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Proc-Type: 2001,MIC-CLEAR
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<SEC-DOCUMENT>0000928385-01-500841.txt : 20010516
<SEC-HEADER>0000928385-01-500841.hdr.sgml : 20010516
ACCESSION NUMBER:		0000928385-01-500841
CONFORMED SUBMISSION TYPE:	10QSB
PUBLIC DOCUMENT COUNT:		2
CONFORMED PERIOD OF REPORT:	20010331
FILED AS OF DATE:		20010515

FILER:

	COMPANY DATA:	
		COMPANY CONFORMED NAME:			INFORMATION ANALYSIS INC
		CENTRAL INDEX KEY:			0000803578
		STANDARD INDUSTRIAL CLASSIFICATION:	SERVICES-PREPACKAGED SOFTWARE [7372]
		IRS NUMBER:				541167364
		STATE OF INCORPORATION:			VA
		FISCAL YEAR END:			1231

	FILING VALUES:
		FORM TYPE:		10QSB
		SEC ACT:		
		SEC FILE NUMBER:	000-22405
		FILM NUMBER:		1634616

	BUSINESS ADDRESS:	
		STREET 1:		11240 WAPLES MILL RD #400
		CITY:			FAIRFAX
		STATE:			VA
		ZIP:			22030
		BUSINESS PHONE:		7033833000

	MAIL ADDRESS:	
		STREET 1:		2222 GALLOWS ROAD
		STREET 2:		SUITE 300
		CITY:			DUNN LORING
		STATE:			VA
		ZIP:			22027
</SEC-HEADER>
<DOCUMENT>
<TYPE>10QSB
<SEQUENCE>1
<FILENAME>d10qsb.txt
<DESCRIPTION>FORM 10-QSB
<TEXT>

<PAGE>

                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C.  20549

                                  FORM 10-QSB

                 QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF
                      THE SECURITIES EXCHANGE ACT OF 1934

 For the Quarter Ended                                           Commission
    March 31, 2001                                            File No. 0-22405
    --------------                                                     -------


                       INFORMATION ANALYSIS INCORPORATED
             (Exact name of Registrant as specified in its charter)

 Virginia                                                        54-1167364
 --------                                                        ----------
 (State or other jurisdiction of                                (IRS Employer
 incorporation or organization)                              Identification No.)

 11240 Waples Mill Road,  Suite 400, Fairfax, VA                     22030
 -----------------------------------------------                     -----
 (Address of principal executive offices)                          (Zip Code)

 (Registrant's telephone number,
 including area code)                                            (703) 383-3000
                                                                 --------------


  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 Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

     Yes     X                 No
         ----------               -----------

  State the number of shares outstanding of each of the
issuer's classes of common stock, as of May 1, 2001:

     Common Stock, par value $.01, 9,701,473 shares

 Transitional small business disclosure format.

     Yes                       No      X
         -----------              ------------
<PAGE>

                       INFORMATION ANALYSIS INCORPORATED
                                  FORM 10-QSB

                                     Index

                                                                          Page
PART I.   FINANCIAL INFORMATION                                          Number

Item 1.   Financial Statements (Unaudited)

          Consolidated Balance Sheets as of March 31, 2001
          and December 31, 2000 (Audited)                                  3

          Consolidated Statements of Operations for the
          three months ended March 31, 2001 and March 31, 2000             4

          Consolidated Statements of Cash Flows for the
          three months ended  March 31, 2001 and March 31, 2000            5

          Notes to Consolidated Financial Statements                       6

Item 2.   Management's Discussion and Analysis of
          Financial Condition and Results of Operations                    6

PART II   OTHER INFORMATION

Item 2.   Changes in Securities                                            9

Item 6.   Exhibits and Reports on Form 8-K                                 9

SIGNATURES                                                                 9

INDEX TO EXHIBITS                                                         10

                                       2
<PAGE>

               INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>

                                                                                    March 31, 2001                 December 31, 2000
                                                                                       Unaudited                        Audited
                                                                                    ---------------                 ----------------
<S>                                                                                  <C>                              <C>
                                    ASSETS
Current assets:
     Cash and cash equivalents                                                       $     27,556                     $     42,881
     Accounts receivable, net                                                           1,218,973                        1,073,941
     Prepaid expenses                                                                     149,397                          174,875
     Other receivables                                                                     92,431                           57,800
                                                                                     ------------                     ------------
          Total current assets                                                          1,488,357                        1,349,497
                                                                                     ------------                     ------------

