquisition through its cash on hand, senior debt from Bank of America, N.A. and the Series B Senior Subordinated Notes (see Note 10).

The total cost of the acquisition of BAI, which was valued at approximately $37.9 million, including the assumption of BAI’s debt of $1.7 million, was accounted for using the purchase method of accounting. Under the purchase method of accounting, the purchase price is first allocated to the underlying tangible and intangible assets acquired and liabilities assumed based on their respective fair market values, with any excess recorded as goodwill. The Stock Purchase Agreement contains certain financial representations, which will survive after the closing date.

~~ANALEX CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued~~

~~Unaudited~~

Incorporated subsidiary.

5.Goodwill, Contract Rights And Other Intangible Assets

~~Effective January 1, 2002,~~The Company has recorded goodwill of $77.9 million as of March 31, 2006 and December 31, 2005. Since December 31, 2005, there were no events or conditions that the Company ~~adopted SFAS No. 142,~~believes would result in an impairment of goodwill. Goodwill ~~and Other Intangible Assets~~~~. SFAS 142 requires, among other things, the discontinuance of goodwill amortization. Under SFAS 142, goodwill is to~~must be reviewed at least annually for impairment. The Company has ~~have~~ elected to perform this review annually during the ~~third~~fourth quarter each calendar year. The Company has recorded goodwill of $78.0 million and $43.2 million as of June 30, 2005 and 2004. There were no events or conditions existing through the six months ended June 30, 2005 that would result in an impairment of goodwill.

Identifiable intangible assets, which have finite useful lives, consist of ~~customer~~contract rights and non-compete agreements. The following table provides the details of the net carrying amounts of these intangible ~~assets as of:~~assets:


	June 30, 2005							December 31, 2004							March 31, 2006							December 31, 2005
	Gross Carrying Value		Accumulated Amortization			Net Carrying Value		Gross Carrying Value		Accumulated Amortization			Net Carrying Value		Gross Carrying Value		Accumulated Amortization			Net Carrying Value		Gross Carrying Value		Accumulated Amortization			Net Carrying Value
Amortizable intangible assets
Contract rights	$	14,346,300	$	(2,486,100	)	$	11,860,200	$	7,082,300	$	(1,184,100	)	$	5,898,200	$	14,346,300	$	(5,084,000	)	$	9,262,300	$	14,346,300	$	(4,245,800	)	$	10,100,500
Non-compete agreements		1,105,500		(639,500	)		466,000		1,495,500		(1,030,200	)		465,300		1,105,500		(877,400	)		228,100		1,105,500		(801,200	)		304,300

Total amortizable intangible assets	$	15,451,800	$	(3,125,600	)	$	12,326,200	$	8,577,800	$	(2,214,300	)	$	6,363,500	$	15,451,800	$	(5,961,400	)	$	9,490,400	$	15,451,800	$	(5,047,000	)	$	10,404,800

The Company amortization expense associated with identifiable intangible assets of $914,400 and $490,000 for the three months ended March 31, 2006 and 2005 respectively.

The gross carrying values of customer rights and non-compete agreements increased by $7.3 million and $0.2 million, respectively, from December 31, 2004 to June 30, 2005 due to the acquisition of ComGlobal on April 1, 2005.7

ANALEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued

Unaudited

The following table provides the estimated amortization expense for the remainder of 2006 and each of the next five years ending December 31 based on the carrying amount of amortizable intangible assets existing as of ~~June 30, 2005:~~March 31, 2006:

Year
   Estimated Amortization Expense
2005
   $ 1,865,500
2006
   3,448,000
2007
   2,660,200
2008
   2,004,200
2009
   785,000


Year	Estimated Amortization Expense
April 1, to December 31, 2006	$	2,537,800
2007		2,661,000
2008		2,004,200
2009		785,000
2010		598,000
2011		434,000

6.~~Debt~~Other Current Liabilities

The components of other current liabilities at March 31, 2006 and December 31, 2005 were as follows:


	2006		2005
Payroll and related taxes	$	6,137,700	$	6,031,800
Accrued vacation		3,670,800		3,119,800
Self-insured medical expenses		966,200		890,800
Accrued subcontractor costs		595,300		937,300
Dividends payable		774,900		781,300
Other		3,946,500		2,157,600

Total other current liabilities	$	16,091,400	$	13,918,600

7.Debt

The Company has a $40 million revolving line of credit agreement with Bank of America, N.A. (“the Credit Facility”). ~~On May 28, 2004, in connection with the acquisition of BAI, the~~The Credit Facility ~~was amended~~is subject to certain borrowing base and restated to provide a $20 million revolving credit facility, and the remaining outstanding balance on the Company’s term loan of $1.7 million was consolidated into the Credit Facility. On April 1, 2005, in connection with the acquisition of ComGlobal, the Credit Facility was further amended and restated to increase the amount available under the Credit Facility from $20.0 million to $40.0 million.other requirements. As of ~~June 30, 2005,~~March 31, 2006, the outstanding balance of the Credit Facility was ~~$21.6~~$26.6 million and the interest rate was ~~5.83%~~7.83%. The Credit Facility has a maturity date of May 31, ~~2007.~~

2008.

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, 2005,~~March 31, 2006, the Company was in compliance with these covenants. The Credit Facility also restricts the Company’s ability to dispose of ~~properties other than ABS,~~certain properties; incur additional ~~indebtedness,~~indebtedness; pay dividends (except to holders of the Series A and Series ~~B-1 and B-2~~B Preferred Stock) or other ~~distributions,~~distributions; create liens on ~~assets,~~assets; enter into ~~sale and~~certain leaseback ~~transactions,~~transactions; make investments, loans or ~~advances,~~advances; engage in mergers or ~~consolidations,~~consolidations; and engage in certain transactions with affiliates. The Credit Facility is generally secured by the ~~accounts receivable and other~~ assets of the Company.

~~In January 2002, the~~The Company ~~entered into~~also has outstanding an ~~interest-rate swap agreement with Bank~~aggregate $10.0 million of America whereby its obligation to pay floating-rate LIBOR on debt was swapped into a fixed rate obligation at 4.25%. The purpose of the swap was to protect the Company from potential rising interest rates on debt with variable interest rate features. During periods of rising interest rates, the Company will benefit from the protection of the swap, during periods of declining interest rates the Company will incur additional interest expense due to the fixed interest rate component of the swap agreement. During the term of the swap agreement, comprehensive income or loss related to the swap agreement was recorded as a current liability with an offset to accumulated other comprehensive income (loss), which is a component of shareholders’ equity. The swap agreement maturedSeries A Convertible Notes issued on December ~~1, 2004.~~9, 2003 (see Note 11).

The Company’s comprehensive loss available to common shareholders for the three months ended June 30, 2004 was $1,822,000 which includes the net loss available to common shareholders of $1,837,200 and other comprehensive income of $15,2008

ANALEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued

Unaudited

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 arising from the interest rate swap.

~~The Company also has outstanding a $10.0 million Series A Convertible Note issued on December 9, 2003 (see Note 10).~~

7.8.Earnings Per Share

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

   Three Months Ended June 30,
Six Months Ended June 30,

   2005
2004
2005
2004

Income (loss) from continuing operations
   $ 482,700 $ (100,600 ) $ 1,148,700 $ (84,200 )
Dividends on convertible preferred stock
   (781,900 ) (225,000 ) (1,181,300 ) (450,000 )
Accretion of convertible preferred stock
   (1,588,800 ) (939,100 ) (2,526,300 ) (1,876,600 )


Net loss from continuing operations
   (1,888,000 ) $ (1,264,700 ) (2,558,900 ) $ (2,410,800 )
Income (loss) from discontinued operations, net of income taxes
   6,700 (50,700 ) 30,300 (79,200 )
Loss on disposal of discontinued operations, net of income taxes
   —   (521,800 ) —   (521,800 )


Net loss available to common shareholders
   $ (1,881,300 ) $ (1,837,200 ) $ (2,528,600 ) $ (3,011,800 )


Weighted average shares outstanding
   15,821,971 14,049,715 15,623,730 13,547,203
Warrants
   —   —   —   —
Employee stock options
   —   —   —   —


Diluted weighted average shares outstanding
   15,821,971 14,049,715 15,623,730 13,547,203


Net loss available to common shareholders per share

Continuing operations

Basic
   $ (0.12 ) $ (0.09 ) $ (0.16 ) $ (0.18 )


Diluted
   $ (0.12 ) $ (0.09 ) $ (0.16 ) $ (0.18 )


Discontinued operations

Basic
   $ 0.00 $ (0.04 ) $ 0.00 $ (0.04 )


Diluted
   $ 0.00 $ (0.04 ) $ 0.00 $ (0.04 )


Net loss available to common shareholders

Basic
   $ (0.12 ) $ (0.13 ) $ (0.16 ) $ (0.22 )


Diluted
   $ (0.12 ) $ (0.13 ) $ (0.16 ) $ (0.22 )

~~ANALEX CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued~~

~~Unaudited~~


	Three Months Ended March 31,
	2006			2005
Net income from continuing operations	$	515,900		$	619,800
Dividends on convertible preferred stock		(780,000	)		(399,500	)
Accretion of convertible preferred stock		(1,545,700	)		(937,500	)

Net loss attributable to common shareholders from continuing operations		(1,809,800	)		(717,200	)
(Loss) income from discontinued operations, including disposal, net of income taxes		(159,700	)		69,900

Net loss attributable to common shareholders		(1,969,500	)	$	(647,300	)

Basic and diluted weighted average shares outstanding		16,619,505			15,423,286

Net loss attributable to common shareholders per share
Continuing operations
Basic and diluted	$	(0.11	)	$	(0.04	)

Discontinued operations
Basic and diluted	$	(0.01	)	$	0.00

Net loss attributable to common shareholders
Basic and diluted	$	(0.12	)	$	(0.04	)

Shares issuable upon the exercise of stock options, stock appreciation rights or warrants or upon conversion of the Company’s convertible preferred stock or convertible debt have been excluded from the computation of earnings per share to the extent that ~~their~~the inclusion of these instruments would be anti-dilutive. As of ~~June 30, 2005,~~March 31, 2006, shares issuable upon conversion of such instruments are as follows:


Instrument	Common shares issuable upon conversion	Exercise price	Proceeds from conversion		Common shares issuable upon conversion, exercise or vesting	Conversion or exercise price		Proceeds from conversion or exercise
Series A Convertible Preferred Stock	6,726,457	$2.23	$	—	6,726,457	$	2.23	$	—
Series A Common Stock Warrants					1,345,291		3.28		4,412,556
Series A Convertible Notes					3,321,707		3.01		—
Series A Convertible Note Warrants	664,341	$3.28		2,179,038	664,341		3.28		2,179,038
Series A Convertible Notes	3,321,707	$3.01		—
Series A Common Stock Warrants	1,345,291	$3.28		4,412,554
Series B-1 Convertible Preferred Stock	4,285,714	$2.80		—	4,285,714		2.80		—
Series B-1 Common Stock Warrants	857,142	$4.32		3,702,853	857,142		4.32		3,702,853
Series B-2 Convertible Preferred Stock	8,928,569	$2.80		—	8,928,569		2.80		—
Series B-2 Common Stock Warrants	1,785,713	$4.29		7,660,709	1,785,713		4.29		7,660,709
Warrants issued under 2000 financing agreement	32,500	$0.75		24,375
Options issued under Incentive Stock Option Plans	996,358	$ 0.50 - $1.99		1,327,836	101,833		0.69 –1.99		111,722
Options issued under Incentive Stock Option Plans	1,248,413	$ 2.20 - $2.49		2,848,882	1,148,413		2.20 – 2.49		2,606,882
Options issued under Incentive Stock Option Plans	1,609,166	$ 2.54 - $4.49		5,815,406	1,672,500		2.79 – 4.49		5,911,175
Unvested restricted stock awards					150,000		2.80		—
Stock Appreciation Rights issued under Incentive Stock Option Plans					35,000		2.86		—

Total	31,801,371		$	27,971,653	31,022,680			$	26,584,935

ANALEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued

Unaudited

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


Instrument	Common shares issuable upon conversion or exercise	Conversion or exercise price		Proceeds from conversion or exercise
Series A Convertible Preferred Stock	6,726,457	$	2.23	$	—
Series A Common Stock Warrants	1,345,291		3.28		4,412,554
Series A Convertible Notes	3,321,707		3.01		—
Series A Convertible Note Warrants	664,341		3.28		2,179,038
Series B-1 Convertible Preferred Stock	4,285,714		2.80		—
Series B-1 Common Stock Warrants	857,142		4.32		3,702,853
Warrants issued under 2000 financing agreement	32,500		0.75		24,375
Options issued under Incentive Stock Option Plans	1,171,358		0.50-1.99		1,548,336
Options issued under Incentive Stock Option Plans	1,323,413		2.20-2.49		3,024,882
Options issued under Incentive Stock Option Plans	1,627,499		2.54-4.49		5,884,455

Total	21,355,422			$	20,776,493

8.9.Stock-based compensation

In ~~December~~May 2002, shareholders approved the ~~FASB issued SFAS No. 148, “Accounting~~Analex Corporation 2002 Stock Option Plan (“2002 Stock Option Plan”). The 2002 Stock Option Plan currently provides for ~~Stock-Based Compensation—Transition and Disclosure—an amendment~~the issuance of ~~SFAS No. 123.” This statement amends SFAS No. 123, “Accounting for Stock-Based Compensation,” to provide alternative methods~~incentive stock options within the meaning 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 effectSection 422 of the ~~method used on reported results.~~Internal Revenue Code of 1986 and non-qualified stock options to purchase an aggregate of up to 3,000,000 shares of Common Stock. The ~~Company has chosen~~2002 Stock Option Plan permits the grant of options to ~~continue to account for stock-based compensation using~~key employees, consultants and directors of the ~~intrinsic value method prescribed in APB Opinion No. 25 and related interpretations. Accordingly, compensation expense for~~Company. The exercise price of the incentive stock options is ~~measured as the excess, if any,~~required to be at least equal to 100% of the fair market value of the Company’s stock at the date of the grant over the exercise price of the related option. The following table is a computation of the pro forma earnings had the Company accounted for stock option grants based on their fair value as determined under SFAS No. 123:

