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<SEC-DOCUMENT>0000928385-01-502428.txt : 20020410
<SEC-HEADER>0000928385-01-502428.hdr.sgml : 20020410
ACCESSION NUMBER:		0000928385-01-502428
CONFORMED SUBMISSION TYPE:	10QSB
PUBLIC DOCUMENT COUNT:		3
CONFORMED PERIOD OF REPORT:	20010930
FILED AS OF DATE:		20011113

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:		1934 Act
		SEC FILE NUMBER:	000-22405
		FILM NUMBER:		1783952

	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>INFORMATION ANALYSIS, INC.
<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
 September 30, 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, #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 October 31, 2001:

Common Stock, par value $.01, 10,181,015 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)

           Condensed Consolidated Balance Sheets as of
           September 30, 2001 and December 31, 2000                    3

           Condensed Consolidated Statements of Operations
           for the three months ended September 30, 2001
           and September 30, 2000                                      4

           Condensed Consolidated Statements of Operations
           for the nine months ended September 30, 2001
           and September 30, 2000                                      5

           Condensed Consolidated Statements of Cash Flows
           for the nine months ended  September 30, 2001 and
           September 30, 2000                                          6

           Notes to Unaudited Condensed Consolidated
           Financial Statements                                        7

Item 2.    Management's Discussion and Analysis of
           Financial Condition and Results of Operations               9

PART II    OTHER INFORMATION

Item 1.    Legal Proceedings                                          11

Item 2.    Changes in Securities                                      11

Item 3.    Exhibits and Reports on Form 8-K                           11

SIGNATURES                                                            12

Item 4.    Index to Exhibits                                          13

                                       2
<PAGE>

              Information Analysis Incorporated and Subsidiaries
                          Consolidated Balance Sheets

<TABLE>
<CAPTION>
                                                                        As of             As of
                                                                September 30, 2001   December 31, 2000
                                                                     (unaudited)        (audited)
                                                                ------------------   ----------------
<S>                                                             <C>                  <C>
ASSETS
Current assets:
     Cash and cash equivalents                                  $     (5,027)        $     42,881
     Accounts receivable, net                                      1,373,714            1,073,941
     Prepaid expenses                                                 50,861              174,875
     Other receivables                                                77,428               57,800
                                                                ------------         ------------
          Total current assets                                     1,496,976            1,349,497

Fixed assets, net                                                     41,854               96,139

Equipment under capital leases, net                                       --                6,717

Capitalized software, net                                            333,789              491,552
Other receivables                                                     11,865               18,142
Other assets                                                          58,275               58,275
                                                                ------------         ------------
          Total assets                                          $  1,942,759         $  2,020,322
                                                                ============         ============

LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
    Revolving line of credit                                    $    609,000         $    598,591
    Accounts payable                                               1,230,677            1,517,897
    Accrued payroll and related liabilities                          294,106              211,866
    Other accrued liabilities                                        135,302              208,976
                                                                ------------         ------------
Total current liabilities                                          2,269,085            2,537,330

Long Term liabilities
       Notes payable                                                  70,000                   --
                                                                ------------         ------------
Total liabilities                                                  2,339,085            2,537,330

Common stock, par value $0.01, 30,000,000 shares authorized;
     11,685,626 and 11,206,084 shares issued, 10,181,015 and
     9,701,473 outstanding at September 30, 2001 and
     December 31, 2000, respectively                                 116,856              112,061
Additional paid in capital                                        14,104,269           13,915,702
Accumulated Deficit                                              (13,763,138)         (13,690,458)
Less treasury stock; 1,504,611 shares at cost                       (854,313)            (854,313)
                                                                ------------         ------------
         Total stockholders' equity                                 (396,326)            (517,008)
                                                                ------------         ------------
Total liabilities and stockholders' equity                      $  1,942,759         $  2,020,322
                                                                ============         ============

</TABLE>

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

                                       3
<PAGE>

              Information Analysis Incorporated and Subsidiaries
                     Consolidated Statements of Operations

<TABLE>
<CAPTION>
                                                         Three months ended Sept 30,
(unaudited)                                                  2001          2000
                                                         -----------    ----------
<S>                                                      <C>           <C>
Net sales:
   Professional services                                 $ 1,456,079    $1,257,921
   Software sales                                             94,999       127,701
                                                         -----------    ----------
   Total sales                                             1,551,078     1,385,622
Cost of goods sold and services provided:
   Cost of professional services                             983,769       854,137
   Cost of software sales                                    101,989       176,788
                                                         -----------    ----------
   Total cost of goods sold and services provided          1,085,758     1,030,925
Gross margin                                                 465,320       354,697
Operating expenses:
   Selling, general and administrative                       592,638       467,637
                                                         -----------    ----------
   Total operating expenses                                  592,638       467,637
Operating loss                                              (127,318)     (112,940)
Other income (expense)                                         1,267       (17,255)
                                                         -----------    ----------
Loss before income taxes                                    (126,051)     (130,195)
Provision for income taxes                                        --            --
                                                         -----------    ----------
Net loss before extraordinary item                          (126,051)     (130,195)
Extraordinary gain - settlement of debt with equity          107,883            --
                                                         -----------    ----------
Net loss                                                 $   (18,168)   $ (130,195)
                                                         ===========    ==========
Earnings per common share:
 Basic:
Loss from continuing
 operations before extraordinary gain                         ($0.01)       ($0.01)
Extraordinary gain on settlement of debt with equity           $0.01            --
                                                              ------        ------
Basic net income per common share                             ($0.00)       ($0.01)
                                                              ======        ======
 Diluted:
Loss from continuing
 operations before extraordinary gains                        ($0.01)       ($0.01)
Extraordinary gains on settlement of debt with equity          $0.01            --
                                                              ------        ------
Diluted net income per common share                           ($0.00)       ($0.01)
                                                              ======        ======
Weighted average common shares outstanding:
   Basic                                                  10,087,925     9,589,299
   Diluted                                                10,087,925     9,589,299

</TABLE>

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



                                       4
<PAGE>

              Information Analysis Incorporated and Subsidiaries
                     Consolidated Statements of Operations

<TABLE>
<CAPTION>

                                                       Nine months ended Sept 30,
(unaudited)                                                2001         2000
                                                        ----------   ----------
<S>                                                     <C>          <C>
Net sales:
   Professional services                                $3,700,823   $3,887,652
   Software sales                                          347,712      733,639
                                                        ----------   ----------
   Total sales                                           4,048,535    4,621,291
Cost of goods sold and services provided:
   Cost of professional services                         2,639,509    2,792,988
   Cost of software sales                                  405,306      464,948
                                                        ----------   ----------
   Total cost of goods sold and services provided        3,044,815    3,257,936
Gross margin                                             1,003,720    1,363,355
Operating expenses:
   Selling, general and administrative                   1,282,539    1,467,263
                                                        ----------   ----------
   Total operating expenses                              1,282,539    1,467,263
Operating (loss) income                                   (278,819)    (103,908)
Other expense                                              (22,339)     (23,960)
                                                        ----------   ----------
(Loss) Income before income taxes                         (301,158)    (127,868)
Provision for income taxes                                      --           --
                                                        ----------   ----------
Net (loss) income before extraordinary item               (301,158)    (127,868)
Extraordinary gain - settlement of debt with equity        228,478           --
                                                        ----------   ----------
Net (loss) income                                       $  (72,680)  $ (127,868)
                                                        ==========   ==========
Earnings per common share:
 Basic:
Loss from continuing
 operations before extraordinary gain                       ($0.03)      ($0.01)
Extraordinary gain on settlement of debt with equity         $0.02           --
                                                            ------       ------
Basic net income per common share                           ($0.01)      ($0.01)
                                                            ======       ======
 Diluted:
Loss from continuing
 operations before extraordinary gains                      ($0.03)      ($0.01)
Extraordinary gain on settlement of debt with equity         $0.02           --
                                                            ------       ------
Diluted net income per common share                         ($0.01)      ($0.01)
                                                            ======       ======
Weighted average common shares outstanding:
   Basic                                                 9,865,056    9,535,635
   Diluted                                               9,865,056    9,535,635