Fixed assets, net                                                                          68,188                           96,139

Equipment under capital leases, net                                                         5,508                            6,717

Capitalized software, net                                                                 452,915                          491,552

Other receivables                                                                          18,142                           18,142
Other assets                                                                               58,275                           58,275
                                                                                     ------------                     ------------
          Total assets                                                               $  2,091,385                     $  2,020,322
                                                                                     ============                     ============

                        LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
     Revolving line of credit                                                             592,000                          598,591
     Accounts payable                                                                $  1,607,933                        1,517,897
     Accrued payroll and related liabilities                                              219,263                          211,866
     Other accrued liabilities                                                            198,734                          208,976
                                                                                     ------------                     ------------
          Total current liabilities                                                     2,617,930                        2,537,330

Stockholders' equity:
Common stock, par value $0.01, 30,000,000 shares authorized;
     11,206,084 shares issued, 9,701,473 outstanding
     at March 31,2001 and December 31, 2000                                               112,061                          112,061
     Additional paid in capital                                                        13,915,702                       13,915,702
     Retained earnings                                                                (13,699,995)                     (13,690,458)
     Less treasury stock; 1,504,611 shares at cost                                       (854,313)                        (854,313)
                                                                                     ------------                     ------------
          Total stockholders' equity                                                     (526,545)                        (517,008)
                                                                                     ------------                     ------------
Total liabilities and stockholders' equity                                           $  2,091,385                     $  2,020,322
                                                                                     ============                     ============
</TABLE>

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

                                       3
<PAGE>

<TABLE>
<CAPTION>
              INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF OPERATIONS

                                                                                        For the three months ended
                                                                                        --------------------------
                                                                                                 March 31,
                                                                                                 ---------
                                                                                      2001                       2000
                                                                                    Unaudited                  Unaudited
                                                                                    ---------                  ---------
<S>                                                                                 <C>                       <C>
Sales
  Professional fees                                                                 $1,258,078                $ 1,221,805
  Software sales                                                                        94,041                    466,512
                                                                                    ----------                -----------
     Total sales                                                                     1,352,119                  1,688,317
                                                                                    ----------                -----------

Cost of sales
  Cost of professional fees                                                            905,658                    939,154
  Cost of software sales                                                               109,664                    144,514
                                                                                    ----------                -----------
     Total cost of sales                                                             1,015,322                  1,083,668
                                                                                    ----------                -----------

Gross profit                                                                           336,797                    604,649

Selling, general and administrative expenses                                           333,767                    560,544
                                                                                    ----------                -----------

Income from operations                                                                   3,030                     44,105

Other expenses ,net                                                                    (12,567)                    (2,203)
                                                                                    ----------                -----------

(Loss) Income before provision for income taxes                                         (9,537)                    41,902

Provision for income taxes                                                                   0                          0
                                                                                    ----------                -----------

Net (loss) income                                                                   $   (9,537)               $    41,902
                                                                                    ==========                ===========

Earnings per common share:
Basic                                                                                    $0.00                      $0.00
Diluted                                                                                  $0.00                      $0.00

Weighted average common shares outstanding:
Basic                                                                                9,701,473                  9,435,543
Diluted                                                                              9,701,473                 10,149,573
</TABLE>



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

                                       4
<PAGE>

              INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                        For the Three Months Ended
                                                                                        --------------------------
                                                                                                 March 31,
                                                                                                 ---------
                                                                                        2001                     2000
                                                                                     Unaudited                Unaudited
                                                                                     ---------                ---------

<S>                                                                                <C>                      <C>
Net (loss) income                                                                    $  (9,537)               $  41,902

Adjustments to reconcile net income to
net cash provided by operating activities:
    Depreciation                                                                        27,940                   57,352
    Amortization                                                                         1,209                    3,691
    Amortization of capitalized software                                                38,637                   38,637
    Gain on sale of fixed assets                                                        (9,353)                      --
    Changes in operating assets and liabilities
    Accounts receivable                                                               (145,032)                    (810)
    Other receivables and prepaid expenses                                              (9,153)                  41,265
    Accounts payable and accrued expenses                                               87,191                 (494,752)
                                                                                     ---------                ---------
              Net cash used by operating activities                                  $ (18,098)               $(312,715)
                                                                                     ---------                ---------