   Three Months Ended June 30
Six Months Ended June 30

   2005
2004
2005
2004

Net loss available to common shareholders, as reported
   $ (1,881,300 ) $ (1,837,200 ) $ (2,528,600 ) $ (3,011,800 )
Deduct: Total stock-based compensation expense determined under fair value based method (SFAS No. 123) for all awards, net of related tax effects
   125,000 244,300 624,000 343,200


Pro forma net loss available to common shareholders
   $ (2,006,300 ) $ (2,081,500 ) $ (3,152,600 ) $ (3,355,000 )


Earnings per share:

Basic, as reported
   $ (0.12 ) $ (0.13 ) $ (0.16 ) $ (0.22 )


Diluted, as reported
   $ (0.12 ) (0.13 ) $ (0.16 ) (0.22 )


Basic, pro forma
   $ (0.13 ) (0.15 ) $ (0.20 ) (0.25 )


Diluted, pro forma
   $ (0.13 ) (0.15 ) $ (0.20 ) (0.25 )

~~The fair value of each option grant is estimated~~Common Stock 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~~(110% of the ~~option~~fair market value in the case of options granted to employees who are 10% shareholders). The exercise price of the non-qualified stock options is required to be not less than the par value of a share of the Company’s common stock on the date of grant. The term of ~~5 years; and risk-free interest rate of 2.25% to 5.85%.~~

~~ANALEX CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued~~

~~Unaudited~~

~~In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 123(R)—~~~~Share-Based Payment~~~~, which replaces SFAS No. 123—~~~~Accounting for Stock-Based Compensation,~~ ~~and supersedes APB Opinion No. 25~~~~—Accounting for Stock Issued to Employees.~~ ~~SFAS No. 123(R) requires compensation costs related to share-based payment transactions to be recognized~~an incentive or non-qualified stock option may not exceed ten years (five years in the ~~financial statements. With limited exceptions,~~case of an incentive stock option granted to a 10% shareholder). The vesting for each option holder is set forth in the ~~amount of compensation cost~~individual option agreements and is ~~measured based on the grant-date fair value~~generally a three-year period. The 2002 Stock Option Plan honors all of the ~~equity or liability instruments issued. SFAS No. 123(R) requires liability awards to be re-measured each reporting period~~stock options outstanding under the Company’s 2000 and ~~compensation costs to be recognized over the period that an employee provides service in exchange for the award. SFAS No. 123(R) is effective~~1994 Stock Option Plans, as ~~of the beginning of the first fiscal year that begins after June 15, 2005.~~amended (the “Plan”). The company plans on adopting the provisions of SFAS No. 123(R) during the first quarter of 2006. The approach towards adoption of the new pronouncement is still under consideration and the effects of adoption have yet to be determined.

~~To avoid recognizing additional compensation expense following the adoption of SFAS No. 123(R) 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.

The Company’s Board of Directors approved amending and restating the Company’s Stock Option Plans (collectively, the “Plans”). These amendments allow the Plans to issue Stock Only Stock Appreciation Rights (“SOSAR”). Furthermore, the Board has authorized the Compensation Committee, commencing January 1, 2006, to permit certain option holders, on an individual basis, the right to exchange previously vested options for SOSARs under the Plan and immediately exercise such SOSARs. Any exchange of vested options for SOSARs shall be for economic value substantially equivalent to the options upon exercise. The Company shall withhold all amounts required under applicable income tax laws and regulations and deduct an equivalent number of Company common stock from the number of shares issued to such holder.

Adoption of SFAS No. 123(R)

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), “Share-Based Payment,” which requires that compensation costs related to share-based payment transactions be recognized in financial statements. SFAS No. 123(R) eliminates the alternative to use the intrinsic method of accounting provided for in Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” which generally resulted in no compensation expense recorded in the financial statements related to the grant of stock options to employees if certain conditions were met.

Effective January 1, 2006, the Company adopted SFAS No. 123(R) using the modified prospective method. Under this method, compensation costs for all awards granted after the date of adoption and the unvested portion of previously granted awards outstanding at the date of adoption are measured at estimated fair value and included in operating expenses over the vesting period during which an employee provides service in exchange for the award. Accordingly, prior period amounts presented herein have not been restated to reflect the adoption of SFAS No. 123(R).

ANALEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued

Unaudited

Prior to the adoption of SFAS No. 123(R), the Company reported all tax benefits resulting from the exercise of stock options as operating cash flows in the consolidated statements of cash flows. In accordance with SFAS No. 123(R), for the period beginning January 1, 2006, excess tax benefits from the exercise of stock options are presented as financing cash flows. Such benefits were not considered material for the three months ended March 31, 2006 or 2005, respectively.

As a result of adopting SFAS No. 123(R), the Company recorded $102,800 of stock-based compensation expense, or approximately $82,000 after-tax This stock-based compensation expense reduced both basic and diluted earnings per share less than a penny per share for the three months ended March 31, 2006.

Stock-Based Compensation Activity

During the quarter ended March 31, 2006, the Company granted 35,000 SOSARs to certain members of the Company’s Board or Directors. The SOSARs were issued at an exercise price of $2.86 per share, the fair value of the Company’s common stock on the date of grant. The Black-Scholes option pricing model weighted-average value for the SOSARs was $1.84 per share. The SOSARs are 100 percent vested and expire ten years from the grant date. The Company recorded approximately $65,000 of stock-based compensation expense associated with these SOSAR grants.

During the quarter ended March 31, 2006, the Company also exchanged 875,725 nonqualified stock options for an equal number of SOSARs. The 875,725 SOSARs were issued on the same terms as the original options grant and were immediately exercised.

The table below summarizes stock option and SOSAR activity for the three months ended March 31, 2006:


	Number of Shares		Weighted-Average Exercise Price		Aggregate Intrinsic Value
Options and SOSARs outstanding, January 1, 2006	3,802,800		$	2.59
Options and SOSARs granted	35,000			2.86
Options and SOSARs exercised	(875,725	)		1.38
Options cancelled and expired	(4,300	)		1.38

Options and SOSARs outstanding, March 31, 2006	2,957,775		$	2.95	$	719,600

Exercisable at March 31, 2006	2,952,775		$	2.95	$	719,600

Shares reserved for equity awards at March 31, 2006	112,252

Information with respect to stock options and SOSARs outstanding and stock options and SOSARs exercisable at March 31, 2006 was as follows:


Range of Exercise Price	Options and SOSARs Outstanding	Weighted-Average Remaining Contractual Life (Years)	Weighted-Average Exercise Price
0.69 – 1.99	101,833	3.48	$	1.10
2.20 – 2.49	1,148,413	3.05		2.27
2.79 – 4.49	1,707,500	8.61		3.53

ANALEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued

Unaudited

Information with respect to stock options outstanding and stock options exercisable at March 31, 2005 was as follows:


Range of Exercise Price	Options Outstanding	Weighted-Average Remaining Contractual Life (Years)	Weighted-Average Exercise Price
0.50 – 1.99	1,171,358	2.04	$	1.33
2.20 – 2.49	1,323,413	4.38		2.30
2.54 – 4.49	1,627,499	9.19		3.77

Fair Value Determination

To determine the fair value of each option or SOSAR grant, the Company has elected to continue to use both the Black-Scholes option pricing model and straight-line amortization of compensation expense over the requisite service period of the grant. The Company will reconsider use of the Black-Scholes model if additional information becomes available in the future that indicates another model would be more appropriate, or if the fair value of the grants issued in future periods have characteristics that cannot be reasonably estimated using this model.

The Black-Scholes model uses the assumptions noted in the table below to compute a fair value of each option or SOSAR grant. The expected volatility of the Company’s shares was estimated based upon the historical volatility of the Company’s share price. The expected term was calculated based upon the simplified method for estimating expected terms as allowed under SEC Staff Accounting Bulletin (“SAB”) No. 107. The Company bases the risk-free interest rate used in the Black-Scholes valuation method on the implied yield available on a U.S. Treasury note with a term equal to the expected term of the underlying grants. The Black-Scholes valuation model calls for a single expected dividend yield as an input. The Company has not paid dividends in the past nor does it expect to pay dividends in the future.

The table below summarizes the ~~accelerated vesting of options~~Black-Scholes option pricing model fair value assumptions used for stock option and SOSAR awards during the ~~six~~following periods:


	Three Months Ended March 31, 2006			Three Months Ended March 31, 2005
Weighted average exercise price	$	2.86		$	3.70
Range of expected volatilities		76	%		50 – 54	%
Expected term		5 years			5 years
Range of risk free interest rates		4.47	%		3.78 – 4.18	%
Expected dividend yield		0.00	%		0.00	%

ANALEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued

Unaudited

Pro Forma Disclosures

Under the modified prospective method, results for the three months ended ~~June 30, 2005.~~March 31, 2005 were not restated to include stock option expense. The previously disclosed pro forma effects of recognizing the estimated fair value of stock-based compensation for the three months ended March 31, 2005 is presented below.

Number of options
   Exercise price
   Original vesting date
   Accelerated vesting date
      100,000
   $ 3.42    02/17/06    03/02/05
        90,002
   $ 3.80    04/08/06    01/26/05
        25,000
   $ 3.69    02/02/06    01/31/05
          6,668
   $ 3.90    03/01/06    01/19/05
          1,667
   $ 3.80    02/25/06    01/26/05


	Three Months Ended March 31, 2005
Net loss attributable to common shareholders, as reported	$	(647,300	)
Deduct: Total stock-based compensation expense determined under fair value based method (SFAS No. 123) for all awards, net of related tax effects		(499,000	)

Pro forma net loss attributable to common shareholders	$	(1,146,300	)

Loss per share:
Basic and diluted, as reported	$	(0.04	)

Basic and diluted, pro forma	$	(0.07	)

Restricted Stock Awards

The Company awarded 150,000 shares of restricted common stock, at a weighted-average price of $2.80 per share, to three members of the Company’s senior management team as an inducement for their employment. The restricted stock will vest at the rate of 25 percent per year over 4 years starting on the employee’s first day of employment. As of March 31, 2006, none of the 150,000 shares of restricted stock has either become vested or has been forfeited.

The Company’s stock-based compensation expense related to the restricted stock award was based on the grant-date quoted market price of the Company’s common stock, which was $2.80 per share. The Company recorded approximately $29,000 of stock-based compensation expense associated with this transaction for the three months ended March 31, 2006. There was approximately $362,000 of unrecognized compensation cost related to the nonvested shares of restricted stock as of March 31, 2006. The Company estimates these costs will be fully amortized in four years.

9.Employee stock purchase plan

In December 1997, shareholders approved the Analex Corporation 1997 Employee Stock Purchase Plan (the “Plan”). The number of shares currently reserved for issuance under the Plan is 650,000. The purpose of the Plan is to secure for the Company and its shareholders the benefits of the incentive inherent in the ownership of Common Stock by present and future employees of the Company. The Plan is intended to comply with the terms of Section 423 of the Internal Revenue Code of 1986, as amended, and Rule 16b-3 of the Securities Exchange Act of 1934. The Plan is non-compensatory as defined by SFAS 123(R). Under the terms of the Plan, individual employees may pay up to $14,000 for the purchase of the Company’s common shares, at 95% of the determined market price. During the three months ended March 31, 2006, employees paid approximately $111,100 into this plan.

10.Concentration of Business

Almost all of the Company’s revenue is derived either directly from the U.S. government as prime contractor or indirectly as a subcontractor to other government prime contractors. Approximately ~~67%~~72% of the Company’s ~~2005~~2006 year-to-date revenue has been derived from various Department of Defense and intelligence agencies. Approximately ~~33%~~27% of the Company’s ~~2005~~2006 year-to-date revenue has been derived, directly or indirectly, from NASA.

~~10.~~11.Convertible Preferred Stock and Convertible Notes

Series A Convertible Preferred Stock and Convertible Notes

In December 2003, the Company issued for $15.0 million, 6,726,457 shares of Series A Convertible Preferred Stock (“Series A Preferred Stock”) ~~for $15.0 million.~~and 1,345,291 Common Stock Warrants. The Series A Preferred Stock accrues dividends at 6% per annum payable quarterly in cash. Dividend expense for the Series A Preferred Stock ~~for three and six months ended June 30, 2005 and 2004~~ was $0.2 million for the three months ended March 31, 2006 and ~~$0.4 million,~~2005, respectively.

Upon issuance of the Series A Preferred Stock, the Company allocated relative fair value of approximately ~~$3.8~~$3.9 million to the Common Stock Warrants and recorded a beneficial conversion charge related to the Series A Preferred Stock of approximately $11.1 million. These amounts are being recorded as accretion of Series A Preferred Stock ~~over~~through the ~~period to the~~ earliest

ANALEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued

Unaudited

redemption date ~~which is September 15, 2008.~~of December 9, 2007. For the three ~~and six~~ months ended ~~June 30,~~March 31, 2006 and 2005, ~~and 2004,~~ the Company recorded $0.9 ~~million and $1.9~~ million, respectively, of accretion related to these charges. The unamortized discount as of ~~June 30,~~March 31, 2006 and 2005 was ~~$9.1 million.~~

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

Holders of the Series A Preferred Stock may require the Company to redeem their shares in four equal quarterly installments any time on or after September 15, 2008, at the Series A Purchase Price, as adjusted for stock splits, stock dividends$6.3 million and ~~similar events, plus accrued but unpaid dividends.~~

$10.1 million, respectively.

In December of 2003, the Company also issued, in aggregate, $10,000,000 ~~principle~~principal amount of Series A Secured Subordinated Convertible Promissory Notes that bear interest a 7.0% annual rate (the “Series A Convertible Notes”).

~~ANALEX CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued~~

~~Unaudited~~

convertible into 3,321,707 shares of common stock and 664,341 Common Stock Warrants.

