10-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K

(Mark One)

(X)	Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (Fee Required) For the fiscal year ended March 31, 2002
(  )	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (Fee Required) For the transition period from ______ to ______

Commission file Number 1-08964

Halifax Corporation
(Exact name of registrant as specified in its charter)

Virginia	54-0829246
(State or other jurisdiction of incorporation of organization)	(IRS Employer Identification No.)

5250 Cherokee Avenue, Alexandria, VA 22312
(Address of principal executive offices)

Registrant’s telephone number, including area code     (703) 750-2202

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Name of each exchange on which registered
Common Stock ($.24 par value)	American Stock Exchange

Securities registered pursuant to Section 12 (g) of the Act: None
(Title of class)

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

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.                (  )

     The aggregate market value of the voting stock held by non-affiliates of the Registrant as of June 5, 2002 was $5,533,608 computed based on the closing price for that date.

     Indicate the number of shares outstanding of each of the issuer’s classes of stock, as of the latest practicable date.

Class	Outstanding at June 5, 2002
Common Stock		2,175,613
$0.24 par value

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive proxy statement of the registrant for the Registrant’s 2002 Annual Meeting of Shareholders, which definitive proxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the registrants fiscal year end of March 31, 2002, are incorporated by reference into Part III.

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TABLE OF CONTENTS

		page
	PART 1
Item 1.	Business	3
Item 2.	Properties	9
Item 3.	Legal Proceedings	10
Item 4.	Submission of Matters to a Vote of Security Holders	10
	PART II
Item 5.	Market for Registrant’s Common Equity and Related Stockholder Matters	10
Item 6.	Selected Financial Data	11
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operation	11
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	20
Item 8.	Financial Statements and Supplementary Data	21
	Independent Auditors’ Report	21
	Consolidated statements of operations for the years ended March 31, 2002, 2001 and 2000	22
	Consolidated balance sheets as of March 31, 2002 and 2001	23
	Consolidated statements of cash flows for the years ended March 31, 2002, 2001 and 2000	24
	Consolidated statements of changes in stockholders’ deficit	25
	Notes to consolidated financial statements for the years ended March 31, 2002, 2001 and 2000	26
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	42
	PART III
Item 10.	Directors and Executive Officers of the Registrant	43
Item 11.	Executive Compensation	43
Item 12.	Security Ownership of Certain Beneficial Owners and Management	43
Item 13.	Certain Relationships and Related Transactions	44
Signatures		45
	PART IV
Item 14.	Exhibits, Financial Statement Schedules, and Reports on Form 8-K	46

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PART I

Item 1. Business

Halifax Corporation (“Halifax” or the “Company”), headquartered in Alexandria, Virginia provides a comprehensive range of information technology services and solutions to a broad base of commercial and governmental clients. Halifax operates nationwide, providing 24x7 technology solutions that can meet the most stringent enterprise computing requirements, while enabling our clients to focus on their own core competencies.

Our primary technology offices include locations in:

Harrisburg, Pennsylvania
Richmond, Virginia
Trenton, New Jersey
Charleston, South Carolina
Frederick, Maryland
Baltimore, Maryland
Dallas, Texas
Seattle, Washington

Our Company’s major initiatives consist of the following:

• Enterprise Maintenance Solutions

We provide clients with a comprehensive enterprise maintenance solution through a single point of contact. Clients are offered a unique mix of proven nationwide coverage; multi-vendor and multi-system support, project management expertise, and customized service programs. The result is a tailored solution that meets all of our clients’ desktop and network requirements, while reducing costs.

We provide maintenance services to over 25,000 locations and more than 350,000 units of equipment through a wide variety of custom designed programs. A 24x7 Dispatch Center, a state-of-the-art Depot Repair facility, inventory warehouses and a technical support staff support the enterprise maintenance clients. Halifax is an authorized service provider with many major manufacturers, including IBM, Compaq, Dell, Gateway, Hewlett Packard and Lexmark. Halifax works closely with clients to develop and implement the exact program needed to achieve their business objectives. We draw from a wide range of services expertise and established corporate technology base to deliver customized, results-driven enterprise maintenance solutions.

• Seat Management / IT Solutions

Seat Management is a highly customizable and comprehensive service that encompasses the management, operation, and maintenance of an organization’s desktops, servers, communications, printers, peripherals and associated network infrastructure and components. The program transfers complete PC desktop responsibility along with all its associated services from the client to Halifax. In return, the organization is afforded a full spectrum of computing resources for a fixed price per “seat” through a single ordering process.

Our Seat Management Services provide clients with a business solution that is flexible enough to suit the unique requirements of the organization, while still offering the client absolute control over their IT environment by defining the level of service required to support the end users and their missions.

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Our Seat Management Services provide numerous tangible benefits that can have an immediate impact on an organization. These benefits include the ability to:

• Reduce clients’ total cost of ownership

• Improve service levels and response times

• Reduce the administrative costs for procurement

• Increase user productivity through decreased downtime

• Amortize costs across thousands of users

• Focus IT staff on core responsibilities

• Eliminate the time and expense of storage, sale, and disposal of surplus equipment

• Simplify accounting with one report, one invoice, and one charge per user

• Create a single source of accountability for all PC desktop hardware, software, and services.

In addition, we provide clients with competitive advantages through innovative, cost-effective IT solutions that meet the unique business goals and technical requirements of an organization. Halifax specializes in the following IT services and solution areas:

Network Security

Our approach to network security assists clients in identifying risk and providing a clear roadmap for security planning. Halifax focuses on business strategy and security implementation. To solve the complex challenges of client’s business environments, we offer full-service security solutions while assisting clients in safeguarding their future success with solutions based on efficient processes and leading edge technology.

eBusiness/eGovernment

We have a mix of technical and creative resources to develop, deploy and support eBusiness/eGovernment initiatives. Halifax has been providing web services since 1995 and has assembled a group of skilled technical, creative, and project management professionals to provide clients with true interactive solutions to successfully deploy Internet-based business solutions. Moreover, Halifax partners with leading eBusiness partners such a SurfControl Software, Intel, and Business Intelligence, Inc. to provide clients with the latest available technology for this constantly evolving area.

Technical Enterprise Staffing

Our Enterprise Staffing group is responsible for delivering quality-based outsourcing, consulting, staff augmentation and placement services to clients. Our emphasis on maintaining high quality standards allows Halifax to service a diversified group of clients.

Hardware and Software Products

We are a proven provider of integrated IT solutions, with a professional staff of knowledgeable people who understand and anticipate customers’ needs. Moreover, we provide clients with a variety of software and hardware products that when combined with the expertise of Halifax system integration specialists, provide clients with a value added service.

Federal Government Communications Services

We serve the needs of various sectors of the Federal Government related to communication services in voice, data, and video; providing installation, engineering, maintenance and logistics support for communications projects worldwide. Principal customers include the US Army and the US Army National Guard. Orders are typically placed with the Company using multi-task support contracts including Long Term Life Cycle Support (LTLCS) and Digital Switch Systems Modernization Program (DSSMP).

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Our highly trained communications professionals are experienced in the installation of Local and Wide Area Networks (LANs and WANs). Most of these communications professionals have current/active security clearances with major federal agencies. This advantage gives Halifax the ability to install secure or non-secure networks in sensitive areas of the government without the standard delay other companies incur in the waiting process.

Cabling Infrastructure Services

Includes inside/outside cable plant design, installation and consulting. These services are accomplished using single and multimode fiber optic cable, air blown fiber optic and low control cable.

Voice Telecommunication

Includes expertise in meeting complete voice installation needs with all major switch manufacturers. Moreover, these services provide installation needs for Voice over IP, Voicemail, Telecom Management Systems, Interactive Voice Response, and ADSL.

Complete Project Support

Halifax provides comprehensive project support from initial concept, through testing, to follow-up maintenance. Components include:

• Site Survey and installation plans

• Engineering integration plans and specifications

• On-site engineering

• Installation and testing

• Drawings and documentation

• Training and maintenance

• Logistics support

Investment in Halifax involves various risks. Additionally, certain information contained herein may be deemed to constitute “forward looking statements”.

Forward Looking Statements

Certain statements in this Annual Report on Form 10-K constitute “forward-looking statements” within the meaning of the Federal Private Securities Litigation Reform Act of 1995. While forward-looking statements sometimes are presented with numerical specificity, they are based on various assumptions made by management regarding future circumstances over many of which we have little or no control. Forward-looking statements may be identified by words including “anticipate,” “believe,” “estimate,” “expect” and similar expression. We caution readers that forward-looking statements, including without limitation, those relating to future business prospects, revenues, working capital, liquidity, and income, are subject to certain risks and uncertainties that would cause actual results to differ materially from those indicated in the forward-looking statements. Factors that could cause actual results to differ from forward-looking statements include the concentration of our revenues, risks involved in contracting with our customers, difficulties we may have in attracting, and retaining management, professional and administrative staff, fluctuation in quarterly results, risks related to acquisitions, continued favorable banking relations, the availability of capital to finance operations and planned growth, ramifications of the embezzlement matter referenced herein, risks related to competition and our ability to continue to perform efficiently on contracts, and other risks and factors identified from time to time in the reports we file with the U.S. Securities and Exchange Commission (SEC). Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected.

Forward-looking statements are intended to apply only at the time they are made. Moreover, whether or not stated in connection with a forward-looking statement, our Company undertakes no obligation to correct or update a forward-looking statement should we later become aware that it is not likely to be achieved. If we were to update or correct a forward-looking statements, investors and others should not conclude that the Company will make additional updates or corrections thereafter.

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HISTORY

We were incorporated in Virginia in 1967 as Halifax Engineering, Inc., the successor to the business begun as a sole proprietorship in 1967. On April 1, 1970, Halifax acquired the Field Service Division of United Industries. This expanded the business base in technical services and field engineering. In 1991, our Company’s name was changed to Halifax Corporation.

On June 30, 1993, we acquired the services division of Electronic Associates, Inc. The division expanded our non-federal business and provided an additional service line for simulator operations, maintenance and integration.

On April 1, 1996, we completed the acquisition of privately held CMS Automation, Inc. (CMSA) a Richmond, Virginia computer systems integration company. On November 25, 1996, Halifax, through its wholly owned subsidiary, CMSA, acquired the ongoing computer network integration business of Consolidated Computer Investors, Inc. (CCI) of Hanover, Maryland. The combined entity name was changed to Halifax Technology Services Company (HTSC), a wholly owned subsidiary of Halifax Corporation. On April 1, 1999, HTSC was merged into Halifax Corporation and began operating as the Technology Services Division of the Halifax Corporation.

On May 31, 2000, we sold our Operational Outsourcing business (See Note 17 to the consolidated financial statements) which was non-core to the our long-term growth strategy. The Operational Outsourcing Division provided complete facilities management and maintenance outsourcing capabilities to assist institutional, government and commercial clients in outsourcing facilities operations.

As a result of our discontinuation of the outsourcing facilities operations, we operate in a single business segment; whereby we provide information technology services and solutions for commercial and government activities. These services include seat management, enterprise maintenance solutions, network security solutions ebusiness/egovernment development and communication services.

We maintain our principal executive offices at Halifax Office Park, 5250 Cherokee Avenue, Alexandria, Virginia 22312. Its telephone number is (703) 750-2202, and its website is www.hxcorp.com. The information on our web site is not and should not be considered part of this document and is not incorporated into this document by reference. This web address is only intended to be an inactive textual reference.

Embezzlement Matter

On March 18, 1999, we announced that an internal investigation had revealed a material embezzlement by the former controller of one of our subsidiaries. The embezzlement had a material effect on our financial statements. The embezzlement occurred over a four year period and aggregated approximately $15.4 million of which approximately $15 million was embezzled from us and $400 thousand prior to its acquisition by Halifax. After net recoveries through March 31, 2001, the cumulative net embezzlement loss to us before taxes was approximately $7.7 million. During the year ended March 31, 2001, we recovered $1.6 million (net of recovery costs of $1.2 million). See “Legal Proceedings” for information regarding the termination of the investigation commenced by the Securities and Exchange Commission related to this embezzlement matter.

Concentration of Risk

The Company has a number of major customers. Our largest customer accounted for 16%, 17% and 12% of the Company’s revenues for the years ended March 31, 2002, 2001 and 2000, respectively. Our five largest customers collectively accounted for 42%, 33% and 33% of revenues for the years ended March 31, 2002, 2001 and 2000, respectively. We anticipate that significant customer concentration will continue for the foreseeable future, although the companies which constitute the Company’s largest customers may change. The loss of any one of these customers may cause results of operations to vary materially from those anticipated.

Federal Government Contracts

A significant portion of our revenues have historically been derived from contracts and subcontracts with the United States Government. Excluding the sale of HTSI (“Discontinued Operations”) in fiscal years 2002, 2001 and 2000, we received revenues from 10, 15, and 29 Government contracts, respectively, which accounted for approximately 17%,

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26%, and 25%, respectively, of the our total revenues. The embezzlement matter referred to above did not involve or affect our fulfillment of its Government contracts nor its accounting thereof, nor did it trigger any termination provisions under government contracts.

The services of Halifax are performed under time-and-material, fixed-price contracts, subcontracts, Indefinite Delivery/Indefinite Quantity (IDIQ), and General Services Administration (GSA) schedule contracts. For time-and-material contracts, we receive a fixed hourly rate intended to cover salary costs attributable to work performed on the contracts and related indirect expenses, as well as a profit margin, and reimbursement for other direct costs. Under fixed-price contracts, the Government pays us an agreed-upon price for services rendered. Under fixed-price contracts and time-and-material contracts, the Company bears any risk of increased or unexpected costs that may reduce its profits or cause it to sustain losses.

Our Government contracts and subcontracts are subject to termination, reduction or modification as a result of changes in the Government’s requirements or budgetary restrictions. When we participate as a subcontractor, it is subject to the risk that the primary contractor may fail or become unable to perform the prime contract.

All Government contracts are subject to termination at the convenience of the Government. If a contract were to be terminated for convenience, we would be reimbursed for its allowable costs incurred up to the date of termination and would be paid a proportionate amount of the stipulated profits or fees attributable to the work actually performed. While we operate under the risk that such terminations may occur, such terminations have been rare.

Contracts with the Government are generally complex in nature and require Halifax to comply with numerous Federal regulations regarding discrimination in the hiring of personnel, fringe benefits for employees, safety, safeguarding classified information, responsibility for Government property, fire prevention, equipment maintenance, record keeping and accounting, management qualifications, drug free work place and numerous other matters. We have not experienced any material difficulty in complying with applicable Federal regulations.

We are sensitive to the present climate in the Government with respect to fraud, waste and abuse, and have adopted a Code of Business Ethics and Standards of Conduct and associated Company procedures. In addition, all employees receive training in ethics and associated Company procedures, and a hot line has been established to encourage reporting of potential ethical violations.

The books and records of Halifax are subject to audit by the Defense Contract Audit Agency (DCAA), which can result in adjustments to contract costs and fees. Audits by DCAA have been completed for years through fiscal year 1999 with minimal adjustment to the Company’s cost accounting records and contract revenue reimbursement.

With the sale of the Operational Outsourcing Division on May 31, 2000, our dependence on Government contracts has been reduced. However, as a result of increased federal funding for Homeland Security efforts we expect to increase government contracts as a percentage of revenue in the future.

Commercial and State/Municipal Government Contracts

We continue to work towards expanding our commercial and state/municipal government business. Commercial revenues are being pursued by targeting non-federal and outsourcing opportunities. State/municipal government contracts may expand from privatization opportunities.

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The following table reflects the distribution of revenues (in thousands) by type of customer excluding Discontinued Operations (see Management Discussion and Analysis for further discussion):

				Years Ended March 31,
	2002				2001				2000
State/Local	$	22,776	46	%	$	23,881	46	%	$	16,435	31	%
Commercial		18,082	37	%		14,504	28	%		23,394	44	%
Federal Government		8,541	17	%		13,365	26	%		13,701	25	%
Total	$	49,399	100	%	$	51,750	100	%	$	53,530	100	%

Type of Contracts

For the three years ended March 31, 2002, 2001 and 2000, 97%, 91% and 94%, respectively of our revenue received was from fixed priced revenue contracts.

Accounts Receivable

Trade accounts receivable at March 31, 2002 and 2001 represented 49% and 48% of total assets, respectively. Accounts receivable are comprised of billed and unbilled receivables. Billed receivables represent invoices presented to the customer. Unbilled receivables represent revenue earned with future payments due from the customer for which invoices will not be presented until a later period.

Backlog

Excluding Discontinued Operations, our funded backlog for services as of March 31, 2002, 2001 and 2000 was $73.0 million, $37.5 million, and $14.0 million, respectively. Of the $73.0 million of backlog at March 31, 2002, approximately 50% will be recognized during the next fiscal year. “Funded” backlog represents commercial orders and Government contracts to the extent that funds have been appropriated by and allotted to the contract by the procuring entity, some of which may span multiple years. Some of our contract orders provide for potential funding in excess of the monies initially provided by the Government. Additional monies are subsequently and periodically authorized in the form of incremental funding documents. The excess of potential future funding over funding provided represents unfunded backlog. A majority of our customer orders or contract awards and extensions for contracts previously awarded are received or occur at various times during the year and may have varying periods of performance.

Marketing

During 2002, we continued to build our direct sales and marketing organization with a focus on delivering additional services and solutions to our targeted markets and current client base. Our marketing efforts have focused on increasing brand awareness, creating a world-class web site, producing targeted sales aids, attending industry tradeshows, identifying high potential sales leads, and engaging in other public relations activities.

Halifax delivers services and solutions through a variety of distribution channels including contracting with Federal Government and State/Local Government entities. We continue to cultivate strong alliances with leading-edge technology vendors to deliver our services as well as to establish contracts directly with commercial clients in the Healthcare, Retail, and Utility markets. Our ability to successfully compete for Government contracts is largely dependent on recognizing Government requirements and opportunities, the submission of timely and responsive proposals, and a reputation for the successful completion of government contracts.

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Competition

We have numerous competitors in all areas in which we do business. Some competitors are large diversified firms having substantially greater financial resources and larger technical staffs than ours, including, in some cases, the manufacturers of the systems being supported. Customer in-house capabilities can also be deemed to be competitors in that they perform certain services which might otherwise be performed by our Company. It is not possible to predict the extent of competition which present or future activities of Halifax will encounter because of changing competitive conditions, customer requirements, technological developments and other factors. The principal competitive factors for the type of service business in which we are engaged are technology skills, quality, responsiveness, ability to perform within estimated time and expense limits and pricing.

Personnel

On March 31, 2002, we had 324 employees, of whom 7 were part-time and 5 were temporary employees. Because of the nature of services provided, many employees are professional or technical personnel with high levels of training and skills, including engineers, skilled technicians and mechanics. Our Company believes its employee relations are excellent. Although many of the our personnel are highly specialized, our Company has not experienced material difficulties obtaining the personnel required to perform under its contracts and generally does not bid on contracts where difficulty may be encountered in hiring personnel. We interface with a labor union on one of our government contracts. As of March 31, 2002, we believe relations with such union are excellent. Management believes that the future growth and success of the Company will depend, in part, upon its continued ability to retain and attract highly qualified personnel.

The key executive officers of the Company who are not also directors are:

Joseph Sciacca, age forty-nine, Vice President of Finance and Chief Financial Officer since May 2000. He was appointed Corporate Controller in December 1999 and provided consulting services to Halifax prior thereto beginning in March 1999. From September 1996 through September 1998, he was Chief Financial Officer of On-Site Sourcing, a legal document management services firm. From 1994 through 1996 he was a principal in a tax and consulting firm.

Jim L. May, age sixty-six, Vice President Operations. Mr. May has been with Halifax since April 1, 1997. Prior to joining our Company, Mr. May was an independent Consultant from 1992 to 1997. Prior to that time Mr. May was a Vice President of Decision Data Corporation. Other positions held include Vice President, Bell Atlantic Corporation, Sorbus Service Division. He also was President and Chief Operating Officer for Beta Products Corporation. Mr. May has also served on the Board of Directors for Forney Special Products.

Thomas J. Basile, age forty-eight, Vice President, Sales and Marketing since March 2001. Mr. Basile was Vice President of Sales for MATCOM, an information technology integration firm, from June 1998 to February 2001 where he established vertical market eBusiness solutions for health care, human resources and claims processing. He was director of consulting for FDC Technologies from March 1996 to June 1998, where he was responsible for the sales and delivery of various information systems. Earlier experience included marketing and sales positions with Andersen Consulting, Price Waterhouse Coopers, and Grant Thornton LLP.

James L. Sherwood, IV, age sixty, is Vice President, Contracts and Administration. He previously served as Vice President of the our Facilities Services Division. He has been with the Company and its subsidiaries since 1978.

Item 2. Properties

We are obligated under 17 short-term facility leases connected with our operations. The total rent expenses under existing leases were $677 thousand, $972 thousand and $1.1 million for the years ended March 2002, 2001 and 2000, respectively. The information contained in “Item 1 Business” regarding the Company’s primary technology offices is hereby Incorporated by Reference. See Note 12 to the consolidated financial statements.

On November 6, 1997, we sold our headquarters office complex for $5.25 million and leased back the building. The transaction generated other income of $1.49 million of which $715 thousand was deferred and is being amortized over the 12 year lease-back of its headquarters building. The net sale proceeds were applied to the reduction of debt.

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Item 3. Legal Proceedings

On January 9, 2001, the Securities & Exchange Commission issued a formal order directing private investigation of the Company and unnamed individuals concerning trading activity in our Company’s securities, periodic reports filed by management with the SEC, certain accounting and financial matters and internal accounting controls. We cooperated fully with the SEC. In addition, we received an SEC subpoena for documents related to these matters. The staff of the SEC advised that the inquiry was confidential and should not be construed as an indication by the Commission or its staff that any violation of law has occurred, or as an adverse reflection on any person, entity or security. We believe the investigation was primarily related to the previously reported embezzlement by one of our former employees. By letter dated May 31, 2002, the Company was advised that the investigation of the Company undertaken by the Staff of the Securities and Exchange Commission was terminated and no enforcement action was recommended to the Securities and Exchange Commission.

There are no material pending legal proceedings to which our Company is a party. We are engaged in ordinary routine litigation incidental to the our business to which Halifax is a party. While we cannot predict the ultimate outcome of these various legal proceedings, it is management’s opinion that the resolution of these matters should not have a material effect on our financial position or results of operations.