</TABLE>


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


                                       5
<PAGE>

               Information Analysis Incorporated and Subsidiaries
                      Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>

                                                           For the nine Months Ended September 30,
                                                           ---------------------------------------
(unaudited)                                                           2001         2000
<S>                                                               <C>          <C>
Cash flows from operating activities:
Net (loss)                                                         $ (72,680)  $ 127,868

 Adjustments to reconcile net loss to
 Net cash provided by operating activities:
  Extraordinary gain                                                (228,478)
  Depreciation                                                        57,364     150,334
  Amortization                                                         3,627       3,627
  Amortization of Capitalized Software                               157,763     115,911
  Gain on sale of fixed assets                                        (9,353)         --
  Changes in operating assets and liabilities
  Accounts receivable                                               (299,773)    434,252
  Other receivables and prepaid expenses                             110,663      27,416
  Accounts payable and accrued expenses                              143,186    (703,159)
                                                                   ---------   ---------
Net cash used by operating activities                              $(137,681)  $ (99,487)
                                                                   ---------   ---------

Cash flows from investing activities:
  Acquisition of furniture and equipment                                  --          --
  Increase in capitalized software                                        --    (182,447)
  Proceeds from sale of fixed assets                                   9,364          --
                                                                   ---------   ---------
Net cash provided (used) in investing activities                       9,364    (182,447)
                                                                   ---------   ---------

Cash flows from financing activities:
  Net borrowing (payments) under bank revolving line of credit        10,409     154,491
  Net proceeds from issuance of notes payable                         70,000          --
  Principal payments on capital leases                                    --      (5,831)
  Net Proceeds from private placement                                     --     125,000
  Proceeds from exercise of stock options and warrants                    --      31,626
                                                                   ---------   ---------
 Net cash provided (used) by financing activities:                    80,409     305,286
                                                                   ---------   ---------

 Net (decrease) increase in cash and cash equivalents                (47,908)     23,352

 Cash and cash equivalents at beginning of the period                 42,881     133,468
                                                                   ---------   ---------
 Cash and cash equivalents at end of the period                      ($5,027)  $ 156,820
                                                                   =========   =========

 Supplemental cash flow Information
   Interest paid                                                   $  37,566   $  42,617

Non-Cash Financing Activity:
   Issuance of common stock to settle debt                         $ 193,362
                                                                   =========
Non-Cash Operating Activity:
  Reduction of accounts payable through issuance of equity         $ 421,840
                                                                   =========

</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.

                                       6
<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.

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.

                                       7
<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.

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

<TABLE>
<CAPTION>
                                           Income Before
                                           Extraordinary     Extraordianry       Net                Per Share
                                               Item              Item          Income     Shares      Amount
                                           -------------     -------------     ------     ------    ---------
<S>                                        <C>                  <C>            <C>        <C>       <C>
(dollars in thousands)
(except per share amounts)
Basic net income per common
 share for the nine months ended
 September 30, 2001:

Income available to common Stockholders         $(301)           $228           $ (73)   9,865,056    $(0.01)

*Effect of dilutive stock options

Diluted net income per common
 Share for the nine months ended
 September 30, 2001:                            $(301)           $228           $ (73)   9,865,056    $(0.01)

Basic net income per common
 Share for the nine months ended
 September 30, 2000:

Income available to common Stockholders         $(128)           $000           $(128)   9,535,635    $(0.01)

*Effect of dilutive stock options

Diluted net income per common
  Share for the nine months ended
  September 30, 2000:                           $(128)           $000           $(128)   9,535,635    $(0.01)

Basic net income per common
  share for the three months
  ended September 30, 2001:

Income available to common Stockholders         $(125)           $108           $ (17)  10,087,925    $(0.00)

*Effect of dilutive stock options

Diluted net income per common
  share for the three months ended
  September 30, 2001:                           $(125)           $108           $ (17)  10,087,925    $(0.00)

Basic net income per common
 share for the three months ended
 September 30, 2000:

Income available to common stockholders         $(130)           $000           $(130)   9,589,299    $(0.01)

*Effect of dilutive stock options

Diluted net income per common
 share for the three months ended
 September 30, 2000:                            $(130)           $000           $(130)   9,589,299    $(0.01)

* All Stock Options/Warrants are
  Anti-Dilutive.
</TABLE>

                                       8
<PAGE>

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

Three Months Ended September 30, 2001 Versus Three Months Ended September 30,
2000

Revenue

          IAI's revenues in the third quarter of fiscal 2001 were $1,551,078,
compared to $1,385,622 in the third quarter of fiscal 2000, an increase of
12.0%.  Professional services revenues were $1,456,079 versus $1,257,921, an
increase of 15.8%, and product revenues were $94,999 versus $127,701 a decrease
of 25.6%.

Gross margin

          Gross margins were $465,320 or 30% of sales, in the third quarter of
fiscal 2001 versus $354,697, or 25.6% of sales, in the third quarter of fiscal
2000.  Of the $465,320 in 2001, $472,310 was attributable to professional
services and ($6,990) was attributable to software sales. Gross margins as a
percentage of sales were 32.4% for professional services and (7.3%) for software
sales.  In the third quarter of 2000, the Company reported gross margins of
approximately 32.1% for professional services and (38.4%) for software products.

Selling, General & Administrative

          Selling, General & Adminsitrative expenses totaled $592,638, or 38.2%
of revenues, in the third quarter of 2001 versus $467,637, or 33.7% of revenues,
in the third quarter of 2000, an increase in expenses of 26.7%. The increase is
attributable to the Company's taking a bad debt provision for a doubtful
account.

Profit

          The Company reported an operating loss of $126,051, before an
extraordinary gain in the third quarter of 2001 compared to an operating loss of
$130,195 in the third quarter of 2000.


                                       9
<PAGE>

Nine Months Ended September 30, 2001 Versus nine Months Ended September 30, 2000

Revenue

          IAI's revenues in the first nine months of fiscal 2001 were
$4,048,535, compared to $4,621,291 in the first nine months of fiscal 2000,
a decrease of 12.4%.  Professional services revenues were $3,700,823 versus
$3,887,652, a decrease of 4.8%, and product revenues were $347,712 versus
$733,639, a decrease of 52.6%. The decrease in software sales was mainly
attributable to no sales of the Company's ICONS software tool for the first
nine months of 2001, versus the first nine months of 2000. ICONS is a software
toolset that is used in connection with conversions and migrations from
mainframe legacy systems.

Gross margin

  Gross margins were $1,003,720 or 24.8% of sales, in the first nine months of
fiscal 2001 versus $1,363,355, or 29.5% of sales, in the first nine months of
fiscal 2000.  Of the $1,003,720 in 2001, $1,061,314 was attributable to
professional services and $(57,594) was due to software sales. Gross margins as
a percentage of sales were 28.7% for professional services and (16.5%) for
software sales for 2001, versus 28.2% for professional services and 36.6% for
software sales in 2000. The decrease in gross margin as a whole is attributable
to no sales of the Company's ICONS software tool.

Selling, General & Administrative

  Selling, General & Adminsitrative expenses totaled $1,282,539, or 31.7% of
revenues, for the nine months ending September 30, 2001 versus $1,467,263, or
31.8% of revenues, for the nine months ending September 30, 2000, a decrease in
expenses of 12.6%. The decrease is attributable to the Company's continued
commitment to align Selling, General & Administrative costs to the level of its
professional services and software business.

Profit

  The Company reported an operating loss of $301,158 before an extraordinary
gain in the first nine months of fiscal 2001 compared to an operating loss of
$127,868 for the first nine months of 2000. In general, the net operating loss
is a result of lower software sales during the first nine months of 2001, and
accounting for a bad debt provision as a result of a doubtful account.