Upon issuance of the Series A Convertible Notes, the Company allocated relative fair value of approximately $1.9 million to the Series A Convertible Note Warrants and recorded a beneficial conversion charge related to the Series A Convertible Notes of approximately $5.3 million. The discount created by these charges is being amortized to interest expense over the life of the Series A Convertible Notes. For the three ~~and six~~ months ended ~~June 30,~~March 31, 2006 and 2005, ~~and 2004,~~ the Company recognized $0.5 million, ~~and $0.9 million~~respectively, of amortization of that discount. The unamortized discount as of ~~June 30,~~March 31, 2006 and 2005 was ~~$4.4 million.~~

approximately $3.1 million and $4.9 million, respectively.

Series B-1 and B-2 Convertible Preferred Stock

In May 2004, the Company issued ~~and sold~~in aggregate $12.0 million principal amount of convertible secured ~~senior~~ subordinated promissory notes (“Series B-1 Notes”) ~~in the aggregate amount of $12 million. Subsequently, in~~and 857,142 Common Stock Warrants (the “Series B-1 Common Stock Warrants”). In September 2004, the Series BB-1 Notes were converted into 3,428,571 shares of Series B Convertible Preferred Stock (“Series B-1 Preferred Stock”).

The Series B-1 ~~Preferred Stock is convertible into~~ Common Stock ~~at any time at~~Warrants will expire on May 28, 2014.

The Company had the ~~election~~option to obtain an additional $25.0 million through the sale of ~~its holders at a per share conversion price of $2.80 (the “Series B-1 Conversion Price”). The~~additional Series B-1 Preferred Stock will automatically convert into Common Stock if, any time following 18 months after, (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-1 Original Issue Price of $3.50 (as adjusted for certain dilutive equity issuances and for stock splits, stock dividends and similar events related to the Series B-1 Preferred Stock); or (ii) with respect to any holder’s shares of Series B-1 Preferred Stock, such holder does not accept, within 60 days of notice to such holder, the Company’s offer to purchase the Series B-1B Preferred Stock for ~~at least 2.5 times~~ the ~~Series B-1 Original Issue Price~~purpose of ~~$3.50. The Series B-1 Preferred Stock will automatically convert into Common Stock upon~~paying for the ~~agreement~~cost of a Company acquisition. In connection with the ~~holders~~April 2005 acquisition of ~~75% of the then outstanding Series B-1 Preferred Stock.~~

~~Holders of two-thirds of the Series B-1 Preferred Stock may require~~ComGlobal, the Company to redeem their shares in four equal quarterly installments any time on or after the fourth anniversary of the Series B-1 Issue Date at the Series B-1 original issue price plus accrued but unpaid dividends.

~~In April 2005, the Company~~exercised this option and issued for $25.0 million, an additional 7,142,856 shares of Series B Convertible Preferred Stock (“Series B-2 Preferred Stock”) ~~for $25.0 million.~~

and 1,785,713 Common Stock Warrants (the “Series B-2 Common Stock Warrants”). The Series B-2 Common Stock Warrants will expire on April 1, 2015.

Upon issuance of the Series B-2 Preferred Stock, the Company allocated relative fair value of $2.4 million to the ~~Preferred~~Common Stock Warrants and recorded a beneficial conversion charge related to the Series B-2 Preferred Stock of $8.0 million. These amounts are being recorded as accretion of Series B-2 Preferred Stock ~~over the period to~~through the earliest redemption date ~~which is~~of September 15, 2008. For the three ~~and six~~ months ended ~~June 30, 2005~~March 31, 2006 the Company recorded $0.6 million of accretion related to these charges. The unamortized discount as of ~~June 30, 2005~~March 31, 2006 was ~~$9.8~~$7.9 million.

The Series B-2 Preferred Stock is 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-2 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-2 Issue Date, but 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-2 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.

The Series B-2 Preferred Stock will automatically convert into common stock if, any time following 18 months after the Series B-2 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-2 Preferred Stock); or (ii) with respect to any holder’s shares of Series B-2 Preferred Stock, such holder does not accept, within 60 days of notice to such holder, the Company’s offer to purchase the Series B-2 Preferred Stock for at least 2.5 times the Series B-2 Original Issue Price. The Series B-2 Preferred Stock will automatically convert into common stock upon the agreement of the holders of 75% of the then outstanding Series B-2 Preferred Stock.

Holders of two-thirds of the Series B-2 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-2 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-2 Preferred Stock issued pursuant to the Series B-2 Purchase Agreement remain outstanding, the Company may not take

~~ANALEX CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued~~

~~Unaudited~~

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-2 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-2 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.

All Series B Convertible Preferred ~~Stocks accrue~~Stock accrues dividends at 6% per annum payable quarterly in cash. Dividend expense for the Series ~~B-1~~B Convertible Preferred Stock for the three ~~and six~~ months ended ~~June 30,~~March 31, 2006 and 2005 was $0.6 million and $0.2 million, respectively.

Summary of Convertible Instruments

The table below provides the face value and ~~$0.4 million, respectively. Dividend expense for~~carrying value of the ~~Series B-2 Preferred Stock for~~convertible preferred stock as of March 31, 2006 and December 31, 2005 and the ~~three and six months ended June 30, 2005 was $0.4 million.~~remaining periods of amortization associated with each as of March 31, 2006:

~~Common Stock Warrants~~


	Face Value		2006				2005				Remaining Periods of Amortization
	Face Value		Carrying Value		Remaining Amount to be Accreted		Carrying Value		Remaining Amount to be Accreted		Remaining Periods of Amortization
Series A Preferred Stock	$	15,000,000	$	8,673,800	$	6,323,200	$	7,736,300	$	7,263,700	1.75 years
Series B-1 Preferred Stock	$	12,000,000	$	12,000,000		—	$	12,000,000		—	—
Series B-2 Preferred Stock	$	25,000,000	$	17,101,500	$	7,898,500	$	16,493,300		8,506,700	2.50 years

The Common Stock Warrants issued in connection with the Series B-2 financing will expire on April 1, 2015. 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-2 Preferred Stock. The exercise price of the Common Stock Warrants is $4.32 per share.14

ANALEX CORPORATION

~~Summary of Charges~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued

Unaudited

~~The following provides the details of the Series A and Series B-1 and B-2 Preferred Stock and the associated quarterly accretion for 2005.~~

            Quarterly Dividends and Accretion

   Face Value
   Carrying Value
At June 30, 2005
   Remaining
Amount to
be Accreted
   Cash

Non -
Cash Preferred
Stock Accretion
   Remaining
Period of
Amortization
Series A Preferred Stock
   $ 15,000,000    $ 5,861,300    $ 9,138,700    $ 225,000    $ 937,500    2.5 years
Series B-1 Preferred Stock
   $ 12,000,000    $ 12,000,000    —      $ 177,500    —      —
Series B-2 Preferred Stock
   $ 25,000,000    $ 15,234,500    $ 9,765,500    $ 375,000    $ 651,300    3.75 years

The table below ~~details~~provides the face value and carrying value of the Series A convertible debt as of March 31, 2006 and December 31, 2005 and the remaining period of amortization ~~expense that will be recognized in subsequent quarters~~ as ~~interest expense:~~of March 31, 2006:

            Quarterly Expenses

   Face Value
   Carrying Value
At June 30, 2005
   Remaining Amount
to be Amortized
   Cash
   Non – Cash
Interest Accretion
   Remaining
Period of
Amortization
Series A Convertible Notes
   $ 10,000,000    $ 5,593,600    $ 4,406,400    $ 172,600    $ 482,000    2.5 years


	Face Value		2006				2005				Remaining Period of Amortization
	Face Value		Carrying Value		Remaining Amount to be Accreted		Carrying Value		Remaining Amount to be Accreted		Remaining Period of Amortization
Series A Convertible Notes	$	10,000,000	$	6,949,700	$	3,050,300	$	6,497,700	$	3,502,300	1.75 years

~~11.~~12.Commitments and Contingencies

Pursuant to the November 2, 2001 acquisition of the former Analex, the Company issued 3,572,143 shares of the Company’s Common Stock to the shareholders representing all of the outstanding equity of Analex (the “Sellers”). Of the 3,572,143 shares, 857,143 shares are subject to a provision by which the Company guarantees for a five-year period to reimburse the Sellers the difference between the price at which they sell such shares and a guaranteed sales price ranging from $1.60 to $2.20 per share, if such shares are sold within such period and if certain other conditions are satisfied. As of ~~June 30, 2005,~~March 31, 2006, the maximum amount payable under the terms of the guaranteed shares was $1,628,600. As the fair market value of the Company’s Common Stock was in excess of the guaranteed share prices as of ~~June 30, 2005,~~March 31, 2006, no amounts were accrued under the guarantee.

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

In February 2006 the Company entered into a lease agreement, considered an operating lease, with a property management company to lease approximately 7,000 square feet of office space to be used as the Company’s Chantilly regional office. The lease commenced on February 1, 2006 and the initial term of the lease is five years with one optional renewal period of five years. The Company took occupancy of the new facility in April 2006. Future minimum lease payments over the five-year lease term will be approximately $0.9 million.

~~12.~~13.Segment Reporting

Although ~~the Company~~Analex is organized byinto two strategic business units, the Company considers each of its government contracting units to have similar economic characteristics, provide similar types of services, and have a similar customer base. Accordingly, the Company aggregates the operations of all of its government contracting units into one reportable segment consisting of two strategic business units: the Homeland Security Group and the Systems Engineering Group. Both Homeland Security Group and Systems Engineering Group provide engineering, information technology, security, intelligence support or technical services to federal government agencies or major defense contractors.

~~ANALEX CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued~~

~~Unaudited~~

~~13.~~14.Discontinued Operations

During the quarter ended March 31 2006, the Company concluded that SyCom did not fit with the Company’s long-term strategic plan and committed to a plan to dispose of this subsidiary. SyCom provides staff augmentation services, principally to a single customer and had 32 employees. SyCom’s results of operations are presented as a discontinued operation for all periods presented herein.

During the second quarter of 2004, the Company concluded that ~~ABS,~~Advanced Bio-Systems, Inc. (“ABS”), a then wholly owned subsidiary of the Company did not fit with the Company’s long-term plan and decided to divest ABS. The Company disposed of ABS on November 16, 2004. Therefore, the results of operations of this business are reported as discontinued operations, net of applicable income taxes, for all periods ~~presented in accordance with SFAS 144,~~~~Accounting for the Impairment of Disposal of Long-Lived Assets~~.presented. Proceeds from the sale of ABS were two non-recourse notes for $1 million. The Company collected approximately $17,000 against these notes during the three-months ended March 31, 2006, compared to $38,400 for the same period in the prior year. The Company reviewed the future viability of ABS and its underlying credit worthiness and determined a full reserve against the remaining outstanding notes was still necessary.

~~The Company’s historical financial statements have been restated to reflect ABS as discontinued operations for the periods presented.~~ 15

ANALEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued

Unaudited

Operating results of the discontinued ~~business~~businesses, excluding the related disposal activity, for the three months ended March 31, 2006 and 2005 are as follows:

   Three Months Ended
June 30

Six Months Ended
June 30

   2005
   2004
2005
   2004

Revenue
   $ —      $ 500,000 $ —      $ 978,700
Income (loss) from discontinued operations
   8,900    (99,000 ) 47,200    (128,900 )
Income tax expense (benefit)
   2,200    (48,300 ) 16,900    (49,700 )
Income (loss) from discontinued operations, net of tax
   $ 6,700    $ (50,700 ) $ 30,300    $ (79,200 )


	Three Months Ended March 31
	2006			2005
Revenue	$	892,500		$	1,858,100
(Loss) income from discontinued operations		(275,000	)		74,600
Income tax benefit (expense)		104,500			(23,800	)
(Loss) income from discontinued operations, net of tax	$	(170,500	)	$	46,300

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

~~14.~~15.Litigation and Claims

The Company was served on October 9, 2003 with a complaint filed by Swales & Associates, Inc. (“Swales”) alleging breach of contract and other claims relating to Swales’ termination as a subcontractor under the Company’s ELVIS contract with NASA. The Company entered into a Settlement Agreement dated July 22, 2004 with Swales. Under the terms of the Settlement Agreement, the Company paid $1,000,000 to Swales in July 2004. Included in the $1,000,000 settlement is approximately $320,000 for work performed by Swales prior to termination. This amount was billed to NASA and ~~payment was~~the Company received ~~by the Company.~~payment. Legal fees are expected to be approximately $290,000. ~~Based on~~The Company has received an opinion byfrom legal counsel ~~the Company believes~~ that the unreimbursed amount of the settlement payment, together with legal fees and expenses incurred in connection with the litigation, are costs that are reimbursable under the ELVIS contract with NASA. Therefore, the Company established a receivable inof approximately $1.0 million related to the ~~amount~~expected reimbursement of ~~$984,000 has been recorded. However, on July 28, 2004,~~these costs. In May 2005, the Company received ~~from~~oral customer feedback that the costs were allowable and allocable to the contract, but the reasonableness of these costs still needed to be assessed by NASA. Based on the opinion of legal counsel and management’s assessment of relevant facts, the Company believed and continues to believe that the costs incurred are allowable, allocable and reasonable. During the quarter ended December 31, 2005, the Company met with NASA ~~a Notice of Intent~~procurement personnel who indicated to ~~Disallow Costs. Notwithstanding the Notice of Intent~~us prior NASA communications with respect to ~~Disallow Costs,~~allowability and allocability should not be relied upon. While the Company continues to believe that the ~~costs of~~full amounts is allowable, allocable and reasonable, and therefore should be recoverable under the ~~settlement will be reimbursed by NASA. Discussions~~ELVIS contract with NASA, ~~are continuing. However, there can be no assurance that~~ the Company ~~will in fact be reimbursed in~~had concluded a reserve of $500,000 was appropriate and was therefore recorded as of December 31, 2005. The Company intends to continue to use all reasonable efforts to recover the full ~~by NASA in the foreseeable future.~~

amount of its costs from NASA.

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

16.Subsequent Events

The Company sold its SyCom Services subsidiary on April 1, 2006. Neither the SyCom Services subsidiary nor the consideration received are material to the Company’s results of operations or financial position.

