UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2003

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

For the 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

Suite 300

Alexandria, Virginia 22303

(Address of principal executive offices)

Registrant’s Telephone number including area code

(703) 329-9400

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes x No ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act)

Yes ¨ No x

As of November 12, 2003, 15,487,426 shares of the common stock of the registrant were outstanding.

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ANALEX CORPORATION

TABLE OF CONTENTS

		Page No.
Part I Financial Information:
Item 1.	Financial Statements
	Consolidated Balance Sheets at September 30, 2003 (unaudited) and December 31, 2002	3
	Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2003 and 2002 (unaudited)	5
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2003 and 2002 (unaudited)	6
	Notes to Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosure About Market Risk	31
Item 4.	Controls and Procedures	32
Part II Other Information:
Item 1.	Legal Proceedings	32
Item 6.	Exhibits and Reports on Form 8-K	33
SIGNATURES		34

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ANALEX CORPORATION

CONSOLIDATED BALANCE SHEETS

SEPTEMBER 30, 2003 AND DECEMBER 31, 2002

	September 30, 2003 (unaudited)		December 31, 2002
ASSETS
Current assets:
Cash and cash equivalents	$	110,700	$	301,800
Accounts receivable, net		12,154,600		12,556,100
Prepaid expenses and other		295,200		270,500
Total current assets		12,560,500		13,128,400
Fixed assets, net		477,800		216,700
Goodwill		15,534,600		15,534,600
Contract rights and other intangibles, net		1,418,900		1,770,200
Deferred finance costs		61,100		75,900
Other		441,300		58,400
Total other assets		17,933,700		17,655,800
Total assets	$	30,494,200	$	30,784,200

See Notes to Consolidated Financial Statements

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ANALEX CORPORATION

CONSOLIDATED BALANCE SHEETS

SEPTEMBER 30, 2003 AND DECEMBER 31, 2002

	September 30, 2003 (unaudited)			December 31, 2002
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,854,500		$	3,294,700
Note payable - line of credit		594,100			2,187,700
Note payable - bank term note		700,000			700,000
Notes payable - other		1,043,400			1,012,100
Other current liabilities		7,306,700			5,258,400
Total current liabilities		11,498,700			12,452,900
Note payable - bank term note		1,516,700			2,041,700
Notes payable - other		1,317,300			2,297,200
Other		59,200			90,600
Total long-term liabilities		2,893,200			4,429,500
Total liabilities		14,391,900			16,882,400
Commitments and contingencies
Shareholders’ equity:
Common stock $.02 par; authorized 30,000,000 shares; issued and outstanding - September 30, 2003, 14,980,569 shares and December 31, 2002, 14,427,080 shares		299,600			288,500
Additional capital		21,331,300			21,171,400
Deferred compensation		—			(7,700	)
Accumulated other comprehensive loss		(59,200	)		(90,600	)
Accumulated deficit		(5,469,400	)		(7,459,800	)
Total shareholders’ equity		16,102,300			13,901,800
Total liabilities and shareholders’ equity	$	30,494,200		$	30,784,200

See Notes to Consolidated Financial Statements

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ANALEX CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002

	Three Months Ended September 30,						Nine Months Ended September 30,
	2003 (unaudited)			2002 (unaudited)			2003 (unaudited)			2002 (unaudited)
Revenues	$	16,589,800		$	16,318,600		$	49,823,900		$	42,282,300
Operating costs and expenses:
Costs of revenue		14,091,000			13,800,100			41,873,900			36,060,100
Selling, general and administrative		1,498,700			1,233,000			4,578,800			3,673,600
Amortization of other intangible assets		104,200			92,200			308,700			232,200
Total operating costs and expenses		15,693,900			15,125,300			46,761,400			39,965,900
Operating income		895,900			1,193,300			3,062,500			2,316,400
Other income (expense):
Interest income		200			600			1,200			1,200
Interest expense		(83,200	)		(269,700	)		(279,800	)		(780,100	)
Total other expense		(83,000	)		(269,100	)		(278,600	)		(778,900	)
Income before income taxes		812,900			924,200			2,783,900			1,537,500
Provision for income taxes		231,900			10,200			793,400			23,900
Net income	$	581,000		$	914,000		$	1,990,500		$	1,513,600
Net income per share:
Basic	$	0.04		$	0.06		$	0.13		$	0.11
Diluted	$	0.03		$	0.05		$	0.11		$	0.09
Weighted average number of shares:
Basic		14,971,765			14,238,707			14,750,464			14,408,181
Diluted		17,811,841			17,013,845			17,601,869			16,981,384

See Notes to Consolidated Financial Statements

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ANALEX CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002

	September 30, 2003 (unaudited)			September 30, 2002 (unaudited)
Cash flows from operating activities:
Net income	$	1,990,500		$	1,513,600
Adjustments to reconcile net income to net cash from operating activities:
Depreciation		90,900			73,700
Amortization of other intangible assets		308,700			232,200
Non-cash interest expense					270,700
Stock-based compensation expense		7,700			6,100
Write-off of patent related cost		48,600			—
Changes in operating assets and liabilities:
Accounts receivable		401,500			(2,947,400	)
Prepaid expenses and other		(24,700	)		41,200
Other assets		(368,100	)		57,500
Accounts payable		(1,440,200	)		454,500
Other current liabilities		2,048,300			1,954,900
Other long-term liabilities		—			(60,000	)
Total adjustments		1,072,700			83,400
Net cash provided by operating activities		3,063,200			1,597,000
Cash flows from investing activities:
Property additions		(332,300	)		(186,200	)
Intangible additions		(25,700	)		—
Net cash used in investing activities		(358,000	)		(186,200	)
Cash flows from financing activities:
Proceeds from borrowings on bank and other loans		1,829,000			8,300
Proceeds from stock options and warrants exercised		97,000			16,400
Proceeds from employee stock purchase plan		74,000			74,000
Payments on bank and other loans		(4,896,300	)		(1,137,200	)
Net cash used in financing activities		(2,896,300	)		(1,038,500	)
Net (decrease) increase in cash and cash equivalents		(191,100	)		372,300
Cash and cash equivalents at beginning of period		301,800			83,100
Cash and cash equivalents at end of period	$	110,700		$	455,400

See Notes to Consolidated Financial Statements

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ANALEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. Business Groups

Analex Corporation provides information technology and systems engineering services to the United States government through two groups: the Homeland Security Group, supporting intelligence systems; and the Systems Engineering Group, supporting the development of space-based systems, the operation of terrestrial assets, and the launch of unmanned rockets by NASA under the Company’s Expendable Launch Vehicle Integrated Support (“ELVIS”) contract with NASA. In addition, its Advanced Biosystems Inc. subsidiary (“ABS”) pursues research and business opportunities in the areas of defenses against biological warfare agents and other infectious diseases.