Cash flows from investing activities
    Increase in capitalized software                                                        --                  (45,680)
    Proceeds from sale of fixed assets                                                   9,364                       --
                                                                                     ---------                ---------
              Net cash provided (used) by investing activities                           9,364                  (45,680)
                                                                                     ---------                ---------

Cash flows from financing activities
    Net (payments) borrowing under bank revolving line of credit                        (6,591)                 159,100
    Principal payments on capital leases                                                    --                   (1,458)
    Net Proceeds from private placement                                                     --                  125,000
    Proceeds from exercise of stock options and warrants                                    --                   31,626
                                                                                     ---------                ---------
              Net cash (used) provided by financing activities                          (6,591)                 314,268
                                                                                     ---------                ---------

Net decrease in cash and cash equivalents                                              (15,325)                 (44,127)

Cash and cash equivalents at beginning of the period                                    42,881                  133,468
                                                                                     ---------                ---------

Cash and cash equivalents at end of the period                                       $  27,556                $  89,341
                                                                                     =========                =========

    Supplemental cash flow Information
    Interest paid                                                                    $  12,640                $   6,242
</TABLE>


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

                                       5
<PAGE>

PART I

Item 1.  Financial Statements.

                      INFORMATION ANALYSIS, INCORPORATED
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Basis of Presentation

          The accompanying consolidated financial statements have been prepared
by Information Analysis Incorporated ("IAI" or the "Company") pursuant to the
rules and regulations of the Securities and Exchange Commission.  Financial
information included herein is unaudited, however, in the opinion of management,
all adjustments (which include normal recurring adjustments) considered
necessary for a fair presentation have been made.  Certain information and
footnote disclosures normally included in annual financial statements prepared
in accordance with generally accepted accounting principles have been omitted
pursuant to such rules and regulations, but the Company believes that the
disclosures made are adequate to make the information presented not misleading.
For more complete financial information, these financial statements should be
read in conjunction with the audited financial statements and notes thereto for
the year ended December 31, 2000 included in the Company's annual report on Form
10-KSB.  Results for interim periods are not necessarily indicative of the
results for any other interim period or for the full fiscal year.


Item 2.  Management's Discussion and Analysis of Financial
         Condition or Plan of Operation.

Overview

     Prior to mid-1999, the Company was primarily dedicated to solving Year 2000
problems by providing software and services.  Since the latter part of 1999 the
Company's main focus has been modernizing client information systems and
developing Web-based solutions. IAI primarily applies its technology, services
and experience to legacy software migration and modernization. Internet and
intranet technology offer a different approach at collecting and processing
large volumes of user transactions and processes which were the forte of older
legacy systems. The Company has been using its expertise in legacy systems to
develop solutions that allow these legacy systems to interface with the Web.

Cautionary Statement Regarding Forward-Looking Statements

          This Form 10-QSB contains forward-looking statements regarding the
Company's business, customer prospects, or other factors that may affect future
earnings or financial results that are subject to the safe harbor created by the
Private Securities Litigation Reform Act of 1995.  Such statements involve risks
and uncertainties which could cause actual results to vary materially from those
expressed in the forward-looking statements.  Investors should read and
understand the risk factors detailed in the Company's 10-KSB for the fiscal year
ended December 31, 2000 and in other filings with the Securities and Exchange
Commission.

                                       6
<PAGE>

Net Income Per Share

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

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

                                                                   Per Share
                                              Income      Shares     Amount
                                              ------      ------     ------


Basic net income per common share for the
    three months ended March 31, 2001:
Income available to common stockholders       $(9,537)   9,701,473   $ 0.00
Effect of dilutive stock options                                --       --
Diluted net income per common share for
   the three months ended March 31, 2001:     $(9,537)   9,701,473   $ 0.00

Basic net income per common share for the
    three months ended March 31, 2000:
Income available to common stockholders       $41,902    9,435,543   $ 0.00
Effect of dilutive stock options                           714,030       --
Diluted net income per common share for
   the three months ended March 31, 2000:     $41,902   10,149,573   $ 0.00

                                       7
<PAGE>

Three Months Ended March 31, 2001 Versus Three Months Ended March 31, 2000

Revenue

          IAI's revenues in the first quarter of fiscal 2001 were $1,352,119,
compared to $1,688,317 in the first quarter of fiscal 2000, a decrease of 19.9%.
Professional services revenue was $1,258,078 versus $1,221,805, an increase of
3.0%, and product revenue was $94,041 versus $466,512 a decrease of 79.8%. The
decrease in software sales were mainly attributable to no sales of the Company's
ICONS software tool for the first quarter of 2001, versus the first quarter of
2000. ICONS is a software toolset that is used in connection with conversions
and migrations from mainframe legacy systems.