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

~~Introduction~~

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

~~Overview of Business~~

~~New Accounting Pronouncements~~

~~Results of Operations and Related Information~~

~~Capital Resources and Liquidity~~

~~Overview of Business~~

Analex specializes in providing information technology, systems engineering, security services and intelligence support services in support of the U.S. Government. All of our sales are generated using written contractual arrangements. The contracts require us to deliver technical, security and intelligence support services to the U.S. Government, analyze and support defense systems, design, develop and test aerospace systems according to the specifications provided by our customers.

On April 1, 2005, Analex acquired ComGlobal Systems, Incorporated (“ComGlobal”). ComGlobal is reported as a part of the Homeland Security Group. ComGlobal specializes in command, control, communications, computers and intelligence (C4I) programs for the military, and its largest customer is the U.S. Navy’s Tomahawk Cruise Missile Program. We believe that our acquisition of ComGlobal will yield additional significant yearly revenue and strong operating income, enhanced attractiveness to institutional investors and an enhanced ability to compete effectively within our industry.

On May 28, 2004, Analex acquired Beta Analytics, Inc. (“BAI”). BAI is reported as a part of the Homeland Security Group. BAI provides information and technology asset protection solutions, intelligence analysis, and security services to federal government and Department of Defense agencies. BAI’s services cover a range of life cycle protection and physical security services specifically in the areas of information protection, physical security, intelligence threat assessment and analysis, technology protection, security management and security education and training. We believe that our acquisition of BAI will yield additional significant yearly revenue and strong operating income, enhanced attractiveness to institutional investors and an enhanced ability to compete effectively within our industry

During the second quarter of 2004, the Company concluded that Advanced Biosystems, Inc., (“ABS”), a wholly owned subsidiary of the Company, did not fit with the Company’s long-term plan and decided to divest ABS. The Company disposed of ABS on November 16, 2004. Therefore, the results of operations of this business are reported as discontinued operations, net of applicable income taxes, for all periods presented in accordance with SFAS 144,~~Accounting for the Impairment of Disposal of Long-Lived Assets~~~~. The Company has written down the assets of ABS to the fair value of the expected proceeds to be received from the disposition of ABS.~~

~~New Accounting Pronouncements~~

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

~~Results of Operations and Related Information~~

We have one reportable segment, which is engaged in professional services related to information technology and systems engineering for the U.S. government, primarily the Department of Defense, certain intelligence agencies, and NASA. This segment consists of two business groups: the Homeland Security Group and the Systems Engineering Group. The Homeland Security Group

provides information technology services, systems integration, hardware and software engineering and independent quality assurance, security and intelligence services in support of the U.S. intelligence community and Department of Defense. With BAI included as a part of the Homeland Security Group, the latter also provides information and technology asset protection solutions, intelligence analysis, and security services to federal government and Department of Defense agencies. We expect that our Homeland Security Group will continue to benefit from the country’s shifting priorities and new emphasis on enhanced intelligence capabilities. The Systems Engineering Group provides engineering, information technology and program management support to NASA, the Department of Defense, and major aerospace contractors.

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

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

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

Fixed price contracts provide for delivery of products or services for a price that is negotiated in advance on the basis of the contractor’s costs experiences. The price is not subject to any adjustment and that means we assume the financial risk of costs overruns. If the costs exceed the estimates, profit margins decrease and a loss may be realized on the contract.

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

   Three Months Ended
June 30
Six Months Ended
June 30

   2005
2004
2005
2004

Cost-plus-fees
   45 % 40 % 38 % 43 %
Time-and-materials
   32 43 35 41
Fixed price
   23 17 27 16


Total
   100 % 100 % 100 % 100 %

Revenue generated from contracts to U.S. federal government agencies and their prime contractors represented approximately 99% of our total net sales during the six months ended June 30, 2005 and 98% during the six months ended June 30, 2004. The Department of Defense accounted for approximately 67% and 47% of our revenues in the six months ended June 30, 2005 and 2004, respectively. NASA is our largest customer, generating 33% and 52% of our revenues for the six months ended June 30, 2005 and 2004, respectively. Approximately 12% of our revenues and 43% of our operating income for the six months ended June 30, 2005 came from one prime contract with an agency within the Department of Defense. Approximately 22% of our revenues for the six months ended June 30, 2005 came from one prime contract with NASA, which will continue until September 2011 if all options are exercised. We expect that federal government contracts will continue to be the source of substantially all of our revenue for the foreseeable future.

For the six months ended June 30, 2005, a majority of our revenue was generated as a prime contractor to the federal government. We intend to focus on retaining and increasing the percentage of our business as prime contractor because it provides us with stronger client relationships. The following table shows our revenue as prime contractor and as subcontractor as a percentage of our total revenue for the following periods:

   Three Months Ended
June 30
Six Months Ended
June 30

   2005
2004
2005
2004

Prime contract revenue
   70 % 67 % 71 % 55 %
Subcontract revenue
   30 33 29 45


Total revenue
   100 % 100 % 100 % 100 %

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

We plan to selectively acquire companies that complement and enhance our existing businesses, and are currently reviewing potential targets. We anticipate that we will need to obtain additional financing through sale of equity and debt securities to fund our acquisitions.

The Company’s backlog of orders, based on remaining contract value, believed to be firm as of June 30, 2005 was approximately $352 million. Funded backlog as of June 30, 2005 was approximately $64 million. Included in the backlog approximation are amounts from future years of government contracts under which the government has the right to exercise an option for the Company to perform services.

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

~~COMPARISON OF THE THREE AND SIX MONTHS ENDED JUNE 30, 2005~~

~~TO THE THREE AND SIX MONTHS ENDED JUNE 30, 2004~~FORWARD-LOOKING STATEMENTS

Three Months Ended

June 30,
2005
% of
Revenue

June 30,
2004
% of
Revenue

Revenue
   $ 38,148,600 100.0 % $ 22,215,200 100.0 %
Operating costs and expenses

Cost of revenue
   30,975,300 81.2 17,357,200 78.1
Selling, general and administrative
   3,418,500 9.0 2,552,500 11.5
Amortization of intangible assets
   989,100 2.6 277,300 1.2


Total operating costs and expenses
   35,382,900 92.8 20,187,000 90.9
Operating income
   2,765,700 7.3 2,028,200 9.1
Other income and expense

Interest income
   2,500 0.0 29,600 0.1
Interest expense
   (998,700 ) (2.6 ) (1,698,900 ) (7.6 )


Income from continuing operations before income taxes
   1,769,500 4.6 358,900 1.6


Provision for income taxes
   (1,286,800 ) (3.4 ) (459,500 ) (2.1 )


Income (loss) from continuing operations
   482,700 1.3 (100,600 ) (0.5 )
Income (loss) from discontinued operations, net of tax
   6,700 0.0 (50,700 ) (0.2 )
Loss on disposal of discontinued operations, net of income taxes
   —   0.0 (521,800 ) (2.3 )


Net income (loss)
   489,400 1.3 (673,100 ) (3.0 )


Dividends on convertible preferred stock
   (781,900 ) (2.0 ) (225,000 ) (1.0 )
Accretion of convertible preferred stock
   (1,588,800 ) (4.2 ) (939,100 ) (4.2 )


Net loss available to common shareholders
   $ (1,881,300 ) (4.9 )% $ (1,837,200 ) (8.3 )%

~~COMPARISON OF THE THREE AND SIX MONTHS ENDED JUNE 30, 2005~~

~~TO THE THREE AND SIX MONTHS ENDED JUNE 30, 2004 - continued~~

Six Months Ended

June 30,
2005
% of
Revenue

June 30,
2004
% of
Revenue

Revenue
   $ 66,586,800 100.0 % $ 38,846,600 100.0 %
Operating costs and expenses

Cost of revenue
   54,687,900 82.1 31,408,600 80.9
Selling, general and administrative
   5,609,700 8.4 4,353,900 11.2
Amortization of intangible assets
   1,479,600 2.2 426,500 1.1


Total operating costs and expenses
   61,777,200 92.8 36,189,000 93.2
Operating income
   4,809,600 7.2 2,657,600 6.8
Other income and expense

Interest income
   4,800 0.0 42,900 0.1
Interest expense
   (1,764,100 ) (2.6 ) (2,400,000 ) (6.2 )


Income from continuing operations before income taxes
   3,050,300 4.6 300,500 0.8


Provision for income taxes
   (1,901,600 ) (2.9 ) (384,700 ) (1.0 )


Income (loss) from continuing operations
   1,148,700 1.7 (84,200 ) (0.2 )
Income (loss) from discontinued operations, net of tax
   30,300 0.0 (79,200 ) (0.2 )
Loss on disposal of discontinued operations, net of income taxes
   —   0.0 (521,800 ) (1.3 )


Net income (loss)
   1,179,000 1.8 (685,200 ) (1.8 )


Dividends on convertible preferred stock
   (1,181,300 ) (1.8 ) (450,000 ) (1.2 )
Accretion of convertible preferred stock
   (2,526,300 ) (3.8 ) (1,876,600 ) (4.8 )


Net loss available to common shareholders
   $ (2,528,600 ) (3.8 )% $ (3,011,800 ) (7.8 )%

~~REVENUE AND PERCENT OF REVENUE BY GROUP~~

Three Months Ended

June 30,
2005
   % of
Total

June 30,
2004
   % of
Total

Homeland Security Group
   27,024,800    71 % $ 11,404,800    51 %
Systems Engineering Group
   11,123,800    29 10,810,400    49




Total
   38,148,600    100 % 22,215,200    100 %




Six Months Ended

June 30,
2005
   % of
Total

June 30,
2004
   % of
Total

Homeland Security Group
   44,502,500    67 % $ 18,626,200    48 %
Systems Engineering Group
   22,084,300    33 20,220,400    52




Total
   66,586,800    100 % 38,846,600    100 %

~~PERCENTAGE REVENUE GROWTH BY GROUP~~

Three Month Ended
June 30,
2005 vs. 2004

Six Months Ended
June 30,
2005 vs. 2004

Homeland Security Group
   137 % 139 %
Systems Engineering Group
   3 9 %


Total
   72 % 71 %

Revenue for the three months ended June 30, 2005 was $38.1 million, which represented an increase of $15.9 million, or 71.7% from the same period in the previous year. Revenue for the six months ended June 30, 2005 was $66.6 million, which represented an increase of $27.7 million, or 71.4% from the same period in the prior year. Revenue growth attributable to acquisitions was $15.5 million for the three months ended June 30, 2005 and $24.4 million for the six months ended June 30, 2005.

The Homeland Security Group provided $27.0 million or 71% and $44.5 million or 67% of the Company’s revenue during the three and six months ended June 30, 2005. Homeland Security revenue grew 137% and 139% in the three and six months ended June 30, 2005, respectively, compared to the same periods in the prior year. Homeland security revenue grew through the combination of acquisitions and increased independent validation and verification services provided in support of launches of expendable launch vehicles by the United States Air Force and the National Reconnaissance Office (“NRO”).

Revenue of the Systems Engineering Group increased approximately $0.3 million, 2.9%, in the second quarter of 2005 compared to the same period in the previous year. Year-to-date, the System Engineering Group’s revenue has increased $1.9 million, or 9.2% from the same period last year. This was primarily due to additional tasking from the customer under both the ELVIS and Glenn Engineering Support Services contracts with NASA. This increase was offset by the continuation of planned step-down in activities under the Micorgravity Research Development and Operations subcontract. This contract provides services to NASA related to designing and building experiments to be run on the International Space Station.

Cost of revenue for the three months ended June 30, 2005 was $31.0 million, an increase of $13.6 million from the same period in the prior year. Cost of revenue for the six months ended June 30, 2005 was $54.7 million, an increase of $23.3 million from the same period in the prior year. In addition to added cost of revenue associated with the acquisitions, costs increased in relation to revenue primarily due to higher medical and worker’s compensation expenses and investments made in business development to grow the business. Cost of revenue as a percentage of revenue was approximately 81.2% and 82.1% for the three and six months ended June 30, 2005, compared with 78.1% and 80.9% from the same periods in the prior year.

SG&A expenses increased by $0.9 million or 35.0% and $1.3 million or 29.5% for the three and six months ended June 30, 2005, respectively. This growth was primarily due to additional SG&A expenses from the acquisitions of ComGlobal and BAI and also additional costs incurred in the investor relations area. SG&A as a percentage of revenue was 9.0% for the second quarter of 2005, down from 11.5% in the second quarter of the prior year, and was 8.4% for the six-month period ending June 30, 2005 compared to 11.2% for the same period in 2004.

Intangible amortization expense totaled $1.0 million and $1.5 million for the three and six months ended June 30, 2005, respectively, compared with $0.3 million and $0.4 million for the same periods in the prior year. This increase is due to approximately $7.0 million of identifiable intangible assets related to the ComGlobal acquisition being amortized over nine years and amortization on the $6.1 million of identifiable intangible assets related to the BAI acquisition being amortized over four years.

Operating income increased $0.7 million and $2.2 million for the three and six months ended June 30, 2005, respectively, compared to the same period in 2004. Operating margin for the three months ended June 30, 2005 declined to 7.3% from 9.1% in the same period of the prior year, while the operating margin for the six month period ending June 30, 2005 increased to 7.2% from 6.8% for the comparable period of 2004. The operating margin levels are a reflection of increased costs related to insurance, business development and amortization expenses of intangible assets associated with acquisitions.

Interest expense totaled $1.0 million and $1.8 million for the three and six months ended June 30, 2005, compared with $1.7 million and $2.4 million for the same periods in the prior year. In the prior year, interest expense of $1.0 million was recorded for the three and six months ended June 30 related to the Series B Senior Subordinated Note. This expense was recorded until the Note converted into the Series B-1 Preferred Stock in September 2004. No such interest was recorded in 2005. The elimination of the interest on the Series B Note was partially offset by increased interest on the Credit Facility for the $22 million borrowed for the ComGlobal acquisition.