The Homeland Security Group has accounted for approximately 41% of the Company’s 2003 year-to-date revenue. The Homeland Security Group expects to benefit from the country’s shifting priorities and new emphasis on enhanced intelligence capabilities. This group provides engineering, scientific and information technology services and solutions to assist in the development, implementation and support of intelligence systems. Analex provides these services to various members of the Intelligence community, including the National Reconnaissance Office, the National Security Agency, the Department of Defense, and major prime contractors.

The Systems Engineering Group has accounted for approximately 52% of the Company’s 2003 year-to-date revenues. 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.

ABS has accounted for approximately 7% of the Company’s 2003 year-to-date revenues. ABS pursues research in the areas of defenses against, and treatments for, biological warfare agents and other infectious diseases. ABS also provides consulting services regarding biological weapons, threats, and defensive strategies.

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2. Basis of Presentation

The interim consolidated financial statements for Analex Corporation (the “Company”) are unaudited, but in the opinion of management, reflect all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of results for such periods. The results of operations for any interim period are not necessarily indicative of results for the full year. The balance sheet at December 31, 2002 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. These unaudited consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Amendment No. 2 to Annual Report on Form 10-K/A for the year ended December 31, 2002 (“2002 Form 10-K”) filed with the Securities and Exchange Commission on November 7, 2003.

Recent Accounting Pronouncements

In November 2002, the Emerging Issues Task Force (EITF) reached a consensus on Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. EITF Issue No. 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. The provisions of EITF Issue No. 00-21 apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The Company adopted EITF Issue No. 00-21 effective July 1, 2003. The implementation of EITF Issue No. 00-21 did not have a material impact on the Company’s financial position or results of operations.

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

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

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3. Debt

On November 2, 2001, to finance the acquisition of Analex, the Company entered into a Credit Agreement (“Agreement”) with Bank of America, N.A. The Agreement originally provided the Company with a $4,000,000 revolving credit facility (the “Credit Facility”) through November 2, 2006 and a five-year $3,500,000 term loan (“Term Loan”). The Credit Facility has an annual renewal occurring April 30 of each year. To fund additional working capital requirements generated by the award of the ELVIS contract, the Company negotiated an increase of the Credit Facility. The Company now has an $8,000,000 Credit Facility. The principal amount of the Term Loan is amortized in sixty equal monthly payments of $58,333. Interest on each of the facilities is at the LIBOR Rate plus an applicable margin as specified in a pricing grid. As of September 30, 2003, the Credit Facility and Term Loan balances were $594,100 and $2,216,700, respectively. The interest rate at September 30, 2003 was 3.62% for the Credit Facility and 4.12% for the Term Loan. The Company is subject to certain financial covenants pursuant to the Agreement, including debt to EBITDA ratio, fixed charge coverage ratio, senior debt to EBITDA ratio, and net worth requirements. As of September 30, 2003, the Company was in compliance with these covenants. The accounts receivable and the other assets of the Company secure the Credit Facility and Term Loan.

The Company’s $3.5 million Term Loan facility from Bank of America carries interest comprised of two components: floating-rate LIBOR plus a credit performance margin. In January 2002, the Company entered into an interest-rate swap agreement with Bank of America whereby its obligation to pay floating-rate LIBOR on debt, now totaling $1,900,000,was swapped into a fixed rate obligation at 4.25%. The Company continues to have the obligation to pay the credit performance margin in addition to its swapped 4.25% payment obligation. The total effective interest rate on the swapped portion of the Term Loan amounted to 7.25% at September 30, 2003.

The Company’s comprehensive income for the three months ended September 30, 2003 was $596,100, which includes net income of $581,000 and other comprehensive income of $15,100 arising from the interest rate swap. The Company’s comprehensive income

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for the nine months ended September 30, 2003 was $2,021,900, which includes net income of $1,990,500 and other comprehensive income of $31,400 arising from the interest rate swap.

4. Earnings Per Share

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2003		2002		2003		2002
Net income	$	581,000	$	914,000	$	1,990,500	$	1,513,600
Weighted average shares outstanding		14,971,765		14,238,707		14,750,464		14,408,181
Effect of dilutive securities:
Warrants		1,590,539		1,894,427		1,703,315		1,841,337
Employee stock options		1,249,537		880,711		1,147,300		731,866
Diluted weighted average shares outstanding		17,811,841		17,013,845		17,601,079		16,981,384
Basic earnings per share	$	.04	$	.06	$	.13	$	.11
Diluted earnings per share	$	.03	$	.05	$	.11	$	.09

Shares issuable upon the exercise of stock options or warrants or upon conversion of debt have been excluded from the computation to the extent that their inclusion would be anti-dilutive.

5. Stock-based compensation

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure—an amendment of SFAS No. 123.” This statement amends SFAS No. 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in APB Opinion No. 25 and related

10

interpretations. Accordingly, compensation expense for stock options is measured as the excess, if any, of the fair market value of the Company’s stock at the date of the grant over the exercise price of the related option. The Company adopted the disclosure provisions of SFAS No. 148 beginning with its financial reports for the year ended December 31, 2002.

	Three Months Ended September 30, 2003		Three Months Ended September 30, 2002		Nine Months Ended September 30, 2003		Nine Months Ended September 30, 2002
Net income, as reported	$	581,000	$	914,000	$	1,990,500	$	1,513,600
Add: Total stock-based employee compensation expense as reported under intrinsic value method (APB No. 25) for all awards, net of related tax effects	$	—	$	900	$	5,500	$	5,800
Deduct: Total stock-based compensation expense determined under fair value based method (SFAS No. 123) for all awards, net of related tax effects	$	54,100	$	62,000	$	922,100	$	702,500
Pro forma net income	$	526,900	$	852,900	$	1,073,900	$	816,900
Earnings per share:
Basic as reported	$	.04	$	.06	$	.13	$	.11
Diluted as reported	$	.03	$	.05	$	.11	$	.09
Basic pro forma	$	.04	$	.06	$	.07	$	.06
Diluted pro forma	$	.03	$	.05	$	.06	$	.05

6. Concentration of Business

Almost all of the Company’s revenues are derived either directly from the U.S. Government as prime contractor or indirectly as a subcontractor to other government prime contractors. With the award of the ELVIS contract to the Company, approximately 54% of the Company’s 2003 year-to-date revenues have been derived, directly and indirectly, from NASA. Approximately 46% of the Company’s 2003 year-to-date revenues have been derived from various Department of Defense agencies.