Liquidity and Capital Resources

    Through the first nine months of 2001, the Company financed its operations
from current collections and through its bank line of credit. Cash and cash
equivalents at September 30, 2001 were ($5,027) compared to $156,820 at
September 30, 2000.  As of September 30, 2001 the Company had an outstanding
balance on its line of credit of $609,000.

    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 $800,000 to November 27, 2001.
The Company is in negotiations with various organizations to obtain a new line
of credit.

    If revenue continues at curent levels the Company believes that it will
derive sufficient cash flow to continue to pay all essential expenses which are
required to 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

                                       10
<PAGE>

capital that is necessary to repay approximately $500,000 of past due payables.
The Company is in the process of negotiating with past due creditors to obtain
concessions on their claims. Three creditors accepted 222,448 shares of common
stock and one creditor accepted warrants for 12,000 shares of common stock in
satisfaction of their claims in the amount of $187,558. The Company received
$70,000 from various investors and issued three year convertable notes at 12%
APR, with a conversion price of $.25 per share. The Company cannot be certain
that there will not be a need for additional cash resources at some point in
fiscal 2001. Accordingly, the Company may from time to time consider additional
equity offerings to finance business expansion. 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 1. Legal Proceedings

The Company is not aware of any legal proceedings against it at this time.

Item 2. Changes in Securities

Between July 25, 2001 and August 9, 2001 the Company issued 222,448 shares of
common stock to three trade creditors, and warrants, expiring 5 years from
issuance date, for 12,000 shares  of common stock to one trade creditor to
satisfy their claims in the aggregate amount of $187,558.  The Company relied
upon section 4(2) in issuing these securities without registration under the
Securities Act of 1933. The Company also issued to three acredited investors
$70,000 of 3 year 12% convertible notes, having a conversion price of $.25 per
share.  No commissions were paid in connection with the issuance of these notes.
The Company relied upon section 4(2) in issuing these notes without registration
under the Securities Act of 1933.

Item 3.  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.


                                       11
<PAGE>



                                    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: November 12, 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



                                       12
<PAGE>



                               INDEX TO EXHIBITS

<TABLE>
<CAPTION>

Exhibit  Description                                   Location
No.
<C>        <S>                                         <C>
4.1      Form of 12% 3 year convertible note           Filed with this Form 10-QSB

4.2      Form of Warrant issued to trade creditors     Filed with this Form 10-QSB
         who exchanged claims for warrants.
</TABLE>


                                       13

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-4.1
<SEQUENCE>3
<FILENAME>dex41.txt
<DESCRIPTION>EXHIBIT 4.1
<TEXT>
<PAGE>

Exhibit 4.1

THIS NOTE, AND THE SECURITIES ISSUABLE UPON CONVERSION OF THIS NOTE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE  "ACT"), OR
THE SECURITIES LAWS OF ANY STATE.  THIS NOTE AND ANY OF SUCH SECURITIES MAY NOT
BE SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED, OR OTHERWISE TRANSFERRED
EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT RELATING TO SUCH
TRANSACTION UNDER THE ACT AND ALL OTHER APPLICABLE SECURITIES LAWS, OR PURSUANT
TO AN EXEMPTION FROM THE REGISTRATION PROVISIONS OF THE ACT AND OTHER APPLICABLE
SECURITIES LAWS.


<PAGE>

                         CONVERTIBLE SUBORDINATED NOTE

$__________                                                September ___ , 2001

    FOR VALUE RECEIVED, INFORMATION ANALYSIS INCORPORATED (the "Company"), a
Virginia corporation, hereby promises to pay to the order of  _________________
(the "Holder") the sum of _______________dollars ($                 ).  All
payments to be made by the Company in repayment of principal and interest
hereunder shall be made in currency of the United States of America which at the
time of payment shall be legal tender for the payment of public or private
debts.

  1.  THE NOTE.

  1.1  Related Transactions.  This Note is one of a duly authorized series of
       --------------------
Notes in the aggregate principal amount of up to $500,000 due on September 30,
2004 (the "Notes").  For purposes of this Note, the Noteholder Majority shall
mean those holders of the Notes representing more than fifty percent (50%) of
the outstanding balances then due under the Notes.

  1.2  Place of Payment.  Principal on this Note shall be payable at the offices
       ----------------
of the Company at 11240 Waples Mill Road, Fairfax, Virginia 22030 or at such
other place as the Holder may from time to time designate in writing to the
Company.


  2.  PAYMENTS OF PRINCIPAL AND INTEREST.

  2.1  Rate of Interest.  For the period from the date hereof until all sums due
       ----------------
hereunder, whether principal, interest, charges, fees or other sums, have been
paid in full, interest shall accrue on the unpaid principal balance of this Note
at the simple rate of twelve percent (12.0%) per annum.  Interest on the
outstanding principal balance of the Note will be computed on the basis of a
360-day year comprised of twelve 30 day months.

  2.2  Mandatory Principal and Interest Payment. Commencing on March 31, 2002,
       ----------------------------------------
interest hereunder shall be paid semi-annually on March 31 and September 30 of
each calendar year. Unless converted into shares of the Company's common stock,
par value $.01 per share (the "Common Stock"), in accordance with Section 4
hereof, the total amount of principal due under this Note and all accrued and
unpaid interest thereon shall be paid in a single lump sum on September 30, 2004
(herein referred to as the "Repayment Date").


  3.  CONVERSION OF NOTE.

  3.1  Conversion Privilege.  Subject to and upon compliance with the provisions
       --------------------
hereof, at the option of the Holder, any or all of the principal amount and/or
accrued and unpaid interest owing under this Note may be converted, in whole or
in any part, into fully paid and non-assessable shares of Common Stock (the
"Shares") at the Conversion Price (as defined in Section 4.2 below).

  3.2  Conversion Price.  The price at which shares of Common Stock shall be
       ----------------
issuable upon conversion of this Note (the "Conversion Price") shall be $.25 per
share.

  3.3  Manner of Exercise of Conversion Privilege.  In order to exercise the
       ------------------------------------------
conversion privilege under Section 3.1 above, the Holder of this Note shall give
written notice to the Company (in the form of the Conversion Notice attached
hereto) that the Holder elects to convert all or a portion of this Note which
notice shall also specify the amount of principal to which such conversion
relates.  Any such notice of conversion shall supersede the actual payment of
the amount against which the conversion is to occur if such notice is received
by the Company prior to

                                       2
<PAGE>

the actual receipt by the Holder of the payment. The conversion shall become
effective on the date the notice of conversion is received by the Company, and
the person or persons in whose name or names any certificate for the Shares
shall be issuable upon such conversion shall be deemed to have become on said
date the holder or holders of record of the Shares represented by that
certificate and the Note shall be deemed cancelled as of that date.

  3.4  Reorganization, Reclassification, Consolidation, Merger or Sale.  If any
       ---------------------------------------------------------------
capital reorganization or reclassification of the capital stock of the Company,
or any consolidation or merger of the Company with another corporation, or the
sale of all or substantially all of the assets of the Company to another
corporation, or any exchange of capital stock of the Company for cash or any
other securities or assets, shall be effected in such a way that holders of
Shares shall be entitled to receive stock, securities, cash or assets with
respect to or in exchange for Shares, then, as a condition of such
reorganization, reclassification, consolidation, merger, sale or exchange,
lawful and adequate provisions shall be made whereby the Holder hereof shall
thereafter have the right to purchase and receive, upon the basis and upon the
terms and conditions specified in this Note and in lieu of the Shares
immediately theretofore purchasable and receivable upon the exercise of the
rights represented hereby, such shares of stock, securities, cash or assets as
may be issued or payable with respect to or in exchange for a number of
outstanding Shares equal to the number of Shares immediately theretofore
purchasable and receivable upon the exercise of the rights represented hereby
had such reorganization, reclassification, consolidation, merger, sale or
exchange not taken place.  In any such case, appropriate provision shall be made
with respect to the rights and interests of the Holder of this Note to the end
that the provisions hereof (including, without limitation, provisions for
adjustments of the Conversion Price) shall thereafter be applicable, as nearly
as may be practicable, in relation to any shares of stock, securities, cash or
assets thereafter deliverable upon the exercise hereof.

