10-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

           (Mark One)

þ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

                     For the fiscal year ended March 31, 2005 or

o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

                     For the transition period from                      to                     

Commission file Number 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)	(zip code)

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

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

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. o

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

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of September 30, 2004 was $12,263,464 computed based on the closing price for that date.

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

Class	Outstanding at June 30,2005
Common Stock
$0.24 par value	3,172,206

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive proxy statement of the registrant for the registrant’s 2005 Annual Meeting of Shareholders, which definitive proxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the registrant’s fiscal year ended March 31, 2005, are incorporated by reference into Part III. Notwithstanding such incorporation, the Audit Committee Report, Compensation Committee Report and the graph showing performance of our stock and other information in the 2005 Proxy Statement that is not required to be included in Part III shall not be deemed to be incorporated by reference into or filed as part of this report.

TABLE OF CONTENTS

		page
PART 1
Item 1.	Business		1
Item 2.	Properties		13
Item 3.	Legal Proceedings		13
Item 4.	Submission of Matters to a Vote of Security Holders		14
Item 4A.	Executive Officers of the Registrant		14
PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		15
Item 6.	Selected Financial Data		16
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operation		16
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk		35
Item 8.	Financial Statements and Supplementary Data		37
	Reports of Independent Registered Public Accounting Firms		37
	Consolidated statements of operations for the years ended March 31, 2005, 2004 and 2003		39
	Consolidated balance sheets as of March 31, 2005 and 2004		40
	Consolidated statements of cash flows for the years ended March 31, 2005, 2004 and 2003		41
	Consolidated statements of changes in stockholders’ deficit for the years ended March 31, 2005, 2004 and 2003		42
	Notes to consolidated financial statements		43
	Schedule II, Valuation and Qualifying Accounts		63
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		64
Item 9A.	Controls and Procedures		64
Item 9B.	Other Information		64
PART III
Item 10.	Directors and Executive Officers of the Registrant		65
Item 11.	Executive Compensation		65
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		65
Item 13.	Certain Relationships and Related Transactions		65
Item 14.	Principal Accountant Fees and Services		65
PART IV
Item 15.	Exhibits, Financial Statement Schedules		66
	Signatures		69

PART I

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 events over which we have little or no control. Forward-looking statements may be identified by words including “anticipate,” “believe,” “estimate,” “expect” and similar expressions. 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, including difficulties to accurately estimate costs when bidding on a contract and the occurrence of start-up costs prior to receiving revenues and contract with fixed price provisions, government contracting risks, potential conflicts of interest, difficulties we may have in attracting and retaining management, professional and administrative staff, fluctuation in quarterly results, risks related to acquisitions, continued favorable banking relationships, the availability of capital to finance operations and ability to make payments on outstanding indebtedness, weakened economic conditions, reduced end-user purchases relative to expectations, pricing pressures, excess and obsolete inventory, acts of terrorism, our ability to focus on and grow our core business, 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 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, we undertake 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 statement, investors and others should not conclude that we will make additional updates or corrections thereafter.

Item 1. Business

Halifax Corporation (“Halifax” or the “Company”, “we”, “our”, or “us”), headquartered in Alexandria, Virginia provides a comprehensive range of enterprise maintenance services and solutions to a broad base of clients throughout the United States and prior to June 30, 2005, we also provided secured network services to the Department of Defense (“DOD”) and the intelligence community. On June 30, 2005, we sold our secure networks services business to enable us to focus our resources on our core business of high availability enterprise maintenance solutions. We provide 7x24x365 technology solutions that can meet stringent enterprise service requirements. For more than 36 years, we have been known for quality and reliability in service delivery to our customers.

Sale of Secure Network Services Business

On June 30, 2005, we simultaneously entered into and closed on an asset purchase agreement with INDUS Corporation pursuant to which we sold substantially all of the assets and certain liabilities of our secure network services business. The purchase price was approximately $12.5 million, subject to adjustments described in the asset purchase agreement based on the net assets of the business on the date of closing. The asset purchase agreement provides that $3.0 million of the purchase price will be held in escrow. Of this amount, $625,000 will be held as security for the payment of our indemnification obligations pursuant to the asset purchase agreement, if any, and will be released to us eighteen (18) months following the date of the asset purchase agreement unless a certain key government contract, referred to as the Key Contract, is not assigned (referred to as a novation) as of such time. A portion of the escrow amount equal to $2.0 million (which includes the portion referenced above for indemnification obligations), plus any interest or other income earned thereon, will also serve as security for a payment obligation we have to INDUS Corporation if the novation of the Key Contract from us to INDUS Corporation is not approved by such government customer and received within two years from the date of the asset purchase agreement. If such novation of the Key Contract is not received by the second anniversary of the date of the asset purchase agreement or if such novation is affirmatively rejected prior to such time under circumstances not giving rise to the rescission right

referenced below, we will be obligated to pay to INDUS Corporation an amount equal $2.0 million with the entire amount then held in escrow being released to INDUS Corporation as full or partial payment of such obligation, as the

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case may be. We will be obligated to pay directly to INDUS Corporation the amount, if any, by which the balance of escrow funds at the time of disbursement is less than $2.0 million. Finally, a portion of the escrow amount equal to $1.0 million serves as security for a payment obligation we have to INDUS Corporation in connection with a failure to obtain certain consents related to the transaction. In addition, INDUS Corporation has certain rescission rights. First, if the government customer to the Key Contract rejects the novation of such Key Contract on or before the six month anniversary of the date of the asset purchase agreement and the government customer takes action to preclude us from providing INDUS Corporation with the economic benefit of such Key Contract (whether by subcontract or otherwise), INDUS Corporation may rescind the entire sale transaction in lieu of being paid the $2.0 million amount referenced above. Second, if we are unable to provide INDUS Corporation with evidence of the government’s approval of the assignment to INDUS Corporation to a material contract (other than the Key Contract) on or before a date roughly six months from the date of closing, INDUS Corporation may rescind the transaction. The asset purchase agreement contains representations, warranties, covenants and related indemnification provisions, in each case that are customary in connection with a transaction of this type; however, certain of the representations and warranties require updating to a date which is the earlier of the contract novation or thirty months from the closing. In addition, survival periods applicable to such updated warranties may be extended together with related indemnification periods. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Sale of Secure Network Services Business.”

The description of the sale described in this Annual Report on Form 10-K does not purport to be complete and is qualified in its entirety by reference to the asset purchase agreement, which is filed as an exhibit to this Annual Report on Form 10-K. The asset purchase agreement is included to provide investors and security holders with information regarding its terms. It is not intended as an exhibit to this Annual Report on Form 10-K to provide any other factual information about our company. The asset purchase agreement contains representations and warranties the parties thereto made to and solely for the benefit of each other. The assertions embodied in those representations and warranties are qualified by information in confidential disclosure schedules that the parties have exchanged in connection with signing the asset purchase agreement. Accordingly, investors and security holders should not rely on the representations and warranties as characterizations of the actual state of facts, since they were only made as of the date of the asset purchase agreement and are modified in important part by the underlying disclosure schedules. Moreover, information concerning the subject matter of the representations and warranties may change after the date of the asset purchase agreement, which subsequent information may or may not be fully reflected in our public disclosures.

In connection with the asset purchase agreement, we also transferred to INDUS Corporation all of our right, title and interest in and to our Federal Supply Service Information Technology (Schedule 70) Contract (the “Contract”) with the federal government and a Blanket Purchase Agreement (“BPA”) that we entered into with one federal agency pursuant to the Contract. Since we have a need to utilize the Contract and BPA in connection with businesses that we have retained, we will enter into a transition services agreement with INDUS Corporation with respect to the Contract and BPA in order to continue performing existing, and to receive new, task/delivery orders from federal government agencies awarded under the Contract and BPA until such time as we are awarded a new Federal Supply Service Information Technology Contract.

The secure network services business comprised approximately $13.5 million, or 22%, and $9.5 million, or 19%, of our revenues for the fiscal years ended 2005 and 2004 and represented 7% of our assets at March 31, 2005.

We estimate the gain on the sale of the secure network services business after taxes, fees and costs to be approximately $5.0 million. The recognition of the gain on the sale of the secure network services business is subject to certain contingencies, and as such, the gain will be deferred until the contingencies are resolved.

We expect that we will use approximately $9.0 million of the proceeds from the sale of the secure network services business to repay indebtedness and accrued interest and the remainder of the proceeds will be used for working capital purposes.

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Amended and Restated Loan and Security Agreement

On June 29, 2005, we and our subsidiaries amended and restated our Amended and Restated Loan and Security Agreement with Provident Bank to extend the maturity date to June 30, 2007 and revise the covenants as more fully described in the agreement. The amount available under the agreement remains at $12.0 million. The amount outstanding under the agreement bears interest at the bank’s prime rate plus one-quarter percent (0.25%). For more information on our amended and restated loan and security agreement see “ Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.”

Amendments to 8% Promissory Notes and 7% Convertible Subordinated Debentures

On June 29, 2005, we amended our 8% promissory notes and 7% convertible subordinated debentures to extend the maturity date to July 1, 2007, which date is the next day immediately succeeding the expiration of the second amended and restated loan and security agreement. The holders of the 8% promissory notes and 7% convertible subordinated debentures are The Arch C. Scurlock Children’s Trust (the “Children’s Trust”) and Nancy M. Scurlock. Both are greater than 10% shareholders of our common stock. Arch C. Scurlock, Jr., a beneficiary and trustee of the Children’s Trust, and John H. Gover, a trustee of the Children’s Trust are our directors. Subject to the prior approval of Provident Bank, which has been obtained, we agreed to make principal and accrued interest payments on the 8% promissory notes and 7% convertible subordinated debentures aggregating $1.5 million. We intend to utilize a portion of the proceeds from the sale of our secured network services business to make these payments to the holders of our 8% promissory notes and 7% convertible subordinated debentures.

Our Business

We are a nation-wide, high-availability, multi-vendor enterprise maintenance services and solutions provider for enterprises, including businesses, global service providers, governmental agencies and other organizations.

Our principal services are high availability hardware maintenance services and technology deployment and integration. Prior to June 30, 2005 our services also included secure network services.

We were incorporated in 1967 under the laws of the Commonwealth of Virginia. We maintain our principal executive offices at Halifax Office Park, 5250 Cherokee Avenue, Alexandria, Virginia 22312. Our telephone number is (703) 750-2202, and our website is www.hxcorp.com. We make available free of charge on www.hxcorp.com a link to our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, on the SEC’s website. The information on the website listed above is not and should not be considered part of this Form10-K and is not incorporated by reference in this document. This website is and only is intended to be an active textual reference.

Our strategy is to build our position as an innovative leader in the high availability enterprise maintenance solutions marketplace. We currently have the following key business focuses:

•	High Availability Maintenance Services
	7 days a week, 24 hours a day, 365 days a year, multi-vendor support for nationwide customers with demanding service level requirements
•	Technology Deployment and Integration Services
	Nationwide deployment and integration support services
	High Availability Maintenance Services

We provide our clients with a comprehensive high availability enterprise maintenance solution through a single point of contact. Our service offerings include high availability enterprise maintenance services customized to specific customer needs for 7 days per week, 24 hours per day, 365 days per year (7x24x365) support on a nationwide basis, life cycle management of client desktop environment and equipment, moves and changes, and providing personnel with security

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clearances to support certain governmental agencies. 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 customized solution that meets all of our customers’ enterprise maintenance requirements while reducing their costs.

We provide our maintenance services to over 25,000 locations and more than 350,000 units of equipment through a wide variety of custom designed programs. A 7x24x365 dispatch center, a state-of-the-art depot repair facility, inventory warehouses and a technical support staff supports the enterprise maintenance clients. Halifax is an authorized service provider for many major manufacturers, including IBM, Hewlett Packard, Dell, Gateway and Lexmark.

Halifax works closely with each client to develop and implement the service program needed to achieve its business objectives. We draw from a wide range of services expertise and established corporate technology base to deliver customized, results-driven enterprise maintenance solutions.

Technology Deployment and Integration Services

We provide technology deployment and integration services through several of our alliance partners and certain direct customers. At present, our principal service offering is seat management, which 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 associated services from the client to us. 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.

Our seat management services provide numerous tangible benefits that can have an immediate impact on an organization. These benefits include the ability to:

- Reduce our 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

Secure Network Services

Prior to June 30, 2005, we served the needs of various sectors of the Federal government related to communication services in voice, data, and video primarily for secure environments. We provided installation, engineering, maintenance and logistics support for our clients’ projects. Our principal customers included the DOD and U.S. Army and the intelligence community. Orders were typically placed with us using multi-task support contracts. We also provided these services on a subcontract basis to several system integrators for the federal marketplace.

Our highly trained communications professionals were experienced in the installation of local area networks and wide area networks. Most of these communications professionals had current/active security clearances with major federal agencies.

Acquisitions

On September 30, 2004, we acquired 100% of the outstanding capital stock of AlphaNational Technology Services, Inc., referred to as AlphaNational, in a merger transaction, for total consideration of approximately $2.4 million excluding the contingent earn out payment described below. We acquired AlphaNational to increase our geographic coverage, expand the depth of management and increase the breadth of our product serviceability. AlphaNational is an enterprise maintenance solutions company providing services to a national market place. The merger consideration was comprised of cash in an amount equal to $200 thousand and notes in principal amount of $168 thousand with an interest rate of 6% per annum with a term of 18 months, liabilities assumed of approximately $623 thousand, 235,294 shares of our common stock having an aggregate value of $1.03 million based upon a price of $4.38 and fees and other related costs of

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approximately $379 thousand. The quoted closing price of $5.10 was discounted by 14% as such shares were not registered under the Securities Act of 1933, as amended, and are subject to transfer restrictions. The notes were adjusted from an aggregate value of $500 thousand to $168 thousand based upon the adjusted closing balance sheet of AlphaNational.

In addition, the agreement included a contingent earn out payment pursuant to which an additional $150,000 in cash or our common stock at the discretion of certain former AlphaNational shareholders. The earn out is payable if certain agreed upon financial targets are met through September 30, 2005.

On August 29, 2003, we completed the acquisition of Microserv, Inc., an enterprise maintenance solutions company located in Seattle, Washington. The acquisition expanded our geographic base and strengthened our nationwide service delivery capabilities, as well as added a number of prestigious customers.