7. Equity Capital

Pursuant to the November 2, 2001 acquisition of Analex, the Company issued 3,572,143 shares of the Company’s common stock to the shareholders representing all of the outstanding equity of Analex (the “Sellers”). Of the 3,572,143 shares, 857,143 shares are subject to a provision by which the Company guarantees for a five-year period to reimburse the Sellers the difference between

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the price at which they sell such shares and a guaranteed sales price. The agreement phases in portions of the total shares subject to the guarantee over a period of two years following the acquisition in increments of 25% of the total guaranteed shares covered by the agreement. Of the total shares guaranteed, 25% (214,286 shares) are guaranteed from the acquisition date through November 5, 2006, at a price of $1.60. An additional 214,286 shares are guaranteed beginning November 5, 2002 through November 5, 2006 at a price of $1.80. An additional 214,286 shares are guaranteed beginning May 5, 2003 through November 5, 2006 at a price of $2.00 per share, resulting in a maximum amount of $1,157,100 payable under the terms of the guaranteed shares as of September 30, 2003. As the fair market value of the Company’s common stock was in excess of the guaranteed share prices as of September 30, 2003, no amounts were accrued under the guarantee. On November 5, 2003, the final portion of shares (214,286 additional shares) became guaranteed at a price of $2.20 per share. These shares will be guaranteed through November 5, 2006.

8. Business Segments

The Company has two reportable segments, ABS and Analex. The Homeland Security Group, and the Systems Engineering Group have been aggregated to form the reportable segment Analex. This aggregation is due to the fact that both groups perform similar services, operate in similar regulatory environments, and have similar customers. Each of the operating segments provides engineering, information technology, medical research or technical services to federal government agencies or major defense contractors. The reportable segments are distinguished by their individual clients, prior experience and technical skills.

Operating results are measured at the net income level for each segment. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies contained in Note 2 to the 2002 Form 10-K. The Company’s corporate amounts consist primarily of certain activities and assets not attributable to the reportable segments.

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	THREE MONTHS ENDED SEPTEMBER 30, 2003			THREE MONTHS ENDED SEPTEMBER 30, 2002		NINE MONTHS ENDED SEPTEMBER 30, 2003		NINE MONTHS ENDED SEPTEMBER 30, 2002
	(unaudited)			(unaudited)		(unaudited)		(unaudited)
Revenues:
ABS	$	712,100		$	1,708,000	$	3,242,700	$	4,866,400
Analex		15,877,700		$	14,610,600		46,581,200		37,415,900
Total revenues:	$	16,589,800		$	16,318,600	$	49,823,900	$	42,282,300
Net income:
ABS	$	(74,100	)	$	104,200	$	75,500	$	310,500
Analex		655,100			809,800		1,915,000		1,203,100
Total net income:	$	581,000		$	914,000	$	1,990,500	$	1,513,600
Assets:
ABS	$	881,700		$	1,928,300	$	881,700	$	1,928,300
Analex		29,612,500			27,075,900		29,612,500		27,075,900
Total assets:	$	30,494,200		$	29,004,200	$	30,494,200	$	29,004,900

9. Litigation and Claims

The Company was served on October 9, 2003 with a lawsuit filed by Swales & Associates, Inc. in the Circuit Court for Prince George’s County, Maryland, alleging breach of contract and other claims relating to Swales’ termination as a subcontractor under the Company’s ELVIS contract. Under the complaint, Swales is seeking damages in excess of $4.0 million. Management believes that any liability that may ultimately result from the resolution of this matter will not have a material adverse effect on the financial position or results of operations of the Company.

10. Pequot Transaction

On July 18, 2003, the Company entered into a Purchase Agreement (the “Pequot Purchase Agreement”) with two investment funds managed by Pequot Capital Management, Inc. (“Pequot”) pursuant to which the Company has agreed to:

• issue and sell to Pequot 6,726,457 shares of the Company’s Series A Convertible Preferred Stock (the “Series A Preferred Stock”) for a purchase price of $2.23 per share of Series A Preferred Stock (the “Series A Purchase Price”) and an aggregate consideration of approximately $15,000,000;

• in connection with the issuance and sale of the Series A Preferred Stock, issue warrants (the “Preferred Warrants”) exercisable to purchase the Company’s common stock (the “Common Stock”) at a ratio of one share of Common Stock for

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every five shares of Common Stock issued or issuable upon conversion of the Series A Preferred Stock;

• issue and sell to Pequot $10,000,000 in aggregate principal amount of the Company’s Secured Subordinated Convertible Promissory Notes (the “Convertible Notes”); and

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

In addition, on July 18, 2003, the Company entered into a Securities Repurchase Agreement (the “Stout Repurchase Agreement”) with Company Chairman Jon M. Stout, certain members of Mr. Stout’s immediate family and certain entities controlled by Mr. Stout and his family (collectively, the “Stout Parties”) pursuant to which the Company will purchase an aggregate of 2,625,451 shares of Common Stock and warrants and options exercisable to purchase an aggregate of 1,209,088 shares of Common Stock from the Stout Parties for aggregate consideration of approximately $9.2 million. The aggregate purchase price to be paid by the Company to the Stout Parties pursuant to the Stout Repurchase Agreement is calculated by multiplying the number of shares of Common Stock to be repurchased (including those issuable under warrants and options held by the Stout Parties) by $2.63 per share, and then reducing such amount by the amount of the aggregate exercise prices of the warrants and options held by the Stout Parties. The Common Stock, warrants and options to be purchased by the Company represent all of the equity interests in the Company owned by the Stout Parties other than approximately 100,000 shares of Common Stock which Mr. Stout may use to make a gift to a specified academic institution pursuant to the terms of the Stout Repurchase Agreement and which the Company may subsequently repurchase pursuant to the Stout Repurchase Agreement if such gift is not made.

The transactions contemplated by the Pequot Purchase Agreement and the Stout Repurchase Agreement are required to be closed simultaneously at a closing (the “Closing”) following approval of the Pequot Transaction by the Company’s stockholders and the satisfaction of the closing conditions provided for in the Pequot Purchase Agreement and the Stout Repurchase Agreement.

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

COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2003

TO THE THREE MONTHS ENDED SEPTEMBER 30, 2002

Revenues for the three months ended September 30, 2003 were $16.6 million, an increase of $0.3 million from the $16.3 million in revenues for the three months ended September 30, 2002. This increase is primarily due to increases in revenues in the Homeland Security Group and the Systems Engineering Group, offset by a decrease in revenues in ABS. Revenues of the Homeland Security Group increased 8.1%, or approximately $0.5 million, due to growth in services provided to the intelligence community and related agencies. Revenues of the Systems Engineering Group increased 10.1%, or approximately $0.9 million primarily due to an approximate $1.2 million increase in revenues under the ELVIS contract, as compared to the third quarter of 2002. This increase was offset by a reduction in revenues of $0.5 million due to the planned step-down in activities under the Microgravity Research Development and Operations contract with NASA related to designing and building experiments to be run on the International Space Station. In addition, ABS experienced a $1.0 million, or 58%, decline in revenues.