  3.5  Subdivision or Combination of Stock.  In case the Company shall at any
       ------------------------------------
time subdivide its outstanding shares of Common Stock into a greater number of
shares, the Conversion Price in effect immediately prior to such subdivision
shall be proportionately reduced, and conversely, in case the outstanding shares
of Common Stock of the Company shall be combined into a smaller number of
shares, the Conversion Price in effect immediately prior to such combination
shall be proportionately increased.

  3.6  Other Notices.  In case at any time after the issuance of this Note:
       -------------

       (a) the Company shall declare any dividend upon its Shares payable in
shares of capital stock or make any special dividend or other distribution
(other than regular cash dividends) to the holders of its Shares;

       (b) the Company shall offer for subscription pro rata to the holders of
its Shares any additional shares of stock of any class or other rights;

       (c) there shall be any capital reorganization or reclassification of the
capital stock of the Company, or any consolidation or merger of the Company
with, or sale of all or substantially all of its assets or the sale of the
patent to, another corporation; or

       (d) there shall be a voluntary or involuntary dissolution, liquidation or
winding up of the Company;

then, the Company shall give, by first-class mail, postage prepaid, addressed to
the Holder of this Note at the address of such Holder as shown on the books of
the Company, (i) at least ten (10) days prior written notice of the date on
which the books of the Company shall close or a record shall be taken for
determining the holders of Shares entitled to receive a dividend, distribution
or subscription right or the right to vote in respect of any such
reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation or winding up, and (ii) as to (c) and (d), above, at least ten (10)
days prior written notice of the date when any such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding up shall take place.  Such notice in accordance with the foregoing
clause (ii) shall specify the date on which the holders of Shares shall be
entitled to exchange their shares for
                                       3
<PAGE>

securities or other property deliverable upon such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding up, as the case may be.

  3.7  Company to Provide Stock.  The Company shall at all times reserve and
       ------------------------
keep available out of the aggregate of its authorized but unissued capital stock
or its issued capital stock held in its treasury, or both, for the purpose of
effecting the conversion of this Note, such number of shares of Common Stock or
as shall then be issuable upon the conversion of this Note under Section 3.1,
3.3 and 3.4 hereof.  The Company covenants that all shares of Common Stock
issued on conversion of this Note shall be duly and validly issued and fully
paid and nonassessable and free from all taxes, liens and charges with respect
to the issue thereof.

  3.8  Fractional Shares.  No fractional Shares shall be issued upon conversion
       -----------------
of this Note.  Instead of any fractional share which would otherwise be issuable
upon conversion of this Note, the Company shall pay a cash adjustment in respect
of such fractional interest in an amount equal to the portion of the then
applicable Conversion Price for each share.


  4.  SUBORDINATION.

     4.1  Subordination.  The Company, for itself and its successors and
          -------------
assigns, covenants and agrees, and the Holder by its acceptance hereof likewise
covenants and agrees, that notwithstanding any other provision of this Note, the
indebtedness evidenced by this Note and the payment of the principal and
interest on this Note shall be subordinated in right of payment, to the extent
and in the matter hereinafter set forth, to the prior payment in full of all
Senior Indebtedness (as hereinafter defined) at any time outstanding.  The
provisions of this Section 5 shall constitute a continuing obligation in favor
of all persons who become the holders of or continue to hold Senior Indebtedness
and such provisions are made for the benefit of the holders of Senior
Indebtedness and such holders of Senior Indebtedness are hereby made obligees
hereunder the same as if their names were written hereinafter as such and they
or any of them may proceed to enforce such provisions against the Company and
the Holder.

     4.2  Definition of Senior Indebtedness.  The term "Senior Indebtedness"
          ---------------------------------
shall mean all (i) indebtedness of the Company for money borrowed from a bank or
other commercial lender, (ii) obligations of the Company as lessee under leases
of real or personal property and, in each case with respect to indebtedness
under (i) or (ii), whether outstanding on the date hereof or hereafter created,
or to any entity which refinances, restructures or acquires, in whole or in
part, any such indebtedness of the Company, including, without limitation, all
obligations of the Company for principal, interest (including post-petition
interest, whether or not allowable), fees, penalties, indemnities, reimbursement
obligations and expenses (including reasonable attorneys' fees) and any other
amounts owing in respect of such indebtedness, for the payment of which the
Company is responsible or liable as an obligor, guarantor, indemnitor, or
otherwise (including, without limitation, all amounts committed or permitted to
be advanced pursuant to agreements in respect of such indebtedness under which
the Company is responsible or liable) and all deferrals, renewals, extensions,
amendments, modifications and refundings thereof and (iii) any other
indebtedness of the Company which the Company and the Noteholder Majority may
hereafter agree in writing shall constitute Senior Indebtedness.
Notwithstanding the foregoing, "Senior Indebtedness" shall not include
indebtedness of the Company evidenced by any other notes which shall rank
equally and ratably with this Note.

     4.3  Payment of Senior Indebtedness.  In the event of any insolvency or
          ------------------------------
bankruptcy proceedings under federal or state bankruptcy statutes or any
receivership, liquidation, reorganization, or other similar proceedings in
connection therewith, relative to the Company, or, in the event of any
proceedings for voluntary liquidation, dissolution, or other winding up of the
Company or distribution or marshaling of its assets or any composition with or
assignment for the benefit of all or substantially all of the creditors of the
Company, then and in any such event all Senior Indebtedness shall be paid in
full before any payment or distribution of any character, whether in cash,
securities, or other property, shall be made on account of this Note and any
such payment or distribution, except for payment by means of the transfer of
securities which are subordinate and junior in right of payment to the payment
of all Senior Indebtedness then outstanding on terms of substantially the same
tenor as this Section 5, which would, but for the provisions hereof, be payable
or deliverable in respect of this Note, shall be paid or delivered directly to
the

                                       4
<PAGE>

holders of Senior Indebtedness (or their duly authorized representatives),
in the proportions in which they hold the same, until all Senior Indebtedness
shall have been paid in full and the Holder, by becoming a Holder, shall have
designated and appointed the holder or holders of Senior Indebtedness (and their
duly appointed representatives) as its agent and attorney-in-fact to file any
necessary proof of claim not otherwise filed.  The original and each successor
Holder of this Note, by its acceptance hereof, agrees to execute, at the request
of the Company, a separate agreement with any holder of Senior Indebtedness on
the terms set forth in this Section 5.

     4.4  No Payment on Note under Certain Circumstances.  In the event that:
          ----------------------------------------------

     i.    Any default occurs in the payment of the principal of or interest on
any Senior Indebtedness and during the continuance of such default until such
payment has been made or such default has been cured or waived in writing by
such holder of Senior Indebtedness;

     ii.   Any other default occurs with respect to any Senior Indebtedness and
during the continuance of such default for a period of up to one hundred and
twenty (120) days thereafter and thereafter if the maturity of such Senior
Indebtedness has been accelerated by the holder thereof, until such acceleration
has been rescinded or such default has been cured or waived; or

     iii.  The maturity of any Senior Indebtedness is accelerated by any holder
thereof because of a default with respect thereto and until such acceleration
has been rescinded or said Senior Indebtedness has been paid;

then, during the continuance of any of such events, the Company shall not,
directly or indirectly, make any payment on account of, or transfer any
collateral for, any part of the Note, and the Holder shall not demand or
accept from the Company or any other person any such payment or collateral or
cancel, set off or otherwise discharge any part of the Note, and neither the
Company nor the Holder shall otherwise take or permit any action in violation of
the terms of this subordination.  Notwithstanding anything to the contrary
herein, nothing herein shall be deemed at any time to delay or prohibit (a) the
tender to the Company of all or a portion of the principal amount plus accrued
interest of the Note to purchase equity securities of the Company, or (b) the
Company from converting the principal plus accrued interest on the Note any time
into equity securities of the Company.