Types of Customers

The following table reflects the distribution of revenues by type of customer (see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further discussion):

	Years Ended March 31,
(Amounts in thousands)
	2005				2004				2003
State/Municipal	$	9,791	16	%	$	16,626	34	%	$	17,326	34	%
Commercial		38,636	62	%		21,812	44	%		20,965	42	%
Federal Government		13,579	22	%		11,099	22	%		12,127	24	%
Total	$	62,006	100	%	$	49,537	100	%	$	50,418	100	%

A portion of our revenues have historically been derived from contracts and subcontracts with the Federal government. In fiscal years 2005, 2004 and 2003, we received revenues from 10 government contracts. With the sale of our secure network services business as of June 30, 2005, we no longer have the economic benefit of these contracts and subcontracts. The secure network services business comprised approximately $13.5 million, or 22%, of our revenues and $9.5 million, or 19% of our revenues, and $11.4 million, or 22% of our revenues for the fiscal years ended 2005, 2004 and 2003.

We continue to work towards expanding our commercial and state/municipal government business. Commercial revenues are being pursued by targeting non-federal and IT outsourcing opportunities. State/municipal government contracts may increase as a result of privatization opportunities.

Our ability to successfully compete for federal and state and local 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. Government contracts are subject to a bidding process, which is subject to competitive market pressures and time delays, and are not necessarily awarded on the basis of the lowest price.

Types of Contracts

We perform services under time-and-material, fixed unit-price, subcontracts, 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 unit-price contracts, we are paid an agreed-upon price per unit for services rendered. Under fixed unit-price contracts and time-and-material contracts, we bear any risk of increased or unexpected costs that may reduce our profits or cause us to sustain losses. When we are selected under a GSA schedule contract, to provide products or services, revenues are recognized upon delivery of the product or services.

For the three years ended March 31, 2005, 2004 and 2003, approximately 90%, 90%, and 97%, respectively, of our revenues received were from fixed unit-price revenues contracts.

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 allowable costs incurred up to the date of termination and would

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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 had been rare.

Prior to June 30, 2005, many of our Federal government contracts were performed under indefinite delivery/indefinite quantity contracts.

Historically, our Federal government, state and local contracts and subcontracts are subject to termination, reduction or modification as a result of changes in the government’s requirements or budgetary restrictions. A portion of our sales to the government are made indirectly as a subcontractor to another government contractor, referred to as the prime contractor, who had the direct relationship with the government. We also team with prime contractors to bid on competitive government opportunities for which we would serve as a subcontractor. If prime contractors lost existing business on which we serve as a subcontractor, or fail to win the competitive bids on which we teamed with them, our government business would be adversely impacted.

Contracts with the government are generally complex in nature and require us 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 many other matters. We have not experienced any material difficulties in complying with applicable Federal regulations.

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

Our books and records were subject to audit by the Defense Contract Audit Agency “DCAA”, which could have resulted in adjustments to contract costs and fees. Audits by DCAA have been completed for years through fiscal year 1999 with minimal adjustment to our cost accounting records.

As a result of the sale of our secure network services business which was completed on June 30, 2005, we no longer have any the economic benefit of Federal government contracts.

Our primary offices include locations in:

• Alexandria, Virginia;

• Harrisburg, Pennsylvania;

• Richmond, Virginia;

• Trenton, New Jersey;

• Charleston, South Carolina;

• Seattle, Washington; and

• Ft. Worth, Texas.

Prior to June 30, 2005, we also maintained an office in Frederick, Maryland.

Accounts Receivable

Trade accounts receivable at March 31, 2005 and 2004 represented 37% and 35% of total assets, respectively. Accounts receivable are comprised of billed and unbilled receivables. Billed receivables represent invoices presented to the customer. Unbilled receivables represent revenues earned with future payments due from the customer for which invoices will not be presented until a later period. Included in our accounts receivable at March 31, 2005 was $2.8 million or 22% of accounts receivable related to our secure network services business which was sold on June 30, 2005.

Backlog

Our funded backlog for services as of March 31, 2005, 2004 and 2003 was $64.9 million, $47.9 million and $50.6 million, respectively. Of the $64.9 million of backlog at March 31, 2005, approximately 50% is expected to 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

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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. Excluding the backlog from our secure network services business as a result of its sale completed on June 30, 2005, our backlog would have been approximately $39.6 million.

Marketing

Our direct sales and marketing organization is focused on delivering additional services and solutions to our targeted markets and current client base. Our marketing efforts have focused on increasing brand awareness, enhancing bid and proposal capabilities, producing targeted sales aids, identifying high potential sales leads, and engaging in other public relations activities.

We deliver services and solutions through a variety of distribution channels. We have developed strong partnership alliances with certain global services providers, OEM’s and system integrators. We have also developed several direct relationships with commercial, federal, state and local customers.

Competition

We have numerous competitors in our marketplace. Some competitors are large diversified firms having substantially greater financial resources and a larger technical staff than ours, including, in some cases, the manufacturers of the systems being supported and others are small companies within a regional market or market niche. Customer in-house capabilities can also create competition in that they perform certain services which might otherwise be performed by us. It is not possible to predict the extent of competition which our present or future activities 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, pricing, responsiveness and the ability to perform within estimated time and expense guidelines.

We believe we are most competitive where the customer is geographically dispersed throughout the U.S. and demands high service attainment levels.

Personnel

On March 31, 2005, we had 581 employees, of whom 68 were part-time and 14 were temporary employees. Of the 581 employees, 134 employees were employed in our secure network services business which was sold on June 30, 2005. Because of the nature of our services, many employees are professional or technical personnel with high levels of training and skills, including engineers, skilled technicians and mechanics. We believe our employee relations are excellent. Although many of our personnel are highly specialized, we have not experienced material difficulties obtaining the personnel required to perform under our contracts and generally do not bid on contracts where difficulty may be encountered in providing these necessary services. On one of our government contracts our employees were members of a union. As of March 31, 2005, we believe our relations with the union were excellent. Management believes that the future growth and our success will depend, in part, upon our continued ability to retain and attract highly qualified personnel.

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Risk Factors

We have an operating loss in fiscal 2005, and continued losses may negatively impact our financial position and value of our common stock.

We incurred a net loss in fiscal 2005 of $1.4 million. The primary reasons for the loss were expenses associated with a new long-term, nation-wide, enterprise maintenance contract, increases in our allowance for inventory obsolescence, and
the abandonment of certain office space. We may not be able to generate sufficient new business to replace the revenues derived from the secure network services business sold on June 30, 2005, adequately contain costs or expand our existing business in order to regain profitable operations.

We will continue to incur expenses in operating our business. As we focus on our core business, there are no assurances that our cost containment efforts will be successful in curbing expenses or that we will be able to accurately estimate start-up costs and expenses associated with new contracts. If we incur expenses at a greater pace than our revenues, we could incur additional losses. If we continue to experience losses, our financial position could be negatively impacted and the value of our common stock may decline.

Our revenues are derived from a few major customers, the loss of any of which could cause our results of operations to be adversely affected.

We have a number of major customers. Our largest customer accounted for 15%, 14%, and 15% of our revenues for the fiscal years ended March 31, 2005, 2004 and 2003, respectively. Through the aggregation of multiple contracts, our largest customer during fiscal year ended March 31, 2005 was IBM Global Services. Our five largest customers collectively accounted for 63%, 56% and 57% of revenues for the fiscal years ended March 31, 2005, 2004 and 2003, respectively. Revenues from services rendered to the Federal government accounted for 22%, 22% and 24% of our revenues for the fiscal years ended March 31, 2005, 2004 and 2003, respectively. As of June 30, 2005, as a result of the sale of our secure network services business, we no longer have the economic benefit of any material contracts or subcontracts providing services to the Federal government. We anticipate that significant customer concentration will continue for the foreseeable future, although the companies which constitute our largest customers may change from period to period. Factors beyond our control, including political, state and federal budget issues, competitor prices and other factors may have an impact on our ability to retain contracts. The loss of any one or more of these customers may adversely affect our results. As a result of the sale of our secure network services business, there can be no assurances that we can replace the revenue stream with other new business.

If we experience a decline in cash flow or are unable to maintain compliance with the covenants contained in our revolving credit facility, our ability to operate could be adversely affected.

If either cash flow from operations decline in value or borrowings under our revolving credit agreement become unavailable, our ability to operate could be adversely affected. In addition, the loss of a significant contract, adverse economic conditions or other adverse circumstances may cause our capital resources to change dramatically. Operating results may also be negatively affected due to costs associated with starting a major contract. Many costs associated with starting a new contract, such as hiring additional personnel, training, travel and logistics are expensed as incurred and may also significantly impact cash flow during the startup period. Additional funds, if needed, to help fund start-up costs related to a major new contract may not be available. We were not in compliance with the terms of our revolving credit facility at December 31, 2004 and March 31, 2005as we failed to meet certain financial covenants. In both instances we requested and received waivers from our bank. On June 29, 2005 our revolving credit agreement was amended to adjusting the covenants such that we are in compliance with the covenants as of March 31, 2005 and to extend the maturity of the agreement to June 30, 2007. We view our revolving credit facility as a critical source of available liquidity. This facility contains various conditions, covenants and representations with which we must be in compliance in order to borrow funds. There is no assurance that we will be in compliance with these conditions, covenants and representations. Although we believe our relationship with our bank is satisfactory and we have requested and received waivers in the past for non-compliance with the financial covenants of our revolving credit agreement, there are no assurances that the bank will waive these covenants in the future.

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We operate in a highly competitive market. If we are unable to offer competitive products and services, our business may be adversely affected.

We have numerous competitors in our marketplace. Some competitors are large diversified firms having substantially greater financial resources and a larger technical staff than us, including, in some cases, the manufacturers of the systems being supported and others are small companies within a regional market or market niche. Customer in-house capabilities can also create competition in that they perform certain services which might otherwise be performed by us. It is not possible to predict the extent of competition which our present or future activities will encounter because of changing competitive conditions, customer requirements, technological developments and other factors.

The industry in which we operate has been characterized by rapid technological advances that have resulted in frequent introductions of new products, product enhancements and aggressive pricing practices, which also impacts pricing of service activities. Also, our operating results could be adversely impacted should we be unable to achieve the revenues growth necessary to provide profitable operating margins in various operations.

Our operating results may be adversely affected because of pricing pressures brought about by competition, proprietary technology that we are unable to support, presence of competitors with greater financial and other resources or other factors beyond our control.

Our revenues and results of operations may vary period to period, which may cause the common stock price to fluctuate.

Our quarterly and annual revenues and results of operations may vary significantly in the future due to a number of factors, which could cause the common stock price to fluctuate greatly. Factors that may affect our quarterly and annual results include but are not limited to:

• changes in economic conditions;

• disruptions or downturns in general economic activity resulting from terrorist activity and armed conflict;

• competitive pricing pressure;

• lengthening sales cycles;

• obsolescence of technology;

• increases in prices of components used to support our enterprise maintenance solutions;

• loss of material contracts; and

• the success of our business strategy in providing improved operating results.

Unfavorable economic conditions and additional costs associated with a new long-term nation-wide enterprise maintenance contract have adversely affected our results of operations and led to a decline in our growth rates. Our business was negatively affected by the economic slowdown and reductions in spending by our customers in 2005 and 2004. The rate at which the portions of our industry improve is critical to our overall performance.

Many of our services are sold as part of a larger technology outsourcing solution. In the past, we have experienced historical growth in our business as we have assumed responsibility for maintaining our customers IT infrastructure. The demand for these services has been adversely affected by the effects of a weakened economy in recent periods with many businesses focusing on cost containment strategies and eliminating or curtailing maintenance.

Our revenues for future periods are expected to decrease as a result of the sale of our secured networks services business which was completed on June 30, 2005. As a result, there can be no assurances that we will be able to return to profitable operations.

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We depend on recurring long-term contracts for services from a limited number of large original equipment manufacturers, or OEMs, partners and end users. Our agreements with OEMs are in the form of master service agreements and are typically cancelable, non-exclusive and have no minimum purchase requirements.

Factors beyond our control, including political, state and federal budget issues, price and other factors may have an impact on our ability to successfully retain contracts.

If we are unable to generate sufficient revenues, we may have to further down size.

On June 30, 2005, we sold our secure network services business. For the past three fiscal years ended March 31, 2005, 2004 and 2003, the secure network services business generated revenues of $13.5 million, $9.4 million, and $11.4 million, respectively. Contribution to overhead was $2.2 million, $1.2 million and $1.3 million for fiscal years 2005, 2004 and 2003. If we are unable to generate sufficient new business to replace the business sold, we may be forced to consolidate our operations to reduce operating expense sufficiently to regain profitable operations. There can be not assurances that we will be able to generate sufficient new business or that cost containment measures in place will be adequate to regain profitability in the future.

If we are unable to retain and attract highly qualified personnel to fulfill our contract obligations, our business may be harmed.

Our most important resource is our employees. Although many of our personnel are highly specialized, we have not experienced material difficulties obtaining the personnel required to perform under our contracts and generally do not bid on contracts where difficulty may be encountered in providing these necessary services.

We are subject to risks related to fluctuations in interest rates.

We are exposed to changes in interest rates, primarily as a result of using bank debt to finance our business. The floating interest debt exposes us to interest rate risk, with the primary interest rate exposure resulting from changes in the prime rate. Adverse changes in the interest rates or our inability to refinance our long-term obligations may have a material negative impact on our results of operations and financial condition.

We incur significant costs in connection with the start-up of new contracts before receiving related revenues, which could result in cash shortfalls and fluctuations in quarterly results from period to period.

When we are awarded a contract to provide services, we may incur expenses before we receive any contract payments. These expenses include, purchasing equipment and hiring personnel. For example, contracts may not fund program start-up costs and we may be required to invest significant sums of money before receiving related contract payments. Additionally, any resulting cash shortfall could be exacerbated if we fail to either invoice the customer or to collect fees in a timely manner. A cash shortfall could result in significant consequences. For example, it:

• could increase our vulnerability to general adverse economic and industry conditions;

• will require us to dedicate a substantial portion of our cash flow from operations to service payments on its indebtedness; reducing the availability of our cash flow to fund future capital expenditures, working capital, execution of its growth strategy, research and development costs and other general corporate requirements;

• could limit our flexibility in planning for, or reacting to, changes in its business and industry, which may place us at a competitive disadvantage compared with competitors; and

• could limit our ability to borrow additional funds, even when necessary to maintain adequate liquidity.

As a result, there are no assurances that additional funds, if needed, to help fund start-up costs related to a major new contract would be available or, if available on terms advantageous to us.

Some of our contracts contain fixed-price provisions that could result in decreased profits if we fail to accurately estimate our costs.

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Some of our contracts contain pricing provisions that require the payment of a set fee by the customer for our services regardless of the costs we incur in performing these services. In such situations, we are exposed to the risk that it will incur significant unforeseen costs in performing the contract. Therefore, the financial success of a fixed price contract is dependent upon the accuracy of our cost estimates made during contract negotiations. Prior to bidding on a fixed-price contract, we attempt to factor in variables including equipment costs, labor and related expenses over the term of the contract; however, it is difficult to predict what these costs will be, especially for contract terms that range from 3 to 5 years. Any shortfalls resulting from the risks associated with fixed-price contracts will reduce our working capital. Our inability to accurately estimate the cost of providing services under these contracts could have an adverse effect on our profitability and cash flows. One of the factors contributing to the loss we incurred for the year ended March 31, 2005, on the start of a new long-term nation-wide enterprise maintenance contract, was underestimating failure rates on certain pieces of equipment, which resulted in increased parts and labor cost.