During the third quarter, ABS fully depleted contract funding under its primary research contract from the Defense Advanced Research Projects Agency (DARPA) resulting in a decrease in revenues and an operating loss of $0.07 million for the third quarter. Other than the DARPA contract and a small research grant with the National Institutes of Health, ABS had no other funded work during the third quarter under which to generate revenue. Thus the depletion of funding under the DARPA contract led to unrecovered costs and, consequently, an operating loss. Subsequent to the end of the third quarter, ABS was granted a contract through George Mason University with a value of $600,000 to conduct research for biological defenses. ABS also was awarded a contract with the Department of State with a value of $320,000 and is awaiting authorization to proceed. Future revenues and operating profits for ABS depend on its success in obtaining additional contracts or research grants.

Increases or decreases in the Company’s revenues are predominantly attributable to changes in the volume of services provided. As a government contractor, costs billed to the government are prescribed by the Federal Acquisition Regulation and include recovery of allowable costs such as labor, fringe benefits, overhead and general and administrative expenses plus a reasonable fee.

Costs of revenue for the quarter ended September 30, 2003 were $14.1 million, an increase of $0.3 million from the same

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period of the prior year. The increase is due to the costs of revenue generated by growth in the Homeland Security and Systems Engineering Group. Costs of revenue as a percentage of revenues were approximately 85% for each of the quarters ended September 30, 2003 and 2002.

Selling, general and administrative expenses totaled $1.5 million for the quarter ended September 30, 2003, compared with $1.2 for the same period of the prior year. The $0.3 million increase is primarily due to costs of $0.1 million related to staffing of key business development and marketing positions that were vacant in the prior period, in addition to increased costs related to corporate insurance policies of $0.05 million.

Operating income for the three months ended September 30, 2003 was $0.9 million, compared to operating income of $1.2 million for the period ended September 30, 2002. This $0.3 million decrease is attributable to a decline in operating income at ABS of approximately $0.2 million due to depletion of contract backlog and lack of new contract awards. The Company’s operating income to be derived in the future from ABS depends on its success in obtaining additional contracts or research grants. In addition, operating income of the Systems Engineering Group decreased by $0.1 due to the step-down on the Microgravity Research Development and Operations contract.

Operating margin for the three months ended September 30, 2003 was 5%, compared to operating margin of 8% for the period ended September 30, 2002. This 3% decrease is attributable to the factors noted in the preceding paragraph.

Interest expense totaled $0.1 million for the quarter ended September 30, 2003, compared with $0.3 million for the same period in the prior year. The $0.2 million decrease is due to the Company’s reduced bank debt, which decreased by $1.8 million from September 30, 2002 to September 30, 2003. This was due to the Company’s continued profitability, which reduced borrowings under the credit facility, coupled with scheduled principal payments on the term note. In addition, the termination of the guarantees associated with the Bank of America debt decreased interest expense by $0.1 million.

Income tax expense for the quarter ended September 30, 2003 was $0.2 million, compared with zero expense for the same period in the prior year. The Company’s effective income tax rate is lower than the statutory federal rate of 34%, primarily due to the reduction of a valuation allowance on the Company’s deferred tax assets. The Company’s valuation allowance is expected to be eliminated by December 31, 2003.

In the quarter ended September 30, 2003, the Company recorded net income of approximately $0.6 million and EBITDA, as defined

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below, of $1.0 million, after add-backs for interest of $0.1 million, depreciation of $0.04 million, amortization of $0.1 million, and income taxes of $0.2 million. In the quarter ended September 30, 2002, the Company recorded net income of approximately $0.9 million and EBITDA of $1.3 million, after add-backs for interest of $0.3 million, depreciation of $0.02 million, amortization of $0.1 million, and income taxes of zero. EBITDA as a percent of revenue was 6.2% for the quarter ended September 30, 2003, compared to 8.0% for the quarter ended September 30, 2002.

EBITDA, or earnings before interest, taxes, depreciation and amortization, is considered 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 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, 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 EBITDA is not calculated identically by all companies, the Company’s presentation of EBITDA may not be comparable to other similarly titled measures of other companies.

COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2003

TO THE NINE MONTHS ENDED SEPTEMBER 30, 2002

Revenues for the nine months ended September 30, 2003 were $49.8 million, an increase of $7.5 million from the $42.3 million in revenues for the nine months ended September 30, 2002. This increase is primarily due to increases in revenues in the Homeland Security Group and Systems Engineering Group, offset by a decrease in revenues in ABS. Revenues of the Homeland Security Group increased 5.6%, or approximately $1.0 million, due to growth in services provided to the intelligence community and related agencies. Revenues of the Systems Engineering Group increased 44.3%, or approximately $8.0 million, primarily due to an approximate $11.0 million increase in revenues under the ELVIS contract. The increase in ELVIS revenues was partially caused by the contract’s commencement date of July 8, 2002. This increase

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was offset by a reduction of revenues of $3.4 million due to the planned step-down in activities under the Microgravity Research Development and Operations contract related to designing and building experiments to be run on the International Space Station. In addition, ABS experienced a $1.6 million, or 33%, decline in revenues.

During the third quarter, ABS fully depleted contract funding under its primary research contract from the Defense Advanced Research Projects Agency (DARPA) resulting in a decrease in revenues and an operating loss for the third quarter. Other than the DARPA contract and a small research grant with the National Institutes of Health, ABS had no other funded work during the third quarter which would generate revenue. Thus the depletion of funding under the DARPA contract led to unrecovered costs and, consequently, an operating loss. Subsequent to the end of the third quarter, ABS was granted a contract through George Mason University with a value of $600,000 to conduct research for biological defenses. ABS was also awarded a contract with the Department of State with a value of $320,000 and is awaiting authorization to proceed. Future revenues and operating profits for ABS depend on its success in obtaining additional contracts or research grants.

Increases or decreases in the Company’s revenues are predominantly attributable to changes in the volume of services provided. As a government contractor, costs billed to the government are prescribed by the Federal Acquisition Regulation and include recovery of allowable costs such as labor, fringe benefits, overhead and general and administrative expenses plus a reasonable fee.

Costs of revenue for the nine months ended September 30, 2003 were $41.9 million, an increase of $5.8 million from the same period in the prior year. The increase is largely due to the costs of revenue generated in the Systems Engineering Group by the ELVIS contract, which were approximately $10 million, offset by the decrease in costs due to the planned step-down under the Microgravity Research Development and Operations contract of approximately $2.9 million. Decreases in costs at ABS were approximately $1.4 million due to the reduction in research and development staff. Costs of revenue as a percentage of revenues were approximately 84% and 85% for the nine months ended September 30, 2003 and 2002, respectively.

Selling, general and administrative expenses totaled $4.6 million for the nine months ended September 30, 2003, compared with $3.7 million for the same period in the prior year. The $0.9 million increase is due to costs related to fulfillment of key business development and marketing positions of $.4 million that were vacant in the prior period, in addition to increased corporate insurance policies of $0.3 million.