Item 4. Submission of Matters to a Vote of Security Holders

None

PART II

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters

Our Company’s Common Stock, par value $0.24, is listed on the American Stock Exchange.

At June 5, 2002, there were approximately 608 holders of record of our common stock as reported by our Company’s transfer agent.

The following table sets forth the quarterly range of high and low sales prices as reported by the American Stock Exchange for the last two fiscal years.

	Fiscal Year 2002				Fiscal Year 2001
Fiscal Quarter	High		Low		High		Low
April - June	$	2.67	$	2.00	$	7.25	$	5.00
July - Sept.		2.31		1.75		6.25		5.25
Oct. - Dec.		3.13		1.84		5.75		2.75
Jan. - March		4.35		2.50		3.87		2.50

We did not declare a cash dividend in either fiscal year 2002 or 2001, and there is no assurance we will do so in future periods. Our current bank loan agreement prohibits the payment of dividends. As a Virginia corporation, we may not declare and pay dividends on capital stock if the amount paid exceeds an amount equal to the excess of our net assets over paid-in capital or, if there is no excess, our net profits for the current and/or immediately preceding fiscal year.

Recent Sales of Unregistered Securities.

On December 13, 2001, Halifax issued 109,927 shares of our common stock to Research Industries, Inc., a company which Mr. Scurlock is a majority shareholder, President and director and Mr. Grover is a director, executive officer and shareholder. The market value of the stock on the date of transfer was $331 thousand. After the transaction, Research Industries owned 825,707 shares of Halifax, or 37.0% of its outstanding common stock. The common stock was issued in lieu of a cash payment for accrued interest on our subordinated debt to Research Industries, Inc.

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On December 1, 1999, the Company issued 35,480 shares of common stock with an aggregate value of $233 thousand in lieu of cash in payment of interest on notes due to Research Industries through October 31, 1999. The value of the stock was equal to the market price on date of issue. In December 2000, the Company made a cash payment of $200 thousand to Research Industries for interest due. At March 31, 2002, 2001 and 2000, interest payable to Research Industries was $101 thousand, $225 thousand and $125 thousand, respectively.

Item 6. Selected Financial Data

The following table includes certain selected financial data adjusted for Discontinued Operations (see Note 17 to the consolidated statements) of Halifax (amounts in thousands, except per share data). Our Company’s selected consolidated financial information set forth below together should be read in conjunction with the more detailed consolidated financial statements, including the related notes, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this document.

(In thousands except share data)			2002		2001			2000		1999			1998
Revenue – continuing operations			$	49,399	$	51,750		$	53,530	$	59,071		$	56,219
Income (loss) from continuing operations				302		(840	)		1,385		(5,316	)		(5,512	)
	Discontinued operations			—		244			928		17			(88	)
Gain on sale of discontinued operations				—		1,694			—		—			—
	Net income (loss)		$	302	$	1,098		$	2,313	$	(5,299	)	$	(5,600	)
Total Assets			$	19,675	$	17,966		$	27,808	$	38,735		$	30,967
Long-term obligations			$	11,295	$	6,886		$	12,793	$	12,505		$	12,923
Income (loss) per common share – basic continuing operations			$	.14	$	(.42	)	$	.70	$	(2.64	)	$	(2.75	)
	Discontinued operations			—		.12			.47		.01			(.04	)
	Gain on sale on discontinued operations			—		.84			—		—			—
			$	.14	$	.54		$	1.17	$	(2.63	)	$	(2.79	)
Income (loss) per common share – diluted Continuing operations			$	.14	$	(.42	)	$	.69	$	(2.64	)	$	(2.75	)
	Discontinued operations			—		.12			.46		.01			(.04	)
	Gain on sale on discontinued operations			—		.84			—		—			—
			$	.14	$	.54		$	1.15	$	(2.63	)	$	(2.79	)
Weighted average number of shares outstanding Basic				2,100,321		2,022,811			1,984,014		2,012,611			2,006,603
		Diluted		2,106,478		2,022,811			1,999,811		2,012,611			2,006,603
Dividends per common share			$	—	$	—		$	—	$	.20		$	.20

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Consolidated Results of Operations

The following discussion and analysis provides information that management believes is relevant to an assessment and understanding of our consolidated results of operations for the fiscal years ended March 31, 2002, 2001 and 2000 and financial conditions as of March 31, 2002 and 2001. The comparison of the 2002 results with 2001 as well as the comparison of the 2001 results with 2000 were affected by the sale of discontinued operations and embezzlement recovery activities. Results of operations and related notes there to have been adjusted for discontinued operations. As a result of our discontinuation of the Operational Outsourcing business, we operate in a single business segment; whereby we provide information technology services and solutions for commercial and government activities. These services include seat management, enterprise maintenance solutions, network security solutions ebusiness/egovernment development and communication services.

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											Years Ended March 31,
(In thousands except share data)
Results of Operations		2002			2001			Change			%			2001			2000			Change			%
Revenues		$	49,399		$	51,750			(2,351	)		-5	%	$	51,750		$	53,530		$	(1,780	)		-3	%
Cost of services			44,574			50,281			(5,707	)		-13	%		50,281			51,183			(902	)		-2	%
	Percent of revenues		91	%		97	%								97	%		96	%
Gross Margin			4,825			1,469			3,356			228	%		1,469			2,347			(878	)		37	%
			10	%		3	%								3	%		4	%
Marketing			619			—			N/M						—			—			—			—
			1	%		—			—						—			—			—			—
General and Administrative			3,210			2,886			324			11	%		2,886			2,096			790			38	%
	Percent of revenues		5	%		6	%								6	%		4	%
Operating income (loss)			996			(1,417	)		2,413			N/M			(1,417	)		251			(1,668	)		N/M
	Percent of revenues		2	%		-3	%								-3	%		0	%
Interest expense			634			955			(321	)		-34	%		955			1,066			(111	)		-10	%
Other expense (income)			—			45			(45	)		N/M			45			(55	)		100			N/M
Embezzlement recovery			—			(1,600	)		(1,600	)		N/M			(1,600	)		(2,250	)		(650	)		N/M
Income (loss) before taxes and discontinued operations			362			(817	)		1,179			N/M			(817	)		1,490			(2,307	)		N/M
Income tax expense			60			23			37			260	%		23			105			(82	)		-78	%
Income (loss) from continuing operations			302			(840	)		1,142			N/M			(840	)		1,385			(2,225	)		N/M
Discontinued operations			—			244			(244	)		N/M			244			928			(684	)		-74	%
Gain on sale of discontinued operations			—			1,694			(1,694	)		N/M			1,694			—			1,694			N/M
Net income		$	302		$	1,098			(796	)		-72	%	$	1,098		$	2,313			(1,215	)		-53	%
Earnings (loss) per share – basic
Continuing operations		$	.14		$	(.42	)							$	(.42	)	$	.70
Discontinued operations			—			.12									.12			.47
Gain on sale of discontinued operations			—			.84									.84			—
		$	.14		$	.54								$	.54		$	1.17
Earnings (loss) per share – diluted
Continuing operations		$	.14		$	(.42	)							$	(.42	)	$	.69
Discontinued operations			—			.12									.12			.46
Gain on sale of discontinued operations			—			.84									.84			—
		$	.14		$	.54								$	.54		$	1.15

N/M = not meaningful

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For the year ended March 31, 2002 compared to March 31, 2001

Revenues

For fiscal year 2002, net revenues of $49.4 million were 5% below 2001 net revenues, reflecting a shift in our business from hardware to services. Revenues declined principally in product delivery due to lengthening sales cycles relating to a general market slowdown in hardware orders. The reduction in hardware related revenue of approximately $8.0 million was partially offset by increases in services revenue of $5.6 million.

We experienced increases in professional services and long-term fixed-price service contracts. The expansion into new markets brought about by an increase in service contracts has increased the footprint of Halifax to include all 50 states and has expanded our services delivery capabilities to seven days a week twenty-four hours a day.

Revenues include the sale of product, consisting primarily of hardware and software, professional services, enterprise maintenance solutions and seat management services. Services revenue include monthly recurring fixed price contracts as well as time-and-material contracts. Amounts billed in advance of the services period are recorded as unearned revenue and recognized when earned. The revenue and related expenses associated with product sales are recognized when the products are delivered and accepted by the customer. Product sales were $10.7 million, $14.7 million and $18.2 million for the years ended March 31, 2002, 2001 and 2000, respectively.

Cost of Services

Operating costs and expenses includes the cost of product, the direct costs, and selling expenses, including fringe benefits, physical plant and other costs. Cost of product was $9.7 million, $13.3 million and $16.6 million for the years ended March 31, 2002, 2001 and 2000, respectively.

The largest components of these costs is product cost. Product cost is highly variable and is dependent on two factors. First, for product sales the cost of product varies directly with the increase or decrease in sales volume. Second, on long term fixed price contracts, product costs vary depending upon the call volume received from customers during the period. Higher call volume typically would result in higher cost of services.

Cost of services for the year ended March 31, 2002 were $44.6 million a decrease of $5.7 million, or 13% compared with 2001. The decrease in cost of services was directly related to the decrease in hardware sales volume discussed above. A large part of our support costs and expenses includes direct labor and infrastructure costs for our service offerings. The reductions in cost related to product sales of approximately $10.4 million are offset by increased costs of $4.7 million in providing services on the long-term recurring contracts. As a result, we experienced improvements in gross margin increasing from $1.5 million during the year ended March 31, 2001 to $4.8 million in 2002, an increase of 228%.

The improvement in gross margin was attributable to the favorable change in sales mix to higher margin long-term services contracts and to continued cost containment policies.

Marketing, General and Administrative

Marketing, general and administrative expenses increased to $3.8 million from $2.9 million for the year ended March 31, 2002 as compared to fiscal year 2001. The increase of approximately $900 thousand or 33% is a result of several factors. During the year ended March 31, 2002 we created a company-wide marketing group. The marketing group was created to facilitate a nationwide sales campaign. In doing so we refined and redirected our sales force and strategy, focusing our direct sales efforts on specific targeted accounts and growing our base of strategic partners to strengthen our indirect sales channels, which has resulted in growth in higher margin service revenues. Marketing expense for the year ended March 31, 2002 was $619 thousand, which accounted for over two-thirds of the increase in marketing, general and administrative expenses over the prior year. The remaining increase in costs for marketing, general and administrative expense is attributable to higher professional fees, consulting services and increases in business insurance brought about by general market conditions.

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Depreciation and Amortization

Depreciation and amortization expenses for the year ended March 31, 2002 were $907 thousand compared to $998 thousand in 2001. The decrease of depreciation and amortization was a result of an increase in fully depreciated assets and a decrease in capital expenditures as compared to prior year.

Operating Income

For the year ended March 31, 2002, we had operating income of $1.0 million compared to an operating loss of $1.4 million over the same period last year. As discussed above the principal reasons for the improved performance were changes in revenue mix to higher margin longer term service contracts, the positive effect of on-going cost containment measures, and as a result, lower operating costs.

Interest Expense

Interest expense consisted primarily of interest on long-term debt. Interest expense for the year ended March 31, 2002 was $634 thousand compared to $955 thousand in 2001. The primary reason for lower expense was the significant reduction in interest rates during the year as a result of the general decline in market rates.

Non-Operational items

During the year ended March 31, 2002, we had no embezzlement recovery activity compared to a recovery of $1.6 million for the year ended March 31, 2001. During the year ended March 31, 2001 Halifax sold its Operational Outsourcing division, and accordingly, recorded income from discontinued operations and a gain on the sale of discontinued operations of $244 thousand and $1.7 million, respectively.

Income Taxes

We provided for a provision for income tax expense of $60 thousand for fiscal 2002 compared to $23 thousand in 2001. Income taxes are primarily related to state tax obligations. Our Company has a net operating tax loss carryforward of approximately $10 million which expires through 2019 and is available to substantially reduce its income tax expense for future periods.

Net Income

For the year ended March 31, 2002, net income was $302 thousand or $.14 per share, compared to $1.0 million or $.54 for the year ended March 31, 2001. The net income in 2001 was generated by embezzlement recoveries and the sale of the operational outsourcing division. Excluding these events from 2001, we would have reported a loss of $2.4 million during 2001.

For the year ended March 31, 2001 compared to March 31, 2000

Revenue

For the year ended March 31, 2001, total revenue decreased 3% to $51.8 million as compared to $53.5 million, for fiscal year 2000 a decrease of $1.7 million. The decrease was due to reductions in product sales and service orders caused by lengthening purchase decrease cycles related to the general slow down in the economy.

Cost of Services

Cost of services for the fiscal year ended March 31, 2001 decreased 2% from 2000 which was in proportion to the decrease in hardware and services revenue discussed above. A large part of cost of services includes direct labor and infrastructure costs which were semi-fixed in nature and included a charge for inventory obsolescence in fiscal year 2001 of $700 thousand due to uncertainties in the market place.

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Gross Margins

For fiscal year 2001, gross margins decreased $878 thousand or 37% to $1.5 million compared to $2.3 million in March 31, 2000. The reduction in product sales, lower margins due to increased competition, longer selling cycles and excess capacity were the principal reasons for the decline in gross margins.

General and Administrative Expenses

During the year ended March 31, 2001 general and administrative expenses increased 38% or $790 thousand over fiscal 2000. The increase in costs is attributable to increases in professional fees, business insurance costs and upgrade and consolidation of our accounting systems.

Operating Income

We incurred an operating loss of $1.4 million during the fiscal year ended March 31, 2001 due primarily to the reductions in revenue, lower margins and the increase in general and administrative expenses as discussed above. For the year ended March 31, 2000, Halifax had operating income of $251 thousand.

Interest and Other Income or Expense

Interest expense declined $111 thousand or 10% to $955 thousand during the year ended March 31, 2001 compared to 2000 principally due to reduced borrowing and lower interest rates.

Other expense of $45 thousand in 2001 resulted from the disposition of certain obsolete fixed assets.

Embezzlement Recovery

During the years ended March 31, 2001, net embezzlement recoveries were $1.6 million, (net of recovery costs of $1.2 million); compared to $2.3 million (net recovery costs of $250 thousand, during the year ended March 31, 2000).

Income Taxes

At March 31, 2001, we recorded a provision for income tax of $23 thousand which was primarily for minimum state taxes. At March 31, 2000, we provided $105 thousand for income tax expense. We had remaining net operating loss carryforwards amounting to approximately $10.3 million at March 31, 2001.

Discontinued Operations

The net of tax results for Discontinued Operations for 2001 was $244 thousand compared to $928 thousand for 2000. The decrease in net income from discontinued operations in fiscal year 2001 was due to the shortened period of operations as a result of the disposition on May 31, 2000. We recorded a gain on the sale of discontinued operations of $1.7 million (net of income tax of $100 thousand) during fiscal year 2001.

Net Income (Loss) from Continuing Operations

The 2001 net loss of $840 thousand from continuing operations was due primarily to higher operating expenses offset by embezzlement recoveries of $1.6 million. The 2000 net income from operations of $1.4 million was principally the result of embezzlement recoveries of $2.25 million.

Net Income

For the year ended March 31, 2001, net income decreased $1.2 million to $1.0 million, a decrease of 53%. The major components that comprised the decrease were lower margins on sales of product and services, higher general and administrative expenses, lower embezzlement recoveries offset by income from and the gain on sale of discontinued operations. Net income for the year ended March 31, 2000 was $2.3 million, with $2.2 million of income related to embezzlement recoveries and $928 thousand related to discontinued operations.

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Liquidity and Capital Resources

Our future operating results may be affected by a number of factors including uncertainties relative to national economic conditions, terrorism, especially as they affect interest rates, industry factors and our ability to successfully increase our business and effectively manage expenses.

We must continue to effectively manage expenses in relation to revenues by directing new business development towards markets that complement or improve our existing service lines. Management must also continue to emphasize operating efficiencies through cost containment strategies, reengineering efforts and improved service delivery techniques.

Halifax serves its customer base by providing consulting, integration, networking, maintenance and installation services. This industry has been characterized by rapid technological advances that have resulted in frequent introduction of new products, product enhancements and aggressive pricing practices, which also impacts pricing of service activities. Our operating results could be adversely affected by industry-wide pricing pressures, the ability to recruit, train and retain personnel integral to the our operations and the presence of competitors with greater financial and other resources. Also, our operating results could be adversely impacted should our Company be unable to achieve the revenue growth necessary to provide profitable operating margins in various operations. Our plan for growth includes intensified marketing efforts, an expanding national sales program, strategic alliances and, where appropriate, acquisitions that expand market share. There can be no assurances these efforts will be successful, or if successful will be on terms advantageous to us.

Liquidity and Capital Resources (In thousands)	2002			2001			2000
Cash balance at March 31	$	111		$	231		$	1,800
Working capital at March 31	$	5,443		$	(102	)	$	3,481
Net cash (used) provided by operations before impact of embezzlement	$	(3,553	)	$	520		$	1,641
Net cash recovered related to embezzlement	$	—			1,600			5,078
Net cash provided by (used in) operating activities	$	(3,553	)	$	2,120		$	6,719
Net cash (used in) provided by investment activities	$	(344	)	$	4,869		$	(847	)
Net cash provided (used in) by financing activities	$	3,777		$	(8,558	)	$	(4,072	)

At March 31, 2002, we had working capital of $5.4 million and a current ratio of 1.59. The increase in working capital is attributable to net earnings and increases in long-term debt.

At March 31, 2001, we had negative working capital of $102 thousand and a current ratio of 0.99. The reduction in working capital was attributable to the loss from operations and significant curtailment of long-term debt. Working capital was provided from the sale of the operational outsourcing division, embezzlement recoveries and bank borrowings.

A summary of future minimum lease payments is in Note 12 to the consolidated financial statements. Capital expenditures in 2002 were $344 thousand, compared to $631 thousand in 2001 a substantial reduction from prior years. We anticipate fiscal year 2003 technology requirements to result in greater capital expenditures of approximately $400 thousand. Our Company continues to sublease a portion of its headquarters building generating approximately $400 thousand annually.

On March 6, 2002, we entered into a new revolving credit agreement with an $8 million maximum credit line. The loan has a term of 25 months maturing on April 6, 2004 and bears interest at the bank’s prime rate plus 3/4%. Advances under the revolving agreement are collateralized by a first priority security interest in all of our assets as defined in the agreement. Amounts available under this agreement are determined by applying stated percentages to the eligible receivables. The agreement has one financial covenant that requires the stockholders’ deficit not increase above $1.4 million. At March 31, 2002, our stockholders’ deficit was $1.3 million. Our recent results have shown increased profitability on contracts due to a combination of efficiencies gained in the change of mix in our business to more services as well as reduced cost achieved through containment measures including reducing occupancy cost, consolidation of administrative functions, reduced staffing and higher utilization of our workforce. Our Company believes that these recent profitable trends will continue, thereby allowing us to meet the financial covenant. However, there can be no assurance we will continue to meet this covenant. Should stockholders’ deficit rise above $1.4 million, we would work with the bank to arrive at a temporary equitable solution.

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On March 12, 2002, the maximum amount of the loan was increased to $9.0 million and on April 30, 2002 the maximum amount of the loan was increased to $10.47 million. The increase of $2.47 million is for a period of six months. Effective October 30, 2002 the maximum amount of the loan will return to $8 million. Borrowings under the revolving line of credit at March 31, 2002 were $7.3 million. The extensions on the line of credit were to assure that we would have sufficient cash available for start-up costs related to new contracts or contract modifications and were not necessary to meet our current cash flow needs. The nature of our business requires us to invest a significant amount of cash upfront that will later be billed to our customers. We do not anticipate requiring the additional funds available beyond the extension period, but rather wanted the assurance that we have the capacity to actively pursue new contracts and effectively serve our existing customers.

If our customer base were to remain constant, we expect to have approximately $2.5 million available on our revolving line of credit through October 31, 2002 based on our forecasted projections. If we were to obtain a significant new contract or contract modification, our availability may be less as we are generally required to invest significant cash upfront that will later be billed to customers.

In November, when our revolving line of credit returns to its original maximum amount of $8 million, we project however, that there will be sufficient availability on the line to fund operations based upon improved cash receipts from contract billing and continued forecasted revenue growth and earnings increases. Our working capital is projected to increase steadily throughout fiscal year 2003.

On December 8, 2000, we entered into a revolving credit agreement with an $8 million maximum credit line. Amounts available under this agreement are determined by applying stated percentages to our Company’s eligible and unbilled receivables. As of March 31, 2001, we had an outstanding balance of $2.9 million with an additional $2.0 million available on the line of credit. The loan was paid in full on March 6, 2002.

The Revolving Credit Agreements prohibit the payment of dividends or distributions as well as limit the payment of principal or interest on Subordinated Debt. Interest expense on Subordinated Debt is accrued on a current basis. The subordinated debt agreements with an affiliate totaled $4 million at March 31, 2001 and 2000. Principal repayment and interest payable on the subordinated debt agreements have been extended to April 6, 2004. (See Note 6 to the consolidated financial statements.)

On December 13, 2001, Halifax issued 109,927 shares of common stock in the amount of $331 thousand in lieu of cash in payment of interest on notes due to Research Industries through November 30, 2001. The value of the stock was equal to the market price on date of issue. January 2, 2002, we made a cash payment of $100 thousand to Research Industries for interest due . At March 31, 2002 and 2001, interest payable to Research Industries was $101 thousand and $225 thousand, respectively.

During the year ended March 31, 2000, the Company paid $105 thousand to a consultant who is now an officer of the Company.

In September 1999, we entered into a note payable arrangement with a major supplier of digital communications switches payable over 18 months with interest at 8.5%. The balance of the note due at March 31, 2001 was $632 thousand and was paid in full during fiscal year 2002.

Our Company believes that funds generated from operations, bank borrowings, and investing activities should be sufficient to meet its current operating cash requirements through July 1, 2003, although there can be no assurances that all the aforementioned sources of cash can be realized.