The provision for income taxes for the three and six months ended June 30, 2005 was $1.3 million and $1.9, respectively, compared with tax expense provisions of $0.5 million and $0.4 million for the same periods in the prior year. The Company expects to experience a tax provision for calendar year 2005 due to certain amortization costs related to the Series A and Series B Financing which are not deductible for tax purposes.

EBITDA, as defined below, was $3.9 million for the three months ended June 30, 2005 after adding back depreciation of $0.2 million and amortization of $1.0 million to operating income of $2.8 million. For the six months ended June 30, 2005, EBITDA was $6.6 million after adding back depreciation of $0.3 million and amortization of $1.5 million to operating income of $4.8 million. EBITDA as a percent of revenue was 10.4% and 9.9% for the three and six months ended June 30, 2005, respectively, compared to 10.6% and 8.2% for the same periods from the previous year.

EBITDA, or earnings before interest, taxes, depreciation and amortization, is a non-GAAP financial measure under applicable SEC rules. Generally, a non-GAAP financial measure is a numerical measure of a Company’s performance, financial position or cash flows that either excludes or includes amounts that are not normally excluded or included in the most directly comparable measure calculated and presented in accordance with U.S. generally accepted accounting principles.

EBITDA is a widely used measure of operating performance. It is presented as supplemental information that management of the Company believes is useful to investors to evaluate the Company’s results because it excludes certain items that are not directly related to the Company’s core operating performance. EBITDA is calculated by adding back net interest expense, income taxes, discontinued operations, depreciation and amortization to net income. EBITDA should not be considered as a substitute either for net income, as an indicator of the Company’s operating performance, or for cash flow, as measures of the Company’s liquidity. In addition, because all companies do not calculate EBITDA identically, the Company’s presentation of EBITDA may not be comparable to other similarly titled measures of other companies.

~~CAPITAL RESOURCES AND LIQUIDITY~~

The Company experienced net income for the three and six months ended June 30, 2005 of $0.5 million and $1.2 million, respectively, compared to net losses of $0.7 million for each of the same periods in 2004. The improvement in both periods reflects a reduction in interest expense through the first two quarters of 2005 compared with the same periods in 2004. Also, the Company recorded losses $0.5 million $0.6 million related to discontinued operations during the three and six months ended June 30, 2004. No such losses were recorded during the same periods of 2005.

For the three and six months ended June 30, 2005, net losses available to common shareholders were $1.9 million and $2.5 million. Included in these losses were $0.8 million and $1.2 million of convertible preferred stock dividend expense and $1.6 million and $2.5 million of non-cash accretion related to the convertible preferred stock and notes.

~~The table below details the Series A and Series B-1 and B-2 Convertible Preferred Stocks and the associated dividends and non-cash preferred stock accretion.~~

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

Net cash provided by operating activities was $8.3 million for the six months ended June 30, 2005, compared to net cash used of $1.1 million for the same period of the prior year. Working capital at June 30, 2005 was negative $7.8 million compared to $4.6 million as of December 31, 2004. This decrease of $12.4 million is primarily due to a $15.0 million increase in the outstanding line of credit, primarily caused by the draw associated with the ComGlobal acquisition. This was offset slightly by an approximate $5.8 million increases in net Accounts Receivable resulting from the acquisition of ComGlobal. Net cash used in investing activities during the six months ended June 30, 2005 was $45.6 million compared to $27.2 million for the same period of the prior year. The increase within net cash used in investing activities during the six months ended June 30, 2005 compared the same period in 2004 was primarily related to the acquisition of ComGlobal. Net cash provided by financing activities during the six months ended June 30, 2005 was $39.4 million, compared to $15.4 million for the same period in the prior year. The increase in cash from financing activities was primarily the result of the cash related activities associated with financing the ComGlobal acquisition.

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 million revolving credit facility, and the remaining outstanding balance on the Company’s term loan of $1.7 million was consolidated into the Credit Facility. On April 1, 2005, in connection with the acquisition of ComGlobal, the Credit Facility was further amended and restated to increase the amount available under the Credit Facility from $20 million to $40 million. The Credit Facility has a maturity date of May 31, 2007. Interest on the Credit Facility is at the LIBOR Rate plus an applicable margin as specified in a pricing grid. As of June 30, 2005, the Credit Facility outstanding balance was $21.6 million. The interest rate at June 30, 2005 was 5.83% for the Credit Facility. Borrowing availability under the Company’s Credit Facility continues to be sufficient to fund normal operations.

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, 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.

~~Available borrowing capacity on the Company’s Credit Facility on June 30, 2005 amounted to approximately $18.4 million.~~

In March 2005, the Company’s’ Board of Directors, including its compensation committee, which is solely comprised of independent directors, approved the sale of up to 300,000 shares of unregistered Common Stock to certain employees of ComGlobal to induce their employment after the merger. During April 2005, all of the approved shares of the Company’s unregistered Common Stock were sold to 22 employees of ComGlobal. The sale resulted in $840,000 of proceeds. Of the 300,000 shares sold, 161,018 shares and 20,000 shares were sold to Mr. Frank F. Hewitt and Mr. Joseph M. Harris, respectively. The sale was made in an exempt offering under Rule 506 of the Securities Act of 1933, as amended.

Pursuant to the November 2, 2001 acquisition of the former Analex, the Company issued 3,572,143 shares of the Company’s Common Stock to the shareholders representing all of the outstanding equity of Analex (the “Sellers”). Of the 3,572,143 shares, 857,143 shares are subject to a provision by which the Company guarantees for a five-year period to reimburse the Sellers the difference between the price at which they sell such shares and a guaranteed sales price. As of June 30, 2005, the maximum amount payable under the terms of the guaranteed shares was approximately $1.6 million. As the fair market value of the Company’s Common Stock was in excess of the guaranteed share prices as of June 30, 2005, no amounts were accrued under the guarantee.

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

~~Forward-Looking Statements~~

Certain matters contained in ~~this~~the following discussion and analysis concerning our operations, cash flows, financial position, economic performance, plans, trends, strategies and financial condition, including in particular, the likelihood of our success in growing our business through acquisitions or otherwise, the realization of sales from backlog, and the sufficiency of capital to meet our working capital needs, include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act and Section 21E of the Exchange Act. Forward-looking statements ~~involve~~are not guarantees of future performance and subject to known and unknown risks, uncertainties, and other factors that may cause our actual results, level of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. In some cases, you can identify these statements by forward-looking words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “should,” “will,” “would” or similar words. We believe that it is important to communicate our future expectations to our investors. However, there are events in the future that we may not be able to predict accurately or control. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, and as a result of many factors, including, but not limited to the following:

our dependence on contracts with U.S. federal government agencies, particularly clients within the Department of Defense and ~~NASA;~~NASA, for substantially all of our revenue;

our dependence on ~~three~~four material contracts, each of which ~~account~~accounted for a significant percentage of our revenue and operating income for the three ~~and six~~ months ended ~~June 30, 2005;~~March 31, 2006;

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

our ability to accurately estimate our backlog;

our ability to maintain strong relationships with other contractors;

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

economic conditions, competitive environment, and timing of awards and contracts;

our ability to identify future acquisition candidates and to ~~integrate acquired operations;~~realize the expected benefits of the acquisition;

our ability to raise additional capital to fund acquisitions; ~~and~~

our substantial debt and the restrictions imposed on us by certain debt ~~agreements.~~agreements; and

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

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

INTRODUCTION

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

Overview of Business

Results of Operations and Related Information

Liquidity and Capital Resources

New Accounting Pronouncements

OVERVIEW OF BUSINESS

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

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

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

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

We provide our services through one reportable segment, comprised of two strategic business units, our Homeland Security Group (“HSG”) and our Systems Engineering Group (“SEG”). HSG accounted for approximately 72% of our revenue for the three months ended March 31, 2006. HSG provides information technology services, aerospace engineering services and security and intelligence support services to the agencies within the intelligence community such as the National Reconnaissance Office (“NRO”), the Missile Defense Agency (“MDA”) and the National Security Agency (“NSA”). HSG also provides services to the DoD, and major aerospace contractors, such as Lockheed Martin and Northrop Grumman. We expect that our Homeland Security Group will continue to benefit from the country’s shifting priorities towards national defense and homeland security and emphasis on enhanced intelligence capabilities.

SEG accounted for approximately 28% of our revenue for the three months ended March 31, 2006. SEG provides aerospace engineering services and information technology services, including program management support, primarily to NASA and major aerospace contractors in support of the development of space-based systems. SEG also supports the operation of terrestrial assets and the launch of unmanned rockets by NASA under our Expendable Launch Vehicle Integrated Support (“ELVIS”) contract. Specific capabilities of the Systems Engineering Group include expendable launch vehicle engineering, space systems development, and ground support for space operations.

Our principal customer is the U.S. government. Revenue generated from contracts to federal government agencies and their prime contractors represented approximately 99% and 100% of our total revenue for the three months ended March 31, 2006 and 2005, respectively. Our principal U.S. government customer is the DoD, which, directly or through its prime contractors, accounted for approximately 72% and 59%, of our revenue for the three months ended March 31, 2006 and 2005, respectively. NASA is also a significant customer, generating 27% and 41% of our revenue for the three months ended March 31, 2006 and 2005, respectively. For the three months ended March 31, 2006 approximately 38% of our revenue and 86% of our operating income came from three prime contracts with agencies within the DoD. For the three months ended March 31, 2005 approximately 15% of our revenue and 52% of our operating income came from one prime contract with an agency within the DoD. For the three months ended March 31, 2006 and 2005 approximately 19% and 27%, respectively, of our revenue came from one prime contract with NASA, which will continue until September 2011, if the remaining contract option is exercised in 2008. We expect that federal government contracts will continue to be the source of substantially all of our revenue for the foreseeable future.

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

During the first fiscal quarter of 2006, we concluded that our wholly-owned subsidiary, SyCom Systems, Inc. (“SyCom”), did not fit with our long-term strategic plan and decided to divest SyCom. SyCom provided staff augmentation services, principally to a single customer and had 32 employees. We disposed of SyCom on April 1, 2006. Therefore, the results of operations of SyCom are reported as discontinued operations, net of applicable income taxes, for all periods presented. Historically, we reported SyCom as a component of our Homeland Security Group.

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


	2006		2005
Prime contract revenue	80	%	77	%
Subcontract revenue	20	%	23	%

Total revenue	100	%	100	%

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

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


	2006		2005
Funded backlog	$	83.7	$	77.0
Unfunded contract value		279.4		206.0

Total estimated backlog	$	363.1	$	283.0

Our total backlog of approximately $363.1 million as of March 31, 2006 represented a 28% increase over the backlog as of March 31, 2005. We currently expect to recognize revenue during the remainder of fiscal 2006 of approximately 24%% from our total backlog as of March 31, 2006.

Contract profit margins are generally affected by the type of contracts we have. We can typically earn higher profits on fixed-price and time-and-material contracts than cost-plus-fee contracts. Thus, an important part of growing our operating income is to increase the amount of services delivered under fixed-price and time and material contracts The following table summarizes our historical contract mix, measured as a percentage of total revenue, for the three months ended March 31:


	2006		2005
Cost-plus-fee	42	%	31	%
Time and material	32	%	36	%
Fixed-price	26	%	33	%

Total	100	%	100	%

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

RESULTS OF OPERATIONS AND RELATED INFORMATION

The following tables provide comparative and common size results of operations for the three months ended March 31, 2006 and 2005, respectively, followed by our discussion and analysis of the results.

Comparison of the Three Months Ended March 31, 2006

to the Three Months Ended March 31, 2005

(dollar amounts in thousands)


	March 31, 2006			% of Revenue		March 31, 2005			% of Revenue		% Change
Revenue	$	35,531		100.0	%	$	26,580		100.0	%	33.7	%
Operating costs and expenses
Cost of revenue		29,037		81.7			21,605		81.3		34.4
Selling, general and administrative		3,022		8.5			2,437		9.2		24.0
Amortization of intangible assets		914		2.6			490		1.8		86.5
Depreciation		247		0.7			79		0.3		212.7

Total operating costs and expenses		33,220		93.5			24,611		92.6		35.0
Operating income		2,311		6.5			1,969		7.4		17.4
Other income and expense
Interest expense, net		(1,186	)	(3.3	)		(763	)	(2.9	)	55.4

Income from continuing operations before income taxes		1,125		3.2			1,206		4.5		(6.7	)

Provision for income taxes		609		1.7			586		2.2		3.9

Income from continuing operations		516		1.5			620		2.3		(16.8	)
(Loss) income from discontinued operations, net of tax		(170	)	(0.5	)		46		0.2		(469.6	)
Gain on disposal of discontinued operations, net of income taxes		10		0.0			24		0.1		(58.3	)

Net income		356		1.0			690		2.6		(48.4	)

Dividends convertible preferred stock		(780	)	(2.1	)		(400	)	(1.5	)	95.0
Accretion of convertible preferred stock		(1,546	)	(4.4	)		(937	)	(3.5	)	65.0

Net loss available to common shareholders	$	(1,970	)	(5.5	)%	$	(647	)	(2.4	)%	204.5	%

Revenue

Our revenue for the three months ended March 31, 2006 was $35.5 million, an increase of $9.0 million, or 33.7%, from the same period in the prior year.

Our Homeland Security Group provided $25.7 million, or 72%, of our revenue for the three months ended March 31, 2006. This represented a 64.8% total increase from the same period in the prior year and organic growth of approximately 9.0%. Contributing to this increase were the effects of our acquisition of ComGlobal in April 2005 and increased information and technology asset protection solutions we provided to certain agencies, including MDA and the Counterintelligence Field Activity (“CIFA”). In addition, we provided increased independent verification and validation services in support of launches of expendable launch vehicles by the United States Air Force and the NRO.

Our Systems Engineering Group provided $9.8 million, or 28%, of our revenue for the three months ended March 31, 2006. Systems Engineering Group revenue decreased approximately 10.7% for the three months ended March 31, 2006 compared to same period in the prior year. This decrease is attributable to decreases in NASA direct material pass-through revenue, which was unusually high in the quarter that ended March 31, 2005, and the continuing planned step-down of our Microgravity Research Development and Operations subcontract (“MRDOC”). On an annual basis, NASA will typically purchase a certain amount of direct material under our ELVIS contract. The timing of these purchases, however, is dictated by NASA and may widely fluctuate from quarter to quarter.