Gross Margins

          Gross margin was $336,797, or 24.9% of sales, in the first quarter of
fiscal 2001 versus $604,649, or 35.8% of sales, in the first quarter of fiscal
2000.  Of the $336,797 in 2001, $352,420 was attributable to services and
($15,623) was attributable to software sales. Gross margin as a percentage of
sales was 28.0% for professional services and (16.6%) for software sales for
2001.  In the first quarter of 2000, the Company reported gross margins of
approximately 23.1% for services and 69.0% for software sales. The increase in
professional services gross margin is a result of better margins on some of the
Company's newer projects for the first quarter of 2001 that were not present
during the same period for 2000. The decrease in software sales gross margin was
mainly attributable to no sales of the Company's ICONS software tool for the
first quarter of 2001, versus the first quarter of 2000.

Selling, General and Administrative

          Selling, general and administrative expenses (SG&A) were $333,767, or
24.7% of revenues, in the first quarter of 2001 versus $560,544, or 33.2% of
revenues, in the first quarter of 2000, a decrease in expenses of 40.5%.  The
decrease is attributable to the Company's continued commitment to align SG&A
costs to the level of its professional services and software business.

Profits

          The Company generated an operating profit before other expenses of
$3,030 in the first quarter of 2001 compared to $44,105 in the first quarter of
2000. There was a net income loss of $9,537 for 2001 versus net income of
$41,902 in 2000. In general, the operating profit and net income decrease is a
result of lower software sales during the first quarter of 2001.

Liquidity and Capital Resources

     The Company financed its operations from current collections, and through
its bank line of credit. Cash and cash equivalents at March 31, 2001 were
$27,556, compared to $42,881 at December 31, 2000.

     The Company is in default with its line of credit with First Virginia Bank
as a result of the Company's failure to meet certain financial tests.  However,
a forbearance agreement between the Company and First Virginia Bank is in
effect, which effectively extends the line of credit of $850,000 to May 29,
2001.  The Company is in negotiations with various organizations to obtain new
financing.

                                       8
<PAGE>

     If revenue continues at current levels the Company believes that it will
derive sufficient cash flow to continue to pay all essential expenses which are
required to currently operate the business. Any material reduction in revenue
could have a material adverse effect on the Company's operational capabilities.
Current operations, however, are insufficient to provide the additional working
capital that is necessary to repay approximately one million dollars of past due
payables. The Company is in the process of negotiating with past due creditors
to obtain concessions on their claims. The Company may require additional cash
resources during 2001 to support its operations and to satisfy its debts.
Accordingly, the Company may from time to time consider additional equity
offerings. The Company is uncertain that it will be able to raise additional
capital.

     The Company has no material commitments for capital expenditures.

PART II - OTHER INFORMATION

Item 2.  Changes in Securities

Item 6.  Exhibits and Reports on Form 8-K

(a)  See the Index to Exhibits attached hereto.

(b) No reports on Form 8-K were filed for the quarter for which this report is
    filed.

                                  SIGNATURES

In accordance with the requirements of the Exchange Act of 1934, the registrant
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.


Information Analysis Incorporated
- ---------------------------------
(Registrant)


Date: May 11, 2001            By:    /S/ Sandor Rosenberg
      ------------                   -------------------------------------------
                                     Sandor Rosenberg, Chairman of the
                                     Board and President



                              By:    /S/ Richard S. DeRose
                                     -------------------------------------------
                                     Richard S. DeRose, Executive Vice
                                     President and Treasurer

                                       9
<PAGE>

                               INDEX TO EXHIBITS



<TABLE>
<CAPTION>

Exhibit    Description                                       Location
No.
<S>        <C>                                               <C>
10.1       Modification of Office Lease at 11240 Waples      Filed with this Form 10-QSB
           Mill Road, Fairfax, Virginia 22030.
</TABLE>