     4.5  Payments Held in Trust.  In case any payment or distribution shall be
          ----------------------
paid or delivered to any Holder in violation or contravention of the terms of
this subordination, such payment or distribution shall, upon such Holder's
receipt of notice of such violation or contravention, be held in trust for and
paid and delivered ratably to the holders of Senior Indebtedness.

     4.6  Subrogation.  Subject to the payment in full of all Senior
          -----------
Indebtedness and until this Note shall be paid in full, the Holder shall be
subrogated to the rights of the holders of Senior Indebtedness (to the extent of
payments or distributions previously made to such holders of Senior Indebtedness
pursuant to the provisions of Subsections (b) and (d) of this Section 4) to
receive payments or distributions of assets of the Borrower applicable to the
Senior Indebtedness.  No such payments or distributions applicable to the Senior
Indebtedness shall, as between the Company and its creditors (other than the
holders of Senior Indebtedness and the Holder), be deemed to be a payment by the
Company to or on account of this Note and, for purposes of such subrogation, no
payments or distributions to the holders of Senior Indebtedness to which the
holder of this Note would be entitled except for the provisions of this Section
4 shall, as between the Company and its creditors (other than the holders of
Senior

                                       5
<PAGE>

Indebtedness and the holder of this Note), be deemed to be a payment by
the Company to or on account of the Senior Indebtedness.

     4.7  Scope of Section.  The provisions of this Section 4 are intended
          ----------------
solely for the purpose of defining the relative rights of the Holder, on the one
hand, and holders of the Senior Indebtedness, on the other hand.  Nothing
contained in this Section 4 or elsewhere in this Note is intended to, or shall
impair, as between the Company and its creditors (other than the holders of
Senior Indebtedness and the Holder), the obligation of the Company, which is
unconditional and absolute, to deliver to the Holder the principal and accrued
and unpaid interest on this Note as and when the same shall become due and
payable in accordance with the terms hereof, or to affect the relative rights of
the Holder of this Note and creditors of the Company other than the holders of
the Senior Indebtedness, nor shall anything herein prevent, as between the
Company and its creditors (other than the holders of Senior Indebtedness and the
Holder), the Holder from accepting any payment with respect to this Note or
exercising all remedies otherwise permitted by applicable law upon default under
this Note.

     4.8  Survival of Rights.  The right of any present or future holder of
          ------------------
Senior Indebtedness to enforce subordination of this Note pursuant to the
provisions of this Section 5 shall not at any time be prejudiced or impaired by
any act or failure to act on the part of the Company or any such holder,
including, without limitation, any forbearance, waiver, consent, compromise,
amendment, extension, renewal, or taking or release of security of or in respect
of any Senior Indebtedness or noncompliance by the Company with the terms of
such subordination regardless of any knowledge thereof such holder may have or
otherwise be charged with.

     4.9  Amendment or Waiver.  The provisions of this Section 4 shall not be
          -------------------
amended or waived in any manner without the consent of the Company and of the
holders of all Senior Indebtedness.

  4.10  Company to Make Payment of Principal and Accrued and Unpaid Interest.
        --------------------------------------------------------------------
Except as provided in this Section 4, the Company shall make payment of
principal and accrued and unpaid interest on this Note in accordance with its
tenor.  Upon any payment or distribution of assets of the Company referred to in
Section 5(b), the Holder shall be entitled to rely upon a certificate of the
receiver, trustee in bankruptcy, liquidating trustee. agent, or other person
making any such payment or distribution for the purpose of ascertaining the
person entitled to participate in such distribution, the holders of Senior
Indebtedness and other indebtedness or the Company, the amount thereof or
payable thereon, the amount or amounts paid or distributed thereon, and all
other facts pertinent thereto or to this Section 5.


  5.   EVENTS OF DEFAULT.

  5.1  Events of Default Defined.  The principal and interest due and owing on
       -------------------------
this Note will become immediately due and payable, at the option of the Holder,
if the Company shall (i) fail to make any payment of principal or interest due
under this Note within forty-five (45) days when due; (ii) admit in writing its
inability to pay its debts generally as they become due, (iii) file a petition
in bankruptcy or petition to take advantage of any insolvency act, (iv) make an
assignment for the benefit of its creditors, (v) consent to the appointment of a
receiver of itself or of the whole of any substantial part of its property, (vi)
on a petition in bankruptcy filed against it, be adjudicated as a bankrupt,
(vii) file a petition or answer seeking reorganization or arrangement under the
federal bankruptcy laws or any other applicable law or statute of the United
States of America or any state thereof, or (viii) distribute any of its assets
upon any dissolution, winding up, liquidation or reorganization of the Company.
For purposes hereof, each of the above events is hereafter referred to as a
"Event of Default".

  5.2  Notification.  If an Event of Default as defined above shall occur
       ------------
without the Holder's knowledge, the Company will notify the Holder promptly in
writing by mail of the Event of Default describing it in reasonable detail,
including a statement of the nature and length of existence thereof, and what
action the Company proposes to take with respect thereto.

                                       6
<PAGE>

  6.  SUITS FOR ENFORCEMENT UPON DEFAULT.

  If an Event of Default shall have occurred, then and in any such event the
Holder may, at any time at its option, declare the principal of and the accrued
interest due under this Note to be due and payable, whereupon the same shall
forthwith mature and become due and payable without demand, protest, notice of
protest and notice of default, presentment for payment and diligence in
collection, all of which are hereby expressly waived by the Company.  In case
any Event of Default shall occur, the Holder may proceed to protect and enforce
its rights hereunder by a suit in equity, action at law or other appropriate
proceeding.  The Company covenants that if default be made in any payment of any
principal or interest on this Note, it will pay to the Holder, to the extent
permitted under applicable law, such further reasonable amount as shall be
sufficient to cover the cost and expenses of collection, including reasonable
compensation to the attorneys of the Holder hereof and any court costs incurred
for all services rendered in that connection.  In addition, until all amounts
are paid in respect of a Note, interest will accrue, to the extent permitted
under applicable law, on any such unpaid amounts at the rate specified herein as
the rate of interest on the Note.  No course of dealing and no delay on the part
of the Holder in exercising any rights shall operate as a waiver thereof or
otherwise prejudice its rights and no consent or waiver shall extend beyond the
particular case involved.  During any period of default, the conversion price
set forth in Section 3.2 shall be reduced to $.10 per share.


  7.  NOTICES.

  Any request, demand, authorization, direction, notice, consent, waiver or
other document permitted by this Note to be made upon, given or furnished to, or
filed with the Company or the Holder shall be sufficient for every purpose
hereunder if in writing and mailed to the Company, addressed to it at 11240
Waples Mill Road, Suite 400, Fairfax, Virginia 22030 (or such subsequent address
as the Company shall advise the Holder hereof in writing) and if to the Holder
at the address for the Holder reflected in the Company's records (or at such
further address as the Holder hereof shall advise the Company in writing).  All
notices required hereunder shall be deemed to have been given or made when
actually delivered to or received by the  party to which the notice is addressed
at its respective address.


  8.  MUTILATION, DESTRUCTION, LOSS, OR REISSUANCE.

  8.1 Mutilation.  This Note, if mutilated, may be surrendered and thereupon the
      ----------
Company shall execute and deliver in exchange therefor a new Note of like tenor
and principal amount.

  8.2 Destruction, Loss, Etc.  If there is delivered to the Company (i) evidence
      ----------------------
of the destruction, loss, or theft of this Note and (ii) such security or
indemnity as may be required by it to save it harmless, then, in the absence of
notice to the Company that this Note has been acquired by a bona fide purchaser,
the Company shall execute and deliver in lieu of such destroyed, lost or stolen
Note, a new Note of like tenor and principal amount.