Cost of Revenue

Cost of revenue for the three months ended March 31, 2006 was $29.0 million, an increase of $7.4 million, or 34.4%, from the same period in the prior year. Cost of revenue, as a percentage of revenue for the three months ended March 31, 2006 was 81.7%, compared to 81.3% for the same period in the prior year. The increase in cost of revenue, as a percentage of revenue, for the three months ended March 31, 2006 was attributable primarily to an increase in personnel fringe benefit costs during the three months ended March 31, 2006 compared to the same period in the prior year. An increased number of larger medical claims during the three months ended March 31, 2006 was the primary reason attributable to the increase in fringe benefit costs.

Selling, General and Administrative Expenses (SG&A)

SG&A for the three months ended March 31, 2006 was $3.0 million, an increase of $0.6 million, or 24.0%, from the same period in the prior year. This increase in total costs incurred is associated with the incremental costs required to support the ComGlobal business acquired in April 2005 and the additional investment in business development made in 2006. SG&A, as a percentage of revenue was 8.5% for the three months ended March 31, 2006 compared to 9.2% for the same period in the prior year. As we acquire and integrate companies, we expect to leverage our central corporate services, reducing the ratio of SG&A to revenue. The operational efficiencies we experienced with our ComGlobal acquisition in April 2005 contributed to the decrease in SG&A as a percentage of revenue for the three months ended March 31, 2006 compared to the same period in the prior year. These efficiencies were partially offset by increased expense associated with establishing a more robust centralized business development function which we completed during the fourth fiscal quarter of 2005.

Depreciation Expense and Amortization of Intangible Assets

Depreciation expense and intangible amortization expense for the three months ended March 31, 2006 was $1.2 million, an increase of $0.6 million or 103.9% from the same period in the prior year. This increase resulted from the fixed assets and identifiable intangible assets we acquired in connection with the ComGlobal acquisition in April 2005.

Operating Income

Operating income for the three months ended March 31, 2006 was $2.3 million, an increase of $0.3 million, or 17.4%, from the same period in the prior year. Our operating margin for the three months ended March 31, 2006 was 6.5% compared to 7.4% for the same period in the prior year. The increase in depreciation and amortization expense for the three months ended March 31, 2006, related to the April 2005 ComGlobal acquisition, reduced our operating margin by approximately 1.4%. Excluding the effects of the depreciation and amortization, our operating margin for the three months ended March 31, 2006 would have increased by 0.5 points compared to the same period in the prior year. This increase was attributed primarily to the SG&A efficiencies described in the SG&A section above.

Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”)

EBITDA, as defined below, for the three months ended March 31, 2006 was $3.5 million after adding depreciation and amortization expense of $1.2 million to operating income of $2.3 million. This was an increase of $0.9 million, or 36.8% from the same period in the prior year. For the three months ended March 31, 2006, EBITDA, as a percentage of revenue was 9.8% compared to 9.6% for the same period in the prior year. The increase in our EBITDA margin for the three months ended March 31, 2006, compared to the same period in the prior year, was attributed primarily to the SG&A efficiencies described in the SG&A section above.

EBITDA is a non-GAAP financial measure under applicable SEC rules. Generally, a non-GAAP financial measure is a numerical measure of a Company’s performance, financial position or cash flows that either excludes or includes amounts that are not normally excluded or included in the most directly comparable measure calculated and presented in accordance with U.S. generally accepted accounting principles. EBITDA should not be considered as a substitute either for net income, as an indicator of our operating performance, or for cash flow, as measures of our liquidity. In addition, because all companies do not calculate EBITDA identically, our presentation of EBITDA may not be comparable to other similarly titled measures of other companies.

EBITDA is a widely used measure of operating performance. It is presented as supplemental information that we believe is useful to investors in evaluating our results because it excludes certain non-cash expenses that are not directly related to our core operating performance. EBITDA is calculated by adding net interest expense, income taxes, discontinued operations, depreciation and amortization to net income. EBITDA should not be considered as a substitute either for net income, as an indicator of our operating performance, or for cash flow, as measures of our liquidity. In addition, because all companies do not calculate EBITDA identically, our presentation of EBITDA may not be comparable to other similarly titled measures of other companies.

Interest Expense

Interest expense for the three months ended March 31, 2006 was $1.2 million, an increase of $0.4 million, or 55.4%, from the same period in the prior year. Interest expense has increased as a result of the $22 million we borrowed from our revolving line of credit in April 2005 to fund a portion of our ComGlobal acquisition.

Provision for Income Taxes

The provision for income taxes for the three months ended March 31, 2006 was $0.6 million, an increase of $23,000, or 3.9%, from the same period in the prior year. Our effective tax rate, or the ratio of income tax expense reported in relation to income from continuing operations before income taxes, was impacted significantly by the non-tax deductible interest and accretion expense associated with our convertible notes and preferred stock issued since 2003.

LIQUIDITY AND CAPITAL RESOURCES

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

Cash Flow

For the three months ended March 31, 2006, net cash provided by operating activities was $0.5 million, compared to $2.8 million for the same period in the prior year. This decrease in cash flow from operations was a result of funding delays that occurred during our prior quarter that ended December 31, 2005. These funding delays resulted in the delayed billing and collection of approximately $8 million of accounts receivable that remained outstanding at March 31, 2006. Since March 31, 2006, we have collected approximately $4 million of this $8 million balance. The other $4 million is accruing interest as it is past due and should be released any day by the government payment office. Accounts receivable represents our largest component of working capital. We bill most of our clients the month after services have been rendered. Our operating cash flow is primarily affected by the overall profitability of our contracts, our ability to invoice and collect from our clients in a timely manner and our ability to manage our vendor payments. We use Days Sales Outstanding, or DSO, to measure how efficiently we manage the billing and collection of our accounts receivable. For the three months ended March 31, 2006, our DSO increased to 84 days. The $8 million in delayed collections, as described above, represented 20 days of sales. We view these delays in payment as a non-recurring event precipitated by personnel changes in one of our large Government customers. We expect DSO to return to its historical level in the range of 60 days of sales.

Cash provided by investing activities was $0.3 million for the three months ended March 31, 2006, compared to $13,500 used in investing activities for the same period in the prior year. Our investing cash flow activity is affected primarily by our purchase of property and equipment. We acquired approximately $0.2 million of property and equipment during the three months ended March 31, 2006. This was offset by approximately $0.5 million we received associated the sale of property which was previously held for sale.

Cash used in financing activities was $1.8 million for the three months ended March 31, 2006, compared to $3.3 million for the same period in the prior year. Our financing cash flow activity was affected by borrowings and repayments on our revolving line of credit. For the three months ended March 31, 2006, we repaid approximately $1.0 million against our revolving line of credit, compared to approximately $3.1 million for the same period during the prior year. Financing activity cash flows were also affected by the payment of dividends on our convertible preferred stock. We paid approximately $0.8 million in dividends on our preferred stock for the three months ended March 31,2006 compared to $0.3 million for the same period in the prior year. The increase in our preferred stock dividend expense from the same period in the prior year was attributed to the $25.0 million of preferred stock we issued in April 2005 in connection with our acquisition of ComGlobal.

Credit Facility and Borrowing Capacity

We have a long-standing relationship with Bank of America, N.A. (“the Bank”). Part of our relationship with the Bank includes a $40.0 million revolving line of credit (“the Credit Facility”) used for senior acquisition financing and working capital requirements. The Credit Facility is subject to a borrowing base determined based on our outstanding accounts receivable balance and certain financial covenants setting forth maximum ratios for total funded debt to EBITDA and minimum ratios for fixed charge coverage. As of March 31, 2006 we were in compliance with these covenants. The Credit Facility has a maturity date of May 31, 2008. Interest on the Credit Facility is at the LIBOR Rate plus an applicable margin as specified the agreement. As of March 31, 2006, the outstanding balance of the Credit Facility was $26.6 million. The interest rate at March 31, 2006 was 7.83%. Borrowing availability under our Credit Facility continues to be sufficient to fund normal operations. Available borrowing capacity on our Credit Facility at March 31, 2006 was approximately $5.5 million.

The Credit Facility also restricts our ability to dispose of properties, incur additional indebtedness, pay dividends (except to holders of the Series A and Series B Preferred Stock) or other distributions, create liens on assets, enter into certain leaseback transactions, make investments, loans or advances, engage in mergers or consolidations, and engage in transactions with affiliates. All assets of our business generally secure the Credit Facility.

Guarantees and Commitments

Pursuant to the November 2, 2001 acquisition of the former Analex, we issued 3,572,143 shares of our Common Stock to the shareholders representing all of the outstanding equity of Analex (the “Sellers”). Of the 3,572,143 shares, 857,143 shares are subject to a provision by which we guarantee for a five-year period to reimburse the Sellers the difference between the price at which they sell such shares and a guaranteed sales price. As of March 31, 2006, the maximum amount payable under the terms of the guaranteed shares was approximately $1.6 million. As the fair market value of our Common Stock was in excess of the guaranteed share prices as of March 31, 2006, we did not accrue any amounts under the guarantee.

On November 2, 2001, we issued promissory notes to certain Analex sellers totaling approximately $0.8 million with a five-year term, bearing interest at 6%. As of March 31, 2006 the outstanding balance of the promissory notes was approximately $0.1 million. We also entered into non-competition agreements with former employees totaling $0.4 million, on a discounted basis, payable over various periods with a current balance of $0.1 million at March 31, 2006.

In February 2006, we entered into a lease agreement for approximately 7,000 square feet to be used as our new Chantilly, Virginia regional office. The lease commenced on February 1, 2006 and has a term of five years with one optional renewal period of five years. Future minimum lease payments over the five-year lease term will be approximately $0.9 million.

NEW ACCOUNTING PRONOUNCEMENTS

Adoption of SFAS No. 123(R)

Effective January 1, 2006, we adopted SFAS No. 123(R) using the modified prospective method. Under this method, compensation costs for all awards granted after the date of adoption and the unvested portion of previously granted awards outstanding at the date of adoption are measured at estimated fair value and included in our operating expenses over the vesting period during which an employee provides service in exchange for the award. Accordingly, prior period amounts presented herein have not been restated to reflect the adoption of SFAS No. 123(R).

Prior to the adoption of SFAS No. 123(R), we reported all tax benefits resulting from the exercise of stock options as operating cash flows in the consolidated statements of cash flows. In accordance with SFAS No. 123(R), for the period beginning January 1, 2006, excess tax benefits from the exercise of stock options are presented as financing cash flows. We did not consider such benefits material for the three months ended March 31, 2006 or 2005, respectively.

As a result of adopting SFAS No. 123(R), we recorded approximately $0.1 million of stock-based compensation expense, or approximately $82,000 after-tax, in our statement of operations for the three months ended March 31, 2006. This stock-based compensation expense reduced both our basic and diluted earnings per share by less than a penny a share for the three months ended March 31, 2006.

Item 3.Quantitative and Qualitative Disclosure about Market Risk

Market Risks and Hedging Activities

The Company’s outstanding bank debt bears interest at variable interest rates tied to LIBOR. The use of variable-rate debt to finance operations and capital ~~improvements~~expenditures exposes the Company to variability in interest payments due to changes in interest rates. The Company ~~currently~~ does not currently use interest rate swaps or other means to reduce the interest rate exposure on these variable rate obligations. ~~The~~Furthermore, the Company does not hold any ~~derivatives for trading or speculative purposes.~~other type of derivative instrument.

Item 4.Controls and Procedures

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

Under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer, the Company carried out an evaluation of the effectiveness of the design and operation of disclosure controls and procedures as of the end of the period covered in this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective, at the reasonable assurance level, as of ~~June 30, 2005,~~March 31, 2006, in timely alerting them to material information relating to the Company required to be included in the Company’s periodic SEC filings.

~~Our~~24

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

Part II. Other Information

Item 1.Legal Proceedings

The Company was served on October 9, 2003 with a complaint filed by Swales & Associates, Inc. (“Swales”) alleging breach of contract and other claims relating to Swales’ termination as a subcontractor under the Company’s ELVIS contract with NASA. The Company entered into a Settlement Agreement dated July 22, 2004 with Swales. Under the terms of the Settlement Agreement, the Company paid $1,000,000 to Swales in July 2004. Included in the $1,000,000 settlement is approximately $320,000 for work performed by Swales prior to termination. This amount was billed to NASA and ~~payment was~~the Company received ~~by the Company.~~payment. Legal fees are expected to be approximately $290,000. ~~Based on~~The Company has received an opinion byfrom legal counsel ~~the Company believes~~ that the unreimbursed amount of the settlement payment, together with legal fees and expenses incurred in connection with the litigation, are costs that are reimbursable under the ELVIS contract with NASA. Therefore, the Company established a receivable inof approximately $1.0 million related to the ~~amount~~expected reimbursement of ~~$984,000 has been booked. However, on July 28, 2004,~~these costs. In May 2005, the Company received ~~from~~oral customer feedback that the costs were allowable and allocable to the contract, but the reasonableness of these costs still needed to be assessed by NASA. Based on the opinion of legal counsel and management’s assessment of relevant facts, the Company believed and continues to believe that the costs incurred are allowable, allocable and reasonable. During the quarter ended December 31, 2005, the Company met with NASA ~~a Notice of Intent~~procurement personnel who indicated to ~~Disallow Costs. Notwithstanding the Notice of Intent~~us prior NASA communications with respect to ~~Disallow Costs,~~allowability and allocability should not be relied upon. While the Company continues to believe that the ~~costs of~~full amounts is allowable, allocable and reasonable, and therefore should be recoverable under the ~~settlement will be reimbursed by NASA. Discussions~~ELVIS contract with NASA, ~~are continuing. However, there can be no assurance that~~ the Company ~~will in fact be reimbursed in~~has concluded a reserve of $500,000 is appropriate and was therefore recorded as of December 31, 2005. The Company intends to continue to use all reasonable efforts to recover the full ~~by NASA in the foreseeable future.~~

amount of its costs from NASA.

time and has filed a counter-claim against HKSBS seeking reimbursement of prior retainer payments made to HKSBS of approximately $110,000, plus certain legal fees. This matter was tried in March 2006 in Fairfax County Circuit Court. Post-trial briefs were filed in April 2006. The judge hearing this matter is expected to rule in June 2006. In the event that HKSBS prevails, the Company could be held liable for up to the full amount of the damages sought; and that result could have a material adverse effect on its operating results and cash flows.