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The following are our contractual obligations associated with lease commitments, debt obligations and consulting commitments. (In thousands)

Year ended	Bank Line		Subordinated		Consulting		Operating
March 31,	of Credit		Debt (1)		Commitment (2)		Leases		Total
2003		—		—		50		669		719
2004		7,294		4,000		50		574		11,918
2005		—		—		50		477		527
2006		—		—		50		497		547
2007		—		—		50		482		532
Thereafter		—		—		100		991		1,091
Total		7,294		4,000		350		3,690		15,334

(1)  A related party (See Note 13), holds $2 million face amount of the Company’s 7% Convertible Subordinated Debenture dated January 27, 1998 and $690 thousand, $310 thousand, $500 thousand, and $500 thousand face amount of the Company’s Promissory Notes dated October 8, 1998, October 13, 1998, November 2, 1998 and November 5, 1998, respectively. These notes are each subordinate to the bank line of credit and cannot be paid without the consent of its bank.

(2)  The Company has a consulting advisory service commitment with a former CEO of the Company. From April 1, 1999 through March 31, 2009, the Company is to pay the former CEO $50 thousand per year for consulting services.

Application of Critical Accounting Policies

The methods, estimates and judgements we use in applying our most critical accounting policies have a significant impact on the results we report in our financial statements. The Security and Exchange Commission has defined critical accounting policies as policies that involve critical accounting estimates that require (i) management to make assumptions that are highly uncertain at the time the estimate is made, and (ii) different estimates that could have been reasonably used for the current period, or changes in the estimates that are reasonably likely to occur from period to period, which would have a material impact on the presentation of our financial condition, changes in financial condition or in results of operations. Based on this definition our most critical policies include: provision for loss contracts, inventory valuation reserve and allowances for doubtful accounts, which impact cost of sales and gross margin; and the assessment of recoverability of goodwill and other intangible assets, which impacts write-offs of goodwill and intangibles. We discuss these policies further below, as well as the estimates and management’s judgements involved. We also have other key accounting policies, such as policies for revenue recognition, including unbilled accounts receivable and deferred revenue, as well as policies governing the estimate of the useful life of our property and equipment. We believe these policies either do not generally require us to make estimates and judgements that are as difficult or subjective, or it is less likely that they would have a material impact on our reported results of operation for a given period.

We recognize service revenue based on contracted fees earned, net of credits and adjustments as the service is performed. Revenue from long-term fixed unit price contracts is recognized monthly as service is performed based upon the number of units covered and the level of service requested. The pricing in these contracts is fixed as to the unit price but varies based upon the number of units covered and service level requested. Revenue from time-and-material professional service contracts is recognized upon the completion of the service. Certain seat-management contracts include the delivery and installation of new equipment combined with multi-year service agreements. Revenue related to the delivery and installation of equipment under theses and certain other contracts is recognized upon the completion of both the delivery and installation. Product sales were $10.7 million, $14.7 million and $18.2 million, with corresponding cost of sales of $9.7 million, $13.3 million and $16.6 million for the years ended March 31, 2002, 2001 and 2000, respectively. Revenue related to the fixed-price service agreements is recognized ratably over the life of the agreement. Invoices billed in advance are recognized as revenue when earned. Revenues are a function of the mix of long-term services contracts and time-and-material professional services. Revenues from time-and-material professional services are difficult to forecast because of wide fluctuations in demand. The long-term contracts are more predictable and, as a result, the revenue stream is less difficult to forecast. The gross margins on long-term contracts vary inversely with the call volume received from customers in any one reporting period. Our expectation is that we will see continued growth in long-term contracts, which historically have had higher gross margins and continued downward pressure on hardware and software margins.

18

Provision for loss contracts, if any, are recognized in the period in which they become determinable. Historically, we have had few loss contracts. The gross margin should benefit from revenue growth and continued cost containment strategies implemented. Our gross margin varies based on the level of long-term professional services compared to product volume, including the mix of types of product being sold.

Our policy for valuation of inventory, including the determination of obsolete or excess inventory requires us to estimate the future demand based on prior usage to support our contracts and anticipated future demand. If the demand is less than anticipated, we would be required to record additional inventory reserves, which would have a negative impact on our gross margins. For the last three years, our inventory reserve has ranged from 12% to 19% of inventory.

We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We base our estimates on the aging of our accounts receivable balances and our historical write-off experience, net of recoveries. If the financial condition of our customers were to deteriorate, additional allowances may be required. We believe the accounting estimate related to the allowance for doubtful accounts is a “critical accounting estimate” because changes in it can significantly affect net income and treatment of the allowance requires us to anticipate the economic viability of our customers and requires a degree of judgement. Over the past three years bad debts expenses represented approximately .6% to 1.4% of revenue.

The Company routinely transfers receivables to a third party in connection with equipment leased to end users. The credit risk passes to the third party at the point of sale of the receivables. Under the provisions of Statement of Financial Accounting Standards No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities,” transfers were accounted for as sales and as a result, the related receivables have been excluded from the accompanying Consolidated Balance Sheets. The amount paid to the Company for the receivables by the transferee is approximately equal to the Company’s carrying value and therefore the gain recognized is not material. The end user remits its monthly payments directly to an escrow account held by a third party from which payments are made to the transferee and the Company, for various services provided to the end users. The Company provides limited monthly servicing whereby the Company invoices the end user on behalf of the transferee.

We are in the process of adopting Financial Accounting Standards Nos. 141 and 142 on accounting for business combinations and goodwill. Accordingly we will no longer amortize goodwill, but will continue to amortize other acquisitions related costs. We expect amortization of acquisition related intangibles to be approximately $15 thousand, down from $213 thousand of amortized goodwill and acquisition related intangibles and costs in fiscal year 2002. We assign useful lives for long-lived assets based on periodic studies of actual assets lives and our intended use for those assets. We assess the impairment of long-lived assets whenever events or changes in circumstances indicate these carrying values may not be recoverable. Any changes in these asset lives would be reported in our statement of operations as soon as any change in estimate is determined. There have been no material changes in asset lives during the three years ended March 31, 2002.

In conjunction with the implementation of the new accounting rules for goodwill, as of the beginning of fiscal year 2003, we have begun the initial goodwill impairment test required by SFAS 142. Although it has not yet completed its analysis, the Company is not expecting an impairment loss to be recognized upon the adoption of SFAS 142. According to our accounting policy under the new rules, we will perform a similar review annually, or earlier if indicators of a potential impairment exists. Our impairment review is based on a market approach that uses valuation ratios for publicly traded companies based on the ratio of market price of their stock and/or invested capital to various financial parameters. Halifax has been designated as a single reporting unit for financial reporting purposes. Under this method, we compare the fair value of the reporting unit to its carrying value inclusive of goodwill. If the fair value exceeds the carrying value their is no impairment and no further analysis is necessary. If our revenue and cost forecast may not be achieved, we fail to have continued profitability and market acceptance, or if the market conditions in the stock market cause the valuation to decline, we may incur charges for impairment of goodwill.

We adopted Financial Accounting Standards No. 144 on accounting for the impairment or disposal of long-lived

19

assets effective April 2, 2002. The adoption of this standard did not have any material impact on our financial statements.

We currently expect our tax rate to be approximately 7% for fiscal year 2003. This estimate is based upon current tax laws, the current estimate of earnings, and the utilization of our net operating loss carry-forward.

Our future results of operations and other forward looking statements contained herein involve a number of risks and uncertainties — in particular plans to cultivate new business, the ability to expand our footprint, revenues, pricing, gross margins and costs, capital spending, depreciation and amortization and potential future impairment of goodwill. In addition to the factors discussed above, among other factors that could cause actual results to differ materially are the following: business and economic conditions in the areas we serve, possible disruption in commercial activities related to terrorist activities, reduced end-user purchases relative to expectations, pricing pressures and excess or obsolete inventory and variations in inventory values.

We believe that we have the service and product offerings, facilities, personnel and competitive resources for continued business success, however future revenues, costs, margins and profits are influenced by a number of factors, including those discussed above, all of which are difficult to forecast.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Our Company is exposed to changes in interest rates, primarily as result of bank debt to finance its business. The floating interest debt exposes us to interest rate risk, with the primary interest rate exposure resulting from changes in the prime rate. It is assumed in the table below that the prime rate will remain constant in the future. Adverse changes in the interest rates or our inability to refinance our long-term obligations may have a material negative impact on our operations.

The definitive extent of our interest rate risk is not quantifiable or predictable because of the variability of future interest rates and business financing requirements. We do not believe such risk is material. We do not customarily use derivative instruments to adjust our interest rate risk profile.

The information below summarizes Halifax’s sensitivity to market risks as of March 31, 2002. The table presents principal cash flows and related interest rates by year of maturity of our funded debt. Note 6 to the consolidated financial statements contains descriptions of our debt and should be read in conjunction with the table below (In thousands).

Long-term debt (including current maturities)	2004		Total Debt		Fair Value
Revolving credit agreement at the PRIME rate plus .75%. Due April 6, 2004. Average interest rate of 5.0%.	$	7,295	$	7,295	$	7,295
7% subordinated note from affiliate due April 6, 2004.		2,000		2,000		2,000
8% subordinated notes from affiliate due April 6, 2004.		2,000		2,000		2,000
Total fixed debt		4,000		4,000		4,000
Total debt	$	11,295	$	11,295	$	11,295

At present, all transactions are billed and denominated in U.S. dollars and consequently, we do not currently have any material exposure to foreign exchange rate fluctuation risk.

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Item 8. Financial Statements and Supplementary Data

INDEPENDENT AUDITORS’ REPORT

To the Board of Directors and Stockholders of
Halifax Corporation:
Alexandria, VA

We have audited the accompanying consolidated balance sheets of Halifax Corporation and subsidiaries as of March 31, 2002, and 2001, and the related consolidated statements of operations, changes in stockholders’ deficit, and cash flows for each of the three years in the period ended March 31, 2002. Our audit also included the financial statement schedule listed in the Index at Item 14(a)2 for the years ended March 31, 2002, 2001 and 2000. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provides a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Halifax Corporation and subsidiaries at March 31, 2002, and 2001, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2002, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

Deloitte & Touche LLP

McLean, VA
May 27, 2002

21

HALIFAX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 2002, 2001 AND 2000
(Amounts in thousands except share and per share data)

		2002			2001			2000
Revenues		$	49,399		$	51,750		$	53,530
Operating costs and expenses:
	Cost of services		44,574			50,281			51,183
	Gross margin		4,825			1,469			2,347
	Marketing expense		619			—			—
	General and administrative		3,210			2,886			2,096
Operating income (loss)			996			(1,417	)		251
Interest expense			(634	)		(955	)		(1,066	)
Other (expense) income			—			(45	)		55
Embezzlement recovery			—			1,600			2,250
Income (loss) from continuing operations before income taxes			362			(817	)		1,490
Income tax expense			60			23			105
Income (loss) from continuing operations			302			(840	)		1,385
Income from discontinued operations net of income tax expense of $0 and $35 in 2001 and 2000, respectively			—			244			928
Gain on sale of discontinued operations (net of income taxes of $100)			—			1,694			—
Net income		$	302		$	1,098		$	2,313
Earnings (loss) per common share-basic:
Continuing operations		$	.14		$	(.42	)	$	.70
Discontinued operations			—			.12			.47
Gain on sale of discontinued operations			—			.84			—
		$	.14		$	.54		$	1.17
Earnings (loss) per common share-diluted:
Continuing operations		$	.14		$	(.42	)	$	.69
Discontinued operations			—			.12			.46
Gain on sale of discontinued operations			—			.84			—
		$	.14		$	.54		$	1.15
Weighted average number of common shares outstanding – basic			2,100,321			2,022,811			1,984,014
Weighted average number of common shares outstanding – diluted			2,106,478			2,022,811			1,999,811

See notes to consolidated financial statements

22

HALIFAX CORPORATION
CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2002 AND 2001
(Amounts in thousands except share and per share data)

		March 31,
		2002			2001
ASSETS
CURRENT ASSETS
	Cash	$	111		$	231
	Trade accounts receivable, net		9,733			8,643
	Inventory, net		4,508			2,889
	Prepaid expenses and other current assets		294			612
TOTAL CURRENT ASSETS			14,646			12,375
PROPERTY AND EQUIPMENT, net			1,604			1,956
GOODWILL AND INTANGIBLE ASSETS, net			2,981			3,192
OTHER ASSETS			444			443
TOTAL ASSETS		$	19,675		$	17,966
LIABILITIES AND STOCKHOLDERS’ DEFICIT
CURRENT LIABILITIES
	Accounts payable	$	4,331		$	5,024
	Accrued expenses		3,825			5,966
	Deferred maintenance revenue		1,000			855
	Current portion of long-term debt		—			632
	Income taxes payable		47			—
TOTAL CURRENT LIABILITIES			9,203			12,477
LONG-TERM BANK DEBT			7,295			2,886
SUBORDINATED DEBT – AFFILIATE			4,000			4,000
DEFERRED INCOME			457			516
TOTAL LIABILITIES			20,955			19,879
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ DEFICIT
Preferred stock, no par value authorized 1,500,000, issued 0 shares			—			—
Common stock, $.24 par value:
Authorized - 6,000,000 shares
Issued – 2,432,297 in 2002 and 2,322,370 in 2001
Outstanding - 2,175,613 in 2002 and 2,065,686 in 2001			588			562
Additional paid-in capital			5,015			4,710
Accumulated deficit			(6,671	)		(6,973	)
Less treasury stock at cost – 256,684 shares			(212	)		(212	)
TOTAL STOCKHOLDERS’ DEFICIT			(1,280	)		(1,913	)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT		$	19,675		$	17,966

See notes to consolidated financial statements

23

HALIFAX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2002, 2001 AND 2000
(Amounts in thousands)

				2002			2001			2000
Cash flows from operating activities:
Net income				$	302		$	1,098		$	2,313
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
	Depreciation and amortization				907			998			1,055
	Loss on sale or disposal of property and equipment				—			45			—
	Gain on sale of discontinued operations				—			(1,694	)		—
	Common stock issued in lieu of interest				331			—			233
	Changes in assets and liabilities:
			(Increase) decrease in accounts receivable		(1,090	)		4			10,242
			(Increase) decrease in inventory		(1,619	)		1,501			(441	)
			Decrease in prepaid expenses and other current assets		318			28			2,851
			(Increase) decrease in other assets		(1	)		417			(291	)
			Decrease in income tax receivable		—			—			808
			Decrease in accounts payable, accrued expenses and other current liabilities		(2,834	)		(444	)		(9,037	)
			Increase (decrease) in income taxes payable		47			(36	)		36
			Increase (decrease) in deferred maintenance revenue		145			259			(992	)
			Decrease in deferred income		(59	)		(56	)		(58	)
		Net cash provided by (used in) operating activities			(3,553	)		2,120			6,719
Cash flows from investing activities:
	Purchase of property and equipment				(344	)		(631	)		(847	)
	Net proceeds from sale of discontinued operations				—			5,500			—
Net cash (used in) provided by investing activities					(344	)		4,869			(847	)
Cash flows from financing activities:
	Proceeds from debt borrowings				31,909			25,003			43,207
	Repayments of debt				(28,132	)		(34,240	)		(46,677	)
	Restricted cash				—			650			(650	)
	Proceeds from sale of stock upon exercise of stock options				—			29			48
Net cash provided by (used in) financing activities					3,777			(8,558	)		(4,072	)
Net (decrease) increase in cash					(120	)		(1,569	)		1,800
Cash at beginning of year					231			1,800			—
Cash at end of year				$	111		$	231		$	1,800

See Note 15 for supplemental cash flow information.
See notes to consolidated financial statements

24

HALIFAX CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT
FOR THE YEARS ENDED MARCH 31, 2002, 2001, AND 2000
(Amounts in thousands except
share and per share data)

	Common Stock				Additional		Retained			Treasury Stock
					Paid-In		Earnings
	Shares		Par Value		Capital		(Deficit)			Shares		Cost			Total
March 31, 1999		2,270,090	$	549	$	4,413	$	(10,384	)		256,684	$	(212	)	$	(5,634	)
Net income		—		—		—		2,313			—		—			2,313
Exercise of Stock Options		10,800		2		46		—			—		—			48
Issuance of
Common Stock		35,480		9		224		—			—		—			233
March 31, 2000		2,316,370	$	560	$	4,683	$	(8,071	)		256,684	$	(212	)	$	(3,040	)
Net income		—		—		—		1,098			—		—			1,098
Exercise of Stock Options		6,000		2		27		—			—		—			29
March 31, 2001		2,322,370	$	562	$	4,710	$	(6,973	)		256,684	$	(212	)	$	(1,913	)
Net income		—		—		—		302			—		—			302
Issuance of Common Stock		109,927		26		305		—			—		—			331
March 31, 2002		2,432,297	$	588	$	5,015	$	(6,671	)		256,684	$	(212	)	$	(1,280	)

See notes to consolidated financial statements.

25

HALIFAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2002, 2001 AND 2000

1.        SIGNIFICANT ACCOUNTING POLICIES AND BUSINESS ACTIVITY

Business Activity — Halifax Corporation (the “Company”) provides information technology services and solutions for commercial and government activities. These services include seat management, enterprise maintenance solutions, network security solutions, eBusiness/eGovernment development and communication services.

Principles of Consolidation — The Company’s consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Wholly-owned subsidiaries include Halifax Engineering, Inc. and Halifax Realty, Inc. Halifax Technical Services, Inc. (HTSI) was sold effective May 31, 2000 (see Note 17). All significant intercompany transactions are eliminated in consolidation.

Accounts Receivable — Receivables are primarily attributable to trade receivables in the ordinary course of business. Allowance for doubtful accounts is provided for estimated losses resulting from our customers inability to make required payments. (See Note 3)

The Company routinely transfers receivables to a third party in connection with equipment leased to end users. The credit risk passes to the third party at the point of sale of the receivables. Under the provisions of Statement of Financial Accounting Standards No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities,” transfers were accounted for as sales and as a result, the related receivables have been excluded from the accompanying Consolidated Balance Sheets. The amount paid to the Company for the receivables by the transferee is approximately equal to the Company’s carrying value and therefore the gain recognized is not material. The end user remits its monthly payments directly to an escrow account held by a third party from which payments are made to the transferee and the Company, for various services provided to the end users. The Company provides limited monthly servicing whereby the Company invoices the end user on behalf of the transferee.

Inventory — Inventory consists principally of spare computer parts, computer and computer peripheral, hardware and software in the process of delivery upon resale to customers. All inventories are valued at the lower of cost or market on the first-in first-out basis. These inventories are recorded on the consolidated balance sheet net of allowances for inventory valuation of $600 thousand and $700 thousand at March 31, 2002 and 2001, respectively.

Property and Equipment — Property and equipment is stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of 4 years for automotive equipment, 3-10 years for machinery and equipment, 5-10 years for furniture and equipment and the lease life for building improvements.

The Company evaluates the recoverability of its long lived assets in accordance with Statement of Financial Accounting Standards No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,” (SFAS No. 121). SFAS No. 121 requires recognition of impairment of long-lived assets in the event that the net book value of such assets exceeds the future undiscounted net cash flows attributable to such assets. Impairment, if any, is recognized in the period of identification to the extent the carrying amount of an asset exceeds discounted net cash flows attributable to such asset. Based on its analysis, the Company believes that there was no impairment of its long-lived assets as of March 31, 2002 or 2001.

Intangible Assets and Goodwill – Intangible assets, including goodwill in acquired companies, described in Note 5, are being amortized using the straight-line method over periods ranging from 10 to 25 years. The Company examines the carrying value of its goodwill to determine whether there are any impairment losses or if indicators of impairment are present. If future cash flows are not expected to be sufficient to recover the asset’s carrying amount, an impairment loss would be charged to expense in the period identified. No reduction of goodwill for impairment was recorded in 2002 or in 2001. See “New Accounting Pronouncements”.

Deferred Maintenance Revenue — Deferred maintenance revenue is derived from contracts for which customers pay in advance for services to be performed at a future date.

26

Revenue Recognition — Service revenue is derived from contracts with various federal and state agencies as well as from commercial enterprises. We recognize service revenue based on contracted fees earned, net of credits and adjustments as the service is performed. Revenue from long-term fixed unit price contracts is recognized monthly as service is performed based upon the number of units covered and the level of service requested. The pricing in these contracts is fixed as to the unit price but varies based upon the number of units covered and service level requested. Revenue from time-and-material professional service contracts is recognized upon the completion of the service. Certain seat-management contracts include the delivery and installation of new equipment combined with multi-year service agreements. Revenue related to the delivery and installation of equipment under theses and certain other contracts is recognized upon the completion of both the delivery and installation. Product sales were $10.7 million, $14.7 million and $18.2 million, with corresponding cost of sales of $9.7 million, $13.3 million and $16.6 million for the years ended March 31, 2002, 2001 and 2000, respectively. Revenue related to the fixed-price service agreements is recognized ratably over the life of the agreement. Invoices billed in advance are recognized as revenue when earned. Losses on contracts, if any are recognized in the period in which they become determinable.

Income Taxes — The Company provides for deferred tax assets and liabilities based on the differences between the financial reporting and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future. Such deferred income tax asset and liability computations are based on enacted tax laws and rates for the period in which the differences are expected to reverse. The Company provides a valuation allowance for deferred tax assets for which it does not consider realization of such assets to be more likely than not.

Comprehensive Income — For the years ended December 31, 2002, 2001 and 2000, the Company did not identify any transactions that should be reported as other comprehensive income other than net income.

Stock-Based Compensation — The Company accounts for stock-based compensation for employees in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” (APB No. 25) and complies with the disclosure provision of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation.” Under APB No. 25 Compensation expense is based on the difference, if any, on the measurement date, between the fair value of the common stock and the exercise price.

Earnings Per Common Share — The computation of basic earnings per share is based on the weighted average number of shares outstanding during the period. Diluted earning per share is based on the weighted average number of shares including adjustments to both net income and shares outstanding to assume the conversion of dilutive common stock equivalents. Due to the loss from continuing operations in the year ended March 31, 2001, the computation of diluted earnings per share for that year is based on the weighted average number of shares outstanding during the period and does not include dilutive common stock equivalents.

Use of Estimates — The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates are used when accounting for certain items such as unbilled accounts receivable, allowance for doubtful accounts, depreciation, inventory valuation reserves and taxes.

Reclassification — Certain reclassifications have been made in the 2002, 2001 and 2000 financial statements to conform to the 2002 presentation. The consolidated statement of operations and related notes thereto have been adjusted to reflect Discontinued Operations arising from the sale of the Company’s Operational Outsourcing Division (HTSI). (See Note 17.)