  9.  SUCCESSORS.

  All of the covenants, stipulations, promises and agreements in this Note
contained by or on behalf of the Company shall bind and inure to the benefit of
its successors  whether so expressed or not and also to the benefit of the
Holder and its successors.

                                       7
<PAGE>

  10.  AMENDMENT.

  The Noteholder Majority shall have the right to amend the provisions of all
the Notes; provided, however, no such amendment shall be binding on the Holder
if such amendment adversely changes the terms of payment to the Holder or
reduces the rate of interest hereunder.

  11.  LAWS OF VIRGINIA TO GOVERN.

  This Note shall be deemed to be a contract made under the laws of the
Commonwealth of Virginia and for all purposes shall be construed in accordance
with the laws of such State.


  12.  TRANSFERABILITY OF NOTE.

  This Note and the Shares issuable upon conversion hereof are not transferable
except pursuant to an effective registration statement under the Securities Act
of 1933, as amended, or unless an exemption from the registration provisions of
such Act is applicable.

  13.   HOLDER REPRESENTATION.

  The Holder named in this Note hereby represents and warrants to the Company
that (i) such Holder is an "accredited investor" within the meaning of
Regulation D under the Securities Act of 1933, as amended, (ii) no other person
has a direct or indirect beneficial interest in this Note and (iii) this Note
and any shares issued upon conversion hereof is being and will be acquired for
investment only and not with a view to or for sale in connection with a
distribution thereof and not with a view to resale.

    IN WITNESS WHEREOF, the Company has caused this Note to be executed in its
corporate name by its duly authorized officers and to be dated as of the day and
year first above written.

ATTEST:                            INFORMATION ANALSYIS INCORPORATED


__________________________         By:____________________________________
Secretary                             President

                                       8
<PAGE>

                               CONVERSION NOTICE
                               -----------------
                                                      Dated: ____________


  Pursuant to that certain Convertible Subordinated Note, dated ___________,
2001 in the principal amount of $__________________, the undersigned hereby
irrevocably elects to exercise its right to purchase ______________ shares of
the $.01 par value Common Stock of Information Analysis Incorporated, such right
being and as issued to the undersigned by Information Analysis Incorporated, by
converting $_____________ principal and/or interest amount under the Convertible
Subordinated Note in payment for same in accordance with the Conversion Price
specified in Section 3.2 of said Convertible Subordinated Note.


INSTRUCTIONS FOR REGISTRATION OF STOCK


Name

____________________________________________


Address

____________________________________________

____________________________________________

                 (Please typewrite or print in block letters)


                                        ________________________________________
                                        Signature

                                       9

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-4.2
<SEQUENCE>4
<FILENAME>dex42.txt
<DESCRIPTION>EXHIBIT 4.2
<TEXT>
<PAGE>

Exhibit 4.2

  THESE WARRANTS AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE HEREOF
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT"), OR THE SECURITIES LAWS OF ANY STATE.  SUCH SECURITIES MAY NOT BE SOLD,
OFFERED FOR SALE, PLEDGED, HYPOTHECATED, OR OTHERWISE TRANSFERRED IN THE ABSENCE
OF REGISTRATION UNDER SAID ACT AND ALL OTHER APPLICABLE SECURITIES LAWS, OR
INFORMATION ANALYSIS INCORPORATED RECEIVES A SATISFACTORY OPINION OF COUNSEL
THAT SUCH REGISTRATION IS NOT REQUIRED.

                              WARRANT CERTIFICATE
                              -------------------

                  WARRANTS TO PURCHASE SHARES OF COMMON STOCK

                     OF INFORMATION ANALYSIS INCORPORATED

                        Date of Issuance:    __________

  THIS CERTIFIES that, for value received, ________________  (the "Holder") will
be entitled to purchase, subject to the provisions of this Warrant Certificate
("Warrant"), from INFORMATION ANALYSIS INCORPORATED, a Virginia corporation (the
"Company"), at the price hereinafter set forth, ________ shares of the Company's
$0.01 par value Common Stock as determined pursuant to Section 8 below.  (All of
the Company's shares of Common Stock are being hereafter referred to as "Common
Stock").  This Warrant Certificate is hereinafter referred to as the "Warrant"
and the shares of Common Stock issued or then issuable pursuant to the terms
hereof are hereinafter sometimes referred to as "Warrant Shares".

  This Warrant is subject to the following terms and conditions:

  Section 1.  Exercise:  Issuance of Certificates; Payment for Shares;
              --------------------------------------------------------
Conversion Right.
- ----------------

  1.1   Duration of Exercise of Warrant.  This Warrant is exercisable at the
        -------------------------------
option of the Holder at any time or from time to time but not later than 5:00
p.m. (Washington, DC Time) on the Expiration Date (as set forth in Section 14)
for all or a portion of the Warrant Shares which may be purchased hereunder.
Such exercise shall be made by presentation to the Company of the Purchase
Notice in the form attached hereto as Exhibit A along with payment of the
aggregate Exercise Price for all Warrant Shares being purchased.  The Company
agrees that the Warrants Shares purchased under this Warrant shall be and are
deemed to be issued to Holder as the record owner of such shares as of the close
of business on the date on which this Warrant shall have been surrendered and
payment made for such shares.  Certificates for the Warrant Shares so purchased,
together with any other securities or property to which Holder is entitled upon
such exercise, shall be delivered to Holder by the Company's transfer agent at
the


<PAGE>

Company's expense within a reasonable time after the rights represented by
this Warrant have been exercised.  Each stock certificate so delivered shall be
in such denominations as may be requested by Holder and shall be registered in
the name of Holder or such other name as shall be designated by Holder.  If,
upon exercise of this Warrant, fewer than all of the Warrant Shares evidenced by
this Warrant are purchased prior to the Expiration Date of this Warrant, one or
more new warrants substantially in the form of, and on the terms in, this
Warrant will be issued for the remaining number of Warrant Shares not purchased
upon exercise of this Warrant.

  1.2  Conversion Right.  In lieu of the payment of the Exercise Price, the
       ----------------
Holder shall have the right (but not the obligation), to require the Company to
convert this Warrant, in whole or in part, into shares of Common Stock (the
"Conversion Right") as provided for in this Section 1.2.  Upon exercise of the
Conversion Right, the Company shall deliver to the Holder (without payment by
the Holder of any of the Exercise Price) that number of shares of Common Stock
equal to the quotient obtained by dividing (x) the value of the Warrant at the
time the Conversion Right is exercised (determined by subtracting the aggregate
Exercise Price in effect immediately prior to the exercise of the Conversion
Right from the aggregate Market Price (as hereinafter defined) for the Warrant
Shares issuable upon exercise of this Warrant immediately prior to the exercise
of the Conversion Right) by (y) the Market Price of one share of Common Stock
immediately prior to the exercise of the Conversion Right.  "Market Price" shall
mean the Stock Price (as defined below) obtained by taking the average over a
period of thirty consecutive trading days ending on the second trading day prior
to the date of determination.  As used in this paragraph, the term Stock Price
shall mean (A) the mean, on each such trading day, between the high and low sale
price of a share of Stock or if no sale takes place on any such trading day, the
mean of the closing bid and lowest closing asked prices therefor on any such
trading day, in each case as officially reported on all national securities
exchanges on which the Common Stock is then listed or admitted to trading, or
(B) if the Common Stock is not then listed or admitted to trading on any
national securities exchange, the closing price of the Common Stock on such
date, or (C) if no closing price is available on any such trading day, the mean
between the highest and lowest closing bid prices thereof on any such trading
date in the over-the-counter market as reported by NASDAQ, (D) if the Common
Stock is not then quoted in such system, the mean between the highest and lowest
bid prices reported by the market makers and dealers for the Common Stock listed
as such by the National Quotation Bureau, Incorporated or any similar successor
organization, or (E) the higher of the last bona fide sale made by the Company
and the fair market value of the Common Stock as determined by the Board of
Directors in its good faith judgment.