If we fail to accurately estimate our future costs under our government contracts, we incur losses fulfilling our obligations under such contracts.

Our business depends in large part on our ability to efficiently perform our obligations under various government contracts. A significant portion of our total revenue from our enterprise maintenance services is derived from firm-fixed price contracts related to specific task orders with federal and state government entities and are subject to a number of conditions. A firm-fixed price contract requires that the specified product and/or service be provided for a negotiated price, irrespective of cost. Therefore, the financial success of a firm-fixed price contract is dependent upon the accuracy of its cost estimates made during contract negotiations. Our inability to accurately estimate the cost of providing services under these contracts could have an adverse effect on our profitability and cash flows.

If we are unable to effectively and efficiently reduce costs and replace the revenues lost as a result of the sale of our secure network services business, our results of operations may be adversely affected.

We have taken, and continue to take, cost reduction actions. Our ability to complete these actions and the impact of such actions on our business may be limited by a variety of factors. The cost reduction actions may in turn expose us to additional service delivery risks and have an adverse impact on our sales and profitability. We have been reducing costs and streamlining our business process throughout our organization. We have reduced our facilities, adjusted our employee population, improved our repair facilities, and reduced other costs. The impact of these cost-reduction actions on our revenues and profitability may be influenced by factors including, but not limited to:

• our ability to complete these on-going efforts,

• our ability to generate the level of savings we expect and/or that are necessary to enable us to effectively compete,

• decrease in employee personnel,

• ability to generate sufficient revenue and or reduce operating expenses to offset the contribution that was generated from the secure network services business which was sold on June 30, 2005, and

• the performance of other parties under arrangements on which we rely to support parts or components.

If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud. As a result, current and potential stockholders and customers could lose confidence in our financial reporting, which could harm our business, the trading price of our stock and our ability to retain our current customers or obtain new customers .

During fiscal 2005, we began to evaluate our internal controls over financial reporting in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act, which requires annual management assessments of the effectiveness of our internal controls over financial reporting and a report by our independent auditors addressing these assessments

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beginning in fiscal year ending March 31, 2007. In this regard, management has been dedicating internal resources to (i) assess and document the adequacy of internal controls over financial reporting, and (ii) take steps to improve control processes, where appropriate. During 2006, we will continue our efforts to address this issue and engage outside consultants as necessary to validate through testing that controls are functioning as documented and implement a continuous reporting and improvement process for internal control over financial reporting. To date, we have identified certain issues in the design and operating effectiveness of our internal controls over financial reporting. If we fail to correct any issues in the design or operating effectiveness of internal controls over financial reporting or fail to prevent
fraud, current and potential stockholders and customers could lose confidence in our financial reporting, which could harm our business, the trading price of our stock and our ability to retain our current customers and obtain new customers.

If we make future acquisitions of companies, technology and other assets that involve numerous risks such as difficulty integrating acquired companies, technologies and assets or generating an acceptable return on its investments.

If we pursue opportunities to acquire companies, technologies and assets that would complement our current service offerings, expand the breadth of its markets, enhance its technical capabilities, or that may otherwise offer growth opportunities as we have done in the past. Acquisitions involve numerous risks, including the following:

• difficulties in integrating the operations, technologies, products and personnel of the acquired companies;

• diversion of management’s attention from normal daily operations of our business;

• difficulties in entering markets in which we have no or limited direct prior experience and where competitors in such markets have stronger market positions;

• initial dependence on unfamiliar supply chains or relatively small supply partners;

• insufficient revenues to offset increased expenses associated with acquisitions; and

• the potential loss of key employees of the acquired companies.

Acquisitions may also cause us to:

• issue common stock or preferred stock or assume stock option plans that would dilute current shareholders’ percentage ownership;

• use cash, which may result in a reduction of our liquidity;

• assume liabilities;

• record goodwill and non-amortizable intangible assets that would be subject to impairment testing and potential periodic impairment charges;

• incur amortization expenses related to certain intangible assets;

• incur large and immediate write-offs; and

• become subject to litigation.

Mergers and acquisitions of companies in our industry and related industries are inherently risky, and no assurance can be given that our acquisition strategy will be successful, that we will have the resources to pursue this strategy, and will not materially adversely affect its business, operating results, or financial condition. Failure to manage and successfully integrate acquisitions could harm our business and operating results in a material way. Even when an acquired company has already developed and marketed products or services, there can be no assurance that product enhancements will be made in a timely fashion or that all preacquisition due diligence will have identified all possible issues that might arise with respect to such products or services.

We do not expect to pay dividends on our common stock.

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We have not declared or paid any dividends on our common stock during fiscal 2003, 2004 and 2005 and do not anticipate paying any cash dividends on our common stock in the foreseeable future.

Shareholders of our common stock may face a lack of liquidity.

Although our common stock is currently traded on the American Stock Exchange, given the fact that our common stock is thinly traded, there can be no assurance that the desirable characteristics of an active trading market for such securities will ever develop or be maintained. Therefore, each investor’s ability to control the timing of the liquidation of the investment in our common stock will be restricted and an investor may be required to retain his investment in our common stock indefinitely.

The market price of our common stock has been and is likely to continue to be volatile, which may make it difficult for shareholders to resell common stock when they want to and at prices they find attractive.

Our share price has been volatile due, in part, to the general volatile securities market. Factors other than our operating results may affect our share price may include the level of perceived growth of the industries in which we participate, market expectations of our performance success of the partners, and the sale or purchase of large amounts of our common stock.

Provisions in our corporate charter documents could delay or prevent a change in control.

Our Articles of Incorporation, as amended, and Bylaws, contain certain provisions that would make a takeover of our company more difficult. Under our Articles of Incorporation, as amended, we have authorized 1,500,000 shares of preferred stock, which the Board of Directors may issue with terms, rights, preferences and designations as the Board of Directors may determine and without the vote of shareholders, unless otherwise required by law. Currently, there are no shares of preferred stock issued and outstanding. Issuing the preferred stock, depending on the rights, preferences and designations set by the Board of Directors, may delay, deter, or prevent a change in control of us. Issuing additional shares of common stock could result in a dilution of the voting power of the current holders of the common stock. This may tend to perpetuate existing management and place it in a better position to resist changes that the shareholders may want to make if dissatisfied with the conduct of our business.

Item 2. Properties

After giving affect to the sale of the secure network services business as of June 30, 2005, we had obligations under 16 short-term facility leases associated with our operations. Total rent expense under existing leases was $1.13 million, $782 thousand and $632 thousand for the years ended March 31, 2005, 2004 and 2003, respectively. See Note 12 to the Consolidated Financial Statements. Our executive offices are located in Alexandria, VA; with additional locations in Harrisburg, PA; Richmond, VA; Trenton, NJ; Charleston, SC; Ft. Worth, TX, and Seattle, WA. Prior to June 30, 2005 we also had an office in Frederick, Md.

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 our headquarters building.

Item 3. Legal Proceedings

On January 9, 2001, the Securities and Exchange Commission (SEC) issued a formal order directing a private investigation of the Company and unnamed individuals concerning trading activity in our 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 us that the inquiry was confidential and should not be construed as an indication by the SEC 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, we were advised that the investigation of our undertaken by the Staff of the SEC was terminated and no enforcement action was recommended by the SEC.

There are no material pending legal proceedings to which we are a party. From time to time, we are engaged in ordinary routine litigation incidental to our business to which we are a party. While we cannot predict the ultimate outcome of these matters, or other routine litigation matters, 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.

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

None

Item 4-A. Executive Officers of the Registrant

The key executive officers of the Company are:

Charles L. McNew, age fifty-three is our President and Chief Executive Officer. Mr. McNew has held this position since May 2000. Mr. McNew became a director in 2000. He served as our acting President and Chief Executive Officer from April 2000 to May 2000 and prior to that was our Executive Vice president and Chief Financial Officer from July 1999 until April 2000. Mr. McNew has over 25 years of progressive management experience and has held senior level management positions with a variety of public telecommunications and services companies. Prior to joining the Company, from July 1994 through July 1999, Mr. McNew was Chief Financial Officer and then Chief Operating Officer of Numerex Corporation, a publicly traded wireless telecommunications solutions company. Mr. McNew has a Masters in Business Administration from Drexel University and a BS in accounting from Penn State.

Joseph Sciacca, age fifty-two, is our Vice President of Finance and Chief Financial Officer. Mr. Sciacca has been Vice President of Finance and Chief Financial Officer since May 2000. He was appointed Corporate Controller in December 1999 and provided consulting services to us 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.

Hugh Foley, age fifty-three, is our Vice President of Operations. As Vice President of Operations, a position held since April 2002, Mr. Foley manages the service delivery operations for our seat management program, staff augmentation services, as well as IT professional services and product offerings. Mr. Foley joined us in November 1998, initially to manage and implement the Virginia Department of Transportation / Virginia Retirement Systems seat management contract. Prior to joining us, Mr. Foley spent 16 years in the computer service industry in various sales, operations and financial management positions with Sorbus, Bell Atlantic Business Systems, and DecisionOne.

James L. Sherwood, IV, age sixty-three, is our Vice President of Contracts and Administration. Mr. Sherwood has held his current position since 1986. He previously served as Vice President of our Facilities Services Division. He has been employed by our Company and its subsidiaries since 1978. After the completion of the sale of our secure network services business on June 30 ,2005, Mr. Sherwood became an employee of INDUS Corporation.

Jonathan L. Scott, age forty-seven, is our Senior Vice President of Sales and Marketing. Mr. Scott has held this position since our acquisition of Microserv in August 2003 where he previously served as President and Chief Executive Officer from January 2001 to August 2003 and Executive Vice President from November 1998 to December 2000. Prior to this, Mr. Scott was a principal of New Venture Associates, a firm providing strategic advisory services to early stage venture funded technology companies, which he founded, from July 1996 to October 1998. Prior to that he served in executive and sales and marketing management positions in the software industry.

Larry Whiteside, age sixty-five, is our Senior Vice President, Support Services. Mr. Whiteside joined us in October 2004 following our acquisition of AlphaNational. As the Vice President for Support Services, Mr. Whiteside is responsible for the resources required to support the delivery of on-site services in a timely and highly effective manner. Prior to joining Halifax, Mr. Whiteside served as AlphaNational’s President and Chief Executive Officer from September 1995 to September 30, 2004. Mr. Whiteside possesses 35 years of experience in the high-tech services industry. Prior to AlphaNational, Mr. Whiteside was involved in consulting services as well as serving as a Director for Data Processing Enterprises. He also spent twenty years with International Business Machines Corporation, (“IBM”), an information technology corporation, in a variety of positions.

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PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

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

At July 8, 2005, there were approximately 210 holders of record of our common stock as reported by our transfer agent and approximately 529 beneficial holders.

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 2005				Fiscal Year 2004
Fiscal Quarter	High		Low		High		Low
April — June	$	4.80	$	4.04	$	4.49		2.91
July — Sept.		5.16		3.90		6.25		3.60
Oct. — Dec.		6.05		4.45		5.80		4.76
Jan. — March		6.01		4.17		5.20		3.95

On July 8, 2005, the closing price of our common stock on the American Stock Exchange was $4.10.

We did not declare a cash dividend in either fiscal year 2005 or 2004, and there is no assurance we will do so in future periods. Our revolving credit loan agreement prohibits the payment of dividends and limits payment of principal or interest on our subordinated debt without a waiver from the bank. As a Virginia corporation, we may not declare and pay dividends on capital stock, if after giving effect to a dividend our total assets would be less than the sum of our total liabilities or we would not be able to pay our debts when due in the usual course of business. We currently expect to retain our future earnings, for use in the operation and expansion of our business and do not anticipate paying any cash dividend in the future.

See Item 12 “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” for disclosure regarding our equity compensation plan information.

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Item 6. Selected Financial Data

The following table includes selected financial data adjusted for discontinued operations in 2001 of Halifax. Our Company’s selected consolidated financial information set forth below 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. This historical selected financial data does not give effect to ths sale of our secure network services business on June 30, 2005.

	Years Ended March 31,
(Amounts in thousands, except share data)	2005(1)			2004(2)		2003		2002		2001
Revenues – continuing operations	$	62,006		$	49,537	$	50,418	$	49,351	$	51,720
(Loss) income from continuing operations		(1,411	)		4,228		648		302		(840	)
Discontinued operations		—			—		—		—		244
Gain on sale of discontinued operations		—			—		—		—		1,694
Net (loss) income	$	(1,411	)	$	4,228	$	648	$	302	$	1,098
(Loss) income per common share – basic
continuing operations	$	(.46	)	$	1.60	$	.30	$	.14	$	(.42	)
Discontinued operations		—			—		—		—		.12
Gain on sale on discontinued operations		—			—		—		—		.84
	$	(.46	)	$	1.60	$	.30	$	.14	$	.54
(Loss) income per common share – diluted
Continuing operations	$	(.46	)	$	1.54	$	.30	$	.14	$	(.42	)
Discontinued operations		—			—		—		—		.12
Gain on sale on discontinued operations		—			—		—		—		.84
	$	(.46	)	$	1.54	$	.30	$	.14	$	.54
Weighted average number of shares outstanding
Basic		3,043,465			2,638,345		2,175,781		2,100,321		2,022,811
Diluted		3,094,922			2,787,656		2,212,360		2,106,478		2,022,811
Dividends per common share	$	—		$	—	$	—	$	—	$	—

	At March 31,
	2005		2004		2003		2002		2001
Total Assets	$	33,750	$	26,491	$	17,981	$	20,845	$	18,827
Long-term obligations	$	12,144	$	9,983	$	10,138	$	11,295	$	6,886

(1)	No effect is given to dilutive securities for loss periods.
(2)	See Note 11 to the consolidated financial statements for discussion of deferred tax benefit.

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

Overview

We are a nationwide, high availability, multi-vendor enterprise maintenance service and solutions provider for enterprises, including business, global services providers, governmental agencies and other organizations. We have undertaken significant changes to our business in recent years. After selling the operational outsourcing division in 2001, we began the shift of our business to a predominantly services model. In September 2004, we completed the acquisition of

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AlphaNational Technology Services, Inc. and in August 2003, we completed the acquisition of Microserv, Inc. These acquisitions significantly expanded our geographic base, strengthened our nationwide service delivery capabilities, bolstered management depth, and added several prestigious customers.