Concentration of Risk — The Company has a number of major customers. The Company’s largest customer accounted for 16%, 17% and 12% of the Company’s revenues for the years ended March 31, 2002, 2001 and 2000, respectively. The Company’s five largest customers collectively accounted for 42%, 33% and 33%, of revenues for the years ended March 31, 2002, 2001 and 2000, respectively. The Company anticipates that significant customer concentration will continue for the foreseeable future, although the companies which constitute the Company’s largest customers may change.

New Accounting Pronouncements — On April 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 133 (“SFAS 133”), “Accounting for Derivative Instruments and Hedging Activities,” as amended by SFAS 137 and 138. SFAS 133 requires all derivatives to be recorded at fair value. Unless designated as hedges, changes in these fair values will be recorded in the income statement. Fair value changes involving hedges will generally be recorded by offsetting gains and losses on the hedge and on the hedged item, even if the fair value of the hedged item is not otherwise recorded. Adoption of this standard did not have any impact on the Company’s financial statements.

27

In June, 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141 (“SFAS 141”) “Business Combinations.” and Statement of Financial Accounting Standards No. 142 (“SFAS 142”) “Goodwill and Other Intangible Assets.” SFAS 141 establishes new standards for accounting and reporting requirements for business combinations and requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS 142 requires goodwill and certain intangible assets with indefinite useful lives to remain on the balance sheet and not be amortized. On an annual basis, and when there is reason to suspect that their values have been impaired, these assets must be tested for impairment and write-downs may be necessary. SFAS 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. Amortization of goodwill, including goodwill recorded in past business combinations, will cease upon adoption of this statement. SFAS 142 will also require recognized intangible assets with finite lives to be amortized over their respective estimated useful lives and reviewed for impairment in accordance with Statement of Financial Accounting Standards No 121 (“SFAS 121”) “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.” Any recognized intangible asset determined to have an indefinite useful life will not be amortized, but instead tested for impairment in accordance with the Standard until its life is determined to no longer be indefinite.

In connection with the goodwill impairment evaluation, SFAS 142 will require the Company to perform an assessment of whether there is an indication that goodwill is impaired at the date of adoption. To accomplish this, the Company will identify its reporting units and determine the carrying value of each reporting unit by assigning the assets and liabilities, including existing goodwill and intangible assets, to those reporting units as of the date of adoption and determine the fair value of each reporting unit and compare it to the reporting unit’s carrying amount. To the extent a reporting unit’s carrying amount exceeds its fair value, an indication exists that the reporting unit’s goodwill may be impaired and the Company must perform the second step of the impairment test. In the second step, the Company must compare the implied fair value of the reporting unit’s goodwill, determined by allocating the reporting unit’s fair value to all of its assets and liabilities in a manner similar to a purchase price allocation in accordance with SFAS 141, to its carrying amount, both of which would be measured as of the date of adoption. Any impairment loss will be recognized as the cumulative effect of a change in accounting principle in the Company’s statement of operations.

The Company will adopt the provisions of SFAS 141 and SFAS 142 as of April 1, 2002, with the exception of the immediate requirement to use the purchase method of accounting for all business combinations initiated after June 30, 2001. Effective April 1, 2002, the Company will stop amortizing goodwill, but will continue amortizing other intangible assets with finite lives. The Company will perform the initial goodwill impairment test required by SFAS 142 during its first quarter of fiscal 2003. Although it has not yet completed its analysis, the Company is not expecting an impairment loss to be recognized upon the adoption of SFAS 142. We will continue to test for impairment on an annual basis.

In June 2001, the FASB issued SFAS No 143 “Accounting for Asset Retirement Obligations”. SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS 143 is effective for fiscal years beginning after June 15, 2002. The Company does not believe that the adoption of SFAS 143 will have any material impact upon the Company’s financial statements.

In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144 (“SFAS 144”), “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS 144 addresses the financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS 144 supersedes SFAS 121 but retains the fundamental provisions of SFAS 121 for (i) recognition/measurement of impairment of long-lived assets to be held and used and (ii) measurement of long-lived assets to be disposed of by sale. SFAS 144 also supersedes the accounting and reporting provisions of Accounting Principles Board’s No. 30 (“APB 30”), “Reporting the Results of Operations — Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,” for segments of a business to be disposed of but retains APB 30’s requirement to report discontinued operations separately from continuing operations and extends that reporting to a component of an entity that either has been disposed of or is classified as held for sale. SFAS 144 is effective for fiscal years beginning after December 15, 2001. The Company adopted the provisions of SFAS 144 effective April 2, 2002. The adoption of this standard did not have any material impact on the Company’s financial statements.

28

2.     EMBEZZLEMENT MATTER

On March 18, 1999, the Company announced that an internal investigation had revealed a material embezzlement by the former controller of one of the Company’s subsidiaries. The embezzlement occurred over a four year period and aggregated approximately $15.4 million of which approximately $15 million was embezzled from the Company and $400 thousand prior to its acquisition by Halifax. The embezzlement had a material effect on the Company’s financial statements. After net recoveries through March 31, 2001, as discussed below, the cumulative net embezzlement loss to the Company before taxes was approximately $7.7 million. There were no embezzlement recoveries during fiscal year 2002.

During the year ended March 31, 2001, the Company recovered $1.6 million (net of recovery costs of $1.2 million). During the year ended March 31, 2000, the Company recovered $2.2 million (net of recovery costs of $250 thousand) in conjunction with its embezzlement recovery activities.

Recoveries relating to the embezzlement were as follows: (In thousands)

Fiscal 2001	$	2,756
Fiscal 2000 and prior		7,000
Total recoveries		9,756
Recovery costs		(2,406	)
Net recoveries	$	7,350

3.     ACCOUNTS RECEIVABLE

Trade accounts receivable consist of:	March 31,
(In thousands)
	2002			2001
Amounts billed	$	9,738		$	7,994
Amounts unbilled		285			968
Total		10,023			8,962
Allowance for doubtful accounts		(290	)		(319	)
Total	$	9,733		$	8,643

4.     PROPERTY AND EQUIPMENT

Property and equipment consists of:	March 31,
(In thousands)
							Estimated
	2002			2001			Useful Lives
Machinery and equipment	$	4,391		$	4,235		4 years
Furniture and fixtures		511			426		3 – 10 years
Building and improvements		508			447		5 – 10 years
Automotive equipment		—			21		12 years
Total	$	5,410		$	5,129
Accumulated depreciation		(3,806	)		(3,173	)
Total	$	1,604		$	1,956

29

5.     GOODWILL AND INTANGIBLE ASSETS

Amortization of Goodwill is calculated using the straight-line method over the estimated useful lives ranging from 10 to 25 years. Contract rights are amortized over ten years. As of March 31, 2002 and 2001, contract rights totaled approximately $34 thousand and $41 thousand, respectively, net of accumulated amortization of $115 thousand and $108 thousand, respectively. As of March 31, 2002 goodwill consisted of $2.6 million being amortized over 20 years, $397 thousand being amortized over 25 years, $1.3 million being amortized over 24 years. Amortization expense was $210 thousand for March 31, 2002 and 2001, respectively.

(In thousands)	March 31,
	2002			2001
Goodwill	$	4,244		$	4,244
Contract Rights		149			149
Accumulated Amortization		(1,412	)		(1,201	)
Net Goodwill	$	2,981		$	3,192

As a result of the disposition of its operational outsourcing division (HTSI), the net book value of goodwill was reduced by approximately $700 thousand and resulting annual amortization of goodwill was reduced by approximately $60 thousand. (See Note 17)

Pursuant to Statement of Financial Accounting Standards 142 (SFAS 142) we will no longer amortize goodwill effective April 1, 2002. See “New Accounting Pronouncements”.

30

6.     LONG-TERM DEBT

			March 31,
			(In thousands)
Long-term debt consists of:			2002		2000
Revolving credit facility dated March 6, 2002 maturing April 6, 2004 with a maximum line of $8 million. Amounts available under this agreement are determined by applying stated percentages to the Company’s eligible receivables and inventory. At March 31, 2002, $705 thousand was available to the Company under the terms of the agreement. The loan has a term of 25 months maturing on April 6, 2004 and bear interest at the banks prime rate plus 3/4%. The interest rate at March 31, 2002 was 4.55%. The loan contains a subjective acceleration clause whereby the lender may demand payment on the loan under certain circumstances as defined in the agreement			$	7,295	$	—
On March 12, 2002 the maximum amount of the loan was increased to $9.0 million and on April 30, 2002 the maximum amount of the loan was increased to $10.47 million. The increase of $2.47 million is for a period of six months. Effective October 30, 2002 the maximum amount of the loan will return to $8 million. Borrowings under the revolving line of credit at March 31, 2002 were $7.3 million
Revolving credit facility effective December 8, 2000 maturing August 31, 2002 with a maximum line of $8 million. Amounts available under this agreement are determined by applying stated percentages to the Company’s eligible billed and unbilled receivables. At March 31, 2001, $4.9 million was available to the Company under the terms of the agreement. Interest accrues on the principal at the LIBOR rate plus 2.5%. The interest rate at March 31, 2001 was 7.58%. The note was paid in full on March 6, 2002				—		2,886
	Subtotal bank debt			7,295		2,886
7% Convertible Subordinated Debenture with an affiliate (see Note 13) dated January 27, 1998. Principal due in full on April 6, 2004. Interest payable semiannually in arrears beginning August 1, 1998. May be prepaid by the Company on any date more than two years after January 27, 1998 Convertible to common stock by note holder at any time at a conversion price of $11.72 per common share				2,000		2,000
Subordinated note with an affiliate (see Note 13) dated October 8, 1998 Principal due in full April 6, 2004 but may be prepaid by the Company at any time without penalty. Interest accrues annually at 8%				690		690
Subordinated note with an affiliate (see Note 13) dated October 13, 1998 Principal due in full April 6, 2004 but may be prepaid by the Company at any time without penalty. Interest accrues annually at 8%				310		310
Subordinated note with an affiliate (see Note 13) dated November 2, 1998 Principal due in full April 6, 2004 but may be prepaid by the Company at any time without penalty. Interest accrues annually at 8%				500		500
Subordinated note with an affiliate (see Note 13) dated November 5, 1998 Principal due in full April 6, 2004 but may be prepaid by the Company at any time without penalty. Interest accrues annually at 8%				500		500
		Subtotal – debt affiliated parties		4,000		4,000
Subordinated note dated September 2, 1999. Principal and interest payments of $299,965 due on the first of each month. The note bears interest of 8.5%. Total amount was due as of March 31, 2001				—		632
Total debt				11,295		7,518
Less current maturities				—		632
Total long-term debt			$	11,295	$	6,886

31

The Company is in compliance with the covenant of its credit and security agreement at March 31, 2002. The covenant requires that stockholders deficit not increase above $1.4 million.

On December 8, 2000, the Company entered into a revolving credit agreement which refinanced the Company’s revolving credit line. Advances under the revolving agreement are collateralized by a first priority security interest on all the Company’s assets as defined in the financing and security agreement. The agreement also contains certain financial covenants and reporting covenants. The loan was paid in full on March 6, 2002.

The revolving credit agreements prohibit the payment of dividends or distributions as well as the payment of principal or interest on Subordinated Debt. Interest expense on Subordinated Debt is accrued on a current basis.

In September 1999, the Company entered into a note payable agreement with a major supplier of digital communications switches. The balance of the note due March 31, 2001 was $632 thousand. The note was paid in full during the fiscal year ended March 31, 2002.

The aggregate annual maturities of long-term debt, based on the terms of the new banking agreement, are as follows for the fiscal years ending March 31: (In thousands)

2004	$	11,295
Total	$	11,295

The carrying value of the revolving credit facility approximates fair market value at March 31, 2002. Because other subordinated debt of $2 million with an interest rate of 7% and $2 million with an interest rate of 8% is with a related party it was not practicable to estimate the effect of subjective risk factors, which might influence the value of the debt. The most significant of these risk factors include the subordination of the debt and the lack of collateralization.

7.     ACCRUED EXPENSES

Accrued expenses consist primarily of the following:

	March 31,
(In thousands)
	2002		2001
Accrued lease payments	$	1,502	$	993
Accrued contract costs		747		3,138
Accrued vacation		499		478
Accrued payroll		568		540
Payroll taxes accrued and withheld		124		155
Other accrued expenses		385		662
	$	3,825	$	5,966

8.     STOCK–BASED COMPENSATION

Stock Options — On September 16, 1994, the shareholders approved the new Key Employee Stock Option Plan (“1994 Plan”). Options expire five to ten years after the date of grant. The maximum number of shares of the Company’s common stock subject to the 1994 Plan and approved for issuance was originally 280 thousand shares either authorized and unissued or shares held in treasury. This number is subject to adjustment in the event of stock splits, stock dividends or other recapitalization of the Company’s common stock. On March 2, 2000, the shareholders approved amendments to the 1994 Plan which increased the number of shares available for issuance to 400 thousand shares.

32

A summary of options activity is as follows:

				Weighted
				Average Exercise
	Number of			Price Per
	Shares			Share
1994 PLAN
Outstanding at March 31, 1999		143,201		$	6.72
Granted		202,000			6.07
Exercised		(10,800	)		4.80
Forfeited/Expired		(121,033	)		6.19
Outstanding at March 31, 2000		213,368		$	6.50
Granted		134,000		$	4.70
Exercised		(6,000	)		4.77
Forfeited/Expired		(51,518	)		6.89
Outstanding at March 31, 2001		289,850		$	5.60
Granted		111,500		$	3.63
Exercised		—			—
Forfeited/Expired		(104,850	)		5.46
Outstanding at March 31, 2002		296,500		$	4.90

The following table summarizes the information for options outstanding and exercisable under the 1994 Plan at March 31, 2002.

					Options Outstanding
					Weighted Average	Options Outstanding				Options Exercisable
Range of			Options		Remaining	Weighted Average		Options		Weighted Average
Exercise Prices			Outstanding		Contractual Life	Exercise Price		Exercisable		Exercise price
		$7.81		5,000	2 years	$	7.81		3,750	$	7.81
	5.75-7.56			92,000	8 years		6.35		—		—
	5.38-5.50			54,000	9 years		5.47		—		—
	2.60-4.05			145,500	10 years		3.68		—		—
	$2.60-7.81			296,500		$	4.90		3,750	$	7.81

33

A summary of Non-Employee Directors Stock Option Plan activity is as follows:

				Weighted
				Average Exercise
	Number of			Price Per
	Shares			Share
Outstanding at March 31, 1999		42,000		$	9.33
Granted		—			—
Outstanding at March 31, 2000		42,000		$	9.33
Granted		13,000		$	7.03-7.06
Cancelled		(8,250	)		9.28
Outstanding at March 31, 2001		46,750		$	8.27
Granted		21,000		$	1.80
Outstanding at March 31, 2002		67,750		$	7.03

The following table summarizes the information for options outstanding and exercisable under the Non-Employee Directors Stock Option Plan at March 31, 2002.

						Options Outstanding
						Weighted Average	Options Outstanding				Options Exercisable
Range of				Options		Remaining	Weighted Average		Options		Weighted Average
Exercise Prices				Outstanding		Contractual Life	Exercise Price		Exercisable		Exercise price
		$10.25			24,250	6 years	$	10.25		22,628	$	10.25
			7.03		10,500	7 years		7.03		10,500		7.03
			7.06		12,000	8 years		7.06		9,019		7.06
			5.69		8,000	9 years		5.69		8,000		5.69
			1.80		13,000	10 years		1.80		4,503		1.80
	$1.80-10.25				67,750		$	7.03		54,650	$	7.74

Stock-based incentive awards granted under the 1994 Employee Stock Option Plan prior to March 31, 2001 were stock options with 10 year terms with cliff vesting after four years. Employee stock options granted subsequent to March 31, 2001 were stock options with 10 year terms which vest monthly over a four year period following the completion of one year of service from the date of grant. Upon separation from the company, former employees have 30 days to exercise vested options.

The initial stock-based incentive awards granted under the 1999 Non-Employee Directors Stock Option Plan to a director upon joining the Company’s Board of Directors are stock options with 10 year terms and vest monthly over five years. Subsequent grants to directors for annual service are stock options with 10 year terms and vest monthly over one year.

The exercise prices of all options awarded in all years, under all plans, were equal to the market price of the stock on the date of grant.

34

The fair value of each of the Company’s option grants is estimated on the date of grant using Black-Scholes option – pricing model as prescribed by SFAS No. 123 using the following assumptions for the years ended March 31, 2002, 2001 and 2000: risk-free interest rate of 5.10%, 4.65% and 5.8 % respectively, dividend yield of 0%, 0% and 0% respectively, volatility factor related to the expected market price of the Company’s common stock of 88.7%, 80.4% and 44.9% respectively, and weighted-average expected option life of five to ten years. The weighted average fair value of options calculated using the Black-Scholes option pricing model granted during 2002, 2001 and 2000 were $2.20, $3.01 and $ 2.91 respectively.

For purposes of proforma disclosures, the options’ estimated fair values are amortized to expense over the options’ vesting periods. Consistent with the provisions of SFAS No. 123, had compensations cost been determined based on the fair value of awards granted in 2002, 2001 and 2000 the net income attributable to common shareholders would have been as follows:

		Year Ending March 31,
(In thousands except for per share data)		2002		2001		2000
Net income (as reported)		$	302	$	1,098	$	2,313
Earnings per common share (as reported):
	Basic	$	.14	$	.54	$	1.17
	Diluted	$	.14	$	.54	$	1.15
Proforma net income		$	41	$	868	$	2,067
Proforma earnings per common share:
	Basic	$	.02	$	.43	$	1.04
	Diluted	$	.02	$	.43	$	1.03

9.     EMPLOYEE 401(K) RETIREMENT PLAN

The Company sponsors a 401(k) retirement plan covering substantially all non-union employees with more than 3 months of service. The plan provides that the Company will contribute an amount equal to 50% of a participant contribution up to 4% of salary, and at the Company’s discretion, additional amounts based upon the profitability of the Company. The Company’s contributions were $109 thousand, $129 thousand and $198 thousand for the years ended March 31, 2002, 2001 and 2000, respectively. Union employees receive benefits as prescribed in their collective bargaining agreement.

10.     EMPLOYEE STOCK PURCHASE PLAN

The Company has an Employee Stock Purchase Plan under which all employees of the Company are eligible to contribute funds for the purchase of the Company’s common stock on the open market at market value. Under the Plan, the Company agrees to pay all brokerage commissions associated with such purchases. There has not been any significant activity in this Plan during the three years ended March 31, 2002.

11.     INCOME TAXES

Deferred tax assets and liabilities on the balance sheets reflect the net tax effect of temporary differences between carrying amounts of assets and liabilities for financial statement purposes and the amounts used for income tax purposes. The deferred tax assets and liabilities are classified on the balance sheets as current or non current based on the classification of the related assets and liabilities.

35

The components of income tax expense for continuing operations are as follows for the years ended March 31:

(In thousands)		2002		2001		2000
Current expense:
	Federal	$	4	$	5	$	15
	State		56		18		5
	Total current:		60		23		20
Deferred expense:
	Federal		—		—		85
	State		—		—		—
	Total deferred:		—		—		—
Income tax expense		$	60	$	23	$	105

The components of the Company’s deferred tax assets and liabilities consist of the following at March 31:

(In thousands)		2002			2001
Deferred tax assets:
	Accounts receivable reserves	$	143		$	146
	Inventory reserve		384			114
	Accrued compensation/vacation		244			216
	AMT credit carryforwards		53			66
	Net operating loss carryforward		3,560			3,488
	Deferred gain on building sale		224			233
			4,608			4,263
Deferred tax liabilities:
	Depreciation/amortization	$	778		$	434
	Contract claims/other		—			2
			778			436
			3,830			3,827
	Valuation allowance		(3,830	)		(3,827	)
	Net deferred tax asset	$	—		$	—

Due to the uncertainty of future realization, the Company has not recorded a net benefit for these operating loss carryforwards and other deferred tax assets in its fiscal 2002 and 2001 financial statements. The change in the valuation allowance results primarily from the use of the net operating loss carryforward of $146 thousand to offset taxable income in the current year and increases of estimates of approximately $149 thousand.

The differences between the provision for income taxes at the expected statutory rate for continuing operations and those shown in the consolidated statements of operations are as follows for the years ended March 31:

	2002			2001			2000
Provision (benefit) for income taxes at statutory rate		35.0	%		(34.0	)%		34.0	%
State taxes, net of federal benefit		9.2			(5.0	)		5.8
Other (goodwill amortization)		25.1			3.0			4.5
Valuation allowance		(52.7	)		38.8			(39.5	)
Total		16.6	%		2.8	%		4.8	%

The Company has a $10 million of net operating loss carryforwards virtually all of which expires in fiscal 2019.

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12.     LEASING ACTIVITY

The Company is obligated under operating leases for office space and certain equipment. The following are future minimum lease payments under operating leases as of March 31: (In thousands)

Year ending March 31,
2003	$	669
2004		574
2005		477
2006		497
2007		482
thereafter		991
Total minimum lease payments	$	3,690

Deferred income of $457 thousand and $516 thousand at March 31, 2002 and 2001 represents the deferred gain on the sale – lease-back of the Company’s office complex. The deferred revenue is being recognized as a reduction of rent expense over the remaining life of the lease.

Total rent expense under operating leases was $677 thousand, $972 thousand and $1.1 million for the years ended March 31, 2002, 2001 and 2000, respectively. The Company sold its office complex on November 6, 1997 and leased back its headquarters building for 12 years. Aggregate future minimum rentals to be received under non-cancelable subleases as of March 31, 2002 are $1.9 million.

13.     RELATED PARTY TRANSACTIONS

During the years ended March 31, 2002, 2001 and 2000, the Company paid $25 thousand, $0, and $103 thousand respectively, for legal services to a former Board member serving as General Counsel.

Research Industries, Incorporated, the owner of 825,707 shares, or 37% of the Company’s common stock, holds $2 million face amount of the Company’s 7% Convertible Subordinated Debenture dated January 27, 1998 and $690 thousand, $310 thousand $500 thousand and $500 thousand face amount of the Company’s Promissory Notes dated October 8, 1998, October 13, 1998, November 2, 1998 and November 5, 1998, respectively. Interest expense on the subordinated debt totaled $300 thousand for 2002, 2001 and 2000. (See Note 6).