  1.3  Exercise of Conversion Right.  The conversion rights provided under
       ----------------------------
Section 1.2 hereof may be exercised in whole or in part and at any time and from
time to time while any Warrants remain outstanding.  In order to exercise the
conversion privilege, the Holder shall surrender to the Company, at its offices,
this Warrant accompanied by a duly completed Notice of Conversion in the form
attached hereto as Exhibit B.  The presentation and surrender shall be deemed a
waiver of the Holder's obligation

                                       2
<PAGE>

to pay all or any portion of the aggregate Exercise Price payable for the
Warrant Shares issuable upon exercise of this Warrant. This Warrant (or so much
thereof as shall have been surrendered for conversion) shall be deemed to have
been converted immediately prior to the close of business on the day of
surrender of such Warrant for conversion in accordance with the foregoing
provisions. As promptly as practicable on or after the conversion date, the
Company shall issue and shall deliver to the Holder (i) a certificate or
certificates representing the largest number of whole shares of Common Stock to
which the Holder shall be entitled as a result of the conversion and (ii) if the
Warrant is being converted in part only, a new warrant in principal amount equal
to the unconverted portion of this Warrant. If this Warrant is executed in
whole, in lieu of any fractional shares of Common Stock to which the Holder
shall be entitled, the Company shall pay to the Holder the cash equivalent
thereof based upon the Market Price.

  Section 2.  Reservation of Shares.  The Company hereby covenants that at all
  ---------   ---------------------
times during the term of this Warrant there shall be reserved for issuance such
number of shares of its Common Stock as shall be required to be issued upon
exercise of this Warrant.

  Section 3.  Fractional Shares.  This Warrant may be exercised only for a whole
  ---------   -----------------
number of shares of Common Stock, and no fractional shares or scrip representing
fractional shares shall be issuable upon the exercise of this Warrant.

  Section 4.  Assignment of Warrant.  This Warrant, any of the Warrants, and the
  ---------   ---------------------
shares of Common Stock issuable hereunder shall not be sold, offered for sale,
pledged, hypothecated, or otherwise transferred in the absence of registration
under the Act and other applicable securities laws or the Company's receipt of
an opinion of counsel satisfactory to the Company that such registration is not
required.  Upon such transfer or assignment of this Warrant, the Holder shall
surrender this Warrant to the Company with the Assignment Form in the form
annexed hereto duly executed and with funds sufficient to pay any transfer
taxes, and the Company shall cancel this Warrant, and without charge, shall
execute and deliver a new Warrant of like tenor in the name of the assignee
entitling such assignee to all rights and interests of its assignor at the time
of assignment of this Warrant.

  Section 5.  Loss of Warrant.  Upon receipt by the Company of evidence
  ---------   ---------------
satisfactory to it of the loss, theft, or destruction of this Warrant, and of
indemnification satisfactory to it, or upon surrender and cancellation of this
Warrant, if mutilated, the Company will execute and deliver a new Warrant of
like tenor and date.

  Section 6.  Rights of the Holder.  No provision of this Warrant shall be
  ---------   --------------------
construed as conferring upon the Holder hereof the right to vote, consent,
receive dividends or receive notice other than as herein expressly provided in
respect of meetings of stockholders for the election of directors of the Company
or any other matter whatsoever as a stockholder of the Company.  No provision
hereof, in the absence of affirmative action by the Holder hereof to purchase
Warrant Shares, and no enumeration herein of the rights or privileges of the
Holder hereof, shall give rise to any liability of such Holder for the purchase
price

                                       3
<PAGE>

of any Warrant Shares or as a stockholder of the Company, whether such
liability is asserted by the Company or by creditors of the Company.

  Section 7.  Exercise Price.  The Exercise Price for each Warrant Share shall
  ---------   --------------
be $______ per share; provided if the Company shall subdivide by stock split or
stock dividend its outstanding shares of Common Stock, the Exercise Price then
existing hereunder shall proportionately decrease and if the Company shall
combine its outstanding shares of Common Stock, the Exercise Price then existing
hereunder shall proportionately increase.

  Section 8.  Number of Warrant Shares.  This Warrant shall be exercisable, in
  ---------   ------------------------
accordance with the terms hereof, for ______ shares of Common Stock; provided if
the Company shall subdivide by stock split or stock dividend its outstanding
shares of Common Stock, the Warrant Shares then issuable hereunder shall
proportionately increase and if the Company shall combine its outstanding shares
of Common Stock, the Warrant Shares then issuable hereunder shall
proportionately decrease.

  Section 9.  Certain Distributions.  In case the Company shall, at any time,
  ---------   ---------------------
prior to the Expiration Date set forth in Section 14 hereof, make any
distribution of its assets to holders of its Common Stock as a partial
liquidation distribution or by way of return of capital, other than as a
dividend payable out of earnings or any surplus legally available for dividends,
then the Holder upon the exercise of this Warrant in whole or in part in
accordance with its terms and prior to such distribution, as herein provided,
after the date of record for the determination of those holders of Common Stock
entitled to such distribution of assets, shall be entitled to receive, in
addition to the shares of Common Stock issuable on such exercise, the amount of
such assets (or at the option of the Company a sum equal to the value thereof at
the time of such distribution to holders of Common Stock as such value is
determined by the Board of Directors of the Company in good faith), which would
have been payable to the Holder had it been the holder of record of such shares
of Common Stock on the record date for the determination of those holders of
Common Stock entitled to such distribution.

                                       4
<PAGE>

  Section 10.  Dissolution or Liquidation.  In case the Company shall, at any
  ----------   --------------------------
time prior to the Expiration Date set forth in Section 14 hereof, dissolve,
liquidate or wind up its affairs, the Holder shall be entitled, upon the
exercise of this Warrant in whole or in part in accordance with its terms and
prior to any such distribution in dissolution or liquidation, to receive on such
exercise, in lieu of the shares of Common Stock which the Holder would have been
entitled to receive, the same kind and amount of assets as would have been
distributed or paid to the Holder upon any such dissolution, liquidation or
winding up, with respect to such shares of Common Stock had the Holder been the
holder of record of such share of Common Stock on the record date for the
determination of those holders of Common Stock entitled to receive any such
liquidation distribution.

  Section 11.  Reclassification, Reorganization or Merger.  In case of any
  ----------   ------------------------------------------
reclassification, capital reorganization or other change of outstanding shares
of Common Stock of the Company (other than a change in par value, or from par
value to no par value, or from no par value to par value, or as a result of an
issuance of Common Stock by way of dividend or other distribution or of a
subdivision or combination), or in case of any consolidation or merger of the
Company with or into another corporation (other than a merger with a subsidiary
in which merger the Company is the continuing corporation or which does not
result in any reclassification, capital reorganization or other change of
outstanding shares of Common Stock of the class issuable upon exercise of this
Warrant), the Company shall cause effective provision to be made so that the
Holder shall have the right thereafter by exercising this Warrant in accordance
with the terms hereof, to purchase the kind and amount of shares of stock and
other securities and property receivable upon such reclassification, capital
reorganization or other change, consolidation or merger, by a holder of the
number of shares of Common Stock which might have been purchased upon exercise
of this Warrant immediately prior to such reclassification, change,
consolidation or merger.  Any such provision shall include provision for
adjustments which shall be as nearly equivalent as may be practicable to the
adjustments provided for in this Warrant.  The foregoing provisions of this
Section 11 shall similarly apply to successive reclassifications, capital
reorganizations and changes of shares of Common Stock and to successive
consolidations and mergers.  In the event that in any such capital
reorganization or reclassification, consolidation or merger, additional shares
of Common Stock shall be issued in exchange, conversion, substitution or
payment, in whole or in part, for or of a security of the Company other than
Common Stock, any amount of the consideration received upon the issue thereof
being determined by the Board of Directors of the Company shall be final and
binding on the Holder.