On June 30, 2005, we sold our secure network services business. We undertook this sale to leverage the valuations in federal government properties and to enable us to focus our resources and management on our core business of high availability maintenance services. The proceeds from this transaction will be used to repay approximatley $9.0 million of outstanding indebtedness and provide working capital. The sale of the secure network services business has significantly improved our balance sheet. See “- Sale of secure network services business” for more information.

We offer a growing list of services to businesses, global service providers, governmental agencies and other organizations. Our services are customized to meet each customer’s needs providing 7x24x365 service, personnel with required security clearances for certain governmental programs, project management services, depot repair and roll out services. We believe the flexible services we offer to our customers enable us to tailor a solution to obtain maximum efficiencies within their budgeting constraints.

On September 30, 2004, we acquired 100% of the outstanding capital stock of AlphaNational in a merger transaction, for total consideration of approximately $2.4 million, excluding the contingent earn out payment described below. We acquired AlphaNational to increase our geographic coverage, expand the depth of management and increase the breadth of our product serviceability. AlphaNational is an enterprise maintenance solutions company providing services to a national market place. The merger consideration was comprised of cash in an amount equal to $200 thousand and notes in principal amount of $168 thousand with an interest rate of 6% per annum with a term of 18 months, liabilities assumed of approximately $623 thousand, 235,294 shares of our common stock having an aggregate value of $1.03 million based upon a price of $4.38 and fees and other related costs of approximately $379 thousand. The quoted closing price of $5.10 was discounted 14% because as such shares which were not registered under the Securities Act of 1933, as amended, and are subject to transfer restrictions. The notes were adjusted from an aggregate value of $500 thousand to $168 thousand based upon the adjusted closing balance sheet of AlphaNational. In addition, the agreement included a contingent earn out payment pursuant to which an additional $150,000 in cash or our common stock at the discretion of certain former AlphaNational shareholders. The earn out is payable if certain agreed upon financial targets are met through September 30, 2005.

At March 31, 2004, we recorded a deferred tax asset of $3.9 million. Based upon our historical taxable income as a result of the gain on the sale of our secure network services business and estimates of future profitability, management concluded that future income will more than likely be sufficient to realize our deferred tax assets. The recording of this tax benefit had a significant positive effect on the results of operations and balance sheet.

In August 2003, we completed the acquisition of Microserv, Inc., which significantly expanded our geographic base in the western part of the US.

In July 2003, we completed a private placement of common stock and warrants in the aggregate amount of $1.2 million, to strengthen our financial position.

Primarily as a result of the costs incurred related to the start up of a new long-term nation-wide enterprise maintenance contract, we incurred an operating loss for year ended March 31, 2005. After the successful implementation of the initial phase, the remaining roll out schedule was accelerated. The cost of the accelerated roll out of service and certain unanticipated service delivery costs exceeded our estimates when pricing the contract. These costs were comprised of procurement and consumption of inventory, freight costs to stage the inventory where strategically necessary, increases in overtime and higher than anticipated usage of subcontractors. We also experienced higher than anticipated failure rates on certain pieces of equipment, which contributed to the poor financial performance of this contract and operating results for the year ended March 31, 2005. We have undertaken several cost containment measurements and modifications designed to minimize the potential for future loss on this contract on a going forward basis. In addition, we negotiated a favorable adjustment to the contract effective January 1, 2005 though May 31, 2005.

Services revenues included monthly recurring fixed unit-price contracts as well as time-and-material contracts. Revenues related to the fixed-price service agreements are recognized ratably over the lives of the agreements. Amounts billed in advance of the services period are recorded as unearned revenues and recognized when earned. Losses on contracts, if any, are recognized in the period in which the losses become determinable.

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When we are awarded a contract to provide services, we may incur expenses before we receive any contract payments. This may result in a cash short fall that may impact our working capital and financing. This may also cause fluctuations in operating results as start-up costs are expensed as incurred. See ”Business Risk Factors – We incur significant costs in connection with the start-up of new contracts before receiving related revenues, which could result in cash shortfalls and fluctuations in quarterly results from period to period.”

The revenues and related expenses associated with product sales are recognized when the products are delivered and accepted by the customer.

Our goal is to return to maintain profitable operations, expand our customer base of clients through our existing global service provider partners, seek new global service provider partners, and enhance the technology we utilize to deliver cost-effective services to our growing customer base. Our ability to increase profitability will be impacted by our ability to continue to compete within the industry, and our ability to replace contracts which were sold in connection with the sale of the secure network services business. We must also effectively manage expenses in relation to revenues by directing new business development towards markets that complement or improve our existing service lines. We must continue to emphasize operating efficiencies through cost containment strategies, re-engineering efforts and improved service delivery techniques, particularly within costs of services, selling, marketing and general and administrative expenses.

Our future operating results may be affected by a number of factors including uncertainties relative to national economic conditions and terrorism, especially as they affect interest rates, the reduction in revenue as a result of the sale of our secure network services business, industry factors and our ability to successfully increase our sales of services, accurately estimate costs when bidding on a contract, and effectively manage expenses.

We have streamlined our service delivery process, expanded our depot repair facility to repair rather than purchase new component parts and are working with our customers to modify the processes under which services are rendered to our customers.

We plan 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.

The industry in which we operate has experienced unfavorable economic conditions and competitive challenges. Our 2005 operating results reflect the impact of this challenging environment. We continue to see significant price competition and customer demand for higher service attainment levels. In addition, there is significant price competition in the market for state and local government contracts as a result of budget issues, political pressure and other factors beyond our control. As experienced with the loss of our contract with the Commonwealth of Pennsylvania in early fiscal year 2005, longevity and quality of service may have little influence in the customer decision making process.

18

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, 2005, 2004 and 2003 and financial condition as of March 31, 2005 and 2004. We operate as a single business segment, whereby we provide high availability maintenance services, and technology deployment and integration for commercial and governmental clients. Prior to June 30, 2005 we provided secure network services for government clients. The results of operations do not take into account the sale of our secure network services business on June 30, 2005.

	Years Ended March 31,
(Amounts in thousands except share data)
Results of Operations	2005			2004			Change			%			2004			2003			Change			%
Revenues	$	62,006		$	49,537			12,469			25	%	$	49,537		$	50,418		$	(881	)		(2	%)
Costs of services		57,872			43,609			14,263			31	%		43,609			44,200			(591	)		(1	%)
Percent of revenues		93	%		88	%								88	%		88	%
Gross Margin		4,134			5,928			(1,794	)		(20	%)		5,928			6,218			(290	)		(5	%)
Percent of revenues		7	%		12	%								12	%		12	%
Selling		1,530			1,254			276			22	%		1,254			1,102			152			14	%
Percent of revenues		2	%		3	%								3	%		2	%
Marketing		241			534			(293	)		(55	%)		534			652			(118	)		(18	%)
Percent of revenues					1	%								1	%		1	%
General and administrative		3,725			3,086			639			21	%		3,086			3,127			(41	)		(1	%)
Percent of revenues		6	%		6	%								6	%		6	%
Abandonment of lease		179			—			179			100	%		—			—			—			—
Total operating expenses		5,496			4,874			622			13	%		4,874			4,881			(7	)		N/M
Percent of Revenues		9	%		10	%								10	%		10	%
Operating (loss) income		(1,541	)		1,054			(2,595	)		(246	%)		1,054			1,337			(283	)		(21	%)
Percent of revenues		(2	%)		2	%								2	%		3	%
Interest expense		663			591									591			649			(58	)		(9	%)
Other income		—			15			(15	)		—			15			20			(5	)		N/M
Income before taxes		(2,204	)		478			(2,682	)		(430	%)		478			708			(230	)		(32	%)
Income tax (benefit) expense		(793	)		(3,750	)		2,957			(79	%)		(3,750	)		60			3,810			N/M
Net (Loss) Income	$	(1,411	)	$	4,228		$	(5,639	)		(133	%)	$	4,228		$	648		$	3,580			552	%
(Loss) Earnings per share – basic	$	(.46	)	$	1.60								$	1.60		$	.30
(Loss) Earnings per share – diluted	$	(.46	)	$	1.54								$	1.54		$	.30

N/M = not meaningful

19

Revenues

Revenues are generated from the sale of high availability enterprise maintenance services, technology deployment and secure network services (consisting of professional services, seat management and deployment services, and product sales and secure network services). Services revenues include monthly recurring fixed unit-price contracts as well as time-and-material contracts. Amounts billed in advance of the services period are recorded as unearned revenues and recognized when earned. The revenues and related expenses associated with product held for resale are recognized when the products are delivered and accepted by the customer.

The components of revenues are as follows:

(Amounts in thousands)	March 31,
	2005		%			2004		%			2003		%
Revenues:
Services	$	59,298		96	%	$	43,990		88.8	%	$	45,394		90.0	%
Product held for resale		2,708		4	%		5,547		11.2	%		5,024		10.0	%
Total revenues	$	62,006		100.0	%	$	49,537		100.0	%	$	50,418		100.0	%

Revenues increased 25%, or $12.4 million, during fiscal year 2005, compared to fiscal year 2004. During fiscal year 2005 we experienced growth in our high availability maintenance services as a result of the start-up of several new contracts, which was partially offset by decreased product sales. Included in fiscal year 2005 was the AlphaNational acquisition which was completed on September 30, 2004. In addition, we experienced significant growth in our secure network services offering as a result of continued demand from Homeland Security. Product held for resale decreased $2.8 million in fiscal year 2005 compared to fiscal year 2004. The decrease was a result of intense competition in the product marketplace, a declining rate of orders and lower margins. We have de-emphasized product sales and intend to focus primarily on our recurring services revenue model for enterprise maintenance solutions.

For fiscal year 2004 revenues decreased 2%, or $881 thousand, compared to fiscal year 2003. During fiscal year 2004, we experienced an increase in our high availability maintenance services and technology deployment activities, however this was offset by a decrease in our secure network services offering. The decline in secure network services was a result of non-recurring services in 2003 that did not materialize in 2004. Product held for resale also increased by $500 thousand during fiscal year 2004 to $5.5 million compared to $5.0 million in 2003.

The AlphaNational and Microserv acquisitions completed in September 2004 and August 2003 added several marquee accounts to our enterprise maintenance services. However, these gains were negatively affected by pricing concessions and certain lost contracts.

In fiscal year 2006, we expect our services revenues to decrease as a result of the sale of our secure network services business and continued reductions in our product sales revenues due to on-going price competition. We expect the product trends to continue downward with many of the new products being offered at lower prices and with significantly lower margins.

Revenues for the secured network services business were $13.5 million, $9.5 million and $11.4 million for fiscal years 2005, 2004 and 2003, respectfully. As result of the sale of this business on June 30, 2005, these revenues will not be recurring.

Cost of Services

Included within cost of services are direct costs, including fringe benefits, product and part costs, and other costs.

A large part of our service costs are support costs and expenses that include direct labor and infrastructure costs to support our service offerings. As we continue to expand our service offerings, we anticipate that the direct costs to support these service offerings will continue to increase in fiscal year 2006.

20

On long-term fixed unit-price contracts, part costs vary depending upon the call volume received from customers during the period. Many of these costs are volume driven and as volumes increase, these costs as a percentage of revenues increase, generating a negative impact to profit margins.

The variable component of these costs are product and part costs, overtime, subcontracted work and freight. Product is broken into two categories: parts and equipment to support our service base and product held for resale. Part costs are highly variable and are dependent on several factors. On long-term fixed unit-price contracts, parts and peripherals are consumed on service calls. For installation services and seat management services, product may consist of hardware, software, cabling and other materials that are components of the service performed. Product held for resale consists of hardware and software.

Cost of services consists of the following components:

(Amounts in thousands)						March 31,
	2005		%			2004		%			2003		%
Services delivery and support	$	49,867		86.2	%	$	33,989		77.9	%	$	36,198		82.0	%
Product held for resale		2,494		4.3			5,151		11.8			4,445		10.0
Total direct costs		52,361		90.5			39,140		89.7			40,643		92.0
Indirect costs		5,511		9.5			4,469		10.3			3,557		8.0
Costs of services	$	57,872		100.0	%	$	43,609		100.0	%	$	44,200		100.0	%

During fiscal year 2005, our cost of services, delivery and support increased $15.8 million to $49.8 million from $33.9 million in fiscal year 2004. This increase was partially due to an increase in salaries, overtime, and subcontracted services. Also, as a result of the startup of a new long-term, nation-wide, enterprise maintenance contract, we incurred an operating loss. After the successful implementation of the initial phase, the remaining roll out schedule was accelerated. The costs associated with the accelerated roll out and certain unanticipated delivery costs were comprised of inventory, freight, costs to stage the inventory where strategically necessary, increased overtime and higher than anticipated usage of sub-contractors that exceeded our estimates. Many of these costs were one time in nature, such as freight costs incurred to stage inventory, initial parts cost and non-recoverable labor incurred in hiring and training staff. Historically, other increased costs are initially incurred at the start of a new contract that are difficult to measure, such as increased repair times due to becoming familiar with new product sets and higher call volumes which are inherent when one switches service providers. We also experienced higher than anticipated failure rates on certain pieces of equipment, which contributed to the poor performance on this contract and operating results for the fiscal year.

During fiscal year 2004, our cost of services delivery and support decreased by $2.3 million from $36.2 million during 2003 to $33.9 million. The decrease in the cost of services delivery and support was primarily related to reduced costs associated with the non-recurring revenues in our secured network services in 2003. Additional cost reductions were achieved through the integration of Microserv and continued cost containment efforts.

During fiscal year 2005 and 2004, we continued to see erosion in gross margins on product held for resale due to the competitively priced product market. During fiscal year 2005, the costs of product held for resale decreased 51% to $2.5 million from $5.1 million in fiscal year 2004, primarily as a result of reduced revenues. The cost of product held for resale increased $706 thousand to $5.1 million due to increased revenue compared to fiscal year 2003. The gross margin on product held for resale was $214 thousand, or 7.9% in fiscal year 2005 compared to $397 thousand, or 7.1% in fiscal year 2004, and $579 thousand or 11.55 in fiscal year 2003.

When compared to fiscal year 2004, total direct costs for fiscal year 2005 increased by approximately $13.3 million, or 34%, to $5.8 million. As discussed above, the increase in direct costs was due to increases in salaries and overtime costs related to the start-up of a new long-term, nation-wide, enterprise maintenance contract.

21

Total direct cost during fiscal year 2004 when compared to fiscal year 2003 decreased $1.5 million, or 3.7%, from 2003 to 2004 as result of the decrease in services delivery and support offset by the increases in costs related to product held for resale.

Indirect costs include costs related to operating our call center, logistics, dispatch operations, facility costs and other costs incurred to support the field service technicians and engineers. During fiscal year 2005, indirect costs increased by $1.0 million, or 24% from $4.4 million in fiscal year 2004 to $4.9 million. The primary reason for the increase in indirect costs was increases in our allowance for inventory obsolescence and the integration of AlphaNational with its related occupancy and back office costs.