On December 13, 2001, the Company issued 109,927 shares of common stock in the amount of $331 thousand in lieu of cash in payment of interest on notes due to Research Industries through November 30, 2001. The value of the stock was equal to the market price on date of issue. On January 2, 2002, the Company made a cash payment of $100 thousand to Research Industries for interest due. At March 31, 2002 and 2001, interest payable to Research Industries was $101 thousand and $225 thousand, respectively.

On December 1, 1999, the Company issued 35,480 shared of common stock in the amount of $233 thousand in lieu of cash in payment of interest on notes due to Research Industries through October 31, 1999. The value of the stock was equal to the market price on date of issue. In December 2000, the Company made a cash payment of $200 thousand to Research Industries for interest due. At March 31, 2002 and 2001, interest payable to Research Industries was $101 thousand and $225 thousand, respectively.

During the year ended March 31, 2000, the Company paid $105 thousand to a consultant who is now an officer of the Company.

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14.     COMMITMENTS AND CONTINGENCIES

Costs incurred by the Company on the performance of U.S. Government contracts are subject to audit by the Defense Contract Audit Agency (DCAA). In the opinion of management, the final settlement of these costs will not result in significant adjustments to recorded amounts.

There are no material pending legal proceedings to which the Company is a party. The Company is engaged in ordinary routine litigation incidental to the Company’s business to which the Company is a party.

15.     SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

     The Company paid the following amounts for interest and income taxes during the years ended March 31:

(In thousands)	2002		2001		2000
Interest	$	634	$	1,044	$	1,547
Income taxes	$	60	$	158	$	20
Disclosure of non-cash financing activities:
Common Stock issued in lieu of interest	$	331	$	—	$	—

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16.     EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings (loss) per share:
(In thousands except per share data)

			Years Ended March 31,
			2002		2001			2000
Numerator for earnings per share:
	Net income (loss) as reported from:
	Continuing operations		$	302	$	(840	)	$	1,385
	Discontinued operations			—		244			928
	Gain on sale of discontinued operations			—		1,694			—
	Net income		$	302	$	1,098		$	2,313
Denominator:
	Denominator for basic earnings per share-			2,100,321		2,022,811			1,984,014
		Weighted-average shares outstanding
	Effect of dilutive securities:
	7% convertible debenture			—		—			—
	Employee stock options			6,158		—			15,797
	Dilutive potential common shares
		Denominator for diluted earnings per share – adjusted weighted-average shares and assumed conversions		2,106,478		2,022,811			1,999,811
Earnings (loss) per share – basic:
	Continuing operations		$	.14	$	(.42	)	$	.70
	Discontinued operations			—		.12			.47
	Gain on sale of discontinued operations			—		.84			—
Basic earnings per share			$	.14	$	.54		$	1.17
Diluted earnings per share:
	Continuing operations		$	.14	$	(.42	)	$	.69
	Discontinued operations			—		.12			.46
	Gain on sale of discontinued operations			—		.84			—
Diluted earnings per share			$	.14	$	.54		$	1.15

The computation of basic earnings per share is based on the weighted average number of shares outstanding during the period. Diluted earning per share is based on the weighted average number of shares including adjustments to both net income and shares outstanding to assume the conversion of dilutive common stock equivalents. Due to the loss from continuing operations in the year ended March 31, 2000, the computation of diluted earnings per share for those years is based on the weighted average number of shares outstanding during the period and does not include dilutive common stock equivalents. For the years ended March 31, 2002, 2001,and 2000, the convertible debenture was anti-dilutive and therefore not included in diluted earnings per share.

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17.     DISCONTINUED OPERATIONS

During the fourth quarter ended March 31, 2000, the Company announced a plan to divest itself of its Operational Outsourcing Division (HTSI). On May 31, 2000 the transaction was consummated.

On June 2, 2000, the Company executed and delivered a Stock Purchase Agreement dated as of May 31, 2000, with U.S. Facilities, Inc., a Delaware corporation (“Buyer”) providing for the sale by the Company to Buyer of Company’s operational outsourcing business.

At the Closing the Company sold to Buyer, all of the capital stock of its wholly-owned subsidiary, Halifax Technical Services, Inc. for a purchase price of $5.6 million. Summary operating results of the Discontinued Operations are as follows: (In thousands)

	For the years ended
	March 31,
	2001		2000
Revenue	$	4,636	$	26,246
Costs and expenses		4,392		25,283
Operating income		244		963
Income tax expense		—		35
Income from discontinued operations	$	244	$	928

For the years ended March 31, 2001 and 2000, interest expense of approximately $89 thousand and $522 thousand, respectively, was charged to the Discontinued Operations. Interest expense was allocated to Discontinued Operations based on the relationship of Discontinued Operations net assets to total net assets.

18.     SEGMENT REPORTING AND SIGNIFICANT CUSTOMERS

The Company has adopted Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information,” as required. The Company’s business activities are considered to be in one business segment which provides a comprehensive range of information technology services and solutions to a broad base of commercial and governmental customers. Since the discontinuation of the Operational Outsourcing business (Note 17), we have and continue to operate in a single business segment.

Revenues from services rendered to the United States Government and the relative percentages of such revenues to revenues from continuing operations for the years ended March 31, 2002, 2001 and 2000 were $8.5 million (17%), $13.4 million (26%) and $13.7 million (25%), respectively. The reduction in United States Government revenue in fiscal 2000 was primarily a result of reduced deliveries of digital telecommunications switches under long-term contracts.

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19.     UNAUDITED QUARTERLY RESULTS OF OPERATIONS:

(In thousands except for per share data)

	June 30,		September 30,		December 31,		March 31,
	2001		2001		2001		2002
Revenue	$	10,817	$	11,672	$	13,249	$	13,661
Net income	$	18	$	60	$	109	$	115
Basic earnings per share	$	.01	$	.03	$	.04	$	.05
Diluted earning per share	$	.01	$	.03	$	.04	$	.05

		June 30,			September 30,			December 31,		March 31,
		2000			2000			2000		2001*
Revenue		$	12,910		$	12,422		$	14,733	$	11,685
Operating (loss) income		$	(36	)	$	(53	)	$	254	$	(1,582	)
(Loss) income from continuing operations		$	(483	)	$	1,715		$	23	$	(2,095	)
Net income (loss)		$	1,355		$	1,715		$	23	$	(1,995	)
Basic earnings per share
	Continuing operations	$	(.24	)	$	.85		$	.01	$	(1.04	)
	Discontinued operations		.12			—			—		—
	Gain on sale of discontinued operations		.79			—			—		.05
		$	.67		$	.85		$	.01	$	(.99	)
Diluted earning per share
	Continuing operations	$	(.24	)	$	.80		$	.01	$	(1.04	)
	Discontinued operations		.12			—			—		—
	Gain on sale of discontinued operations		.79			—			—		.05
		$	.67		$	.80		$	.01	$	(.99	)

*Fourth quarter 2001 results include a pretax charge of $700 thousand to increase the allowance for inventory valuation due to
  uncertainties in the market brought on by the economic downturn.

41

Halifax Corporation

Schedule II, Valuation and Qualifying Accounts

March 31, 2002

	Balance at		Additions				Balance at
	beginning		charged to				end of
	of year		cost & expense		Deductions		Year
Year Ended March 31, 2002
Allowance for doubtful accounts	$	319,000	$	300,000	$	329,000	$	290,000
Allowance for inventory obsolescence	$	700,000	$	200,000	$	300,000	$	600,000
Year Ended March 31, 2001
Allowance for doubtful accounts	$	403,000	$	300,000	$	384,000	$	319,000
Allowance for inventory obsolescence	$	125,000	$	1,660,000	$	1,085,000	$	700,000
Year Ended March 31, 2000
Allowance for doubtful accounts	$	657,000	$	510,000	$	764,000	$	403,000
Allowance for inventory obsolescence	$	1,500,000	$	628,000	$	2,003,000	$	125,000

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None

42

PART III

Item 10. Directors and Executive Officers of the Registrant

The information required to be included in Item 10 of Part III of this Form 10-K incorporates by reference certain information from our definitive proxy statement, for our 2002 annual meeting of stockholders to be filed with the SEC not later than 120 days after the end of our fiscal year covered by this report.

The information regarding executive officers who are not also directors is hereby incorporated by reference.

Item 11. Executive Compensation

The information required to be included in Item 11 of Part III of this Form 10-K incorporates by reference certain information from our definitive proxy statement, for our 2002 annual meeting of stockholders to be filed with the SEC not later than 120 days after the end of our fiscal year covered by this report.

Item 12. Security Ownership of Certain Beneficial Owners and Management

The Company has two equity compensation plans, the 1994 Key Employee Stock Option Plan and the Non-Employee Director’s Stock Option Plan.

The 1994 Key Employee Stock Option Plan has a maximum of 400,000 options available for issuance. As of March 31, 2002, there were 16,800 options previously exercised, 296,500 options issued, and 86,700 options available for grant. The Non-Employee directors Stock Option Plan has a maximum of 100,000 options available for issuance. As of March 31, 2002 there were 67,750 options issued and 32,250 options available for grant.

Equity Compensation Plan Information

The following table sets forth the information regarding equity compensation plans.

	(a)		(b)		(c)
Plan Category	Number of securities to		Weighted-average		Number of securities
	be issued upon exercise		exercise price of		remaining for future
	of outstanding options,		outstanding options,		issuance under equity
	warrants and rights		warrants and rights		compensation plans
					(excluding securities
					reflected in column
					(a))
Equity compensation plans approved by security holders		364,250	$	5.27		118,950
Equity compensation plans not approved by security holders		—		—		—
Acquired/Assumed equity compensation plans (Aggregated)		—		—		—
Individual Arrangements (Aggregated)		—		—		—
Total		364,250	$	5.27		118,950

The information required to be included in Item 12 of Part III of this Form 10-K incorporates by reference certain information from our definitive proxy statement, for our 2002 annual meeting of stockholders to be filed with the SEC not later than 120 days after the end of our fiscal year covered by this report.

43

Item 13. Certain Relationships and Related Transactions

The information required to be included in Item 13 of Part III of this Form 10-K incorporates by reference certain information from our definitive proxy statement, for our 2002 annual meeting of stockholders to be filed with the SEC not later than 120 days after the end of our fiscal year covered by this report.

44

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

HALIFAX CORPORATION

By /s/Charles L. McNew
Charles L. McNew
President and Chief Executive Officer Date: 6/14/02

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Signature	Title	Date
/s/Charles L. McNew Charles L. McNew Principal Executive Officer	President and Chief Executive Officer, Director	6/14/02
/s/Joseph Sciacca Joseph Sciacca Principal Financial and Accounting Officer	Vice President, Finance and Chief Financial Officer	6/14/02
/s/Arch C. Scurlock Arch C. Scurlock	Chairman of the Board of Directors	6/14/02
/s/John H. Grover John H. Grover	Director	6/14/02
/s/Thomas L. Hewitt Thomas L. Hewitt	Director	6/14/02
/s/John M. Toups John M. Toups	Director	6/14/02
/s/Daniel R. Young Daniel R. Young	Director	6/14/02

45

PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a)  The following documents are filed as part of this report: as Item 8

1.     Consolidated Financial Statements

• Independent Auditors’ Reports

• Consolidated Statements of Operations for the years ended March 31, 2002, 2001 and 2000

• Consolidated Balance Sheets as of March 31, 2002 and 2001

• Consolidated Statements of Cash Flows for the years ended March 31, 2002, 2001 and 2000

• Consolidated Statements of Changes in Stockholders’ Equity (Deficit) for the years ended March 31, 2002, 2001 and 2000

• Notes to Consolidated Financial Statements

2.     Financial Statement Schedule

• Schedule II, Valuation and Qualifying Accounts

All other schedules are omitted since they are not applicable, not required or the required information is included in the consolidated financial statements or notes thereto.

(b)  Reports on Form 8-K

     None

(c)  Exhibits

1	Stock Purchase Agreement Between US Facilities and Halifax dated May 31, 2000. (Incorporated by reference to Exhibit 1 to Form 8-K dated June 2, 2000)
2	Transition Agreement by and Among Halifax Corporation, Halifax Technical Services, Inc. and US Facilities dated May 31, 2000. (Incorporated by reference to Exhibit 1 to Form 8-K dated June 2, 2000)
3.1	Articles of Incorporation, as amended. (Incorporated by reference to Exhibit 3.1 to Form 10-K for the year ended March 31, 1995.)
3.2	By-laws, as amended. (Incorporated by reference to Exhibit 3.2 to Form 10-K for the year ended March 31, 1995.)
3.3	Articles of Amendment to Articles of Incorporation. (Incorporated by reference to Exhibit 3.3 to Form 10-K for the year ended March 31, 2000.)
4.1	Loan and Security Agreement dated January 30, 1989 between the Company and Crestar Bank. (Incorporated by reference to Exhibit 4.1 to Form 10-K for the year ended March 31, 1989.)

46

4.2	First Amendment to Amended and Restated Loan and Security Agreement between the Company and Crestar Bank dated Dec. 11, 1992 and amended and restated revolving note. (Incorporated by reference to Exhibit 4.2 to Form 10-K for the Year ended March 31, 1993.)
4.3	Loan agreement dated June 30, 1993 between the Company and Crestar Bank. (Incorporated by reference to Exhibit 4.3 to Form 10-K for the year ended March 31, 1994.)
4.4	Second Amendment to Amended and Restated Loan and Security Agreement between the Company and Crestar Bank dated November 14, 1994 and amended and restated revolving note. (Incorporated by reference to Exhibit 4.4 to Form 10-K for the year ended March 31, 1995.)
4.5	Fifth Amended and Restated Loan and Security Agreement between the Company and Crestar Bank dated June 25, 1998 and restated notes (Incorporated by reference to Form 8-K dated October 6, 1998.)
4.6	Sixth Amended and Restated Loan and Security Agreement between the Company and Crestar Bank dated September 7, 1999 and restated notes. (Incorporated by reference to Form 10-K dated March 31, 1999.)
4.7	Third Amendment to the Sixth Amended and Restated Loan and Security Agreement between the Company and SunTrust Bank (formerly Crestar Bank) dated September 7, 1999 and related notes. (Incorporated by reference to Form 10-K dated March 31, 2000.)
4.8	Financing and Security Agreement between the Company and Bank of America, N.A. dated December 8, 2000. (Incorporated by reference to Exhibit 4.8 to Form 10-Q for the quarter ended December 31, 2000.)
4.9	Modification Agreement between the Company and Bank of America dated February 11, 2002. (Incorporated by reference to Form 10-Q dated December 30, 2002.)
4.10	Financing and Security Agreement between the Company and Southern Financial Bank March 6, 2002.
4.11	Research Industries Incorporated Promissory Note dated October 8, 1998
4.12	Research Industries Incorporated Promissory Note dated October 13, 1998
4.13	Research Industries Incorporated Promissory Note dated November 2, 1998
4.14	Research Industries Incorporated Promissory Note dated November 5, 1998
10.1	1984 Incentive Stock Option and Stock Appreciation Rights Plan, as amended. (Incorporated by reference to Exhibit 10.3 to the Form 10-K for the year ended March 31, 1989).
10.2	Agreement of purchase and sale with amendments dated June 7, 1992, between the Company and ReCap Inc. for the Halifax Office Complex. (Incorporated by reference to Exhibit 10.5 of the Form 10-K for the year ended March 31, 1992).
10.3	1994 Key Employee Stock Option Plan. (Incorporated by reference to Exhibit 10.3 to Form 10-K for the year ended March 31, 1995).
10.7	Charles L. McNew Executive Severance Agreement dated May 8, 2000. (Incorporated by reference to Exhibit 10.7 to Form 10-K for the year ended March 31, 2000.)
10.8	Charles L. McNew Executive Severance Agreement, dated March 31, 2001. (Incorporated by reference to Form 10-K dated March 31, 2001.)
10.9	Severance Agreement of Joseph Sciacca dated May 10, 2000. (Incorporated by reference to Exhibit 10.9 to Form 10-Q dated September 30, 2001)

47

10.10	Severance Agreement of Thomas Basile March 15, 2001. (Incorporated by reference to Exhibit 10.10 to Form 10-Q dated September 30, 2001)
10.11	Severance Agreement of James Sherwood November 9, 1999. (Incorporated by reference to Exhibit 10.11 to Form 10-Q dated September 30, 2001)
10.12	Severance Agreement of Jimmie L. May March 15, 2001. (Incorporated by reference to Exhibit 10.12 to Form 10-Q dated September 30, 2001)
10.13	Director Stock Option
12	Computation of earnings to fixed charges
20	Audit Committee Charter. (Incorporated by reference to Exhibit 20 to Form 10-Q dated June 30, 2001.)
21	Subsidiaries of the registrant.

48 EX-4.10 3 w60790exv4w10.htm FINANCING AND SECURITY AGREEMENT

BUSINESS LOAN AGREEMENT(ASSET BASED) EXHIBIT 4.10

Principal	Loan Date		Maturity		Loan No		Call/Coll	Account	Officer	Initials
$8,000,000.00		03-06-2002		04-06-2004		76-69310769			MTL
References in the shaded area are for Lender’s use only and do not limit the applicability of this document to any particular loan or item. Any item above containing *****  has been omitted due to text length limitations.

Borrower: Halifax Corporation
5250 Cherokee Avenue
Alexandria, VA 22312 Lender: Southern Financial Bank
37 E. Main Street
Warrenton, VA 20186

THIS BUSINESS LOAN AGREEMENT (ASSET BASED) dated March 6, 2002, is made and executed between Halifax Corporation (“Borrower”) and Southern Financial Bank (“Lender”) on the following terms and conditions. Borrower has received prior commercial loans from Lender or has applied to Lender for a commercial loan or loans or other financial accommodations, including those which may be described on any exhibit or schedule attached to this Agreement (“Loan”). Borrower understands and agrees that: (A) in granting, renewing, or extending any Loan, Lender is relying upon Borrower’s representations, warranties, and agreements as set forth in this Agreement, and (B) all such Loans shall be and remain subject to the terms and conditions of this Agreement.

TERM.  This Agreement shall be effective as of March 6, 2002, and shall continue in full force and effect until such time as all of Borrower’s Loans in favor of Lender have been paid in full, including principal, interest, costs, expenses, attorneys’ fees, and other fees and charges, or until April 6, 2004.

ADVANCE AUTHORITY.  The following persons currently are authorized, except as provided in this paragraph, to request advances and authorize payments under the line of credit until Lender receives from Borrower, at Lender’s address shown above, written notice of revocation of their authority: Charles L. McNew, President of Halifax Corporation; and Joseph Sciacca, Vice President-Finance of Halifax Corporation. Lender shall make advances to the Borrower from time to time during the term of the loan upon Borrower’s request through ARTS, provided that the outstanding principal amount of such advances may not exceed the lesser of $8,000,000.00 or the Borrowing base. 

LINE OF CREDIT.  Lender agrees to make Advances to Borrower from time to time from the date of this Agreement to the Expiration Date, provided the aggregate amount of such Advances outstanding at any time does not exceed the Borrowing Base. Within the foregoing limits, Borrower may borrow, partially or wholly prepay, and reborrow under this Agreement as follows:

Conditions Precedent to Each Advance.  Lender’s obligation to make any Advance to or for the account of Borrower under this Agreement is subject to the following conditions precedent, with all documents, instruments, opinions, reports, and other items required under this Agreement to be in form and substance satisfactory to Lender:

(1) Lender shall have received evidence that this Agreement and all Related Documents have been duly authorized, executed, and delivered by Borrower to Lender.

(2) Lender shall have received such opinions of counsel, supplemental opinions, and documents as Lender may request

(3) The security interests in the Collateral shall have been duly authorized, created, and perfected with first lien priority and shall be in full force and effect.

(4) All guaranties required by Lender for the credit facility(ies) shall have been executed by each Guarantor, delivered to Lender, and be in full force and effect.

(5) Lender, at its option and for its sole benefit, shall have conducted an audit of Borrower’s Accounts, Inventory, Equipment books, records, and operations, and Lender shall be satisfied as to their condition.

(6) Borrower shall have paid to Lender all fees, costs, and expenses specified in this Agreement and the Related Documents as are then due and payable.

(7) There shall not exist at the time of any Advance a condition which would constitute an Event of Default under this Agreement, and Borrower shall have delivered to Lender the compliance certificate called for in the paragraph below titled “Compliance Certificate.”

Making Loan Advances.  Advances under this credit facility, as well as directions for payment from Borrower’s accounts, may be requested orally or in writing by authorized persons. Lender may, but need not, require that all oral requests be confirmed in writing. Each Advance shall be conclusively deemed to have been made at the request of and for the benefit of Borrower (1) when credited to any deposit account of Borrower maintained with Lender or (2) when advanced in accordance with the instructions of an authorized person. Lender, at its option, may set a cutoff time, after which all requests for Advances will be treated as having been requested on the next succeeding Business Day.

Mandatory Loan Repayments.  If at any time the aggregate principal amount of the outstanding Advances shall exceed the applicable Borrowing Base, Borrower, immediately upon written or oral notice from Lender, shall pay to Lender an amount equal to the difference between the outstanding principal balance of the Advances and the Borrowing Base. On the Expiration Date, Borrower shall pay to Lender in full the aggregate unpaid principal amount of all Advances then outstanding and all accrued unpaid interest, together with all other applicable fees, costs and charges, if any, not yet paid.

Minimum Interest Payment.  Borrower recognizes that Lender has incurred and will continue to incur certain costs and expenses in connection with establishing, maintaining, servicing, and administering the credit facility. To ensure that Lender is able to recover such costs and expenses, Borrower agrees that, notwithstanding any other provision of this Agreement, the promissory note for the credit facility, or the Related Documents, Lender shall be entitled to collect a minimum monthly interest charge of Prime rate plus 0.75%, which Borrower hereby promises and agrees to pay.

Loan Account.  Lender shall maintain on its books a record of account in which Lender shall make entries for each Advance and such other debits and credits as shall be appropriate in connection with the credit facility. Lender shall provide Borrower with periodic statements of Borrower’s account, which statements shall be considered to be correct and conclusively binding on Borrower unless Borrower notifies Lender to the contrary within thirty (30) days after Borrower’s receipt of any such statement which Borrower deems to be incorrect.