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Operating income for the nine months ended September 30, 2003 was $3.1 million, compared to operating income of $2.3 million for the nine months ended September 30, 2002. This $0.8 million increase is primarily attributable to the profitability of the Systems Engineering Group derived from the ELVIS contract, which was approximately $0.6 million, coupled with increased profitability of the Homeland Security Group of approximately $0.7 million due to growth noted above. This increase was offset by the reduced operating income of $0.4 million from the planned step-down on the Microgravity Research Development and Operations contract, and reduced operating income at ABS of $0.2 million due to depletion of contract backlog and lack of new contract or grant awards. The Company’s operating income to be derived in the future from ABS depends on its success in obtaining additional contracts or research grants.

Operating margin for the nine months ended September 30, 2003 was 6%, compared to operating margin of 5% for the nine months ended September 30, 2002. This 1% increase is primarily attributable to the increased profitability of the Homeland Security and Systems Engineering Groups as noted above.

Interest expense totaled $0.3 million for the nine months ended September 30, 2003, compared with $0.8 million for the same period of the prior year. The $0.5 million decrease is due to the Company’s reduced bank debt, which decreased by $1.8 million from September 30, 2002 to September 30, 2003. This was due to the Company’s continued profitability, which reduced borrowings under the credit facility, coupled with scheduled principal payments on the term note. In addition, the release of the guarantees associated with the Bank of America debt decreased interest expense by $0.1 million.

Income tax expense for the nine months ended September 30, 2003 was $0.8 million compared with $0.02 million for the same period of the prior year. The Company’s effective income tax rate is lower than the statutory federal rate of 34% primarily due to the reduction of a valuation allowance on the Company’s deferred tax assets. The Company’s valuation allowance is expected to be eliminated by December 31, 2003.

In the nine months ended September 30, 2003, the Company recorded net income of approximately $2.0 million and EBITDA, as defined below, of $3.5 million, after add-backs for interest of $0.3 million, depreciation of $0.09 million, amortization of $0.3 million, and income taxes of $0.8 million. In the nine months ended September 30, 2002, the Company recorded net income of approximately $1.5 million and EBITDA of $2.6 million, after add-backs for interest of $0.8 million, depreciation of $0.07 million, amortization of $0.2 million, and income taxes of zero. EBITDA as a percent of revenue was 6.9% for the nine months ended

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September 30, 2003, compared to 6.2% for the nine months ended September 30, 2002.

EBITDA, or earnings before interest, taxes, depreciation and amortization, is considered 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 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, 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 EBITDA is not calculated identically by all companies, the Company’s presentation of EBITDA may not be comparable to other similarly titled measures of other companies.

CAPITAL RESOURCES AND LIQUIDITY

While the Company experienced decreased net income on a quarterly comparison to 2002, year to date net income has increased compared to the same period of 2002. This continued profitability and strong cash management have allowed the Company to reduce bank debt by $2.1 million and other notes payable by $0.9 million during 2003. Borrowing availability under the Company’s Credit Facility continues to be sufficient to fund normal operations.

Working capital at September 30, 2003 increased by $0.4 million from December 31, 2002 primarily due to a decrease in trade accounts payable and a decrease in the Credit Facility balance.

Net cash provided by operating activities during the nine months ended September 30, 2003 was $3.1 million, as compared with net cash provided of $1.6 million during the same period in 2002. This increase was due to the Company’s continued profitability.

Net cash used in investing activities during the nine months ended September 30, 2003 was $0.4 million compared to $0.2 million used during the nine months ended September 30, 2002.

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Net cash used in investing activities during the nine months ended September 30, 2003, and the nine months ended September 30, 2002, was for fixed asset purchases and costs associated with patent development.

On November 2, 2001, to finance the acquisition of Analex, the Company entered into the Credit Agreement which originally provided the Company with a $4,000,000 Credit Facility through November 2, 2006 and a five-year $3,500,000 Term Loan. The Credit Facility has an annual renewal occurring April 30 of each year. To fund additional working capital requirements generated by the award of the ELVIS contract, the Company negotiated an increase of the Credit Facility. The Company now has an $8,000,000 Credit Facility. The principal amount of the Term Loan is amortized in sixty equal monthly payments of $58,333. Interest on each of the facilities is at the LIBOR Rate plus an applicable margin as specified in a pricing grid. The Company is subject to certain financial covenants pursuant to the Agreement, including debt to EBITDA ratio, fixed charge coverage ratio, senior debt to EBITDA ratio, and net worth requirements. The Company must maintain the following ratios: a Total Funded Debt to EBITDA ratio of no greater than 3.0 to 1.0, a Senior Debt to EBITDA ratio of no greater than 2.75 to 1.0, a Fixed Charge Coverage Ratio of no less than 1.3 to 1.0, and Net Worth equal to at least the sum of $9 million and 65% percent of net income (not to be reduced by net losses) during each fiscal quarter ending March 31, 2002 and thereafter. At September 30, 2003, the Company was in compliance with each of these covenants. The Credit Facility and Term Loan are secured by the accounts receivable and other assets of the Company.

Pursuant to the November 2, 2001 acquisition of Analex, the Company issued 3,572,143 shares of the Company’s Common Stock to the shareholders representing all of the outstanding equity of Analex (the “Sellers”). Of the 3,572,143 shares, 857,143 shares are subject to a provision by which the Company guarantees for a five-year period to reimburse the Sellers the difference between the price at which they sell such shares and a guaranteed sales price. The agreement phases in portions of the total shares subject to the guarantee over a period of two years following the acquisition in increments of 25% of the total guaranteed shares covered by the agreement. Of the total shares guaranteed, 25% (214,286 shares) are guaranteed from the acquisition date through November 5, 2006, at a price of $1.60. An additional 214,286 shares are guaranteed beginning November 5, 2002 through November 5, 2006 at a price of $1.80. An additional 214,286 shares are guaranteed beginning May 5, 2003 through November 5, 2006 at a price of $2.00 per share, resulting in a maximum amount of $1,157,100 payable under the terms of the guaranteed shares as of September 30, 2003. As the fair market value of the Company’s common stock was in excess of the guaranteed share prices as of September 30, 2003, no amounts were accrued under the guarantee.

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On November 5, 2003, the final portion of shares (214,286 additional shares) became guaranteed at a price of $2.20 per share. These shares will be guaranteed through November 5, 2006.

ELVIS Contract

Under the ELVIS contract, Analex provides a broad range of Expendable Launch Vehicle (ELV) support services for NASA requirements at John F. Kennedy Space Center, Florida; Cape Canaveral Air Force Station, Florida; Vandenberg Air Force Base, California; and other launch site locations. This includes management, operation and maintenance of facilities, systems and equipment, as well as specified technical and administrative capabilities.