Item 4.1A.~~Submission of Matters to a Vote of Security Holders~~Risk Factors

~~(a) The Company held its Annual Meeting of Stockholders on May 19, 2005.~~

~~(b) At the Annual Meeting, the Company’s stockholders approved:~~

~~(i)~~

Proposal 1: the election of the incumbent nine (9) directors, namely, Sterling E. Phillips, Jr., Peter C. Belford, Sr., C. Thomas Faulders, III, Lincoln D. Faurer, Martin M. Hale, Jr., Thomas L. Hewitt, Daniel P. March, Gerald A. Poch, and Daniel R. Young;

~~(ii)~~

~~Proposal 2: an amendment to the Company’s Employee Stock Purchase Plan to increase the number of shares of Common Stock reserved for issuance thereunder from 650,000 to 1,050,000; and~~

~~(iii)~~

~~Proposal 3: ratification of the appointment of Ernst & Young LLP as the Company’s independent auditors for the fiscal year 2005~~

~~The following votes were cast~~Other than with respect to ~~each~~the risk factors below, there have been no material changes from the risk factors disclosed in the “Risk Factors” section of the ~~matters voted~~Company’s Annual Report on atForm 10-K for the ~~Special Meeting:~~year ended December 31, 2005. The following risk factors were disclosed on the Form 10-K and have been revised to provide updated information as of the date of filing of this quarterly report on Form 10-Q.

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

Proposal #1

DIRECTORS
   FOR
   WITHHELD

#1-Phillips
   31,330,382    29,286
#2-Belford
   31,333,932    25,736
#3-Faulders
   31,334,457    25,211
#4-Faurer
   31,333,102    26,566
#5-Hale
   31,332,541    27,127
#6-Hewitt
   31,333,927    25,741
#7 March
   31,333,447    26,221
#8-Poch
   33,332,186    27,482
#9-Young
   31,333,427    26,241
Proposal #2
   FOR
   AGAINST
   ABSTAIN
Total
   23,709,332    1,009,686    18,992
Proposal #3
   FOR
   AGAINST
   ABSTAIN
Total
   31,341,304    10,914    7,450

Revenue derived from U.S. federal government agencies and their prime contractors represented 99%, of our total revenue for the fiscal quarters ended March 31, 2006 and 2005, respectively. The Department of Defense, our principal U.S. government customer, accounted for approximately 72% and 59% of our revenue for the fiscal quarters ended March 31, 2006 and 2005, respectively. NASA generated 27% and 41% of our revenue for the fiscal quarters ended March 31, 2006 and 2005, respectively. Approximately 19% and 30% of our revenue for the fiscal quarters ended March 31, 2006 and 2005, respectively, came from one prime contract with NASA, which will continue until September 2011 if the remaining option is exercised in 2008. In the event that the remaining option term is not exercised, we will not be able to recognize the full value of the contract awarded. In addition, the Homeland Security Group’s contracts with three Department of Defense customers generated 38% of our revenue and 86% of our operating income for the fiscal quarter ended March 31, 2006. For the fiscal quarter ended March 31, 2005, there was one prime contract with the DoD which represented 17% of our revenue and 72% of our operating income. We expect that federal government contracts will continue to be the source of substantially all of our revenue for the foreseeable future. If we were suspended or debarred from contracting with the federal government generally, the Department of Defense, NASA or any significant agency in the intelligence community, if our reputation or relationship with government agencies were impaired, or if the government otherwise ceased doing business with us or significantly decreased the amount of business it does with us, our business, operating results, financial condition and business prospects could be materially adversely affected.

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

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

We were served on October 9, 2003 with a complaint filed by Swales & Associates, Inc. (“Swales”) alleging breach of contract and other claims relating to Swales’ termination as a subcontractor under the Company’s ELVIS contract with NASA. We entered into a Settlement Agreement dated July 22, 2004 with Swales. Under the terms of the Settlement Agreement, we paid $1,000,000 to Swales in July 2004. Included in the $1,000,000 settlement is approximately $320,000 for work performed by Swales prior to termination. This amount was billed to NASA and we received payment. Legal fees are expected to be approximately $290,000. We have received an opinion from legal counsel that the unreimbursed amount of the settlement payment, together with legal fees and expenses incurred in connection with the litigation, are costs that are reimbursable under the ELVIS contract with NASA. Therefore, we established a receivable of approximately $1.0 million related to the expected reimbursement of these costs. In May 2005, we received oral customer feedback that the costs were allowable and allocable to the contract, but the reasonableness of these costs still needed to be assessed by NASA. Based on the opinion of legal counsel and management’s assessment of relevant facts, we believed and continue to believe that the costs incurred are allowable, allocable and reasonable. During the quarter ended December 31, 2005, we met with NASA procurement personnel who indicated to us that prior NASA communications with respect to allowability and allocability should not be relied upon. While we continue to believe that the full amount is allowable, allocable and reasonable, and therefore should be recoverable under the ELVIS contract with NASA, we have concluded that a reserve of $500,000 is appropriate as of December 31, 2005. We intend to continue to use all reasonable efforts to recover the full amount of our costs from NASA.

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

Item 6.Exhibits and Reports on Form 8-K

(a)

Exhibits


31.1		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).

31.2		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).

32.1		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).

(b)	Reports on Form 8-K

A Current Report on Form 8-K dated ~~March 30, 2005~~January 13, 2006 and filed with the Securities and Exchange Commission on ~~April 1, 2005~~January 18, 2006 reported that the Company ~~filed~~entered into a written agreement with ~~the Secretary of State~~Mr. Sterling E. Phillips, Jr., Chairman of the ~~State~~Board and Chief Executive Officer, whereby Mr. Phillips exchanged his stock option to purchase 875,725 shares of ~~Delaware~~Analex Common Stock for an ~~amendment to each~~equal number of ~~the Company’s Certificate of Designations of the Series A Convertible Preferred Stock and the Certificate of Designations of the Series B Convertible Preferred Stock.~~stock-only stock appreciation rights (“SOSARs”). Mr. Phillips exercised these SOSARs on January 13, 2006.

A Current Report on Form 8-K dated ~~April 1, 2005~~February 22, 2006 and filed with the Securities and Exchange Commission on ~~April 6, 2005 reported that the Company announced that its acquisition of ComGlobal Systems, Incorporated (“ComGlobal”), a California corporation, was consummated on April 1, 2005.~~

A Current Report on Form 8-K dated April 7, 2005 and filed with the Securities and Exchange Commission on April 12, 2005 reported that Mr. Ronald B. Alexander, effective April 7, 2005, ceased to be an executive officer of the Company, and his last day of employment will be April 29, 2005. Ms. Judith N. Huntzinger has been appointed as the interim Chief Financial Officer.

A Current Report on Form 8-K dated April 11, 2005 and filed with the Securities and Exchange Commission on April 13, 2005 reported that Peter C. Belford, Sr. and Rear Admiral U.S. Navy (retired) Daniel P. March were appointed to the Board of Directors.

~~A Current Report on Form 8-K dated April 27, 2005 and filed with the Securities and Exchange Commission on April 27, 2005~~February 28, 2006 reported that the Company issued a press release announcing its financial results for the fiscal ~~quarter~~year ended ~~March~~December 31, 2005.

A Current Report on Form 8-K dated ~~April 25, 2005~~February 22, 2006 and filed with the Securities and Exchange Commission on ~~April~~February 28, ~~2005~~2006 reported that (i) the Company has amended and restated the Analex Corporation 2000 and 2002 Stock Incentive Plan, (ii) pursuant to the Analex Corporation 2002 Stock Incentive Plan, each non-employee director automatically received stock–only stock appreciation rights covering 5,000 shares of Analex Common Stock on February 22, 2006, and (iii) the Company approved the ~~sale~~grant of ~~up to 300,000~~50,000 shares of restricted stock to each Messrs. C. Wayne Grubbs, V. Joseph Broadwater and Stephen C. Matthews. The form of the ~~Company’s unregistered Common~~ Stock Appreciation Rights Agreement and the Option Exchange and Stock Appreciation Right Agreement were filed as exhibits to ~~certain employees of ComGlobal to induce their employment after~~ the ~~merger.~~filing.

A Current Report on Form 8-K dated April 28, 2005 and filed with the Securities and Exchange Commission on May 2, 2005 reported that the Company has extended Mr. Ronald B. Alexander’s employment, which was originally scheduled to terminate on April 29, to May 13, 2005.

A Current Report on Form 8-K dated May 18, 2005 and filed with the Securities and Exchange Commission on May 18, 2005 reported that the Company has extended Mr. Ronald B. Alexander’s employment, which was originally scheduled to terminate on May 13, to June 15, 2005.

A Current Report on Form 8-K dated March 22, 2005 and filed with the Securities and Exchange Commission on June 15, 2005 reported that the Company has extended Mr. Ronald B. Alexander’s employment, which was originally scheduled to terminate on June 15, 2005, to July 15, 2005.

A Current Report on Form 8-K/A dated April 1, 2005 and filed with the Securities and Exchange Commission on June 15, 2005 reported that the Company in accordance with Item 9.1(a) of Form 8-K provided the required audited financial statements for ComGlobal Systems, Incorporated (“ComGlobal”) as of June 30, 2004, 2003 and 2002 and related Independent Auditors’ Reports (b) in accordance with Item 9.1(b) of Form 8-K, provided the required Unaudited Pro Forma Combined Balance Sheet, the Unaudited Pro Forma Combined Statement of Operations, and Notes to Unaudited Pro Forma Combined Financial Statements.

A Current Report on Form 8-K dated July 15, 2005 and filed with the Securities and Exchange Commission on July 15, 2005 reported that the Company has extended Mr. Ronald B. Alexander’s employment, which was originally scheduled to terminate on July 15, 2005, to July 31, 2005.

A Current Report on Form 8-K dated July 29, 2005 and filed with the Securities and Exchange Commission on July 29, 2005 reported that the Company has extended Mr. Ronald B. Alexander’s employment, which was originally scheduled to terminate on July 31, 2005, to August 15, 2005.26

~~SIGNATURES~~

(c)	SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned there unto duly authorized.

Date: May 5, 2006

~~Date: August 2, 2005~~Analex Corporation

(Registrant)


~~Analex Corporation~~
~~(Registrant)~~

By:	/S/s/ Sterling E. Phillips, Jr.	By:	/~~S/ Judith N. Huntzinger~~s/ C. Wayne Grubbs
	Sterling E. Phillips, Jr.		~~Judith N. Huntzinger~~C. Wayne Grubbs
	Chairman and Chief Executive Officer		~~Interim Chief Financial Officer~~
	(Principal Executive Officer)		Senior Vice President and Chief Financial Officer (Principal Financial Officer and Chief Accounting Officer)

2527


	June 30, 2005			December 31, 2004
ASSETS
Current assets
Cash and cash equivalents	$	3,097,200		$	1,034,200
Accounts receivable, net		24,061,700			18,350,400
Deferred tax asset		457,700			—
Prepaid expenses and other		4,143,100			4,037,800
Raw material inventory		400,300			—

Total current assets		32,160,000			23,422,400
Fixed assets, net		2,402,700			1,434,700
Goodwill		78,027,500			43,175,200
Contract rights and other intangible assets, net		12,326,200			6,363,500
Other assets		716,000			526,300

Total assets	$	125,632,400		$	74,922,100

LIABILITIES, CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	957,400		$	1,486,100
Notes payable – line of credit		21,590,800			6,590,100
Notes payable – other		538,100			904,200
Deferred tax liability		1,633,800			927,400
Other current liabilities		15,260,000			8,919,500

Total current liabilities		39,980,100			18,827,300

Notes payable – other		137,300			329,600
Deferred tax liability		4,400,500			2,123,500
Deferred rent		42,300			—
Series A convertible note		5,593,600			4,689,500

Total liabilities		50,153,800			25,969,900

Commitments and contingencies		—			—
Series A Convertible Preferred Stock; 6,726,457 shares issued and outstanding at June 30, 2005 and December 31, 2004		5,861,300			3,986,300
Series B-1 Convertible Preferred Stock; 3,428,571 shares issued and outstanding at June 30, 2005 and December 31, 2004		12,000,000			12,000,000
Series B-2 Convertible Preferred Stock; 7,142,856 shares issued and outstanding at June 30, 2005; 0 shares issued and outstanding at December 31, 2004		15,234,500			—
Shareholders’ equity
Common stock; $0.02 par; authorized 65,000,000 shares; issued and outstanding June 30, 2005, 16,046,625 shares and December 31, 2004, 15,421,619 shares		320,900			308,400
Additional paid-in capital		49,578,400			40,070,300
Warrants outstanding		9,228,300			6,803,300
Accumulated deficit		(16,744,800	)		(14,216,100	)

Total shareholders’ equity		42,382,800			32,965,900

Total liabilities, convertible preferred stock and shareholders’ equity	$	125,632,400		$	74,922,100


	Three Months Ended June 30,						Six Months Ended June 30,
	2005			2004			2005			2004
Revenue	$	38,148,600		$	22,215,200		$	66,586,800		$	38,846,600
Operating costs and expenses
Cost of revenue		30,975,300			17,357,200			54,687,900			31,408,600
Selling, general and administrative		3,418,500			2,552,500			5,609,700			4,353,900
Amortization of intangible assets		989,100			277,300			1,479,600			426,500

Total operating costs and expenses		35,382,900			20,187,000			61,777,200			36,189,000

Operating income		2,765,700			2,028,200			4,809,600			2,657,600

Other income (expense)
Interest income		2,500			29,600			4,800			42,900
Interest expense		(998,700	)		(1,698,900	)		(1,764,100	)		(2,400,000	)