COLLATERAL. To secure payment of the Primary Credit Facility and performance of all other Loan, obligations and duties owed by Borrower to Lender, Borrower (and others, if required) shall grant to Lender Security Interests in such property and assets as Lender may require. Lender’s Security Interests in the Collateral shall be continuing liens and shall include the proceeds and products of the Collateral, including without limitation the proceeds of any insurance. With respect to the Collateral, Borrower agrees and represents and warrants to Lender:

Perfection of Security Interests.  Borrower agrees to execute financing statements and all documents perfecting Lender’s Security Interest and to take whatever other actions are requested by Lender to perfect and continue Lender’s Security Interests in the Collateral. Upon request of Lender, Borrower will deliver to Lender any and all of the documents evidencing or constituting the Collateral, and Borrower will note Lender’s interest upon any and all chattel paper and instruments if not delivered to Lender for possession by Lender. Contemporaneous with the execution of this Agreement, Borrower will execute one or more UCC financing statements and any similar statements as may be required by applicable law and

	BUSINESS LOAN AGREEMENT (ASSET BASED)
Loan No: 76-69310769	(Continued)	Page 2

Lender will file such financing statements and all such similar statements in the appropriate location or locations. Borrower hereby appoints Lender as its irrevocable attorney-in-fact for the purpose of executing any documents necessary to perfect or to continue any Security Interest. Lender may at any time, and without further authorization from Borrower, file a carbon, photograph, facsimile, or other reproduction of any financing statement for use as a financing statement. Borrower will reimburse Lender for all expenses for the perfection, termination, and the continuation of the perfection of Lender’s security interest in the Collateral. Borrower promptly will notify Lender before any change in Borrower’s name including any change to the assumed business names of Borrower. Borrower also promptly will notify Lender before any change in Borrower’s Social Security Number or Employer Identification Number. Borrower further agrees to notify Lender in writing prior to any change in address or location of Borrower’s principal governance office or should Borrower merge or consolidate with any other entity.

Collateral Records.  Borrower does now, and at all times hereafter shall, keep correct and accurate records of the Collateral, all of which records shall be available to Lender or Lender’s representative upon demand for inspection and copying at any reasonable time. With respect to the Accounts, Borrower agrees to keep and maintain such records as Lender may require, including without limitation information concerning Eligible Accounts and Account balances and agings. Records related to Accounts (Receivables) are or will be located at 5250 Cherokee Avenue, Alexandria, VA. 22312. With respect to the Inventory, Borrower agrees to keep and maintain such records as Lender may require, including without limitation information concerning Eligible Inventory and records itemizing and describing the kind, type, quality, and quantity of Inventory, Borrower’s Inventory costs and selling prices, and the daily withdrawals and additions to Inventory. Records related to Inventory are or will be located at 5250 Cherokee Avenue, Alexandria, Va. 22312. With respect to the Equipment, Borrower agrees to keep and maintain such records as Lender may require, including without limitation information concerning Eligible Equipment and records itemizing and describing the kind, type, quality, and quantity of Equipment, Borrower’s Equipment costs, and the daily withdrawals and additions to Equipment. Records related to Equipment are or will be located at 5250 Cherokee Avenue, Alexandria, VA. 2312. The above is an accurate and complete list of all locations at which Borrower keeps or maintains business records concerning Borrower’s collateral.

Collateral Schedules.  Concurrently with the execution and delivery of this Agreement, Borrower shall execute and deliver to Lender schedules of Accounts, Inventory and Equipment and schedules of Eligible Accounts, Eligible Inventory and Eligible Equipment, in form and substance satisfactory to the Lender. Thereafter supplemental schedules shall be delivered according to the following schedule: With respect to Eligible Accounts, schedules shall be delivered semi-monthly as set up within ARTS program.

Representations and Warranties Concerning Accounts.  With respect to the Accounts, Borrower represents and warrants to Lender: (1) Each Account represented by Borrower to be an Eligible Account for purposes of this Agreement conforms to the requirements of the definition of an Eligible Account; (2) All Account information listed on schedules delivered to Lender will be true and correct, subject to immaterial variance; and (3) Lender, its assigns, or agents shall have the right at any time and at Borrower’s expense to inspect, examine, and audit Borrower’s records and to confirm with Account Debtors the accuracy of such Accounts.

Representations and Warranties Concerning Inventory.  With respect to the Inventory, Borrower represents and warrants to Lender: (1) All Inventory represented by Borrower to be Eligible Inventory for purposes of this Agreement conforms to the requirements of the definition of Eligible Inventory; (2) All Inventory values listed on schedules delivered to Lender will be true and correct, subject to immaterial variance; (3) The value of the Inventory will be determined on a consistent accounting basis; (4) Except as agreed to the contrary by Lender in writing, all Eligible Inventory is now and at all times hereafter will be in Borrower’s physical possession and shall not be held by others on consignment, sale on approval, or sale or return; (5) Except as reflected in the Inventory schedules delivered to Lender, all Eligible Inventory is now and at all times hereafter will be of good and merchantable quality, free from defects; (6) Eligible Inventory is not now and will not at any time hereafter be stored with a bailee, warehouseman, or similar party without Lender’s prior written consent, and, in such event, Borrower will concurrently at the time of bailment cause any such bailee, warehouseman, or similar party to issue and deliver to Lender, in form acceptable to Lender, warehouse receipts in Lender name evidencing the storage of Inventory; and (7) Lender, its assigns, or agents shall have the right at any time and at Borrower’s expense to inspect and examine the Inventory and to check and test the same as to quality, quantity, value, and condition.

Representations and Warranties Concerning Equipment.  With respect to the Equipment, Borrower represents and warrants to Lender: (1) All Equipment represented by Borrower to be Eligible Equipment for purposes of this Agreement conforms to the requirements of the definition of Eligible Equipment; (2) All Equipment values listed on schedules delivered to Lender will be true and correct, subject to immaterial variance; (3) The value of the Equipment will be determined on a consistent accounting basis; (4) Except as agreed to the contrary by Lender in writing, all Eligible Equipment is now and at all times hereafter will be in Borrower’s physical possession; (5) Except as reflected in the Equipment schedules delivered to Lender, all Eligible Equipment is now and at all times hereafter will be of good and merchantable quality, free from defects; (6) Eligible Equipment is not now and will not at any time hereafter be stored with a bailee, warehouseman, or similar party without Lender’s prior written consent, and, in such event, Borrower will concurrently at the time of bailment cause any such bailee, warehouseman, or similar party to issue and deliver to Lender, in form acceptable to Lender, warehouse receipts in Lender name evidencing the storage of Equipment; and (7) Lender, its assigns, or agents shall have the right at any time and at Borrower’s expense to inspect and examine the Equipment and to check and test the same as to quality, quantity, value, and condition

Remittance Account. Borrower agrees that Lender may at any time require Borrower to institute procedures whereby the payments and other proceeds of the Accounts shall be paid by the Account Debtors under a remittance account or lock box arrangement with Lender, or Lender’s agent, or with one or more financial institutions designated by Lender. Borrower further agrees that, if no Event of Default exists under this Agreement, any and all of such funds received under such a remittance account or lock box arrangement shall, at Lender’s sole election and discretion, either be (1) paid or turned over to Borrower; (2) deposited into one or more accounts for the benefit of Borrower (which deposit accounts shall be subject to a security assignment in favor of Lender); (3) deposited into one or more accounts for the joint benefit of Borrower and Lender (which deposit accounts shall likewise be subject to a security assignment in favor of Lender); (4) paid or turned over to Lender to be applied to the Indebtedness in such order and priority as Lender may determine within its sole discretion; or (5) any combination of the foregoing as Lender shall determine from time to time. Borrower further agrees that, should one or more Events of Default exist, any and all funds received under such a remittance account or lock box arrangement shall be paid or turned over to Lender to be applied to the Indebtedness, again in such order and priority as Lender may determine within its sole discretion.

CONDITIONS PRECEDENT TO EACH ADVANCE.  Lender’s obligation to make the initial Advance and each subsequent Advance under this Agreement shall be subject to the fulfillment to Lender’s satisfaction of all of the conditions set forth in this Agreement and in the Related Documents.

Loan Documents.  Borrower shall provide to Lender the following documents for the Loan: (1) the Note; (2) Security Agreements granting to Lender security interests in the Collateral; (3) financing statements and all other documents perfecting Lender’s Security Interests; (4) evidence of insurance as required below; (5) subordinations; (6) together with all such Related Documents as Lender may require for the Loan; all in form and substance satisfactory to Lender and Lender’s counsel.

Borrower’s Authorization.  Borrower shall have provided in form and substance satisfactory to Lender properly certified resolutions, duly authorizing the execution and delivery of this Agreement, the Note and the Related Documents. In addition, Borrower shall have provided such other resolutions, authorizations, documents and instruments as Lender or its counsel, may require.

Fees and Expenses Under This Agreement.  Borrower shall have paid to Lender all fees, costs, and expenses specified in this Agreement and the Related Documents as are then due and payable.

	BUSINESS LOAN AGREEMENT (ASSET BASED)
Loan No: 76-69310769	(Continued)	Page 3

Representations and Warranties.  The representations and warranties set forth in this Agreement, in the Related Documents, and in any document or certificate delivered to Lender under this Agreement are true and correct.

No Event of Default.  There shall not exist at the time of any Advance a condition which would constitute an Event of Default under this Agreement or under any Related Document.

REPRESENTATIONS AND WARRANTIES.  Borrower represents and warrants to Lender, as of the date of this Agreement, as of the date of each disbursement of loan proceeds, as of the date of any renewal, extension or modification of any Loan, and at all times any Indebtedness exists:

Organization.  Borrower is a corporation for profit which is, and at all times shall be, duly organized, validly existing, and in good standing under and by virtue of the laws of the Commonwealth of Virginia. Borrower is duly authorized to transact business in all other states in which Borrower is doing business, having obtained all necessary filings, governmental licenses and approvals for each state in which Borrower is doing business. Specifically, Borrower is, and at all times shall be, duly qualified as a foreign corporation in all states in which the failure to so qualify would have a material adverse effect on its business or financial condition. Borrower has the full power and authority to own its properties and to transact the business in which it is presently engaged or presently proposes to engage. Borrower maintains an office at 5250 Cherokee Avenue, Alexandria, VA 22312. Unless Borrower has designated otherwise in writing, the principal office is the office at which Borrower keeps its books and records including its records concerning the Collateral. Borrower will notify Lender prior to any change in the location of Borrower’s state of organization or any change in Borrower’s name. Borrower shall do all things necessary to preserve and to keep in full force and effect its existence, rights and privileges, and shall comply with all regulations, rules, ordinances, statutes, orders and decrees of any governmental or quasi-governmental authority or court applicable to Borrower and Borrower’s business activities.

Assumed Business Names.  Borrower has filed or recorded all documents or filings required by law relating to all assumed business names used by Borrower. Excluding the name of Borrower, the following is a complete list of all assumed business names under which Borrower does business: None.

Authorization.  Borrower’s execution, delivery, and performance of this Agreement and all the Related Documents have been duly authorized by all necessary action by Borrower and do not conflict with, result in a violation of, or constitute a default under (1) any provision of Borrower’s articles of incorporation or organization, or bylaws, or any agreement or other instrument binding upon Borrower or (2) any law, governmental regulation, court decree, or order applicable to Borrower or to Borrower’s properties.

Financial Information.  Each of Borrower’s financial statements supplied to Lender truly and completely disclosed Borrower’s financial condition as of the date of the statement, and there has been no material adverse change in Borrower’s financial condition subsequent to the date of the most recent financial statement supplied to Lender. Borrower has no material contingent obligations except as disclosed in such financial statements.

Legal Effect.  This Agreement constitutes, and any instrument or agreement Borrower is required to give under this Agreement when delivered will constitute legal, valid, and binding obligations of Borrower enforceable against Borrower in accordance with their respective terms.

Properties.  Except as contemplated by this Agreement or as previously disclosed in Borrower’s financial statements or in writing to Lender and as accepted by Lender, and except for property tax liens for taxes not presently due and payable, Borrower owns and has good title to all of Borrower’s properties free and clear of all Security Interests, and has not executed any security documents or financing statements relating to such properties. All of Borrower’s properties are titled in Borrower’s legal name, and Borrower has not used, or filed a financing statement under, any other name for at least the last five (5) years.

Hazardous Substances.  Except as disclosed to and acknowledged by Lender in writing, Borrower represents and warrants that: (1) During the period of Borrower’s ownership of Borrower’s Collateral, there has been no use, generation, manufacture, storage, treatment, disposal, release or threatened release of any Hazardous Substance by any person on, under, about or from any of the Collateral. (2) Borrower has no knowledge of, or reason to believe that there has been (a) any breach or violation of any Environmental Laws; (b) any use, generation, manufacture, storage, treatment, disposal, release or threatened release of any Hazardous Substance on, under, about or from the Collateral by any prior owners or occupants of any of the Collateral; or (c) any actual or threatened litigation or claims of any kind by any person relating to such matters. (3) Neither Borrower nor any tenant, contractor, agent or other authorized user of any of the Collateral shall use, generate, manufacture, store, treat, dispose of or release any Hazardous Substance on, under, about or from any of the Collateral; and any such activity shall be conducted in compliance with all applicable federal, state, and local laws, regulations, and ordinances, including without limitation all Environmental Laws. Borrower authorizes Lender and its agents to enter upon the Collateral to make such inspections and tests as Lender may deem appropriate to determine compliance of the Collateral with this section of the Agreement. Any inspections or tests made by Lender shall be at Borrower’s expense and for Lender’s purposes only and shall not be construed to create any responsibility or liability on the part of Lender to Borrower or to any other person. The representations and warranties contained herein are based on Borrower’s due diligence in investigating the Collateral for hazardous waste and Hazardous Substances. Borrower hereby (1) releases and waives any future claims against Lender for indemnity or contribution in the event Borrower becomes liable for cleanup or other costs under any such laws, and (2) agrees to indemnify and hold harmless Lender against any and all claims, losses, liabilities, damages, penalties, and expenses which Lender may directly or indirectly sustain or suffer resulting from a breach of this section of the Agreement or as a consequence of any use, generation, manufacture, storage, disposal, release or threatened release of a hazardous waste or substance on the Collateral. The provisions of this section of the Agreement, including the obligation to indemnify, shall survive the payment of the Indebtedness and the termination, expiration or satisfaction of this Agreement and shall not be affected by Lender’s acquisition of any interest in any of the Collateral, whether by foreclosure or otherwise.

Litigation and Claims.  No litigation, claim, investigation, administrative proceeding or similar action (including those for unpaid taxes) against Borrower is pending or threatened, and no other event has occurred which may materially adversely affect Borrower’s financial condition or properties, other than litigation, claims, or other events, if any, that have been disclosed to and acknowledged by Lender in writing.

Taxes.  To the best of Borrower’s knowledge, all of Borrower’s tax returns and reports that are or were required to be filed, have been filed, and all taxes, assessments and other governmental charges have been paid in full, except those presently being or to be contested by Borrower in good faith in the ordinary course of business and for which adequate reserves have been provided.

Lien Priority.  Unless otherwise previously disclosed to Lender in writing, Borrower has not entered into or granted any Security Agreements, or permitted the filing or attachment of any Security Interests on or affecting any of the Collateral directly or indirectly securing repayment of Borrower’s Loan and Note, that would be prior or that may in any way be superior to Lender’s Security Interests and rights in and to such Collateral.

Binding Effect.  This Agreement, the Note, all Security Agreements (if any), and all Related Documents are binding upon the signers thereof, as well as upon their successors. representatives and assigns, and are legally enforceable in accordance with their respective terms.

AFFIRMATIVE COVENANTS.  Borrower covenants and agrees with Lender that, so long as this Agreement remains in effect, Borrower will:

Notices of Claims and Litigation.  Promptly inform Lender in writing of (1) all material adverse changes in Borrower’s financial condition, and (2) all existing and all threatened litigation, claims, investigations, administrative proceedings or similar actions affecting Borrower or any Guarantor which could materially affect the financial condition of Borrower or the financial condition of any Guarantor.

	BUSINESS LOAN AGREEMENT (ASSET BASED)
Loan No: 76-69310769	(Continued)	Page 4

Financial Records.  Maintain its books and records in accordance with GAAP, applied on a consistent basis, and permit Lender to examine and audit Borrower’s books and records at all reasonable times.

Financial Statements.  Furnish Lender with the following:

Annual Statements.  As soon as available, but in no event later than one-hundred-twenty (120) days after the end of each fiscal year, Borrower’s balance sheet and income statement for the year ended, audited by a certified public accountant satisfactory to Lender.

Interim Statements.  As soon as available, but in no event later than thirty (30) days after the end of each fiscal quarter, Borrower’s balance sheet and profit and loss statement for the period ended, audited by a certified public accountant satisfactory to Lender.

Tax Returns.  As soon as available, but in no event later than one-hundred-twenty (120) days after the applicable filing date for the tax reporting period ended, Federal and other governmental tax returns, prepared by a certified public accountant satisfactory to Lender.

Additional Requirements.  The borrower will be required to submit to lender, along with its audited annual financial statement, a list including contact name, address and phone number of Borrower’s then current clients. If at any time during the term of the loan the equity position of the Borrower falls below the current position of a negative $1,400,000.00, such a fall will constitute an event of default under the Loan and pursuant to the Loan Documents.

All financial reports required to be provided under this Agreement shall be prepared in accordance with GAAP, applied on a consistent basis, and certified by Borrower as being true and correct.

Additional Information.  Furnish such additional information and statements, as Lender may request from time to time.

Insurance.  Maintain fire and other risk insurance, public liability insurance, and such other insurance as Lender may require with respect to Borrower’s properties and operations, in form, amounts, coverages and with insurance companies acceptable to Lender. Borrower, upon request of Lender, will deliver to Lender from time to time the policies or certificates of insurance in form satisfactory to Lender, including stipulations that coverages will not be cancelled or diminished without at least ten (10) days prior written notice to Lender. Each insurance policy also shall include an endorsement providing that coverage in favor of Lender will not be impaired in any way by any act, omission or default of Borrower or any other person. In connection with all policies covering assets in which Lender holds or is offered a security interest for the Loans, Borrower will provide Lender with such lender’s loss payable or other endorsements as Lender may require.

Insurance Reports.  Furnish to Lender, upon request of Lender, reports on each existing insurance policy showing such information as Lender may reasonably request, including without limitation the following: (1) the name of the insurer; (2) the risks insured; (3) the amount of the policy; (4) the properties insured; (5) the then current property values on the basis of which insurance has been obtained, and the manner of determining those values; and (6) the expiration date of the policy. In addition, upon request of Lender (however not more often than annually), Borrower will have an independent appraiser satisfactory to Lender determine, as applicable, the actual cash value or replacement cost of any Collateral. The cost of such appraisal shall be paid by Borrower.

Subordination.  Prior to disbursement of any Loan proceeds, deliver to Lender a subordination agreement on Lender’s forms, executed by Borrower’s creditor named below, subordinating all of Borrower’s indebtedness to such creditor, or such lesser amount as may be agreed to by Lender in writing, and any security interests in collateral securing that indebtedness to the Loans and security interests of Lender.

Name of Creditor	Total Amount of Debt
Research Industries		$4,000,000.00

Other Agreements.  Comply with all terms and conditions of all other agreements, whether now or hereafter existing, between Borrower and any other party and notify Lender immediately in writing of any default in connection with any other such agreements.

Loan Fees, Charges and Expenses.  In addition to all other agreed upon fees, charges, and expenses, pay the following: The borrower shall pay to the lender a commitment fee at the rate of 0.25% per annum on the average daily amount of the excess of the Revolving Commitment over the aggregate outstanding principal amount of advances. Such commitment fee is due quarterly in arrears commencing on April 1, 2002 and continuing until termination of the Loan. Loan fee of $40,000.00 is a non-refundable fee and is payable in two equal installments of $20,000.00 upon (1) Loan closing, and (2) the first (1st) anniversary of Loan closing. Upon Borrower acceptance of this Commitment this total fee is considered earned by Lender. 

Loan Proceeds.  Use all Loan proceeds solely for the following specific purposes: Payoff existing Account Receivable line of credit currently held at Bank of America.

Taxes, Charges and Liens.  Pay and discharge when due all of its indebtedness and obligations, including without limitation all assessments, taxes, governmental charges, levies and liens, of every kind and nature, imposed upon Borrower or its properties, income, or profits, prior to the date on which penalties would attach, and all lawful claims that, if unpaid, might become a lien or charge upon any of Borrower’s properties, income, or profits.

Performance.  Perform and comply, in a timely manner, with all terms, conditions, and provisions set forth in this Agreement, in the Related Documents, and in all other instruments and agreements between Borrower and Lender. Borrower shall notify Lender immediately in writing of any default in connection with any agreement.

Operations.  Maintain executive and management personnel with substantially the same qualifications and experience as the present executive and management personnel; provide written notice to Lender of any change in executive and management personnel; conduct its business affairs in a reasonable and prudent manner.

Environmental Studies.  Promptly conduct and complete, at Borrower’s expense, all such investigations, studies, samplings and testings as may be requested by Lender or any governmental authority relative to any substance, or any waste or by-product of any substance defined as toxic or a hazardous substance under applicable federal, state, or local law, rule, regulation, order or directive, at or affecting any property or any facility owned, leased or used by Borrower.

Compliance with Governmental Requirements.  Comply with all laws, ordinances, and regulations, now or hereafter in effect, of all governmental authorities applicable to the conduct of Borrower’s properties, businesses and operations, and to the use or occupancy of the Collateral, including without limitation, the Americans With Disabilities Act. Borrower may contest in good faith any such law, ordinance, or regulation and withhold compliance during any proceeding, including appropriate appeals, so long as Borrower has notified Lender in writing prior to doing so and so long as, in Lender’s sole opinion, Lender’s interests in the Collateral are not jeopardized. Lender may require Borrower to post adequate security or a surety bond, satisfactory to Lender, to protect Lender’s interest.

Inspection.  Permit employees or agents of Lender at any reasonable time to inspect any and all Collateral for the Loan or Loans and Borrower’s other properties and to examine or audit Borrower’s books, accounts, and records and to make copies and memoranda of Borrower’s books, accounts, and records. If Borrower now or at any time hereafter maintains any records (including without limitation computer generated records and computer software programs for the generation of such records) in the possession of a third party. Borrower upon request of Lender, shall

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Loan No: 76-69310769	(Continued)	Page 5

notify such party to permit Lender free access to such records at all reasonable times and to provide Lender with copies of any records it may request, all at Borrower’s expense.