The contract covers responsibility for furnishing engineering services; performing safety and mission assurance functions; and providing communications, data and telemetry support. In addition, at Vandenberg, Analex will also be responsible for maintenance of NASA’s administrative, launch support and spacecraft facilities, mission support planning, and customer support for payload processing activities.

The contract had a one-month phase-in period in June 2002, which is followed by a three-year, three-month basic period of performance. There are two options of three years each for a potential nine-year, four-month contract term. The contract value for the basic performance period is $55 million. The potential contract value including all priced options, is $163.8 million. However, total contract value may be increased as a result of additional task orders which may be issued under the contract as required.

With respect to the ELVIS contract, the Company is the prime contractor with two subcontractors performing various functions. Approximately 18% of the contract is expected to be performed by the subcontractors. As the prime, the Company is responsible for all aspects of work performed by the subcontractors including, but not limited to, quality of work, timeliness of performance, and cost control. The Company records all customer payments under this contract as revenues and all subcontractor invoices as contract costs.

Pequot Transaction

On July 18, 2003, the Company entered into a Purchase Agreement (the “Pequot Purchase Agreement”) with two investment funds managed by Pequot Capital Management, Inc. (“Pequot”) pursuant to which the Company has agreed to:

• issue and sell to Pequot 6,726,457 shares of the Company’s Series A Convertible Preferred Stock (the “Series A

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Preferred Stock”) for a purchase price of $2.23 per share of Series A Preferred Stock (the “Series A Purchase Price”) and an aggregate consideration of approximately $15,000,000;

• in connection with the issuance and sale of the Series A Preferred Stock, issue warrants (the “Preferred Warrants”) exercisable to purchase the Company’s common stock (the “Common Stock”) at a ratio of one share of Common Stock for every five shares of Common Stock issued or issuable upon conversion of the Series A Preferred Stock;

• issue and sell to Pequot $10,000,000 in aggregate principal amount of the Company’s Secured Subordinated Convertible Promissory Notes (the “Convertible Notes”); and

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

In addition, on July 18, 2003, the Company entered into a Securities Repurchase Agreement (the “Stout Repurchase Agreement”) with Company Chairman Jon M. Stout, certain members of Mr. Stout’s immediate family and certain entities controlled by Mr. Stout and his family (collectively, the “Stout Parties”) pursuant to which the Company will purchase an aggregate of 2,625,451 shares of Common Stock and warrants and options exercisable to purchase an aggregate of 1,209,088 shares of Common Stock from the Stout Parties for aggregate consideration of approximately $9.2 million. The aggregate purchase price to be paid by the Company to the Stout Parties pursuant to the Securities Repurchase Agreement is calculated by multiplying the number of shares of Common Stock to be repurchased (including those issuable under warrants and options held by the Stout Parties) by $2.63 per share, and then reducing such amount by the amount of the aggregate exercise prices of the warrants and options held by the Stout Parties. The Common Stock, warrants and options to be purchased by the Company represent all of the equity interests in the Company owned by the Stout Parties other than approximately 100,000 shares of Common Stock which Mr. Stout may use to make a gift to a specified academic institution pursuant to the terms of the Stout Repurchase Agreement and which the Company may subsequently repurchase pursuant to the Stout Repurchase Agreement if such gift is not made.

The transactions contemplated by the Pequot Purchase Agreement and the Stout Repurchase Agreement are required to be closed simultaneously at a closing (the “Closing”) following approval of the Pequot Transaction by the Company’s stockholders and the satisfaction of the closing conditions provided for in

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the Pequot Purchase Agreement and the Stout Repurchase Agreement. The transactions contemplated by the Pequot Purchase Agreement and the Stout Repurchase Agreement are collectively referred to herein as the “Pequot Transaction.”

The proceeds from the sale of the Convertible Notes will be used to repurchase the securities from the Stout Parties and pay expenses in connection with the Pequot Transaction.

The Company anticipates using the proceeds from the sale of the Series A Preferred Stock to pay certain existing liabilities and to support all or a portion of the cost of future acquisitions by the Company.

Pequot Purchase Agreement

The issuance of the Series A Preferred Stock, Convertible Notes and Warrants and the other transactions contemplated by the Pequot Purchase Agreement are subject to several closing conditions, including the approval of the Company’s stockholders.

If the Company is unable to consummate the Pequot Transaction due to a determination by the Company’s Board of Directors that consummation of such transaction conflicts with the Board’s fiduciary duties under applicable law, the Company is required to pay Pequot a fee of $750,000. If the Closing does not occur because Pequot is unable to consummate the transaction for any reason other than the Company’s failure to comply with its obligations or to satisfy the conditions to Pequot’s closing obligations, then Pequot is required to pay the Company a fee of $750,000.

Series A Preferred Stock

The Series A Preferred Stock bears a cumulative annual dividend of 6%, payable quarterly in cash or, if the Company’s available cash for operations does not meet specified levels or such payment would result in a default under the Company’s senior credit facility, in additional shares of Series A Preferred Stock. Holders of Series A Preferred Stock are entitled to vote together with all other classes and series of voting stock of the Company on all actions to be taken by the stockholders of the Company. In addition, as long as 50% of the Series A Preferred Stock originally issued remains outstanding, the Company may not take numerous specified actions (including mergers, certain changes to the Company’s Certificate of Incorporation and acquisitions involving aggregate consideration greater than $10,000,000) without obtaining the written consent of the holders of a majority of the Series A Preferred Stock. If the Company fails to comply with its redemption obligations with respect to the Series A Preferred Stock (discussed below), the Company may

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not take such specified actions without Pequot’s consent, regardless of the amount of Series A Preferred Stock Pequot owns.

Upon any liquidation, dissolution or winding up of the Company, holders of the Series A Preferred Stock are entitled to receive, out of the Company’s assets available for stockholder distributions and prior to distributions to junior securities (including the Common Stock), an amount equal to the Series A Purchase Price plus any accrued but unpaid dividends thereon. Certain mergers, acquisitions or asset sales involving the Company are treated as a liquidation event unless the holders of a majority of the Series A Preferred Stock elect not to treat such transactions as liquidation events.

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 conversion ratio is subject to adjustments for certain dilutive equity issuances and for stock splits, stock dividends and similar events. The Series A Preferred Stock will automatically convert into Common Stock if, any time following 18 months after the Closing, the average closing price of the Common Stock over a 20 consecutive trading day period exceeds 2.5 times the conversion price then in effect 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. In addition, the Series A Preferred Stock will automatically convert into Common Stock upon the agreement of the holders of a majority of the Series A Preferred Stock.

Holders of the Series A Preferred Stock may require the Company to redeem their shares in four equal quarterly installments any time on or after the fourth anniversary of the Closing at the Series A Purchase Price, as adjusted for stock splits, stock dividends and similar events, plus accrued but unpaid dividends. Holders of the Series A Preferred Stock and any debt or equity security of the Company convertible into Series A Preferred Stock (including the Convertible Notes) have pro rata preemptive rights with respect to private equity offerings by the Company after the Closing, subject to specified exceptions.