Indirect costs increased $900 thousand from $3.5 million in fiscal year 2003 to $4.4 million for fiscal year 2004, a 26% increase. The increase in indirect costs was attributable to several factors: the integration of Microserv with associated payroll and occupancy costs, and increases in travel, telecommunications and business insurance. In addition, we experienced a significant increase in recruiting fees as we increased personnel with required security clearances by 400% in our secured networks services business.

Costs related to our secure network services business were $11.3 million, $8.2 million, and $10.1 million for fiscal years 2005, 2004 and 2003, respectively.

Gross Margin

Fiscal year 2005 gross margin was negatively affected by the increase in costs discussed above.

Our fiscal year 2005 gross margin reflected the economic and competitive challenges we faced. As a percent of revenues, the gross margin percent was 7% for fiscal year 2005, and 12% for fiscal years 2004 and 2003, respectively.

The reduction in gross margins in fiscal year 2005 compared to fiscal year 2004 was the result of initial start up costs associated with the commencement of a new long-term, nation-wide, enterprise maintenance contract, higher delivery costs on new business, increases in our allowance for inventory obsolescence and continued industry wide pricing pressures. Gross margins decreased $290 thousand, or 5%, from fiscal year 2004 as compared to fiscal year 2003, primarily as a result of reduced revenues discussed above.

We must continue to increase revenues, continue in our cost reduction efforts and deploy technology to gain operating efficiencies in order to remain competitive. We expect that the continued shift from product sales towards long-term service contracts will have a positive effect on our gross margins over the long term, and for such margins to improve as we must continue to increase our enterprise maintenance solutions base.

Gross margin for our secure network services business was $2.2 million, $1.2 million, and $1.3 million for fiscal years 2005, 2004 and 2003, respectively.

Selling Expenses

Selling expenses consist primarily of salaries, commissions, travel costs and related expenses for personnel engaged in sales. Selling expenses increased $276 thousand or 22% from $1.3 million to $1.5 million in fiscal year 2005, primarily related to increased commissions as a result of increases in new business and increased travel and personnel costs.

For fiscal year 2004, selling expense increased $152 thousand to $1.3 million from $1.1 million in the prior year, which was an increase of 14%. The primary reasons for the increase in selling expense was increased commissions related to new business and increased travel.

Marketing Expense

During fiscal year 2005, marketing expense decreased from $534 thousand to $241 thousand, a decrease of 55%. The decrease in marketing expense was the result of decreased promotional efforts in fiscal year 2005.

Marketing expense decreased from $652 thousand in fiscal year 2004 to $534 thousand in fiscal year 2003, an 18% decrease, was the result of various cost containment actions and curtailment of marketing programs.

22

General and Administrative Expenses

General and administrative expenses consist primarily of non-allocated overhead costs. These costs include executive, accounting, contract administration, professional services, such as legal and audit, business insurance, occupancy and other costs.

During fiscal year 2005, general and administrative expenses increased $600 thousand, from $3.1 million to $3.7 million, or 21%. The increase in general and administrative expense was the result of several factors, which include increases in payroll and fringe benefits, outside services; principally legal, audit and professional fees, increases in occupancy costs related to the acquisition of AlphaNational, telecommunications expense, and depreciation expenses as a result of improvements made to our IT infrastructure.

General and administrative expense decreased $41 thousand, or 1%, in fiscal year 2004 compared to 2003. This decrease was a result of cost control efforts, including employment actions such as postponing salary increases, and in certain cases, reducing wage rates for administrative staff.

In spite of vigorous cost containment efforts, various factors, such as changes in insurance markets, related costs associated with complying with new Securities and Exchange Commission regulations and the American Stock Exchange requirements may increase general and administrative expenses which will have a negative impact on our earnings in fiscal year 2006 and future periods.

Abandonment of facility

In conjunction with the acquisition of AlphaNational we conducted a review of our facility requirement and determined that after the completion of the acquisition we would have excess space. During September 2004, we recorded a charge for abandonment of facility of approximately $179 thousand related to the sub-leasing of rental office space. We leased the excess space effective October 1, 2004. The abandonment charge is net of minimum sub-lease rents of approximately $334 thousand.

Operating (Loss) Income

We incurred an operating loss of $1.5 million in fiscal year 2005 compared to operating income of $1.0 million in fiscal year 2004. The loss in fiscal year 2005 was primarily due to the loss incurred on the new long-term, nation-wide, enterprise maintenance contract previously discussed, increases in our allowance for inventory obsolescence and the abandonment of certain office space.

Operating income was $1.0 million for fiscal year 2004 compared to $1.3 million in 2003, a decrease of 21% or $283 thousand. The economy and competitive challenges were the primary reasons for the decrease in operating income for fiscal year 2004.

Interest Expense

During Fiscal year 2005, interest expense increased from $591 thousand in fiscal year 2004 to $663 thousand, due to increased borrowings.

Interest expense decreased 9% from $649 thousand to $591 thousand during fiscal year 2004 due to slightly lower monthly borrowing activities compared to fiscal year 2003 and lower interest rates.

Income Taxes

For fiscal year 2005, we recorded a tax benefit of $793 thousand, and for fiscal year 2004, we recorded a non-recurring income tax benefit of $3.75 million. We believe that it is appropriate to record the deferred tax asset based upon our estimates of future profitability, and the gain on the sale of our secure network services business completed on June 30, 2005. The tax benefit consists of the realization of the tax benefits for timing differences for financial reporting and income tax purposes. The components of the tax benefit are primarily the net operating loss carryforward, allowances for doubtful accounts, inventory obsolescence reserves and depreciation and amortization expense. For fiscal year 2003, we recorded income tax expense of $60,000, principally for minimum state and local obligations. Note 11 to the consolidated financial statements contains an analysis of our deferred tax assets.

23

Net (Loss) Income

For fiscal year 2005, we recorded a net loss of $1.4 million compared to net income for fiscal year 2004 of $4.2 million. The net loss per share was $(.46) basic and diluted compared to $1.60 and $1.54 basic and diluted for fiscal year ended March 31, 2004. As discussed above, the primary reasons for the loss was the costs incurred on the new long-term, nation-wide, enterprise maintenance contract, increases in our allowance for inventory obsolescence, and the abandonment of certain office space.

As a result of income from operations of $478 thousand and the non-recurring income tax benefit of $3.75 million, net income increased from $648 thousand in fiscal year 2003 to $4.2 million in fiscal year 2004. Earnings per share were $1.60, basic, and $1.54, diluted for the year ended March 31, 2004 compared to $.30, basic and diluted, for the fiscal year 2003.

Depreciation and Amortization

Depreciation and amortization was $1.2 million, $762 thousand and $657 thousand for the fiscal years ended March 31, 2005, 2004 and 2003, respectively. During fiscal year 2005, depreciation and amortization increased $392 thousand of which $132 thousand and $90 thousand was the amortization of intangible assets as a result of the Microserv and AlphaNational acquisitions, respectively and $170 thousand was increased depreciation as a result of upgrading our information systems and technology. In 2006 we will continue our investment in technology which is expected to increase our operating efficiency. We continue to focus the majority of our capital spending on technology enhancements that will increase operating efficiencies.

Sale of Secure Network Services Business

On June 30, 2005, we entered into an asset purchase agreement with INDUS Corporation pursuant to which we sold substantially all of the assets and certain liabilities of our secure network services business. The purchase price was approximately $12.5 million, subject to adjustments described in the asset purchase agreement based on the net assets of the business on the date of closing. The asset purchase agreement provides that $3.0 million of the purchase price be held in escrow. Of this amount, $625,000 is held as security for the payment of our indemnification obligations pursuant to the asset purchase agreement, if any, and will be released to us eighteen (18) months following the date of the asset purchase agreement unless a certain key government contract, referred to as the Key Contract, is not assigned (referred to as a novation) as of such time. A portion of the escrow amount equal to $2.0 million (which includes the portion referenced above for indemnification obligations), plus any interest or other income earned thereon, will also serve as security for a payment obligation we have to INDUS Corporation if the novation of the Key Contract from us to INDUS Corporation is not approved by such government customer and received within two years from the date of the asset purchase agreement. The transaction was completed on June 30, 2005. See “Sale of Secure Network Services Business” for additional information regarding the sale of our secure networks services business.

The unaudited proforma financial information presented reflects the estimated proforma effect of the sale of the secure network services business. The following unaudited proforma condensed consolidated financial statements are included: (a) an unaudited proforma condensed consolidated statements of operations for the years ended March 31, 2005, 2004 and 2003 giving effect to the sale of the secure network services business as if it occurred on April 1, 2004, 2003 and 2002, respectively; and (b) an unaudited proforma condensed consolidated balance sheets at March 31, 2005 and 2004, giving effect to the sale of the secure network services business as if it occurred at the beginning of each fiscal year.

The unaudited proforma condensed consolidated financial statements include specific assumptions and adjustments related to the sale of the secure network services business. These proforma adjustments have been made to illustrate the anticipated financial effect of the sale of the secure network services business. The adjustments are based upon available information and assumptions that we believe are reasonable as of the date of this filing. However, actual adjustments may differ materially from the information presented. Assumptions underlying the proforma adjustments are described in the accompanying notes, which should be read in conjunction with the unaudited proforma condensed consolidated financial statements. These proforma condensed consolidated statements of operations do not include anticipated gain on the sale of the secure network services business of approximately $5.0 million. The recognition of the gain on the sale of the secure network services business is subject to certain contingencies, and as such, the gain will be deferred until the contingencies are resolved.

24

The unaudited proforma financial statements are presented for informational purposes only and do not purport to be indicative of the financial position which would actually have been obtained if the transaction had occurred in the
periods indicated below or which may exist or be obtained in the future. The information is not representative of future results of operations or financial position. In the opinion of management, all material adjustments necessary to reflect the disposition of the secure networks services business by us have been made. The unaudited condensed proforma financial information is qualified in its entirety by and should be read in conjunction with the more detailed information and financial data appearing in the Company’s historical consolidated financial statements and notes thereto included herein.

Proforma Statement of Operations (Unaudited)

				For the year ended
(amounts in thousands, except share				March 31, 2005
data)
	Actual			Adjustments			Proforma
Revenues	$	62,006	(1)	$	(13,580	)	$	48,426
Operating loss		(1,541	) (2)		(2,240	)		(3,781	)
Interest Expense		663	(3)		483			180
(Loss) income before income taxes		(2,204	) (2)		(1,757	)		(3,961	)
Income tax (benefit) expense		(793	) (4)		(632	)		(1,425	)
Net (loss) income	$	(1,411	)	$	(1,125	)	$	(2,536	)
(Loss) earnings per share –basic	$	(0.46	)				$	(0.83	)
(Loss) earnings per share- diluted	$	(0.46	)				$	(0.83	)

The proforma adjustment to the historical financial statements are:

(1)	Reflects the elimination of in revenues attributable to the secure network services business as a result of its sale.
(2)	Reflects the reduction of gross margin attributable to the secured networks services business as a result of the sale.
(3)	Interest savings as a result of assumed reduction in notes payable of $9.0 million using sale proceeds
(4)	Income tax effect of the foregoing adjustments

25

Proforma Statement of Operations (Unaudited)

				For the year ended
(amounts in thousands, except share data)				March 31, 2005
	Actual			Adjustments			Proforma
Revenues	$	49,537	(1)	$	(9,481	)	$	40,056
Operating loss		(1,541	) (2)		(1,040	)		14
Interest Expense		576	(3)		526			50
Income before income taxes		478	(2)		(514	)		(36	)
Income tax (benefit) expense		(3,750	) (4)		(185	)		(3,935	)
Net Income	$	(4,228	)	$	(329	)	$	(3,899	)
Earnings per share –basic	$	1.60					$	1.48
Earnings per share- diluted	$	1.54					$	1.40

The proforma adjustment to the historical financial statements are:

(1)	Reflects the elimination of in revenues attributable to the secure network services business as a result of its sale.
(2)	Reflects the reduction of gross margin attributable to the secured networks services business as a result of the sale.
(3)	Interest savings as a result of assumed reduction in notes payable of $9.0 million using sale proceeds
(4)	Income tax effect of the foregoing adjustments

Proforma Statement of Operations (Unaudited)

				For the year ended
(amounts in thousands, except share data)				March 31, 2005
	Actual			Adjustments			Proforma
Revenues	$	50,418	(1)	$	(11,444	)	$	38,974
Operating loss		1,337	(2)		(1,112	)		225
Interest Expense		629	(3)		526			103
Income before income taxes		708	(2)		(586	)		122
Income tax (benefit) expense		60	(4)		(211	)		(151	)
Net Income	$	648		$	(375	)	$	273
Earnings per share –basic	$	0.30					$	0.13
Earnings per share- diluted	$	0.30					$	0.12

The proforma adjustment to the historical financial statements are:

(1)	Reflects the elimination of in revenues attributable to the secure network services business as a result of its sale.
(2)	Reflects the reduction of gross margin attributable to the secured networks services business as a result of the sale.
(3)	Interest savings as a result of assumed reduction in notes payable of $9.0 million using sale proceeds
(4)	Income tax effect of the foregoing adjustments

26

     The unaudited consolidated pro-forma Balance Sheets at March 31, 2005 and 2004 give effect to the sale of our secure network services business as if the transaction was completed at the beginning of each fiscal year. The results are presented for informational purposes and are not indicative of actual results.