Income from continuing operations before income taxes		1,769,500			358,900			3,050,300			300,500
Provision for income taxes		1,286,800			459,500			1,901,600			384,700

Income (loss) from continuing operations		482,700			(100,600	)		1,148,700			(84,200	)
Income (loss) from discontinued operations, net of income taxes		6,700			(50,700	)		30,300			(79,200	)
Loss on disposal of discontinued operations, net of income taxes		—			(521,800	)		—			(521,800	)

Net income (loss)		489,400			(673,100	)		1,179,000			(685,200	)

Dividends on convertible preferred stock		(781,900	)		(225,000	)		(1,181,300	)		(450,000	)
Accretion of convertible preferred stock		(1,588,800	)		(939,100	)		(2,526,300	)		(1,876,600	)

Net loss available to common shareholders	$	(1,881,300	)	$	(1,837,200	)	$	(2,528,600	)	$	(3,011,800	)

Net loss available to common shareholders per share:
Continuing operations
Basic	$	(0.12	)	$	(0.09	)	$	(0.16	)	$	(0.18	)

Diluted	$	(0.12	)	$	(0.09	)	$	(0.16	)	$	(0.18	)

Discontinued operations
Basic	$	0.00		$	(0.04	)	$	0.00		$	(0.04	)

Diluted	$	0.00		$	(0.04	)	$	0.00		$	(0.04	)

Net loss available to common shareholders:
Basic	$	(0.12	)	$	(0.13	)	$	(0.16	)	$	(0.22	)

Diluted	$	(0.12	)	$	(0.13	)	$	(0.16	)	$	(0.22	)

Weighted average number of shares:
Basic		15,821,971			14,049,715			15,623,730			13,547,203

Diluted		15,821,971			14,049,715			15,623,730			13,547,203


	June 30, 2005			June 30, 2004
Reconciliation of net income (loss) to cash provided by (used in) operating activities
Net income (loss)	$	1,179,000		$	(685,200	)
Net income (loss) from discontinued operations		30,300			(79,200	)

Net income (loss) from continuing operations		1,148,700			(606,000	)

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities
Depreciation		276,400			96,300
Amortization of intangible assets		1,479,600			426,500
Amortization of debt discounts		904,000			—
Amortization of deferred financing costs		90,700			1,762,400
Loss on disposal of discontinued operations		—			521,800
Deferred tax benefit		—			(556,100	)
Changes in operating assets and liabilities
Accounts receivable		2,761,600			(5,101,100	)
Prepaid expenses and other		1,956,800			962,600
Inventory		58,700			—
Other assets		(1,164,500	)		(168,900	)
Accounts payable		(760,100	)		(88,100	)
Other current liabilities		1,488,300			1,956,000
Other long-term liabilities		1,100			(10,200	)

Net cash provided by (used in) continued operating activities		8,241,300			(804,800	)
Net cash provided by (used in) discontinued operating activities		30,300			(295,900	)

Net cash provided by (used in) operating activities		8,271,600			(1,100,700	)

Cash flows from investing activities
Purchase of fixed assets		(218,400	)		(144,600	)
Cash paid for BAI, net of cash acquired		—			(27,049,200	)
Cash paid for ComGlobal, net of cash acquired		(45,391,500	)		—

Net cash used in investing activities		(45,609,900	)		(27,193,800	)

Cash flows from financing activities
Proceeds from net borrowings on bank and other loans		14,442,300			3,411,400
Proceeds from stock sale of common stock		945,000			—
Proceeds from stock options and warrants exercised		422,000			305,800
Proceeds from employee stock purchase plan		196,300			126,700
Proceeds from issuance of Series B-1 Senior Subordinated Notes and Warrants		—			12,000,000
Proceeds from issuance of Series B-2 Preferred Stock and Warrants		24,965,400			—
Payments of dividends on preferred stock		(1,569,700	)		(450,000	)

Net cash provided by financing activities		39,401,300			15,393,900

Net increase (decrease) in cash and cash equivalents		2,063,000			(12,900,600	)
Cash and cash equivalents at beginning of period		1,034,200			14,177,500

Cash and cash equivalents at end of period	$	3,097,200		$	1,276,900


	Pro Forma Three Months Ended June 30, 2004			Pro Forma Six Months Ended June 30, 2004			Three Months Ended June 30, 2005			Pro Forma Six Months Ended June 30, 2005
Revenue	$	33,396,900		$	59,794,000		$	38,148,600		$	76,297,200
Income from continuing operations		1,215,200			1,337,600			482,700			642,100
Net (loss) income		(364,400	)		(487,800	)		489,400			672,400
Net loss available to common shareholders		(2,624,000	)		(5,005,400	)		(1,881,300	)		(4,130,800	)
Basic earnings per share available to common shareholders	$	(0.19	)	$	(0.37	)	$	(0.12	)	$	(0.26	)

Diluted earnings per share available to common shareholders	$	(0.19	)	$	(0.37	)	$	(0.12	)	$	(0.26	)


	Three Months Ended June 30,						Six Months Ended June 30,
	2005			2004			2005			2004
Income (loss) from continuing operations	$	482,700		$	(100,600	)	$	1,148,700		$	(84,200	)

Dividends on convertible preferred stock		(781,900	)		(225,000	)		(1,181,300	)		(450,000	)
Accretion of convertible preferred stock		(1,588,800	)		(939,100	)		(2,526,300	)		(1,876,600	)

Net loss from continuing operations		(1,888,000	)	$	(1,264,700	)		(2,558,900	)	$	(2,410,800	)
Income (loss) from discontinued operations, net of income taxes		6,700			(50,700	)		30,300			(79,200	)

Loss on disposal of discontinued operations, net of income taxes		—			(521,800	)		—			(521,800	)

Net loss available to common shareholders	$	(1,881,300	)	$	(1,837,200	)	$	(2,528,600	)	$	(3,011,800	)

Weighted average shares outstanding		15,821,971			14,049,715			15,623,730			13,547,203
Warrants		—			—			—			—
Employee stock options		—			—			—			—

Diluted weighted average shares outstanding		15,821,971			14,049,715			15,623,730			13,547,203

Net loss available to common shareholders per share
Continuing operations
Basic	$	(0.12	)	$	(0.09	)	$	(0.16	)	$	(0.18	)

Diluted	$	(0.12	)	$	(0.09	)	$	(0.16	)	$	(0.18	)

Discontinued operations
Basic	$	0.00		$	(0.04	)	$	0.00		$	(0.04	)

Diluted	$	0.00		$	(0.04	)	$	0.00		$	(0.04	)

Net loss available to common shareholders
Basic	$	(0.12	)	$	(0.13	)	$	(0.16	)	$	(0.22	)

Diluted	$	(0.12	)	$	(0.13	)	$	(0.16	)	$	(0.22	)


	Three Months Ended June 30						Six Months Ended June 30
	2005			2004			2005			2004
Net loss available to common shareholders, as reported	$	(1,881,300	)	$	(1,837,200	)	$	(2,528,600	)	$	(3,011,800	)
Deduct: Total stock-based compensation expense determined under fair value based method (SFAS No. 123) for all awards, net of related tax effects		125,000			244,300			624,000			343,200

Pro forma net loss available to common shareholders	$	(2,006,300	)	$	(2,081,500	)	$	(3,152,600	)	$	(3,355,000	)

Earnings per share:
Basic, as reported	$	(0.12	)	$	(0.13	)	$	(0.16	)	$	(0.22	)

Diluted, as reported	$	(0.12	)		(0.13	)	$	(0.16	)		(0.22	)

Basic, pro forma	$	(0.13	)		(0.15	)	$	(0.20	)		(0.25	)

Diluted, pro forma	$	(0.13	)		(0.15	)	$	(0.20	)		(0.25	)


Number of options	Exercise price		Original vesting date	Accelerated vesting date
100,000	$	3.42	02/17/06	03/02/05
90,002	$	3.80	04/08/06	01/26/05
25,000	$	3.69	02/02/06	01/31/05
6,668	$	3.90	03/01/06	01/19/05
1,667	$	3.80	02/25/06	01/26/05


							Quarterly Dividends and Accretion
	Face Value		Carrying Value At June 30, 2005		Remaining Amount to be Accreted		Cash		Non - Cash Preferred Stock Accretion		Remaining Period of Amortization
Series A Preferred Stock	$	15,000,000	$	5,861,300	$	9,138,700	$	225,000	$	937,500	2.5 years
Series B-1 Preferred Stock	$	12,000,000	$	12,000,000		—	$	177,500		—	—
Series B-2 Preferred Stock	$	25,000,000	$	15,234,500	$	9,765,500	$	375,000	$	651,300	3.75 years


							Quarterly Expenses
	Face Value		Carrying Value At June 30, 2005		Remaining Amount to be Amortized		Cash		Non – Cash Interest Accretion		Remaining Period of Amortization
Series A Convertible Notes	$	10,000,000	$	5,593,600	$	4,406,400	$	172,600	$	482,000	2.5 years


	Three Months Ended June 30					Six Months Ended June 30
	2005		2004			2005		2004
Revenue	$	—	$	500,000		$	—	$	978,700
Income (loss) from discontinued operations		8,900		(99,000	)		47,200		(128,900	)
Income tax expense (benefit)		2,200		(48,300	)		16,900		(49,700	)
Income (loss) from discontinued operations, net of tax	$	6,700	$	(50,700	)	$	30,300	$	(79,200	)


Three Months Ended	June 30, 2005			% of Revenue		June 30, 2004			% of Revenue
Revenue	$	38,148,600		100.0	%	$	22,215,200		100.0	%
Operating costs and expenses
Cost of revenue		30,975,300		81.2			17,357,200		78.1
Selling, general and administrative		3,418,500		9.0			2,552,500		11.5
Amortization of intangible assets		989,100		2.6			277,300		1.2

Total operating costs and expenses		35,382,900		92.8			20,187,000		90.9
Operating income		2,765,700		7.3			2,028,200		9.1
Other income and expense
Interest income		2,500		0.0			29,600		0.1
Interest expense		(998,700	)	(2.6	)		(1,698,900	)	(7.6	)

Income from continuing operations before income taxes		1,769,500		4.6			358,900		1.6

Provision for income taxes		(1,286,800	)	(3.4	)		(459,500	)	(2.1	)

Income (loss) from continuing operations		482,700		1.3			(100,600	)	(0.5	)
Income (loss) from discontinued operations, net of tax		6,700		0.0			(50,700	)	(0.2	)
Loss on disposal of discontinued operations, net of income taxes		—		0.0			(521,800	)	(2.3	)

Net income (loss)		489,400		1.3			(673,100	)	(3.0	)

Dividends on convertible preferred stock		(781,900	)	(2.0	)		(225,000	)	(1.0	)
Accretion of convertible preferred stock		(1,588,800	)	(4.2	)		(939,100	)	(4.2	)

Net loss available to common shareholders	$	(1,881,300	)	(4.9	)%	$	(1,837,200	)	(8.3	)%


Six Months Ended	June 30, 2005			% of Revenue		June 30, 2004			% of Revenue
Revenue	$	66,586,800		100.0	%	$	38,846,600		100.0	%
Operating costs and expenses
Cost of revenue		54,687,900		82.1			31,408,600		80.9
Selling, general and administrative		5,609,700		8.4			4,353,900		11.2
Amortization of intangible assets		1,479,600		2.2			426,500		1.1

Total operating costs and expenses		61,777,200		92.8			36,189,000		93.2
Operating income		4,809,600		7.2			2,657,600		6.8
Other income and expense
Interest income		4,800		0.0			42,900		0.1
Interest expense		(1,764,100	)	(2.6	)		(2,400,000	)	(6.2	)

Income from continuing operations before income taxes		3,050,300		4.6			300,500		0.8

Provision for income taxes		(1,901,600	)	(2.9	)		(384,700	)	(1.0	)

Income (loss) from continuing operations		1,148,700		1.7			(84,200	)	(0.2	)
Income (loss) from discontinued operations, net of tax		30,300		0.0			(79,200	)	(0.2	)
Loss on disposal of discontinued operations, net of income taxes		—		0.0			(521,800	)	(1.3	)

Net income (loss)		1,179,000		1.8			(685,200	)	(1.8	)

Dividends on convertible preferred stock		(1,181,300	)	(1.8	)		(450,000	)	(1.2	)
Accretion of convertible preferred stock		(2,526,300	)	(3.8	)		(1,876,600	)	(4.8	)

Net loss available to common shareholders	$	(2,528,600	)	(3.8	)%	$	(3,011,800	)	(7.8	)%


Three Months Ended	June 30, 2005	% of Total		June 30, 2004		% of Total
Homeland Security Group	27,024,800	71	%	$	11,404,800	51	%
Systems Engineering Group	11,123,800	29			10,810,400	49

Total	38,148,600	100	%		22,215,200	100	%


Six Months Ended	June 30, 2005	% of Total		June 30, 2004		% of Total
Homeland Security Group	44,502,500	67	%	$	18,626,200	48	%
Systems Engineering Group	22,084,300	33			20,220,400	52

Total	66,586,800	100	%		38,846,600	100	%


	Three Month Ended June 30, 2005 vs. 2004		Six Months Ended June 30, 2005 vs. 2004
Homeland Security Group	137	%	139	%
Systems Engineering Group	3		9	%

Total	72	%	71	%


Proposal #1
DIRECTORS	FOR	WITHHELD
#1-Phillips	31,330,382	29,286
#2-Belford	31,333,932	25,736
#3-Faulders	31,334,457	25,211
#4-Faurer	31,333,102	26,566
#5-Hale	31,332,541	27,127
#6-Hewitt	31,333,927	25,741
#7 March	31,333,447	26,221
#8-Poch	33,332,186	27,482
#9-Young	31,333,427	26,241

Proposal #2	FOR	AGAINST	ABSTAIN
Total	23,709,332	1,009,686	18,992

Proposal #3	FOR	AGAINST	ABSTAIN
Total	31,341,304	10,914	7,450