  Section 12.  Incidental ("Piggyback") Registration Rights.
  ----------   --------------------------------------------

  12.1  Notice and Participation.  If the Company at any time proposes to
        ------------------------
register any of its Common Stock for sale to the public (except with respect to
registration statements on Forms S-4, S-8, any forms replacing such forms, or
any other form not available for registering shares of Common Stock for sale to
the public), each such time it will give written notice to the Holder of its
intention so to do.  Upon the written request of the Holder, given within 15
days after receipt of any such notice, to register any of

                                       5
<PAGE>

the Holder's shares (the "Shares") of Common Stock purchased upon exercise of
this Warrant (which request shall state the intended method of disposition
thereof), the Company will use its best efforts to cause the Shares as to which
registration shall have been so requested to be included in the securities to be
covered by the registration statement proposed to be filed by the Company, all
to the extent requisite to permit the sale or other disposition by the Holder
(in accordance with its written request) of such Shares so registered. No
request shall be made under this Section 12 in connection with any registration
of Common Stock in connection with a merger or acquisition transaction unless
such transaction is accompanied by an offering through which the Company is
seeking to obtain cash proceeds through the sale of Common Stock or other
securities convertible or exercisable for Common Stock. In the event that any
registration pursuant to this Section 12 shall be, in whole or in part, an
underwritten public offering of Common Stock, any request by the Holder pursuant
to this Section 12 to register Shares shall specify that either (i) such Shares
are to be included in an underwriting on the same terms and conditions as the
shares of Common Stock otherwise being sold through underwriters under such
registration, or (ii) such Shares are to be sold in the open market without any
underwriting, on terms and conditions comparable to those normally applicable to
offerings of common stock in reasonably similar circumstances. If, in connection
with any registration under this Section 12, the managing underwriters advise
the Company in writing that in their opinion the number of securities requested
to be included in such registration exceeds the number which can be sold in an
orderly manner in such offering within a price range acceptable to the Company,
the Company will include in such registration (i) first, the securities the
Company proposes to sell, (ii) second, the Restricted Stock (as such term is
defined in that certain Registration Rights Agreement, dated February 27, 1997,
by and between the Company and the Investors named therein), requested to be
included in such registration, pro rata among the holders of such Restricted
Stock on the basis of the number of shares requested to be registered by each
such holder, (iii) third, the Shares requested to be registered by the Holder,
and (iv) fourth, other securities requested to be included in such registration.
Notwithstanding anything to the contrary contained in this Section 12, in the
event that there is a firm commitment underwritten offering of securities of the
Company pursuant to a registration covering any shares of Common Stock and the
Holder does not sell the Holder's Shares to the underwriters of the Company's
securities in connection with such offering, the Holder shall refrain from
selling such Shares so registered pursuant to this Section 12 during the period
of distribution of the Company's securities by such underwriters and the period
in which the underwriting syndicate participates in the after market; provided,
                                                                      --------
however, that the Holder shall, in any event, be entitled to sell its Shares in
- -------
connection with such registration or otherwise commencing on the 180th day after
the effective date of such registration statement. The Company agrees to keep
any registration statement filed under this Section 12 current and effective for
a period of not less than nine (9) months.

  12.2  Expenses.  All expenses incurred by the Company in complying with
        --------
Section 12 hereof, including, without limitation, all registration and filing
fees, printing expenses, fees and disbursements of

                                       6
<PAGE>

counsel and independent public accountants for the Company, fees of the National
Association of Securities Dealers, Inc., transfer taxes, fees of transfer agents
and registrars, costs of insurance and the fees and expenses of counsel for the
Company, but excluding any Selling Expenses, are herein called "Registration
Expenses". All underwriting discounts and selling commissions applicable to the
sale of Shares are herein called "Selling Expenses". The Company will pay all
Registration Expenses in connection with each registration statement filed
pursuant to Section 12 hereof. In connection with each registration statement
filed pursuant to Section 12 hereof, the Holder will pay all Selling Expenses
directly related to the Holder's Shares.

  Section 13.  Notices to Warrant Holder.  In case the Company shall, at any
  ----------   -------------------------
time prior to the Expiration Date set forth in Section 14 hereof, (i) pay any
dividend or make any distribution upon the shares of its Common Stock, or (ii)
offer to the holders of Common Stock for subscription or purchase by them any
shares of stock of any classes or any other rights, or (iii) if any capital
reorganization of the Company, reclassification of the Common Stock of the
Company, consolidation or merger of the Company with or into another
corporation, or voluntary or involuntary dissolution, liquidation or winding up
of the Company shall be affected, then, in any such case, the Company shall
cause to be delivered to the Holder, at least 10 days prior to the date
specified in (a) or (b) below, as the case may be, a notice containing a brief
description of the proposed action and stating the date on which (a) a record is
to be taken or the stock transfer books of the Company are to be closed for the
purpose of determining the stockholders entitled to receive such dividend,
distribution or rights, or (b) a record is to be taken or the stock transfer
books of the Company are to be closed for the purpose of determining the
stockholders entitled to exchange their shares of Common Stock for securities or
other property deliverable upon such reclassification, reorganization,
consolidation, merger, dissolution, liquidation or winding up.

  Section 14.  Expiration Date. The Warrant shall terminate on the Expiration
  ----------   ---------------
Date and may not be exercised on or after such date.  The Expiration Date shall
be five years from the issuance date of this Warrant.

                                       7
<PAGE>

  Section 15.  Applicable Law.  This Warrant shall be construed in accordance
  ----------   --------------
with the laws of the Commonwealth of Virginia.

Attest:                        INFORMATION ANALYSIS INCORPORATED



_________________________      By:___________________________
Richard S. DeRose, Secretary      Sandor Rosenberg, President

                                       8
<PAGE>

                                 ASSIGNMENT FORM
                                 ---------------

Dated:__________________  For value received_____________________ hereby sells,

assigns and transfers unto


Name____________________________________________________________

                 (Please typewrite or print in block letters)

Address_____________________________________________________ and

appoints________________________________________________________________________

Attorney to transfer the said Warrant on the books of the within named Company

with full power of substitution in the premises.



                                     Signature________________________________

                                       9
<PAGE>

                                 PURCHASE NOTICE
                                 ---------------

  The undersigned hereby irrevocably elects to exercise its right to purchase
_________ shares of the $0.01 par value Common Stock of Information Analysis
Incorporated, such right being pursuant to a Warrant dated _____________, 200_,
and as issued to the undersigned by Information Analysis Incorporated, and
remits herewith the sum of $_________ in payment for same in accordance with the
Exercise Price specified in Section 7 of said Warrant.


INSTRUCTIONS FOR REGISTRATION OF STOCK

Name___________________________________________________________

Address________________________________________________________

                 (Please typewrite or print in block letters)


                                       Signature_______________________________



                                                                       EXHIBIT A

                                      10
<PAGE>

                                                                       EXHIBIT B
                              NOTICE OF CONVERSION

       (To be executed upon exercise of Warrant pursuant to Section 1.3)

  The undersigned hereby irrevocably elects to surrender its Warrant for such
Warrant Shares pursuant to the conversion right provisions of the within
Warrant, as provided for in Section 1 of such Warrant.

  Please issue a certificate or certificates for such Warrant Shares in the name
of, and pay cash for fractional shares pursuant to Section 4.3 of the Warrant.

                           Name:___________________________________________


                           (Please Print Name, Address and Social Security No.)


                           Address:________________________________________

                                   ________________________________________

                                   ________________________________________


                           Social Security No.:____________________________


                           Signature:______________________________________


                           NOTE:  The above signature should correspond
                                  exactly with the name on the first page
                                  of this Warrant or with the name of the
                                  assignee appearing in the assignment
                                  form below.


  And if said number of shares shall not be all the shares exchangeable or
purchasable under the within Warrant, a new Warrant is to be issued in the name
of the undersigned for the balance remaining of the Warrant Shares purchasable
thereunder.

                                       11

</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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