Proforma — Balance Sheet (Unaudited)

(amounts in thousands)							For the years ended
	As			March 31, 2004			Proforma			As			March 31, 2004			Proforma
	reported			Adjustments						reported			Adjustments
ASSETS
CURRENT ASSSETS
Cash	$	1,264	(2)	$	12,500		$	4,420		$	430	(2)	$	12,500		$	3,586
			(5)		(9,344	)						(5)		(9,344	)
Trade accounts receivable, net		12,468	(1)		(1,949	)		10,519			9,364	(1)		(1,949	)		7,415
Inventory, net		5,600						5,600			5,845						5,845
Prepaid expenses and other current assets		487	(1)		(16	)		471			599	(1)		(16	)		583
Deferred tax asset		3,814	(3)		(3,039	)		775			1,204	(3)		(1,204	)		—
TOTAL CURRENT ASSETS		23,633			(1,848	)		21,735			17,442			(13	)		17,429
PROPERTY AND EQUIPMENT, net		1,608	(1)		(64	)		1,544			1,598	(1)		(64	)		1,534
GOODWILL AND OTHER INTANGIBLE ASSETS (net)		7,438						7,438			4,606						4,606
OTHER ASSETS		141						141			149						149
DEFERRED TAX ASSET		930	(3)		632			1,526			2,696	(3)		(1,650	)		1,046
TOTAL ASSETS	$	33,750		$	(1,280	)	$	32,470		$	26,491		$	(1,727	)	$	24,764
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable	$	5,955	(1)	$	(500	)	$	5,455		$	3,024	(1)	$	(500	)	$	2,524
Accrued expenses		4,776	(1)		(229	)		8,115			3,699	(1)		(229	)		5,795
			(3)		725							(3)		725
			(4)		3,193							(4)		1,950
			(5)		(350	)						(5)		(350	)
Deferred maintenance revenues		3,776						3,776			2,543						2,543
Current portion of long-term debt		17						17			29						29
Notes payable		662	(5)		(494	)		168			494	(5)		(494	)		—
TOTAL CURRENT LIABILITIES		15,186			2,345			17,531			9,789			1,102			10,891
LONG-TERM BANK DEBT		9,463	(5)		(6,100	)		3,363			7,227	(5)		(6,100	)		1,127
OTHER LONG-TERM DEBT		3						3			19						19
SUBORDINATED DEBT – AFFILIATE		2,400	(5)		(1,400	)		1,000			2,400			(1,400	)		1,000
DEFERRED INCOME		278			—			278			337			—			337
TOTAL LIABILITIES		27,330			(5,155	)		22,175			19,772			(6,398	)		13,374
STOCKHOLDERS’ EQUITY
Common Stock		827						827			764						764
Additional paid in capital		9,011						9,011			7,962						7,962
(Accumulated deficit) retained earnings		(3,206	) (6)		5,000			669			(1,795	) (6)		5,000			2,876
			(7)		(1,125	)						(7)		(329	)
Less treasury stock at cost		(212	)		—			(212	)		(212	)		—			(212	)
TOTAL STOCKHOLDERS’ EQUITY		6,420			3,875			10,295			6,719			4,671			11,719
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	33,750		$	(1,280	)	$	32,470		$	26,491		$	(1,727	)	$	24,764

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(1)	Reflects the elimination of net assets sold in connection with the sale of the secure network services business.
(2)	Reflects the cash proceeds received from the sale of $12.5million and includes amounts held in escrow at closing of $3.0 million, which is reflected in the cash balance.
(3)	Records the provision for income taxes utilizing the net operating loss carryforward and estimated additional income taxes.
(4)	Reflects estimated transaction costs, fees and expenses
(5)	Reflects the approximate use of $9.0 of the proceeds to repay indebtedness
(6)	Reflects the estimated gain on sale of secure network services business,(after contingencies are resolved) net of            taxes and transaction costs.
(7)	Impact on earnings for the elimination of earnings for the secure network services business

Liquidity and Capital Resources

As of March 31, 2005, we had approximately $1.2 million of cash on hand. Sources of our cash in fiscal 2005 have been from cash generated from operations and our revolving credit facility, as described below. After the sale of the secure network services business, on June 30, 2005, we had approximately $4.0 million cash on hand.

We are continuing to focus on our core high availability maintenance services business while at the same time evaluating our future strategic direction. As part of our business strategy, we intend on reducing our indebtedness. With a portion of the proceeds received from the sale of the secure network services business, we are repaying approximately $9 million of our indebtedness including:

• $6.1 million repayment of our revolving credit agreement;

• $400,000 principal amount of our 7% convertible subordinated debentures

• $500,000 principal amount of our 8% promissory notes dated October 8, 1998;

• $500,000 principal amount of our 8% promissory notes dated October 13, 1998;

• $100,000 accrued interest on our 7% convertible subordinated debentures, and 8% promissory notes dated October 8, 1998, October 13, 1998, November 2, 1998 and November 5, 1998;

• $494,000 principal amount on our notes issued to former Microserv shareholders; and

• $250,000 earn out to the former Microserv Shareholders.

The remainder of the proceeds from the sale of the secure network services business will be used for working capital purposes.

We anticipate that our primary sources of liquidity in fiscal 2006 will be cash generated from operations, cash on hand generated from the sale of the secure network services business in June 2005, and cash available to us under our revolving credit agreement.

Cash generated from operations may be affected by a number of factors. See “Forward Looking Statements and “Business – Risk Factors” for a discussion of the factors that can negatively impact the amount of cash we generate from our operations.

Although we have no definite plans to undertake any future debt or equity financing, we will continue to pursue all potential funding alternatives. Among the possibilities for raising additional funds are issuances of debt or equity securities, and other borrowings under secured or unsecured loan arrangements. There can be no assurances that additional funds will be available to us on acceptable terms or in a timely manner.

Our future financial performance will depend on our ability to continue to reduce and manage operating expenses, as well as our ability to grow revenues through obtaining new contracts and replacing contracts sold in connection with the sale of the secure networks services business. Our revenues will continue to be impacted by the loss of customers due to price competition and technological advances. Our future financial performance could be negatively affected by unforeseen factors and unplanned expenses. See “Forward Looking Statements” and “Business – Risk Factors.”

In furtherance of our business strategy, transactions we may enter into could increase or decrease our liquidity at any point in time. If we were to obtain a significant contract or make contract modifications, we may be required to expend our cash or incur debt, which will decrease our liquidity. Conversely, if we dispose of assets, we may receive proceeds from such sales which could increase our liquidity. From time to time, we are in discussions concerning acquisitions and dispositions which, if consummated, could impact our liquidity, perhaps significantly.

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We expect to continue to require funds to meet remaining interest and principal payment obligations, capital expenditures and other non-operating expenses. See the discussion below including the “Contractual Obligations” table. Our future capital requirements will depend on many factors, including revenue growth, expansion of our service offerings and business strategy. We believe that our available funds, together with our existing revolving credit facility, will be adequate to satisfy our current and planned operations for at least the next 12 months.

The table below reflects our liquidity and capital resources.

Liquidity and Capital Resources (Amounts in thousands)	2005			2004			2003
Cash balance at March 31	$	1.264		$	430		$	568
Working capital at March 31	$	8,447		$	7,653		$	5,092
Net cash provided by (used in) operating activities	$	701		$	(110	)	$	2,355
Net cash (used in) investment activities	$	(1,685	)	$	(1,088	)	$	(346	)
Net cash (used in) provided by financing activities	$	1,818		$	1,060		$	(1,552	)

At March 31, 2005, we had working capital of $8.4 million compared to working capital of $7.6 million at March 31, 2004. The current ratio was 1.55 at March 31, 2005 compared to 1.78 at March 31, 2004. The increase in working capital was primarily attributable to the reclassification of a portion of the deferred tax asset from long term to current as a result of the sale of our secure network services business described elsewhere.

On June 30, 2005 we sold our secure network services business for $12.5 million. The gain on the sale of the business is estimated at $5.0 million net of taxes and fees. The net cash after taxes and fees is estimated at $10.0 million. The proceeds will be used to reduce debt and provide working capital.

A summary of future minimum lease payments is set forth below and in Note 12 to the consolidated financial statements.

Capital expenditures in fiscal year 2005 were $861 thousand and in fiscal year 2004 were $672 thousand. We anticipate fiscal year 2006 technology requirements to result in capital expenditures totaling approximately $700 thousand. We continue to sublease a portion of our headquarters building which reduces our rent expense by approximately $400 thousand annually.

On June 29, 2005, we and our subsidiaries amended and restated our Amended and Restated Loan and Security Agreement, referred to as the “revolving credit agreement” with Provident Bank to extend the maturity date to June 30, 2007 and revise the covenants as more fully described in the revolving credit agreement. The amount available under the revolving credit agreement remains at $12.0 million. The amount outstanding under the revolving credit agreement bears interest at the bank’s prime rate plus one-quarter percent (0.25%). We will also pay an unused commitment fee on the difference between the maximum amount we can borrow and the amount advanced, determined by the average daily amount outstanding during the period. The difference is multiplied by one-quarter percent (0.25%). This amount is payable on June 30, 2005 and on the last day of each quarter until the revolving credit agreement has been terminated. Additionally, we will pay a fee of $1,000 per month. Advances under the revolving credit agreement are collateralized by a first priority security interest on all of our assets as defined in the revolving credit agreement. As of June 30, 2005, $10.5 million was outstanding and $1.5 million was available to us. The interest rate at June 30, 2005 was 5%.

The revolving credit agreement contains representations, warranties and covenants that are that are customary in connection with a transaction of this type. The revolving credit agreement contains certain covenants including, but not limited to: (i) having all persons or entities required to make payments to us deposit such payments in a cash collateral account by which Provident Bank, in its own discretion, may, among other things, use such funds against our obligations owed to Provident Bank,(ii) notifying Provident Bank in writing of any cancellation of a contract having annual revenues in excess of $250,000, (iii) in the event receivables arise out of government contracts, we will assign to Provident Bank all government contracts with amounts payable of $100,000 or greater and in duration of six months or longer, (iv) obtaining written consent from Provident Bank prior to permitting a change in ownership of more than 25% of the stock or other equity interests of us and our subsidiaries or permit us or any of such entities to enter into any merger or consolidation or sell or lease substantially all of our or its assets, and (v) obtaining prior written consent of Provident Bank, subject to exceptions, to make payments of debt to any person or entity or making any distributions of any kind to any officers, employees or members. The revolving credit agreement also contains certain financial covenants which we are required to maintain including, but not limited to tangible net worth, current ratio, total liabilities to net worth ratio, debt service coverage and current ratio, as more fully described in the revolving credit agreement.

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Events of default, include, but are not limited to: (i) a determination by Provident Bank that the financial condition of us or any person or entity that generally is now or hereafter liable, directly, contingently or otherwise obligated to pay Provident Bank under the revolving credit agreement (“Other Obligor”) is unsatisfactory, (ii) we or an Other Obligor becoming insolvent, (iii) the suspension of business, or commission of an act amounting to business failure by us or any Other Obligor, and (iv) a change in more than 25% of the ownership of us without the prior written consent of Provident Bank. Upon an event of default, the lender may (i) accelerate and call immediately due and payable all of the unpaid principal, accrued interest and other sums due as of the date of default, (ii) impose the default rate of interest with or without acceleration, (iii) file suit against us or any Other Obligor, (iv) seek specific performance or injunctive relief to enforce performance of the our obligations (v) exercise any rights of a secured creditor under the Uniform Commercial Code, (vi) cease making advances or extending credit to us and stop and retract the making of any advances which we may have requested, and (vii) reduce the maximum amount we are permitted to borrow under the revolving credit agreement. We have also authorized Provident Bank, upon a default, but without prior notice to or demand upon us and without prior opportunity of us to be heard, to institute an action for replevin, with or without bond as Provident Bank may elect, to obtain possession of any of the collateral.

At December 31, 2004 and March 31, 2005 we were not in compliance with the financial covenants contained in our revolving credit agreement and have received a waiver from the bank. In conjunction with amending the revolving credit agreement on June 29, 2005, the bank has waived the compliance requirement of these covenants as of and through March 31, 2005 and amended the covenants prospectively. We believe that we will remain compliance with the revised covenants of the revolving credit agreement, however, there is no assurance we will be in compliance and the bank will waive any future non-compliance with the covenants.

If our customer base were to remain constant, after giving effect to the sale of our secure network services business, we expect to have approximately $5.0 million available on our revolving credit agreement through the next twelve months. If we were to obtain a significant new contract or make contract modifications, our borrowing availability may be less since we are generally required to invest significant initial start-up funds which are subsequently billed to customers.

The revolving credit agreement prohibits the payment of dividends or distributions as well as limits the payment of principal or interest on our subordinated debt, which is not paid until we obtain a waiver from the bank.

In conjunction with the acquisition of AlphaNational, we issued notes to the former AlphaNational shareholders in the aggregate amount of $500 thousand, which bares interest at 6%. Based upon final adjustments to the September 30, 2004 closing balance sheet, the aggregate balance of the notes was reduced to $168 thousand. The notes mature on March 31, 2006. Interest is payable quarterly and in arrears.

In addition, in the acquisition of AlphaNational, we assumed the outstanding balance of AlphaNational notes payable to a financial institution of approximately $474 thousand. These notes were paid in full on November 8, 2004.

On August 29, 2003, we acquired 100% of the common stock of Microserv, Inc. (Microserv) for approximately $3.3 million. The consideration included cash of $360 thousand, 5% notes payable of $494 thousand, and 442,078 shares of restricted common stock valued at $4.23, or $1.87 million and fees and related costs of approximately $575 thousand. The 5% notes matured on February 1, 2005. Due to the non-compliance with our revolving credit agreement at December 31, 2004, the notes were not paid as of February 1, 2005, and were classified as current notes payable. As a result of the non-payment, if the holders requested acceleration of the notes, the notes would have become due and immediately payable. The holders did not request the acceleration. As a result of the non-payment, the interest on these notes has increased to 10%. Subsequent to year end and concurrent with the amendment of the revolving credit agreement, we have requested and received consent from the bank to pay the notes in full. We expect to use a portion of the proceeds from the sale of the secure networks business to do so.

Our subordinated debt agreements with Nancy Scurlock and the Arch C. Scurlock Children’s Trust, which are affiliates, totaled $2.4 million at March 31, 2005 and $4.0 million at March 31, 2004. Pursuant to a subordination agreement between our lender and the subordinated debt holders, principal repayment and interest payable on the subordinated debt agreements may not be paid without the consent of the bank. At March 31, 2005, the affiliates held in the aggregate $400 thousand face amount of our 7% convertible subordinated debt dated January 27, 1998 and $690 thousand, $310 thousand, $500 thousand and $500 thousand face amounts of our 8% promissory notes, with an aggregate outstanding principal balance of $2.4 million at March 31, 2005 and 2004. At their option, the holders of the 7% convertible
subordinated debentures may convert the 7% convertible subordinated debentures into our common stock up to the maturity date or prepayment, subject to certain conditions contained in the notes. As of March 31, 2005, the conversion

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rate of the notes was $3.19 per share. The conversion rate is adjustable in the event we take certain actions described in the notes.

Interest on the unpaid principal amount of the 7% convertible subordinated debentures is at a rate of seven percent (7%) due semiannually. The 7% convertible subordinated debentures provide that we must pay interest on any overdue principal at the same rate monthly, or at the option at the note holders, on demand. If any act of default occurs, the principal and interest due under the 7% convertible subordinated debentures will be due and payable immediately without any action on behalf of the note holders. If we do not make a payment of any installment of interest or principal when it becomes due and payable, we are in default. If we breach or default in the performance of any covenants contained in the notes and continuance of such breach or default for a period of 30 days after the notice to us by the note holders or breach or default in any of the terms of borrowings by us constituting superior indebtedness unless waived in writing by the holder of such superior indebtedness within the period provided in such indebtedness not to exceed 30 days, we are in default. We were in default of these notes because we did not make payments on interest and principal when due. As described below, we received a waiver from the holders of the 7% convertible subordinated debentures of this default. At March 31, 2005, the interest rate was 8% per annum on the 8% promissory notes. We may have been in default of the promissory notes because we did not make payments on the interest or principal when due. As described below, we received a waiver from the holders of the 8% promissory notes of a default, if any.