These and other terms and provisions of the Series A Preferred Stock are set forth in the Certificate of Designations Powers, Preferences and Rights of the Series A Preferred Stock (the “Series A Certificate of Designations”) that will form a part of the Company’s Certificate of Incorporation. The Series A Certificate of Designations will be filed with the Secretary of State of Delaware prior to the Closing.

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Convertible Notes

The Convertible Notes mature on the fourth anniversary of the Closing. The Convertible Notes bear interest at an annual rate of 7%, payable quarterly in cash or, if the Company’s available cash for operations does not meet specified levels or such payment would result in a default under the Company’s senior credit facility, accrued and added to the outstanding principal. Upon a payment default, the interest rate on the Convertible Notes will be increased to 11% per annum.

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

The terms of the Convertible Notes provide for specified events of default, including failure to pay principal of and interest on the Notes, certain violations of financial and operational covenants and certain other events, many of which are similar to the events of default under the Company’s senior credit facility. The Company’s obligations under the Convertible Notes will be secured by a lien on substantially all of the assets of the Company and its subsidiaries and will be guaranteed by the Company’s subsidiaries. Such obligations will be subordinated to the rights of the Company’s present and future senior secured lenders and the rights of the DOJ under the Settlement Agreement between the DOJ and the former Analex Corporation. The relative rights of the Company’s senior lenders and the holders of the Convertible Notes are set forth in an intercreditor agreement (the “Intercreditor Agreement”) that will become effective at the Closing.

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During the time that the Convertible Notes and the Series A Preferred Stock are outstanding, the Company will be subject to financial and operational covenants specified in the Pequot Purchase Agreement. These financial and operational covenants will be no more restrictive than the financial and operational covenants included in the Company’s senior credit facility. Certain of such covenants will continue in effect after the payment or conversion of the Convertible Notes.

Warrants

The Warrants are exercisable at any time before the tenth anniversary of the Closing. The Preferred Warrants are exercisable to purchase one share of Common Stock for every five shares of Common Stock issued or issuable upon conversion of the Series A Preferred Stock. The Note Warrants are exercisable to purchase one share of Common Stock for every five shares of Common Stock issued or issuable upon conversion of the Convertible Notes. The exercise price of the Warrants is $3.28 (representing a 47% premium to the Series A Purchase Price) subject to adjustment for stock splits, stock dividends and similar events.

Stockholders’ Voting Agreement

At the Closing, the Company, Pequot and certain stockholders of the Company who, together with Pequot, will own a majority of the voting stock of the Company upon the Closing, will enter into a Stockholders’ Voting Agreement (the “Stockholders’ Agreement”), pursuant to which Pequot and such stockholders agree to vote, or cause to be voted, all securities of the Company they own or over which they have voting control so that the number of directors of the Company will be seven (7), consisting of:

• the Company’s chief executive officer, currently Mr. Phillips,

• two (2) directors designated by Pequot,

• three (3) non-employee directors designated by the Company’s Chief Executive Officer and acceptable to Pequot, and

• one (1) independent director designated by Pequot and acceptable to the Company’s Chief Executive Officer.

One of the directors designated by Pequot will be the “financial expert” required by Securities and Exchange Commission rules, and, to the greatest extent permitted by applicable law and regulations, at least one director designated by Pequot will be on each committee of the Board. If Pequot holds less than

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specified percentages of the securities it originally purchases at the Closing, Pequot will have the right to designate two, one or no directors. If Pequot has the right to designate fewer than two directors, the above voting provisions are adjusted in the manner described in the Stockholders’ Agreement.

Immediately following the Closing, the Board will be constituted in accordance with the Stockholders’ Agreement, and will consist of four current directors, including Mr. Phillips, and three directors designated by Pequot, including Gerald Poch, Managing Director of Pequot Capital Management, Inc., the investment adviser/manager to Pequot, and Martin Hale, Principal of Pequot Capital Management, Inc. At the Closing, Mr. Stout and Shawna Stout will resign from the Board.

In certain circumstances, including the Company’s failure to redeem the Series A Preferred Stock as required or failure to pay certain amounts due under the Convertible Notes, Pequot may designate additional directors so that the Pequot directors comprise a majority of the Board. This right will terminate if the Company redeems the Series A Preferred Stock and repays the Convertible Notes.

Registration Rights

At the Closing, the Company will enter into a Registration Rights Agreement with Pequot (the “Registration Rights Agreement”), pursuant to which, within 30 days following the Closing, the Company will be required to file a registration statement on Form S-3 registering the resale of the Common Stock underlying the Series A Preferred Stock, the Convertible Notes and the Warrants. The Company will be required to keep such registration statement effective until all the Common Stock registered thereunder is sold or the holders are entitled to sell such Common Stock under Rule 144(k) under the Securities Act of 1933. The Registration Rights Agreement also provides Pequot with piggyback registration rights with respect to certain underwritten offerings initiated by the Company.

Stout Repurchase

The consummation of the transactions under the Stout Repurchase Agreement is subject to several conditions, including the approval of the Company’s stockholders of the Pequot Transaction and the receipt by the Company of an updated fairness opinion from Houlihan, Lokey, Howard & Zukin Financial Advisors, Inc. with respect to the fairness of the Pequot Transaction, including the repurchase of the Stout Parties’ securities.

At the Closing, the Registration Rights Agreement, dated as of March 30, 2000, by and among the Company, Mr. Stout, Patricia

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Stout, the Stout Dynastic Trust, J. Richard Knop and certain other investors in the Company, will be terminated. In addition, the Voting Agreement, dated as of March 30, 2000, by and among Mr. Stout, Mrs. Stout, the Stout Dynastic Trust, Mr. Knop, C.W. Gilluly and certain other investors in the Company, will be terminated at the Closing.

In connection with the Closing, Mr. Stout’s employment with the Company will be terminated, and an Employment Termination Agreement between the Company and Mr. Stout (the “Stout Employment Termination Agreement”) will become effective. Pursuant to the Stout Employment Termination Agreement, at the Closing, the Company will pay Mr. Stout $280,000, representing two years’ base salary under Mr. Stout’s existing employment agreement. In addition, a Non-Competition Agreement between Mr. Stout and the Company (the “Stout Non-Competition Agreement”) will become effective at the Closing. Under the Stout Non-Competition Agreement, Mr. Stout agrees not to compete with the Company, adversely interfere with the Company’s current and prospective customers and clients or solicit or hire Company employees, consultants or service providers for a period of three (3) years following the Closing. As consideration for such non-competition and non-solicitation restrictions, and as long as Mr. Stout is in compliance with the Stout Non-Competition Agreement, the Company will pay him $50,000 every three months during the term of the agreement, for aggregate consideration of $600,000.