Compliance Certificates.  Unless waived in writing by Lender, provide Lender at least annually, with a certificate executed by Borrower’s chief financial officer, or other officer or person acceptable to Lender, certifying that the representations and warranties set forth in this Agreement are true and correct as of the date of the certificate and further certifying that, as of the date of the certificate, no Event of Default exists under this Agreement.

Environmental Compliance and Reports.  Borrower shall comply in all respects with any and all Environmental Laws; not cause or permit to exist, as a result of an intentional or unintentional action or omission on Borrower’s part or on the part of any third party, on property owned and/or occupied by Borrower, any environmental activity where damage may result to the environment, unless such environmental activity is pursuant to and in compliance with the conditions of a permit issued by the appropriate federal, state or local governmental authorities; shall furnish to Lender promptly and in any event within thirty (30) days after receipt thereof a copy of any notice, summons, lien, citation, directive, letter or other communication from any governmental agency or instrumentality concerning any intentional or unintentional action or omission on Borrower’s part in connection with any environmental activity whether or not there is damage to the environment and/or other natural resources.

Additional Assurances.  Make, execute and deliver to Lender such promissory notes, mortgages, deeds of trust, security agreements, assignments, financing statements, instruments, documents and other agreements as Lender or its attorneys may reasonably request to evidence and secure the Loans and to perfect all Security Interests.

LENDER’S EXPENDITURES.  If any action or proceeding is commenced that would materially affect Lender’s interest in the Collateral or if Borrower fails to comply with any provision of this Agreement or any Related Documents, including but not limited to Borrower’s failure to discharge or pay when due any amounts Borrower is required to discharge or pay under this Agreement or any Related Documents, Lender on Borrower’s behalf may (but shall not be obligated to) take any action that Lender deems appropriate, including but not limited to discharging or paying all taxes, liens, security interests, encumbrances and other claims, at any time levied or placed on any Collateral and paying all costs for insuring, maintaining and preserving any Collateral. All such expenditures incurred or paid by Lender for such purposes will then bear interest at the rate charged under the Note from the date incurred or paid by Lender to the date of repayment by Borrower. All such expenses will become a part of the Indebtedness and, at Lender’s option, will (A) be payable on demand; (B) be added to the balance of the Note and be apportioned among and be payable with any installment payments to become due during either (1) the term of any applicable insurance policy; or (2) the remaining term of the Note; or (C) be treated as a balloon payment which will be due and payable at the Note’s maturity.

NEGATIVE COVENANTS.  Borrower covenants and agrees with Lender that while this Agreement is in effect, Borrower shall not, without the prior written consent of Lender:

Indebtedness and Liens.  (1) Except for trade debt incurred in the normal course of business and indebtedness to Lender contemplated by this Agreement, create, incur or assume indebtedness for borrowed money, including capital leases, (2) sell, transfer, mortgage, assign, pledge, lease, grant a security interest in, or encumber any of Borrower’s assets (except as allowed as Permitted Liens), or (3) sell with recourse any of Borrower’s accounts, except to Lender. * continued on page 9

Additional Financial Restrictions.  No dividends or distributions are to be paid to stockholders of Borrower until the equity position of the Borrower reaches $2,000,000.00, and further distributions will cease if the equity position falls below $2,000,000.00.

Continuity of Operations.  (1) Engage in any business activities substantially different than those in which Borrower is presently engaged, (2) cease operations, liquidate, merge, transfer, acquire or consolidate with any other entity, change its name, dissolve or transfer or sell Collateral out of the ordinary course of business, or (3) pay any dividends on Borrower’s stock (other than dividends payable in its stock), provided, however that notwithstanding the foregoing, but only so long as no Event of Default has occurred and is continuing or would result from the payment of dividends, if Borrower is a “Subchapter S Corporation” (as defined in the Internal Revenue Code of 1986, as amended), Borrower may pay cash dividends on its stock to its shareholders from time to time in amounts necessary to enable the shareholders to pay income taxes and make estimated income tax payments to satisfy their liabilities under federal and state law which arise solely from their status as Shareholders of a Subchapter S Corporation because of their ownership of shares of Borrower’s stock, or purchase or retire any of Borrower’s outstanding shares or alter or amend Borrower’s capital structure.

Loans, Acquisitions and Guaranties.  (1) Loan, invest in or advance money or assets, (2) purchase, create or acquire any interest in any other enterprise or entity, or (3) incur any obligation as surety or guarantor other than in the ordinary course of business.

CESSATION OF ADVANCES.  If Lender has made any commitment to make any Loan to Borrower, whether under this Agreement or under any other agreement, Lender shall have no obligation to make Loan Advances or to disburse Loan proceeds if: (A) Borrower or any Guarantor is in default under the terms of this Agreement or any of the Related Documents or any other agreement that Borrower or any Guarantor has with Lender; (B) Borrower or any Guarantor dies, becomes incompetent or becomes insolvent, files a petition in bankruptcy or similar proceedings, or is adjudged a bankrupt; (C) there occurs a material adverse change in Borrower’s financial condition, in the financial condition of any Guarantor, or in the value of any Collateral securing any Loan; or (D) any Guarantor seeks, claims or otherwise attempts to limit, modify or revoke such Guarantor’s guaranty of the Loan or any other loan with Lender; or (E) Lender in good faith deems itself insecure, even though no Event of Default shall have occurred.

RIGHT OF SETOFF.  To the extent permitted by applicable law, Lender reserves a right of setoff in all Borrower’s accounts with Lender (whether checking, savings, or some other account). This includes all accounts Borrower holds jointly with someone else and all accounts Borrower may open in the future. However, this does not include any IRA or Keogh accounts, or any trust accounts for which setoff would be prohibited by law. Borrower authorizes Lender, to the extent permitted by applicable law, to charge or setoff all sums owing on the Indebtedness against any and all such accounts.

DEFAULT.  Each of the following shall constitute an Event of Default under this Agreement:

Payment Default.  Borrower fails to make any payment when due under the Loan.

Other Defaults.  Borrower fails to comply with or to perform any other term, obligation, covenant or condition contained in this Agreement or in any of the Related Documents or to comply with or to perform any term, obligation, covenant or condition contained in any other agreement between Lender and Borrower.

False Statements.  Any warranty, representation or statement made or furnished to Lender by Borrower or on Borrower’s behalf under this Agreement or the Related Documents is false or misleading in any material respect, either now or at the time made or furnished or becomes false or misleading at any time thereafter.

Insolvency.  The dissolution or termination of Borrower’s existence as a going business, or a trustee or receiver is appointed for Borrower or for all or a substantial portion of the assets of Borrower, or Borrower makes a general assignment for the benefit of Borrower’s creditors, or Borrower files for bankruptcy, or an involuntary bankruptcy petition is filed against Borrower and such involuntary petition remains undismissed for sixty (60) days.

Defective Collateralization.  This Agreement or any of the Related Documents ceases to be in full force and effect (including failure of arty collateral document to create a valid and perfected security interest or lien) at any time and for any reason.

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Loan No: 76-69310769	(Continued)	Page 6

Creditor or Forfeiture Proceedings.  Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Borrower or by any governmental agency against any collateral securing the Loan. This includes a garnishment of any of Borrower’s accounts, including deposit accounts, with Lender. However, this Event of Default shall not apply if there is a good faith dispute by Borrower as to the validity or reasonableness of the claim which is the basis of the creditor or forfeiture proceeding and if Borrower gives Lender written notice of the creditor or forfeiture proceeding and deposits with Lender monies or a surety bond for the creditor or forfeiture proceeding, in an amount determined by Lender, in its sole discretion, as being an adequate reserve or bond for the dispute.

Events Affecting Guarantor.  Any of the preceding events occurs with respect to any Guarantor of any of the Indebtedness or any Guarantor dies or becomes incompetent, or revokes or disputes the validity of, or liability under, any Guaranty of the Indebtedness.

Change in Ownership.  Any change in ownership of twenty-five percent (25%) or more of the common stock of Borrower.

Adverse Change.  A material adverse change occurs in Borrower’s financial condition, or Lender believes the prospect of payment or performance of the Loan is impaired.

Insecurity.  Lender in good faith believes itself insecure.

EFFECT OF AN EVENT OF DEFAULT.  If any Event of Default shall occur, except where otherwise provided in this Agreement or the Related Documents, all commitments and obligations of Lender under this Agreement or the Related Documents or any other agreement immediately will terminate (including any obligation to make further Loan Advances or disbursements), and, at Lender’s option, all sums owing in connection with the Loans, including all principal, interest, and all other fees, costs and charges, if any, will become immediately due and payable, all without notice of any kind to Borrower, except that in the case of an Event of Default of the type described in the “lnsolvency” subsection above, such acceleration shall be automatic and not optional. In addition, Lender shall have all the rights and remedies provided in the Related Documents or available at law, in equity, or otherwise. Except as may be prohibited by applicable law, all of Lender’s rights and remedies shall be cumulative and may be exercised singularly or concurrently. Election by Lender to pursue any remedy shall not exclude pursuit of any other remedy, and an election to make expenditures or to take action to perform an obligation of Borrower or of any Grantor shall not affect Lender’s right to declare a default and to exercise its rights and remedies.

MISCELLANEOUS PROVISIONS.  The following miscellaneous provisions are a part of this Agreement:

Amendments.  This Agreement, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in this Agreement. No alteration of or amendment to this Agreement shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment.

Attorneys’ Fees; Expenses.  Borrower agrees that if Lender hires an attorney to help enforce this Agreement, Borrower will pay, subject to any limits under applicable law, Lender’s attorneys’ fees and all of Lender’s other collection expenses, whether or not there is a lawsuit and including without limitation additional legal expenses for bankruptcy proceedings.

Caption Headings.  Caption headings in this Agreement are for convenience purposes only and are not to be used to interpret or define the provisions of this Agreement.

Consent to Loan Participation.  Borrower agrees and consents to Lender’s sale or transfer, whether now or later, of one or more participation interests in the Loan to one or more purchasers, whether related or unrelated to Lender. Lender may provide, without any limitation whatsoever, to any one or more purchasers, or potential purchasers, any information or knowledge Lender may have about Borrower or about any other matter relating to the Loan, and Borrower hereby waives any rights to privacy Borrower may have with respect to such matters. Borrower additionally waives any and all notices of sale of participation interests, as well as all notices of any repurchase of such participation interests. Borrower also agrees that the purchasers of any such participation interests will be considered as the absolute owners of such interests in the Loan and will have all the rights granted under the participation agreement or agreements governing the sale of such participation interests. Borrower further waives all rights of offset or counterclaim that it may have now or later against Lender or against any purchaser of such a participation interest and unconditionally agrees that either Lender or such purchaser may enforce Borrower’s obligation under the Loan irrespective of the failure or insolvency of any holder of any interest in the Loan. Borrower further agrees that the purchaser of any such participation interests may enforce its interests irrespective of any personal claims or defenses that Borrower may have against Lender.

Governing Law. This Agreement will be governed by, construed and enforced in accordance with federal law and the laws of the Commonwealth of Virginia. This Agreement has been accepted by Lender in the Commonwealth of Virginia. 

Choice of Venue.  If there is a lawsuit, Borrower agrees upon Lender’s request to submit to the jurisdiction of the applicable courts for Fauquier County, Commonwealth of Virginia.

No Waiver by Lender.  Lender shall not be deemed to have waived any rights under this Agreement unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Agreement shall not prejudice or constitute a waiver of Lender’s right otherwise to demand strict compliance with that provision or any other provision of this Agreement. No prior waiver by Lender, nor any course of dealing between Lender and Borrower, or between Lender and any Grantor, shall constitute a waiver of any of Lender’s rights or of any of Borrower’s or any Grantor’s obligations as to any future transactions. Whenever the consent of Lender is required under this Agreement, the granting of such consent by Lender in any instance shall not constitute continuing consent to subsequent instances where such consent is required and in all cases such consent may be granted or withheld in the sole discretion of Lender.

Notices.  Any notice required to be given under this Agreement shall be given in writing, and shall be effective when actually delivered, if hand delivered, when actually received by telefacsimile (unless otherwise required by law), when deposited with a nationally recognized overnight courier, or, if mailed, when deposited in the United States mail, as first class, certified or registered mail postage prepaid, directed to the addresses shown near the beginning of this Agreement. Any party may change its address for notices under this Agreement by giving formal written notice to the other parties, specifying that the purpose of the notice is to change the party’s address. For notice purposes, Borrower agrees to keep Lender informed at all times of Borrower’s current address. Unless otherwise provided or required by law, if there is more than one Borrower, any notice given by Lender to any Borrower is deemed to be notice given to all Borrowers.

Severability.  If a court of competent jurisdiction finds any provision of this Agreement to be illegal, invalid, or unenforceable as to any circumstance, that finding shall not make the offending provision illegal, invalid, or unenforceable as to any other circumstance. If feasible, the offending provision shall be considered modified so that it becomes legal, valid and enforceable. If the offending provision cannot be so modified, it shall be considered deleted from this Agreement. Unless otherwise required by law, the illegality, invalidity, or unenforceability of any provision of this Agreement shall not affect the legality, validity or enforceability of any other provision of this Agreement.

Subsidiaries and Affiliates of Borrower.  To the extent the context of any provisions of this Agreement makes it appropriate, including without limitation any representation, warranty or covenant, the word “Borrower” as used in this Agreement shall include all of Borrower’s subsidiaries and affiliates. Notwithstanding the foregoing however, under no circumstances shall this Agreement be construed to require Lender to make any Loan or other financial accommodation to any of Borrower’s subsidiaries’ or affiliates.

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Loan No: 76-69310769	(Continued)	Page 7

Successors and Assigns.  All covenants and agreements contained by or on behalf of Borrower shall bind Borrower’s successors and assigns and shall inure to the benefit of Lender and its successors and assigns. Borrower shall not, however, have the right to assign Borrower’s rights under this Agreement or any interest therein, without the prior written consent of Lender.

Survival of Representations and Warranties.  Borrower understands and agrees that in extending Loan Advances, Lender is relying on all representations, warranties, and covenants made by Borrower in this Agreement or in any certificate or other instrument delivered by Borrower to Lender under this Agreement or the Related Documents. Borrower further agrees that regardless of any investigation made by Lender, all such representations, warranties and covenants will survive the extension of Loan Advances and delivery to Lender of the Related Documents, shall be continuing in nature, shall be deemed made and redated by Borrower at the time each Loan Advance is made, and shall remain in full force and effect until such time as Borrower’s Indebtedness shall be paid in full, or until this Agreement shall be terminated in the manner provided above, whichever is the last to occur.

Time is of the Essence. Time is of the essence in the performance of this Agreement.

Waive Jury. All parties to this Agreement hereby waive the right to any jury trial in any action, proceeding, or counterclaim brought by any party against any other party.

DEFINITIONS.  The following capitalized words and terms shall have the following meanings when used in this Agreement. Unless specifically stated to the contrary, all references to dollar amounts shall mean amounts in lawful money of the United States of America. Words and terms used in the singular shall include the plural, and the plural shall include the singular, as the context may require. Words and terms not otherwise defined in this Agreement shall have the meanings attributed to such terms in the Uniform Commercial Code. Accounting words and terms not otherwise defined in this Agreement shall have the meanings assigned to them in accordance with generally accepted accounting principles as in effect on the date of this Agreement:

Account.  The word “Account” means a trade account, account receivable, other receivable, or other right to payment for goods sold or services rendered owing to Borrower (or to a third party grantor acceptable to Lender).

Advance.  The word “Advance” means a disbursement of Loan funds made, or to be made, to Borrower or on Borrower’s behalf under the terms and conditions of this Agreement.

Agreement.  The word “Agreement” means this Business Loan Agreement (Asset Based), as this Business Loan Agreement (Asset Based) may be amended or modified from time to time, together with all exhibits and schedules attached to this Business Loan Agreement (Asset Based) from time to time.

Borrower.  The word “Borrower” means Halifax Corporation, and all other persons and entities signing the Note in whatever capacity.

Borrowing Base. The words “Borrowing Base” mean, as determined by Lender from time to time, the lesser of (1) $8,000,000.00 or (2) the sum of (a) 85.000% of the aggregate amount of Eligible Accounts (not to exceed in corresponding Loan amount based on Eligible Accounts S$,000,000.00), plus (b)  zero % of the aggregate amount of Eligible Inventory, plus zero % of the aggregate amount of Eligible Equipment.

Business Day.  The words “Business Day” mean a day on which commercial banks are open in the Commonwealth of Virginia.

Collateral.  The word “Collateral” means all property and assets granted as collateral security for a Loan, whether real or personal property, whether granted directly or indirectly, whether granted now or in the future, and whether granted in the form of a security interest, mortgage, collateral mortgage, deed of trust, assignment, pledge, crop pledge, chattel mortgage, collateral chattel mortgage, chattel trust, factor’s lien, equipment trust, conditional sale, trust receipt, lien, charge, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever, whether created by law, contract, or otherwise. The word Collateral also includes without limitation all collateral described in the Collateral section of this Agreement.

Eligible Accounts.  The words “Eligible Accounts” mean at any time, all of Borrower’s Accounts which contain selling terms and conditions acceptable to Lender. The net amount of any Eligible Account against which Borrower may borrow shall exclude all returns, discounts, credits, and offsets of any nature. Unless otherwise agreed to by Lender in writing, Eligible Accounts do not include:

(1) Accounts with respect to which the Account Debtor is employee or agent of Borrower.

(2) Accounts with respect to which the Account Debtor is a subsidiary of, or affiliated with Borrower or its shareholders, officers, or directors.

(3) Accounts with respect to which goods are placed on consignment, guaranteed sale, or other terms by reason of which the payment by the Account Debtor may be conditional.

(4) Accounts with respect to which Borrower is or may become liable to the Account Debtor for goods sold or services rendered by the Account Debtor to Borrower.

(5) Accounts which are subject to dispute, counterclaim, or setoff.

(6) Accounts with respect to which the goods have not been shipped or delivered, or the services have not been rendered, to the Account Debtor.

(7) Accounts with respect to which Lender, in its sole discretion, deems the creditworthiness or financial condition of the Account Debtor to be unsatisfactory.

(8) Accounts of any Account Debtor who has filed or has had filed against it a petition in bankruptcy or an application for relief under any provision of any state or federal bankruptcy, insolvency, or debtor-in-relief acts; or who has had appointed a trustee, custodian, or receiver for the assets of such Account Debtor; or who has made an assignment for the benefit of creditors or has become insolvent or fails generally to pay its debts (including its payrolls) as such debts become due.

(9) Accounts which have not been paid in full within 90 DAYS from the invoice date.

(10) n/a.

Eligible Equipment.  The words “Eligible Equipment” mean, at any time, all of Borrower’s Equipment as defined below except:

(1) Equipment which is not owned by Borrower free and clear of all security interests, liens, encumbrances, and claims of third parties.

(2) Equipment which Lender, in its sole discretion, deems to be obsolete, unsalable, damaged, defective, or unfit for operation.

(3) N/A.

Eligible Inventory.  The words “Eligible Inventory” mean at any time, all of Borrower’s Inventory as defined below except:

(1) Inventory which is not owned by Borrower free and clear of all security interests, liens, encumbrances, and claims of third parties.

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Loan No: 76-69310769	(Continued)	Page 8

(2) Inventory which Lender, in its sole discretion, deems to be obsolete, unsalable, damaged, defective, or unfit for further processing.

(3) N/A.

Environmental Laws.  The words “Environmental Laws” mean any and all state, federal and local statutes, regulations and ordinances relating to the protection of human health or the environment, including without limitation the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, 42 U.S.C. Section 9601, et seq. (“CERCLA”), the Superfund Amendments and Reauthorization Act of 1986, Pub. L. No. 99-499 (“SARA”), the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq., the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., or other applicable state or federal laws, rules, or regulations adopted pursuant thereto.

Equipment.  The word “Equipment” means all of Borrower’s goods used or bought for use primarily in Borrower’s business and which are not included in inventory, whether now or hereafter existing.

Event of Default.  The words “Event of Default” mean any of the events of default set forth in this Agreement in the default section of this Agreement.

Expiration Date.  The words “Expiration Date” mean the date of termination of Lender’s commitment to lend under this Agreement.

GAAP.  The word “GAAP” means generally accepted accounting principles.

Grantor.  The word “Grantor” means each and all of the persons or entities granting a Security Interest in any Collateral for the Loan, and their personal representatives, successors and assigns.

Guarantor.  The word “Guarantor” means any guarantor, surety, or accommodation party of any or all of the Loan.

Guaranty.  The word “Guaranty” means the guaranty from Guarantor to Lender, including without limitation a guaranty of all or part of the Note.

Hazardous Substances.  The words “Hazardous Substances” mean materials that, because of their quantity, concentration or physical, chemical or infectious characteristics, may cause or pose a present or potential hazard to human health or the environment when improperly used, treated, stored, disposed of, generated, manufactured, transported or otherwise handled. The words “Hazardous Substances” are used in their very broadest sense and include without limitation any and all hazardous or toxic substances, materials or waste as defined by or listed under the Environmental Laws. The term “Hazardous Substances” also includes, without limitation, petroleum and petroleum by-products or any fraction thereof and asbestos.

Indebtedness.  The word “Indebtedness” means the indebtedness evidenced by the Note or Related Documents, including all principal and interest together with all other indebtedness and costs and expenses for which Borrower is responsible under this Agreement or under any of the Related Documents.

Inventory.  The word “Inventory” means all of Borrower’s raw materials, work in process, finished goods, merchandise, parts and supplies, of every kind and description, and goods held for sale or lease or furnished under contracts of service in which Borrower now has or hereafter acquires any right, whether held by Borrower or others, and all documents of title, warehouse receipts, bills of lading, and all other documents of every type covering all or any part of the foregoing. Inventory includes inventory temporarily out of Borrower’s custody or possession and all returns on Accounts.

Lender.  The word “Lender” means Southern Financial Bank, its successors and assigns.

Loan.  The word “Loan” means any and all loans and financial accommodations from Lender to Borrower whether now or hereafter existing, and however evidenced, including without limitation those loans and financial accommodations described herein or described on any exhibit or schedule attached to this Agreement from time to time.