On June 29, 2005, we amended our 8% promissory notes and 7% convertible subordinated debentures to extend the maturity date to July 1, 2007, which date is the next day immediately succeeding the expiration of the revolving credit agreement. The holders of our 8% promissory notes and 7% convertible subordinated debentures also waived any rights they had regarding the acceleration of such notes and debentures and any notice which may have been required to be given by us of an event of default under the notes or debentures which may have arisen or occurred prior to June 29, 2005 .

During fiscal year 2004, in conjunction with the private placement of $1.2 million and, following receipt of a waiver from the bank, we made a principal repayment of $1.2 million on the 7% convertible subordinated debenture and an additional $400 thousand payment on the 7% subordinated debt in September 2003. During fiscal year 2005 and fiscal year 2004, the bank approved, and we made payments totaling $300 thousand and $300 thousand for accrued interest on the subordinated debt. Interest payable to the affiliates was $100 thousand and $140 thousand at March 31, 2005 and 2004, respectively.

Subsequent to year end and concurrent with the amendment and restatement of our revolving credit agreement, we have received consent from the bank to pay an aggregate principal amount of $1.4 million and aggregate accrued interest amount of $100 thousand on the 7% convertible subordinated debentures and 8% promissory notes. We expect to use a portion of the proceeds from the sale of the secure network services business to pay the entire principal amount of the 7% convertible subordinated debentures and the principal amount of the 8% promissory notes dated October 8, 1998 and October 13, 1998. After giving effect to these payments we owe $1.0 million in an aggregate principal amount to the holders of the 8% promissory notes.

The following are our contractual obligations associated with lease commitments, debt obligations and consulting commitments.

(Amounts in thousands)

	Bank Line of		Other		Vehicle		Consulting		Operating
Year ended March 31,	Credit		Debt (1) (2) (3)		Loans(4)		Commitment (5)		Leases		Total
Less than 1 year	$	—	$	662		17	$	50	$	713	$	1,442
1 to 3 years		9,463		2,400		3		150		994		13,010
Over 5 years		—		—		—		—		102		102
Total	$	9,463	$	3,062	$	20	$	200	$	1,809	$	14,554

(1) At March 31, 2005, affiliates (See Note 13 to the consolidated financial statements), held in the aggregate $400 thousand face amount of our 7% convertible subordinated debentures dated January 27, 1998 and $690 thousand, $310 thousand, $500 thousand, and $500 thousand face amount of our 8% subordinated notes dated October 8, 1998, October 13, 1998, November 2, 1998 and November 5, 1998, respectively, in the aggregate principal amount of $2.4 million. These notes are subordinate to our revolving credit agreement and we cannot be make principal or interest payments on such notes without the consent of the bank. The balance of our subordinated notes at March 31, 2005 was $2.4 million. Subsequent to year end and after receiving consent from our bank the balance of the subordinated

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	notes will be reduced to $1.0 million, with a maturity date of July 1, 2007. We expect to use a portion of the proceeds from the sale of the secure networks services business to make such repayments.
(2)	In conjunction with the acquisition of AlphaNational, we issued notes totaling $168 thousand to the former AlphaNational shareholders. These notes carry interest at the rate of 6% and mature on March 31, 2006.
(3)	In conjunction with the acquisition of Microserv, we issued $494 thousand notes to the former Microserv shareholders. The notes originally bore interest at 5% and matured on February 1, 2005. Because we were not in compliance with our revolving credit agreement at December 31, 2004, we were unable to repay the notes, and as a result, the interest rate was increased to 10% effective February 1, 2005. The notes were classified as current liabilities in our financial statements. Concurrent with the amendment of the revolving credit agreement, we received consent from the bank to repay the notes in full. We expect to use a portion of the proceeds from the sale of the secure networks business to make such repayments.
(4)	We have three notes with an automobile manufacturer. Two notes have terms of 36 months and one note has a term of 48 months. The balances and respective interest rates on the notes at March 31, 2005, and 2004 were $20 thousand, $37 thousand, and $52 thousand with interest rates of 1.9%, 0.0% and 0.0%, respectively.
(5)	We have a consulting advisory service commitment with a former Chief Executive Officer of the Company. From April 1, 1999 through March 31, 2009, we are to pay the former Chief Executive Officer $50 thousand per year for consulting services.

Off Balance Sheet Arrangements

In conjunction with a government contract, we act as a conduit in a financing transaction on behalf of a third party. We routinely transfer 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 us for the receivables by the transferee is equal to our carrying value and therefore no gain or loss is recognized on these transfers. 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 us, for various services provided to the end users. We provide limited monthly servicing whereby we invoice the end user on behalf of the transferee. The off-balance sheet transactions had no impact on our liquidity or capital resources. We are not aware of any event, demand or uncertainty that would likely terminate the agreement or have an adverse affect on our operations.

Application of Critical Accounting Policies

Our financial statements are prepared in accordance with accounting principles that are generally accepted in the United States. The methods, estimates, and judgments we use in applying our most critical accounting policies have a significant impact on the results we report in our financial statements as they affect the updated amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. The Securities 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: revenue recognition, inventory valuation reserves, allowances for doubtful accounts, which impact cost of sales and gross margin, the assessment of recoverability of goodwill and other intangible assets, which impact write-offs of goodwill and intangibles, depreciation of property and equipment, income taxes and legal contingencies. We discuss these policies further below, as well as the estimates and management’s judgments involved. We also have other key accounting policies, such as policies for revenue recognition, including unbilled accounts receivable and deferred revenues, as well as policies governing the estimate of the useful life of our property and equipment. We base our estimates on historical experience and assumptions that we believe to be reasonable under the circumstances, to make judgments about the carrying value of assets and liabilities not readily apparent from other sources. We believe that the estimates and judgments generally required by these policies are not as difficult or subjective and are less likely to have a material impact on our reported results of operations for a given period.

Revenue Recognition

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We recognize service revenues based on contracted fees earned, net of credits and adjustments, as the service is performed. Revenues from long-term fixed unit-price contracts are 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. Revenues from time-and-material professional service contracts are recognized as services are delivered. Certain seat management contracts include the delivery and installation of new equipment combined with multi-year service agreements. Revenues related to the delivery and installation of equipment under these and certain other contracts are recognized upon the completion of both the delivery and installation. Invoices billed in advance are recognized as revenues when earned.

Revenues are a function of the mix of long-term services contracts and time-and-material and professional service contracts. Revenues from time-and-material professional service contracts are difficult to forecast because of wide fluctuations in demand. The long-term contracts are more predictable and, as a result, the revenues 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.

Provision for loss contracts, if any, are recognized in the period in which they become determinable.

Inventory Valuation Reserves

We write down inventory and record obsolescence reserves for estimated excess and obsolete inventory equal to the cost of inventory and the estimated fair value based upon anticipated future usage, prior demand, equipment use, current and anticipated contracts and market conditions. Although we strive to ensure the accuracy of our forecast for inventory usage, a significant unanticipated change in technology could have a significant impact on the value of our inventory and our reported value. If actual demand is less than anticipated, or if our prior usage to support our contracts and anticipated future demand changes, 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 ranged from 12% to 25% of inventory. The annual charge for fiscal year 2006 is projected to be approximately $300 thousand, or 3.0% to 5.0% of inventory. A 1% change in estimate would have an impact on earnings of approximately $67 thousand. Due to economic uncertainties and the dramatic decreases in the cost for computing equipment, we increased our reserve for inventory obsolescence. The amount charged to expense for reserve for inventory obsolescence was approximately $1.0 million in fiscal year 2005, compared to $379 thousand in fiscal year 2004.

Accounts Receivable

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 judgment. Our estimate of bad debt expense is approximately .01% of annual revenues. A change in the estimate by 0.1% would have an impact on earnings of approximately $50 thousand. Over the past three years bad debts expense represented approximately .01% to 1.4% of revenues.

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Goodwill and Other Acquired Intangibles

We have adopted SFAS No. 141 “Business Combinations” and SFAS No. 142 “Goodwill and Other Intangible Assets”. Accordingly we no longer amortize goodwill, but will continue to amortize other acquisition related costs. During fiscal year 2005, amortization of acquisition related intangibles is $222 thousand, up from $81 thousand of amortizable intangibles and acquisition related intangibles and costs in fiscal year 2004. We assign useful lives for long-lived assets based on periodic studies of actual asset 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 has been no material changes in asset lives during the three fiscal years ended March 31, 2005.

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 there is no impairment and no further analysis is necessary. If our revenues and cost forecasts are not achieved, we fail to have continued profitability and market acceptance, or the market conditions in the stock market cause the valuation to decline, we may incur charges for impairment of goodwill. An assessment of goodwill and intangible assets was conducted for and we have concluded that there was no impairment of goodwill or intangible assets as of March 31, 2005.

Property and Equipment

We estimate the useful lives of property and equipment in order to determine the amount of depreciation and amortization expense to be recorded during any reporting period. The majority of our equipment is depreciated over three to ten years. The estimated useful lives are based on historical experience with similar assets as well as taking into account anticipated technological or other changes. If technological changes were to occur more rapidly than anticipated or in a different form than anticipated, the useful lives assigned to these assets may need to be shortened, resulting in the recognition of increased depreciation and amortization in future periods. We review for impairment annually or when events or circumstances indicate that the carrying amount may not be recoverable over the remaining lives of the assets. In assessing impairments, we follow the provisions of SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets,” utilizing cash flows which take into account management’s estimates of future operations.

Income Taxes and Valuation Allowance

Deferred income taxes are provided for the effect of temporary differences between the amounts of assets and liabilities recognized for financial reporting purposes and the amounts recognized for income tax purposes. We measure deferred tax assets and liabilities using enacted tax rates that, if changed, would result in either an increase or decrease in the provision for income taxes in the period of change. A valuation allowance is recorded when it is more likely than not that deferred tax assets will not be realized. In assessing the likelihood of realization, management considers estimates of future taxable income, the character of income needed to realize future tax benefits, historical financial results adjusted for non-recurring items and all other available evidence. Management believes that based on the weight of the evidence,
consistent past profitability and estimates of future profitability, including the gain as a result of the sale of our secure network services business, that a valuation allowance is not necessary. Note 11 to the consolidated financial statements contains an analysis of our deferred tax assets. Management will continue to monitor its historical results when adjusted for non-recurring items, estimates of future profitability and all other evidence to assess the realizability of its net deferred tax assets based on evolving business conditions. Should management determine it is more likely than not that some portion or all of the deferred tax assets will not be realized, this would have a significant negative effect on net income.

Our other 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, other factors that could cause actual results to differ materially include but are not limited to 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.

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We believe that we have the enterprise maintenance solutions 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.

Recent Accounting Pronouncements

In December 2004, the Financial Accounting Standard Board or FSAB issued SFAS No. 123R “Share-based payment or SFAS No. 123R. SFAS No. 123R addresses the requirements of an entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The cost of such awards will be recognized over the period during which an employee is required to provide services in exchange for the award. We will be required to adopt SFAS No. 123R on April 1, 2006. We are currently evaluating the impact that this pronouncement will have on our financial statements.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

We are exposed to changes in interest rates, primarily as a result of bank debt to finance our business. The floating interest rate 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 our sensitivity to market risks as of March 31, 2005. 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.

Long-term debt (including current maturities)	Total Debt		Fair Value
	(Amounts in thousands)
Revolving credit agreement at the PRIME rate plus .75%, due June 30, 2007. Average interest rate of 5.0%.		9,463		9,463
7% convertible subordinated note from affiliate due July 1, 2007.		400		400
8% subordinated notes from affiliate due July 1, 2007.		2,000		2,000
10% notes issued to former Microserv shareholders currently due.		494		494
6% notes issued to former AlphaNational shareholders due March 31, 2006		168		168
Notes payable GMAC interest rate 0.0 to 1.9 due in 48 and 36 months.		20		20
Total fixed debt		3,065		3,065
Total debt	$	12,545	$	12,545

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.

At March 31, 2005, we had $12.5 million of debt outstanding, of which $3.0 million bore fixed interest rates. If interest rates charges to us on our variable rate debt were to increase significantly, the effect could be materially adverse to our operations.

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Subsequent to year end, we have requested and received consent from the bank to pay $1.4 million to the affiliates paying the $400 thousand face amount of our 7% convertible subordinated debt, $500 thousand and $500 thousand face amounts of our 8% promissory notes in full. With the amendment of the revolving credit agreement the due date on the notes was extended to July 1, 2007.

We conduct a limited amount of business overseas, principally in Western Europe, and in Mexico and Canada. At the present, all transactions are billed and denominated in US 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

Report of Independent Registered Public Accounting Firm

Board of Directors and Shareholders of
Halifax Corporation

We have audited the accompanying consolidated balance sheet of Halifax Corporation and its subsidiaries (the Company) as of March 31, 2005, and the related consolidated statements of operations, changes in stockholders’ equity (deficit), and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also 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 audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Halifax Corporation as of March 31, 2005, and the results of its operations and cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

Our audit was conducted for the purpose of forming an opinion on the basic financial statements as a whole. Schedule II is presented for purposes of additional analysis and is not a required part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole.

/s/Grant Thornton

Vienna, Virginia
June 17, 2005 (except for Notes 6 and 19, as to which the date is June 30, 2005)

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have audited the accompanying consolidated balance sheet of Halifax Corporation and subsidiaries (the Company) as of March 31, 2004, and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for each of the two years in the period ended March 31, 2004. Our audits also included the financial statement schedule listed in the Table of Contents under Item 8. 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 standards of the Public Company Accounting Oversight Board (United States). 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 provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company at March 31, 2004, and the results of its operations and its cash flows for each of the two years in the period ended March 31, 2004, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, 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.

As discussed in Note 1 to the financial statements, effective April 1, 2002 the Company adopted Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets.”

/s/Deloitte & Touche LLP

McLean, VA
July 11, 2005

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HALIFAX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 2005, 2004 AND 2003
(Amounts in thousands except share and per share data)

	2005			2004			2003
Revenues	$	62,006		$	49,537		$	50,418
Operating costs and expenses:
Cost of services		57,872			43,609			44,200
Gross margin		4,134			5,928			6,218
Selling expense		1,530			1,254			1,102
Marketing expense		241			534			652
General and administrative		3,725			3,086			3,127
Abandonment of lease		179			—			—
Operating (loss) income		(1,541	)		1,054			1,337
Interest expense		(663	)		(591	)		(649	)
Other income		—			15			20
(Loss) income before income taxes		(2,204	)		478			708
Income tax (benefit) expense		(793	)		(3,750	)		60
Net (loss) income	$	(1,411	)	$	4,228		$	648
(Loss) earnings per common share-basic	$	(.46	)	$	1.60		$	.30
(Loss) earnings per common share-diluted *	$	(.46	)	$	1.54		$	.30
Weighted average number of common shares outstanding – basic		3,043,465			2,638,345			2,175,781
Weighted average number of common shares outstanding – diluted		3,094,922			2,787,656			2,212,360

*No effect is given to dilutive securities for loss periods.