Amendment to Senior Credit Facility

In connection with the Closing, an amendment (the “Credit Agreement Amendment”) to the Company’s existing credit agreement with Bank of America, N.A. (“Bank of America”) will become effective. The Credit Agreement Amendment will eliminate or revise certain operational and financial covenants and revise an event of default provision. In connection with the execution of the Pequot Transaction documents, Bank of America has provided the Company with a letter (the “Bank of America Consent Letter”) consenting to the Company’s entering into the Pequot Transaction and waiving certain covenant defaults under the existing credit agreement otherwise triggered by the Pequot Transaction.

Increase in Authorized Stock

In connection with its review and approval of the Pequot Transaction, the Company’s Board of Directors has authorized an increase in the number of shares of the Company’s Common Stock and Preferred Stock authorized for issuance. This increase would result in the Company having total authorized capital stock of 100,000,000 shares, consisting of 65,000,000 shares of Common Stock and 35,000,000 shares of Preferred Stock. The increase will be reflected in a Certificate of Amendment to the Company’s

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Certificate of Incorporation (the “Certificate of Amendment”) which will be presented to the Company’s stockholders for approval at the special meeting to be held to approve the Pequot Transaction.

Stockholder Approval

The Company’s stockholders will be asked to approve the Pequot Transaction and the increase in authorized capital stock at a special meeting of stockholders. In connection with the execution of the Pequot Purchase Agreement, stockholders holding approximately 48% of the Company’s Common Stock (including the Stout Parties) entered into a Voting Agreement (the “Pequot Transaction Voting Agreement”), pursuant to which these stockholders have agreed to vote in favor of the Pequot Transaction at any meeting of the Company’s stockholders or in connection with any action taken by such stockholders. The Company has scheduled the special meeting for December 9, 2003.

Summary of Terms

The description of the terms and provisions of the Pequot Purchase Agreement, the Series A Certificate of Designations, the Convertible Notes, the Warrants, the Intercreditor Agreement, the Stockholders’ Voting Agreement, the Registration Rights Agreement, the Stout Repurchase Agreement, the Stout Employment Termination Agreement, the Stout Non-Competition Agreement, the Certificate of Amendment, the Credit Agreement Amendment, the B of A Consent Letter and the Pequot Transaction Voting Agreement set forth herein do not purport to be complete and are subject to, and are qualified in their entirety by, the detailed provisions of those documents. Copies of these documents are filed as exhibits to the Current Report on Form 8-K dated July 18, 2003 and filed with the Securities and Exchange Commission on July 21, 2003. Additionally, amendments to each of the Pequot Purchase Agreement and Stout Repurchase Agreement are filed as Exhibits 10.2 and 10.3 to this Quarterly Report on Form 10Q and as Appendices Q and R to the Company’s definitive proxy statement filed with the SEC on November 7, 2003.

Forward-Looking Statements

Except for the historical information contained herein, the matters discussed in this 10-Q include forward-looking statements that involve a number of risks and uncertainties. There are certain important factors and risks that could cause results to differ materially from those anticipated by the statements contained herein. Such factors and risks include business conditions and growth in the information services, engineering services, software development and government contracting arenas and in the economy in general. Competitive factors include the pressures toward consolidation of small government contracts into larger contracts awarded to major, multi-national corporations; and the Company’s ability to continue to recruit and retain highly skilled technical, managerial and sales/marketing

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personnel. Other risks may be detailed from time to time in the Company’s SEC reports.

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 exposes the Company to variability in interest payments due to changes in interest rates. The Company uses an interest rate swap to reduce the interest rate exposure on these variable rate obligations. The Company does not hold any derivatives for trading or speculative purposes.

The Company’s $3.5 million term loan facility from Bank of America carries interest comprised of two components: floating-rate LIBOR plus a credit performance margin. The Company entered into an interest-rate swap agreement with Bank of America whereby its obligation to pay floating-rate LIBOR was swapped into a fixed rate obligation at 4.25% beginning in January 2002. The Company continues to have the obligation to pay the credit performance margin in addition to its swapped 4.25% payment obligation.

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

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

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

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The notional value of the interest rate swap declines as the amount of the Term Loan is paid down. At September 30, 2003 the notional value of the swap was $1,900,000. Increases in prevailing interest rates could increase the Company’s interest payment obligations relating to variable rate debt. For example, a 100 basis points increase in interest rates would increase annual interest expense by $15,800, based on debt levels at September 30, 2003.

Item 4. Controls and Procedures

As required by Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), Analex management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation as of the end of the period covered by this report, of the effectiveness of the Company’s disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report. As required by Exchange Act Rule 13a-15(d), Analex management, including the Chief Executive Officer and Chief Financial Officer, also conducted an evaluation of the Company’s internal control over financial reporting to determine whether any changes occurred during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. Based on that evaluation, there has been no such change during the quarter covered by this report.

Part II. Other Information

Item 1. Legal Proceedings

The Company was served on October 9, 2003 with a lawsuit filed by Swales & Associates, Inc. in the Circuit Court for Prince George’s County, Maryland alleging breach of contract and other claims relating to Swales’ termination as a subcontractor under the Company’s ELVIS contract with NASA. Under the complaint, Swales is seeking damages in excess of $4.0 million. Management believes that any liability that may ultimately result from the resolution of this matter will not have a material adverse effect on the financial position or results of operations of the Company.

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Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

10.1 Third Amendment, dated as of April 30, 2003, to Credit Agreement, dated as of November 2, 2001, by and among Bank America, N.A., Analex Corporation and certain subsidiaries of Analex Corporation (filed herewith).

10.2 First Amendment, dated September 30, 2003, to Subordinated Note and Series A Convertible Preferred Stock Purchase Agreement by and among Analex Corporation, Pequot Private Equity Fund III, L.P. and Pequot Private Equity Partners III, L.P. (filed herewith).

10.3 First Amendment, dated September 30, 2003, to Securities Repurchase Agreement by and among Analex Corporation, Jon M. Stout, Patricia W. Stout, Shawna Stout, Marcus Stout, Stout Dynastic Trust and S Co. LLC (filed herewith).

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

Current Report on Form 8-K, dated July 18, 2003 and filed with the Securities and Exchange Commission on July 21, 2003, to report that the Company had entered into the Pequot Purchase Agreement and the Stout Repurchase Agreement relating to the Pequot Transaction.

Current Report on Form 8-K, dated July 24, 2003 and filed with the Securities and Exchange Commission on July 24, 2003, to report that the Company had issued a press release announcing second quarter 2003 financial results.

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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: November 14, 2003

Analex Corporation (Registrant)
By:	/S/ Sterling E. Phillips, Jr.	By:	/S/ Ronald B. Alexander
	Sterling E. Phillips, Jr. President and Chief Executive Officer (Principal Executive Officer)		Ronald B. Alexander Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

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