Note.  The word “Note” means the Note executed by Borrower in the principal amount of $8,000,000.00 dated March 6, 2002, together with all modifications of and renewals, replacements, and substitutions for the note or credit agreement.

Permitted Liens.  The words “Permitted Liens” mean (1) liens and security interests securing Indebtedness owed by Borrower to Lender; (2) liens for taxes, assessments, or similar charges either not yet due or being contested in good faith; (3) liens of materialmen, mechanics, warehousemen, or carriers, or other like liens arising in the ordinary course of business and securing obligations which are not yet delinquent; (4) purchase money liens or purchase money security interests upon or in any property acquired or held by Borrower in the ordinary course of business to secure indebtedness outstanding on the date of this Agreement or permitted to be incurred under the paragraph of this Agreement titled “Indebtedness and Liens”; (5) liens and security interests which, as of the date of this Agreement, have been disclosed to and approved by the Lender in writing; and (6) those liens and security interests which in the aggregate constitute an immaterial and insignificant monetary amount with respect to the net value of Borrower’s assets
*continued on page 9

Primary Credit Facility.  The words “Primary Credit Facility” mean the credit facility described in the Line of Credit section of this Agreement.

Related Documents.  The words “Related Documents” mean all promissory notes, credit agreements, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, security deeds, collateral mortgages, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the Loan.

Security Agreement.  The words “Security Agreement” mean and include without limitation any agreements, promises, covenants, arrangements, understandings or other agreements, whether created by law, contract, or otherwise, evidencing, governing, representing, or creating a Security Interest.

Security Interest.  The words “Security Interest” mean, without limitation, any and all types of collateral security, present and future, whether in the form of a lien, charge, encumbrance, mortgage, deed of trust, security deed, assignment, pledge, crop pledge, chattel mortgage, collateral chattel mortgage, chattel trust, factor’s lien, equipment trust, conditional sale, trust receipt, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever whether created by law, contract, or otherwise.

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BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS BUSINESS LOAN AGREEMENT (ASSET BASED) AND BORROWER AGREES TO ITS TERMS. THIS BUSINESS LOAN AGREEMENT (ASSET BASED) IS DATED MARCH 6, 2002. THIS AGREEMENT IS GIVEN UNDER SEAL AND IT IS INTENDED THAT THIS AGREEMENT IS AND SHALL CONSTITUTE AND HAVE THE EFFECT OF A SEALED INSTRUMENT ACCORDING TO LAW. 

BORROWER:
 

HALIFAX CORPORATION

By:  /s/ CHARLES L. MCNEW Charles L. McNew, President of Halifax Corporation (Seal)           By:  /s/ JOSEPH SCIACCA Joseph Sciacca, Vice President-Finance of Halifax
Corporation (Seal)

LENDER:
 

SOUTHERN FINANCIAL BANK

By:       [SIG] Authorized Signer (Seal)

LASER PRO Lending Ver. 5.17 00 03 Copr. Harland Financial Solutions, Inc. 1997   2002.   All Rights Reserved.   – VA L\LaserPro\CFI\LPL\C40 FC  TR–442 PR–4

* Continued from page 5:
In addition, Debtor may secure money purchase financing not to exceed $250,000,00 per annum. Under the provision of Contract 844 (VDOT/VRS) security interest may be filed for financing in the ordinary course of business.

EX-4.11 4 w60790exv4w11.htm PROMISSORY NOTE DATED OCTOBER 8, 1998

EXHIBIT 4.11

PROMISSORY NOTE

$690,000
  October 8, 1998
Alexandria, Virginia

     FOR VALUE RECEIVED, the undersigned, a Virginia corporation (the Borrower) hereby promises to pay to the order of RESEARCH INDUSTRIES INCORPORATED, a Virginia corporation (the Lender), at 123 North Pitt Street, Alexandria, Virginia 22314, or such other location as the holder hereof may in writing designate, the principal sum of SIX HUNDRED AND NINETY THOUSAND AND NO/00 DOLLARS ($690,000), in lawful money of the United States of America in immediately available funds, on January 6, 1999, without defense, offset or counterclaim, together with interest on the unpaid principal amount hereof, at such office, in like money and funds, from the date hereof at the rate of eight (8) per cent per annum.

     This Note is subject to the terms and conditions of the Subordination Agreement dated January 27, 1998 entered into by and among Research Industries Incorporated, Crestar Bank and Halifax Corporation.

     This Note is one of two Notes referred to in the Loan Agreement between the Borrower and the Lender dated October 8, 1998.

     The Borrower hereby waives presentment, demand, notice of dishonor, protest and all other demands and notices in connection with the delivery, acceptance, performance and enforcement of this Note. Lender shall be entitled to recover any costs and reasonable attorney’s fees incurred in the collection of this Note.

     This Note may be prepaid at anytime without penalty.

     This Note shall be governed by and construed in accordance with the laws of the Commonwealth of Virginia, without reference to conflict of laws principles.

     IN WITNESS WHEREOF, the Borrower has caused this note to be executed by its duly authorized President as of the day and year first above written.

BORROWER

HALIFAX CORPORATION
a Virginia Corporation

By:  /s/  HOWARD C. MILLS

Name: Howard C. Mills
Title: President

EX-4.12 5 w60790exv4w12.htm PROMISSORY NOTE DATED OCTOBER 13, 1998

EXHIBIT 4.12

PROMISSORY NOTE

$310,000
  October 13, 1998
Alexandria, Virginia

     FOR VALUE RECEIVED, the undersigned, a Virginia corporation (the Borrower) hereby promises to pay to the order of RESEARCH INDUSTRIES INCORPORATED, a Virginia corporation (the Lender), at 123 North Pitt Street, Alexandria, Virginia 22314, or such other location as the holder hereof may in writing designate, the principal sum of THREE HUNDRED AND TEN THOUSAND AND NO/00 DOLLARS ($310,000), in lawful money of the United States of America in immediately available funds, on January 11, 1999, without defense, offset or counterclaim, together with interest on the unpaid principal amount hereof, at such office, in like money and funds, from the date hereof at the rate of eight (8) per cent per annum.

     This Note is subject to the terms and conditions of the Subordination Agreement dated January 27, 1998 entered into by and among Research Industries Incorporated, Crestar Bank and Halifax Corporation.

     This Note is one of two Notes referred to in the Loan Agreement between the Borrower and the Lender dated October 8, 1998.

     The Borrower hereby waives presentment, demand, notice of dishonor, protest and all other demands and notices in connection with the delivery, acceptance, performance and enforcement of this Note. Lender shall be entitled to recover any costs and reasonable attorney’s fees incurred in the collection of this Note.

     This Note may be prepaid at anytime without penalty.

     This Note shall be governed by and construed in accordance with the laws of the Commonwealth of Virginia, without reference to conflict of laws principles.

     IN WITNESS WHEREOF, the Borrower has caused this note to be executed by its duly authorized President as of the day and year first above written.

BORROWER

HALIFAX CORPORATION
a Virginia Corporation

By:  /s/  HOWARD C. MILLS

Name: Howard C. Mills
Title: President

EX-4.13 6 w60790exv4w13.htm PROMISSORY NOTE DATED NOVEMBER 2, 1998

EXHIBIT 4.13

PROMISSORY NOTE

$500,000
  November 2, 1998
Alexandria, Virginia

     FOR VALUE RECEIVED, the undersigned, a Virginia corporation (the Borrower) hereby promises to pay to the order of RESEARCH INDUSTRIES INCORPORATED, a Virginia corporation (the Lender), at 123 North Pitt Street, Alexandria, Virginia 22314, or such other location as the holder hereof may in writing designate, the principal sum of FIVE HUNDRED THOUSAND AND NO/00 DOLLARS ($500,000), in lawful money of the United States of America in immediately available funds, on January 30, 1999, without defense, offset or counterclaim, together with interest on the unpaid principal amount hereof, at such office, in like money and funds, from the date hereof at the rate of eight (8) per cent per annum.

     This Note is subject to the terms and conditions of the Subordination Agreement dated January 27, 1998 entered into by and among Research Industries Incorporated, Crestar Bank and Halifax Corporation as modified in writing by Crestar Bank in a certain letter dated October 30, 1998.

     This Note is one of two Notes referred to in the November 2, 1998 Amendment to the Loan Agreement between the Borrower and the Lender dated October 8, 1998.

     The Borrower hereby waives presentment, demand, notice of dishonor, protest and all other demands and notices in connection with the delivery, acceptance, performance and enforcement of this Note. Lender shall be entitled to recover any costs and reasonable attorney’s fees incurred in the collection of this Note.

     This Note may be prepaid at anytime without penalty.

     This Note shall be governed by and construed in accordance with the laws of the Commonwealth of Virginia, without reference to conflict of laws principles.

     IN WITNESS WHEREOF, the Borrower has caused this note to be executed by its duly authorized President as of the day and year first above written.

BORROWER

HALIFAX CORPORATION
a Virginia Corporation

By:  /s/  HOWARD C. MILLS

Name: Howard C. Mills
Title: President

EX-4.14 7 w60790exv4w14.htm PROMISSORY NOTE DATED NOVEMBER 5, 1998

EXHIBIT 4.14

PROMISSORY NOTE

$500,000
  November 5, 1998
Alexandria, Virginia

     FOR VALUE RECEIVED, the undersigned, a Virginia corporation (the Borrower) hereby promises to pay to the order of RESEARCH INDUSTRIES INCORPORATED, a Virginia corporation (the Lender), at 123 North Pitt Street, Alexandria, Virginia 22314, or such other location as the holder hereof may in writing designate, the principal sum of FIVE HUNDRED THOUSAND AND NO/00 DOLLARS ($500,000), in lawful money of the United States of America in immediately available funds, on February 2, 1999, without defense, offset or counterclaim, together with interest on the unpaid principal amount hereof, at such office, in like money and funds, from the date hereof at the rate of eight (8) per cent per annum.

     This Note is subject to the terms and conditions of the Subordination Agreement dated January 27, 1998 entered into by and among Research Industries Incorporated, Crestar Bank and Halifax Corporation as modified in writing by Crestar Bank in a certain letter dated October 30, 1998.

     This Note is one of two Notes referred to in the November 2, 1998 Amendment to the Loan Agreement between the Borrower and the Lender dated October 8, 1998.

     The Borrower hereby waives presentment, demand, notice of dishonor, protest and all other demands and notices in connection with the delivery, acceptance, performance and enforcement of this Note. Lender shall be entitled to recover any costs and reasonable attorney’s fees incurred in the collection of this Note.

     This Note may be prepaid at anytime without penalty.

     This Note shall be governed by and construed in accordance with the laws of the Commonwealth of Virginia, without reference to conflict of laws principles.

     IN WITNESS WHEREOF, the Borrower has caused this note to be executed by its duly authorized President as of the day and year first above written.

BORROWER

HALIFAX CORPORATION
a Virginia Corporation

By:  /s/  HOWARD C. MILLS

Name: Howard C. Mills
Title: President

EX-10.13 8 w60790exv10w13.htm DIRECTOR STOCK OPTION

EXHIBIT 10.13

NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN

1.     Purpose. The purpose of the Halifax Non-Employee Directors Stock Option Plan (the “Plan”) is to secure for Halifax Corporation (the “Company”) and its stockholders the benefits of the incentive inherent in increased common stock ownership by the members of the Board of Directors (the “Board”) of the Company who are not employees of the Company or any of its subsidiaries.

2.     Adoption and Term. The Plan has been approved by the Board effective upon approval by the Company’s shareholders on September 19, 1997. The Plan shall terminate without further action at the close of the Company’s business day at its principal executive office on September 18, 2004.

3.     Administration. The Plan shall be administered by the Board. The Board shall have all the powers vested in it by the terms of the Plan, such powers to include authority (within the limitations described herein) to prescribe the form of the agreement embodying awards of stock options made under the Plan (the “Options”) and the power to determine the restrictions, if any, on the ability of participants to dispose of any stock issued in connection with the exercise of any options granted pursuant to the Plan. The Board shall, subject to the provisions of the Plan, have the power to construe the Plan, to determine all questions arising thereunder and to adopt and amend such rules and regulations for the administration of the Plan as it may deem desirable. Any decisions of the Board in the administration of the Plan, as described herein, shall be final and conclusive. The Board may authorize any one or more of their number or the Secretary or any other officer of the Company to execute and deliver documents on behalf of the Board. The Board hereby authorizes the Secretary to execute and deliver all documents to be delivered by the Board pursuant to the Plan. No member of the Board shall be liable for anything done or omitted to be done by such member or by any other member of the Board in connection with the Plan, except for such member’s own willful misconduct or as expressly provided by statute.

4.     Amount of Stock. The stock which may be issued and sold under the Plan will be the Common Stock (par value $0.24 per share) of the Company. The total number of shares of stock for which Options may be granted under the Plan shall not exceed 100,000 shares of Common Stock shares, subject to adjustment as provided in Paragraph 6 below. The stock to be issued may be either authorized and unissued shares or issued shares acquired by the Company or its subsidiaries.

5.     Eligibility. Each member of the Board of the Company who is not an employee of the Company or any of its subsidiaries (a “Non-Employee Director”) shall be eligible to receive an Option in accordance with Paragraph 6 below. The adoption of this Plan shall be not deemed to give any director any right to be granted an Option, except to the extent and upon such terms and conditions, in accordance with the terms of the Plan, as may be determined by the Board.

6.     Terms and Conditions of Options. Each Option granted under the Plan shall be evidenced by an agreement in such form as the Board shall prescribe from time to time in accordance with the Plan, and shall comply with the following terms and conditions:

(a)

The Option exercise price shall be the fair market value of the Common Stock shares subject to such Option on the date the Option is granted, which shall be the average of the high and the low sales prices of a Common Stock share on the date of grant as reported on the American Stock Exchange Composite Transactions Tape or, if the American Stock Exchange is closed on that date, on the last preceding date on which the American Stock Exchange was open for trading.

(b)

Each year, as of the first day of the month following the Annual Meeting of Stockholders of the Company, each Non-Employee Director who has been elected or reelected as a member of the Board as of the adjournment of the Annual Meeting shall receive an Option for shares of Common Stock as follows.

(i) at any time a director is elected by the Stockholders and said director has not previously been granted an option, a First Option shall be granted for 5000 Common Stock shares.

(ii) upon each annual reelection as a director by the Stockholders, a Subsequent Option shall be granted of up to a maximum of 2000 Common Stock shares.

(iii) the total maximum number of shares of Common Stock for which any director shall be granted Options under this Plan is 13,000.

(c)	Options shall not be transferable by the Optionee otherwise than by will or the laws of descent and distribution, and shall be exercisable during the lifetime of the Optionee only by the Optionee.
(d)	No Option or any part of an Option shall be exercisable:

(i) after the expiration of ten years from the date the Option was granted,

(ii) unless written notice of the exercise is delivered to the Company specifying the number of shares to be purchased and payment in full is made for the shares of Common Stock being acquired thereunder at the time of exercise; such payment shall be made (a) in United States dollars by check, or bank draft, or (b) by tendering to the Company Common Stock shares owned by the person exercising the Option and having a fair market value equal to the cash exercise price applicable to such Option, such fair market value to be the average of the high and low sales prices of a Common Stock share on the date of exercise as reported on the American Stock Exchange Composite Transactions Tape, or, if the American Stock Exchange is closed on that date, on the last preceding date on which the American Stock Exchange was open for trading, it being understood that the Board shall determine acceptable methods for tendering Common Stock shares and may impose such conditions on the use of Common Stock shares to exercise Options as it deems appropriate, or (c) by a combination of United States dollars and Common Stock shares as aforesaid; and

(iii) in the event the right to exercise the Option granted did not vest pursuant to paragraph 6(e) or 6(d) of the Plan prior to the date the Optionee ceased to be a Director of the Company.

(e)	If the Option granted is a First Option, it shall become exercisable in installments cumulatively with respect to one sixtieth of the Optioned Stock per month after the date of grant, so that one hundred percent (100%) of the Optioned Stock shall be exercisable five (5) years after the date of grant.
(f)	If the Option granted is a Subsequent Option, it shall become exercisable in installments cumulatively with respect to one-twelfth of the Optioned Stock per month after the date of grant, so that one hundred percent (100%) of the Optioned Stock shall be exercisable one (1) year after the date of grant.

7.     Effect of Changes in Capitalization.

(a) Changes in Shares.

If the number of outstanding shares of Stock is increased or decreased or changed into or exchanged for a different number or kind of stock or other securities of the Company by reason of any recapitalization, reclassification, Stock split, reverse split, combination of Stock, exchange of Stock, Stock dividend or other distribution payable in capital stock, or other increase or decrease in such shares effected without receipt of consideration by the Company occurring after the date the Option is granted, a proportionate and appropriate adjustment shall be made by the Company in the number and kind of shares subject to the Option, so that the proportionate interest of the Optionee immediately following such event shall, to the extent practicable, be the same as immediately prior to such event. Any such adjustment in the Option shall not change the total Option Price with respect to shares subject to the unexercised portion of the Option but shall include a corresponding proportionate adjustment in the Option Price per share.

(b) Reorganization in Which the Company Is the Surviving Entity.

Subject to Section (c) of this Section, if the Company shall be the surviving entity in any reorganization, merger or consolidation of the Company with one or more other entities, the Option shall pertain to and apply to the securities to which a holder of the number of shares subject to the Option would have been entitled immediately following such reorganization, merger or consolidation, with a corresponding proportionate adjustment of the Option Price per share so that the aggregate Option Price thereafter shall be the same as the aggregate Option Price of the shares remaining subject to the Option immediately prior to such reorganization, merger or consolidation.

(c) Reorganization in Which the Company Is Not the Surviving Company or Sale of Assets or Stock.

Upon the dissolution liquidation of the Company, or upon a merger, consolidation or reorganization of the Company with one or more other companies in which the Company

is not the surviving company, or upon a sale of substantially all of the assets of the Company to another company, or upon any transaction (including, without limitation, a merger or reorganization in which the Company is the surviving company) approved by the Board which results in any person or entity owning 50 percent or more of the combined voting power of all classes of stock of the Company, the Option shall terminate, except to the extent provision is made in writing in connection with such transaction for the assumption of the Option, or for the substitution for the Option of a new option covering the stock of a successor company, or a parent or subsidiary thereof, with appropriate adjustments as to the number and kinds of shares and exercise prices, in which event the Option shall continue in the manner and under the terms so provided. In the event of any such termination of the Option, the Optionee shall have the right immediately prior to the occurrence of such termination and during such period occurring prior to such termination as the Board in its sole discretion shall determine and designate, to exercise the Option to the extent that the Option was otherwise exercisable at the time such termination occurs. The Administrator shall send written notice of an event that will result in such a termination to the Optionee not later than the time at which the Company gives notice thereof to its stockholders.

8.     Miscellaneous Provisions.

(a)	Except as expressly provided for in the Plan, no Non-Employee Director or other person shall have any claim or right to be granted an option under the Plan. Neither the Plan nor any action taken hereunder shall be construed as giving any Non-Employee Director any right to be retained in the service of the Company.
(b)	An Optionee’s rights and interest under the Plan may not be assigned or transferred in whole or in part either directly or by operation of law or otherwise (except in the event of an Optionee’s death, by will or the laws of descent and distribution), including, but not by way of limitation, execution, levy, garnishment, attachment, pledge, bankruptcy, or in any other manner, and no such right or interest of any participant in the Plan shall be subject to any obligation or liability of such participant.
(c)	No Common Stock shares shall be issued hereunder unless counsel for the Company shall be satisfied that such issuance will be in compliance with applicable Federal, state, and other securities laws and regulations.
(d)	It shall be a condition to the obligation of the Company to issue Common Stock shares upon exercise of an Option, that the Optionee (or any beneficiary or person entitled to act under subparagraph 5(d)(iii) above) pay to the Company, upon its demand, such amount as may be requested by the Company for the purpose of satisfying any liability to withhold Federal, state, local, or foreign income or other taxes. If the amount requested is not paid (which payment may be made in any manner prescribed in subparagraph 5(d)(ii), the Company may refuse to issue Common Stock shares.
(e)	The expenses of the Plan shall be borne by the Company.

(f)	The Plan shall be unfunded. the Company shall not be required to establish any special or separate fund or to make any other segregation of assets to assure the issuance of shares upon exercise of any Option under the Plan, and the issuance of shares upon exercise of Options shall be subordinate to the claims of the Company’s general creditors.
(g)	By accepting any Option or other benefit under the Plan, each Optionee and each person claiming under or through such person shall be conclusively deemed to have indicated his or her acceptance and ratification of, and consent to, any action taken under the Plan by the Company or the Board.

9.     Amendment or Discontinuance. The Plan may be amended at any time and from time to time by the Board as the Board shall deem advisable; provided, however, that no amendment shall become effective without stockholder approval if such stockholder approval is required by law, rule, or regulation, and provided further, to the extent required by Rule 16B-3 under Section 16 of the Securities Exchange Act of 1934, in effect from time to time, Plan provisions relating to the amount, price, and timing of Options shall not be amended more than once every six months, except that the foregoing shall not preclude any amendment to comport with changes in the Internal Revenue Code of 1986, the Employee Retirement Income Security Act of 1974, or the rules thereunder in effect from time to time. No amendment of the Plan shall materially and adversely affect any right of any participant with respect to any Option theretofore granted without such participant’s written consent.

10.     Effective Date of Plan. The Plan shall become effective when the Plan is approved and adopted by the Company’s stockholders.

EX-12 9 w60790exv12.htm COMPUTATION OF EARNINGS TO FIXED CHARGES

EXHIBIT 12

Computation of Ratio of Earnings to Fixed Charges

Fixed Charges
	Interest Expense	634
	Total Fixed Charges	634
Earnings
	Income from continuting opeations before income tax	362
Fixed Charges		634
		996
Ratio of earnings to fixed charges		1.57

EX-21 10 w60790exv21.htm SUBSIDIARIES OF THE REGISTRANT

EXHIBIT 21

Subsidiaries of the Registrant

1)	Halifax Realty, Inc.
	5250 Cherokee Avenue
	Alexandria, Virginia 22312
2)	Halifax Engineering, Inc.,
	5250 Cherokee Avenue
	Alexandria, Virginia 22312

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