                                       10
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.1
<SEQUENCE>2
<FILENAME>dex101.txt
<DESCRIPTION>FIRST MODIFICATION OF LEASE
<TEXT>

<PAGE>

Exhibit 10.1

FIRST MODIFICATION OF LEASE

          This First Modification of Lease ("Modification") is dated March 26,
               -----                                                 ---------
2001, between Fair Center Office Associates, L.L.C. ("Landlord") and Information
- ----          -------------------------------------                  -----------
Analysis, Inc. ("Tenant").
- --------------


RECITALS
- --------
R-1    The Landlord and Tenant entered into that particular Lease as of December
       20, 1996, (the "Lease"), that particular Addendum #1 as of March 3, 1997,
       and that particular Addendum #2 as of April 11, 1997, for a portion of
       the Fair Center Office Building located in Fairfax County known as 11240
       Waples Mill Road, Fairfax, Virginia 22030, consisting of the following
       approximate square feet of rentable space as described in the Lease as
       "Premises":

           1.  "Part A of the Premises" (Suite 400): 15,023 square feet
           2.  "Part B of the Premises" (Suite 202): 3,257 square feet
           3.  "Part C of the Premises" (Suite 306): 1,754 square feet

R-2    Landlord and Tenant wish to amend the Lease as provided herein.

       In consideration of the mutual promises contained herein, and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties agree as follows:

           1)  Modification of Lease.  Landlord and Tenant agree that the Lease
               ---------------------
is hereby modified as follows:

               A) Article I, "The Premises", Section 1.1: Part A of the Premises
                                                     ---
shall be reduced from fifteen thousand twenty-three (15,023) square feet of
                      --------------------------------------
rentable area on the fourth (4th) floor (the "Initial Premises") of Fair Center
                     ------ -----                                   -----------
Office Building to exclude approximately seven
- ---------------                          -----
<PAGE>

thousand six hundred eighty-nine (7,689) square feet on the fourth (4th) floor
- ----------------------------------------                    ------------
(the "Excluded Premises"), as shown in Exhibit A-1. The total reduced square
footage for Part A of the Premises shall be seven thousand three hundred thirty-
                                            ------------------------------------
four (7,334) square feet of rentable space (the "Reduced Premises"), as shown in
- ------------
Exhibit A-1 and rent will reduce accordingly. Landlord agrees that Tenant's
Suite number will remain Suite 400.

               B) Landlord shall deliver at its sole costs, the Excluded
Premises to Tenant with the changes described below:

                   1) Landlord will demise the Excluded Premise from the Reduced
                      Premises as shown in Exhibit A-1 and be responsible for
                      all costs to accomplish such.

                   2) Landlord at its sole cost shall install a "double door" in
                      the Reduced Premises, as shown in Exhibit A-1. Such door
                      shall be building standard double doors.

     2)  Rent Abatement.  Landlord agrees to abate $7,000.00 of Tenants rent for
         ---------------
the month of March 2001.  Landlord agrees that Tenant is not responsible to pay
March's 2001 rent until April 1, 2001.  Additionally, Landlord agrees to waive
all late notices that have been sent to date.

     3)  Leasing Commissions.  Landlord agrees to pay Irving Group
         --------------------
$7,568.86 as broker for Tenant in this transaction.  If Landlord does not pay
Irving Group such amounts by April 30, 2001, Tenant has the right to offset rent
and pay Irving Group directly for any unpaid sums.  Landlord acknowledges that
Tenant has not dealt with any other broker and Tenant is not responsible for any
brokerage fees in connection with this transaction.

     4)  Reaffirmation of Lease.  Except as modified herein, the
         ----------------------
Lease is hereby reaffirmed and ratified.
<PAGE>

         IN WITNESS WHEREOF, the parties have executed the First Modification
of Lease intending same to be effective the date indicated in the first
paragraph of this First Modification of Lease, having executed the First
Modification of Lease on the date indicated below to their name.

WITNESS

LANDLORD: Fair Center Office Associates, L.L.C.


                                         By:
- -------------------------------------       ---------------------------------

                                         Printed Name:
                                                      -----------------------
                                         Title:
                                               ------------------------------
                                         Date:
                                              -------------------------------

WITNESS                                  TENANT: Information Analysis, Inc.


                                         By:
- -------------------------------------       ---------------------------------

                                         Printed Name:
                                                      -----------------------

                                         Title:


                                         Date:
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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