See notes to consolidated financial statements

39

HALIFAX CORPORATION
CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2005 AND 2004
(Amounts in thousands except share and per share data)

	March 31,
	2005			2004
ASSETS
CURRENT ASSETS
Cash	$	1,264		$	430
Trade accounts receivable, net		12,468			9,364
Inventory, net		5,600			5,845
Prepaid expenses and other current assets		487			599
Deferred tax asset		3,814			1,204
TOTAL CURRENT ASSETS		23,633			17,442
PROPERTY AND EQUIPMENT, net		1,608			1,598
GOODWILL		6,129			3,879
OTHER INTANGIBLE ASSETS, net		1,309			727
OTHER ASSETS		141			149
DEFERRED TAX ASSET		930			2,696
TOTAL ASSETS	$	33,750		$	26,491
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable	$	5,955		$	3,024
Accrued expenses		4,776			3,699
Deferred maintenance revenues		3,776			2,543
Current portion of long-term debt		17			29
Notes payable		662			494
TOTAL CURRENT LIABILITIES		15,186			9,789
LONG-TERM BANK DEBT		9,463			7,227
OTHER LONG-TERM DEBT		3			19
SUBORDINATED DEBT – AFFILIATE		2,400			2,400
DEFERRED INCOME		278			337
TOTAL LIABILITIES		27,330			19,772
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY
Preferred stock, no par value authorized 1,500,000, issued 0 shares		—			—
Common stock, $.24 par value:
Authorized - 6,000,000 shares
Issued – 3,427,640 in 2005 and 3,167,096 in 2004
Outstanding - 3,170,956 in 2005 and 2,910,412 in 2004		827			764
Additional paid-in capital		9,011			7,962
Accumulated deficit		(3,206	)		(1,795	)
Less treasury stock at cost – 256,684 shares in 2005 and 2004		(212	)		(212	)
TOTAL STOCKHOLDERS’ EQUITY		6,420			6,719
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	33,750		$	26,491

See notes to consolidated financial statements

40

HALIFAX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2005, 2004 AND 2003
(Amounts in thousands)

	2005			2004			2003
Cash flows from operating activities:
Net (loss) earnings	$	(1,411	)	$	4,228		$	648
Adjustments to reconcile net income to net
Cash provided by (used in) operating activities:
Depreciation and amortization		1,159			762			657
Deferred income tax		(844	)		(3,805	)		—
Changes in assets and liabilities:
Decrease (increase) in accounts receivable		(2,382	)		(328	)		2,496
Decrease (increase) in inventory		439			(353	)		185
Decrease (increase) in prepaid expenses and other current assets		128			(320	)		27
Decrease (increase) in other assets		14			30			302
Increase (decrease) in accounts payable, accrued expenses and other current liabilities		3,430			(457	)		(1,997	)
(Decrease) increase in deferred maintenance
Revenues		227			(66	)		97
Increase (decrease) in deferred income		(59	)		199			(60	)
Net cash provided by (used in) operating activities		701			(110	)		2,355
Cash flows from investing activities:
Purchase of property and equipment		(861	)		(672	)		(346	)
Payment for acquisitions (net of cash acquired)		(824	)		(416	)		—
Net cash (used in) provided by investing activities		(1,685	)		(1,088	)		(346	)
Cash flows from financing activities:
Proceeds from debt borrowings		33,195			25,204			19,234
Repayments of debt		(31,461	)		(23,699	)		(20,787	)
Retirement of subordinated debt affiliate		—			(1,600	)		—
Proceeds from private placement		—			1,200			—
Costs associated with private placement		—			(45	)		—
Proceeds from sale of stock upon exercise of stock options		84			—			1
Net cash provided by (used in) financing activities		1,818			1,060			(1,552	)
Net increase (decrease) in cash		834			(138	)		457
Cash at beginning of year		430			568			111
Cash at end of year	$	1,264		$	430		$	568

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

41

HALIFAX CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
FOR THE YEARS ENDED MARCH 31, 2005, 2004, AND 2003
(Amounts in thousands except share data)

	Common Stock				Additional					Treasury Stock
					Paid-In		Accumulated
	Shares		Par Value		Capital		Deficit			Shares		Cost			Total
March 31, 2002		2,432,297		588		5,015		(6,671	)		256,684		(212	)		(1,280	)
Net income		—		—		—		648			—		—			648
Exercise of Stock Options		750		—		1		—			—		—			1
March 31, 2003		2,433,047		588		5,016		(6,023	)		256,684		(212	)		(631	)
Net Income		—		—		—		4,228			—		—			4,228
Issuance of Common Stock		734,049		176		2,946		—			—		—			3,122
March 31, 2004		3,167,096		764		7,962		(1,795	)		256,684		(212	)		6,719
Net (Loss)		—		—		—		(1,411	)		—		—			(1,411	)
Issuance of Common Stock		260,544		63		1,049		—			—		—			1,112
March 31, 2005		3,427,640	$	827	$	9,011	$	(3,206	)		256,684	$	(212	)	$	6,420

See notes to consolidated financial statements

42

HALIFAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2004, 2003 AND 2002

1. SIGNIFICANT ACCOUNTING POLICIES AND BUSINESS ACTIVITY

Business Activity - Halifax Corporation (the “Company”) provides enterprise maintenance services and solutions for commercial and government activities. These services include high availability maintenance solutions, technology deployment and integration, secure network services 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. All significant intercompany transactions are eliminated in consolidation.

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 revenues and expenses during the period reported. Actual results could differ from those estimates. Estimates are used when accounting for certain items such as allowances for doubtful accounts, unbilled accounts receivable, depreciation and amortization, taxes, inventory reserves, goodwill, and contingencies.

Accounts Receivable - Receivables are 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 2.)

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 equal to the Company’s carrying value and therefore no gain or loss is recognized on these transfers. 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 peripherals consumed on maintenance contracts, and hardware and software held for 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 sheets net of allowances for inventory valuation of $1.7 million and $952 thousand at March 31, 2005 and 2004, 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:

Machinery and equipment	3-10 years
Furniture and fixtures	5 years
Building improvements	5-10 years
Vehicles	4 years

The Company evaluates the recoverability of its long-lived assets in accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” (SFAS No. 144). SFAS No. 144 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 the fair value of such asset. Based on its analysis, the Company believes that there was no impairment of its long-lived assets at March 31, 2005 and 2004.

43

Goodwill and Intangible Assets - Goodwill is the excess of the purchase price over the fair value of the net assets acquired in a business combination. Beginning April 1, 2002, in accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (SFAS 142), goodwill and indefinite-lived assets are no
longer amortized, but instead tested for impairment at least annually (see Note 5). Intangible assets that have finite useful lives are amortized over their useful lives.

Deferred Maintenance Revenues - Deferred maintenance revenues are derived from contracts for which customers are billed or pay in advance of services to be performed at a future date.

Revenue Recognition - Service revenues are derived from contracts with various federal and state agencies as well as from commercial enterprises. We recognize service revenues based on contracted fees earned, net of credits and adjustments as the service is performed. Revenues from long-term fixed unit price contracts are recognized monthly as service is performed based upon the number of units covered and the level of service requested. The pricing of these contracts is fixed as to the unit price, but varies based upon the number of units covered and service level requested. Revenues from time-and-material professional service contracts are recognized as services are delivered. Certain seat management contracts include the delivery and installation of new equipment combined with multi-year service agreements. Revenues related to the delivery and installation of equipment under these, and certain other contracts are recognized upon the completion of both the delivery and installation. Product sales were $2.7 million, $5.5 million, and $5.0 million, with corresponding direct cost of product of $2.5 million, $5.1 million, and $4.4 million for the fiscal years ended March 31, 2005, 2004 and 2003, respectively. Revenues related to the fixed-price service agreements are recognized ratably over the life of the agreement. Invoices billed in advance are recognized as revenues when earned. Losses on contracts, if any, are recognized in the period in which they become determinable.

Income Taxes - The provision for income taxes is the total of the current year income taxes due or refundable and the change in deferred tax assets and liabilities. The Company uses the asset and liability method of accounting for income taxes. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets are recognized for deductible temporary differences, along with net operating loss carryforwards and credit carryforwards if it is more likely than not that the tax benefits will be realized. To the extent a deferred tax asset cannot be recognized under the preceding criteria, a valuation allowance must be established. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled.

Comprehensive Income - For the fiscal years ended March 31, 2005, 2004 and 2003, the Company did not identify any transactions that should be reported as other comprehensive 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” as amended by Statement of Financial Standards No. 148 (SFAS 148), “Accounting for Stock-based Compensation - Transition of Disclosure.” Accordingly, no compensation expense has been recognized for our stock-based compensation plan. 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.

44

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 “Accounting for Stock-Based Compensation”, had compensation cost been determined based on the fair value of awards granted in fiscal years 2005, 2004 and 2003, the net income attributable to common shareholders would have been as follows:

	Year Ending March 31,
(Amounts in thousands except share data)	2005			2004			2003
Net (loss) income (as reported)	$	(1,411	)	$	4,228		$	648
Deduct: stock-based compensation expense determined under the fair value method, Net of tax		(106	)		(175	)		(250	)
Proforma net (loss) income	$	(1,517	)	$	4,053		$	398
(Loss) earnings per common share (as reported):
Basic	$	(.46	)	$	1.60		$	.30
Diluted	$	(.46	)	$	1.54		$	.30
Proforma (Loss) earnings per common share:
Basic	$	(.50	)	$	1.54		$	.18
Diluted	$	(.50	)	$	1.45		$	.18

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 earnings per share is based on the weighted average number of shares including adjustments to both net income and shares outstanding when dilutive, including potential common shares from options and warrants to purchase common stock using the treasury stock method and effect of the assumed conversion of the Company’s convertible subordinated debt to dilutive common stock equivalents.

Concentration of Risk - The Company has a number of significant customers. The Company’s largest customer accounted for 14%, 15% and 16% of the Company’s revenues for the years ended March 31, 2005, 2004 and 2003, respectively. The Company’s five largest customers, collectively, accounted for 63%, 56%, and 57%, of revenues for the years ended March 31, 2005, 2004 and 2003, respectively. The Company anticipates that significant customer concentrations will continue for the foreseeable future, although the customers which constitute the Company’s largest customers may change.

Revenues from services rendered to the United States Government and the relative percentages of such revenues to total revenues for the fiscal years ended March 31, 2005, 2004 and 2003 were $13.5 million (22%), $9.5 million (19%), and $11.4 million (23%).

Recent Pronouncements

In December 2004, The Financial Accounting Standard Board (“FASB”) issued SFAS 123R. Revised SFAS 123 addresses the requirements of an entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The cost of such awards will be recognized over the period during which an employee is required to provide services in exchange for the award. The Company will be required to adopt SFAS 123 on April 1, 2006. The Company is currently evaluating the impact that this pronouncement will have on its financial statements.

45

2. ACCOUNTS RECEIVABLE

Trade accounts receivable consist of:	March 31,
(Amounts in thousands)	2005			2004
Amounts billed	$	12,373		$	9,332
Amounts unbilled		393			180
Total		12,766			9,512
Allowance for doubtful accounts		(298	)		(148	)
Total	$	12,468		$	9,364

3. PROPERTY AND EQUIPMENT

Property and equipment consists of:
(Amounts in thousands)	March 31,						Estimated
	2005			2004			Useful Lives
Machinery and equipment	$	3,600		$	3,153			3-10 years
Furniture and fixtures		255			423			5 years
Building improvements		599			637			5-10 years
Vehicles		150			137			4 years
Total		4,604			4,350
Accumulated depreciation		(2,996	)		(2,752	)
Total	$	1,608		$	1,598

For the years ended March 31, 2005, 2004 and 2003, depreciation expense was $931 thousand, $681 thousand and $567 thousand, respectively.

4. ACQUISITION

AlphaNational acquisition

On September 30, 2004, the Company acquired 100% of stock of AlphaNational Technology Services, Inc. (AlphaNational) for approximately $2.4 million. The consideration was cash of $200 thousand, notes payable of $168 thousand and 235,294 shares of the Company’s common stock valued at $4.38 per share, or $1.03 million plus the assumption of certain liabilities of approximately $623 thousand. In addition direct acquisition costs were approximately $379 thousand. The shares were discounted approximately 14% from the quoted market value of $5.10 because such shares were not registered under the Securities Act of 1933, as amended, and are subject to trading restrictions. The notes payable to the former AlphaNational shareholders were reduced from $500 thousand to $168 thousand based upon final adjustments to the closing balance sheet.

AlphaNational is an enterprise maintenance solutions company providing services to the national market place. The primary reasons for the acquisition of AlphaNational were to expand the Company’s geographic base and strengthen its service delivery capability. AlphaNational also added a number of prestigious customers, added key management and will enhance the Company’s ability to grow its partnership arrangements with the global services provider community. The results of AlphaNational have been included in the consolidated financial statements from the date of acquisition.

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The following is a summary of the estimated fair values of the assets acquired and liabilities assumed as of the date of acquisition.

(amounts in thousands)

Current assets	$	973
Property and equipment		80
Goodwill		1,470
Trade name		700
Other intangible assets		810
Total assets acquired		4,033
Total liabilities assumed		1,657
Purchase price	$	2,376

The total purchase price of $2.4 million includes $379 thousand of direct acquisition costs relating to legal, investment banking, and accounting services. In addition, the terms of the contract provide for additional consideration of $150 thousand to be paid if revenues of the acquired company exceed certain targeted levels by September 30, 2005.

Other intangible assets of $810 thousand are being amortized over their weighted-average useful lives and include customer contracts of $710 thousand (five years) and non-compete agreements of $100 thousand (two years). The trade name and goodwill have indefinite lives and will not be amortized, but will be subject to periodic impairment testing.

The following unaudited pro-forma financial information presents results of operations as if the acquisition had occurred at the beginning of the respective periods.

	Year Ended			Year Ended
(Amounts in thousands except per share data)	March 31, 2005			March 31, 2004
Revenues	$	60,677		$	56,176
Net (loss) income		(1,042	)		4,384
(Loss) earnings per share:
Basic	$	(.46	)	$	1.54
Diluted	$	(.46	)	$	1.48

These proforma results have been prepared for comparative purposes only and include certain adjustments such as additional amortization expense as a result of identifiable intangible assets arising from the acquisition, increased interest expense, and changes in income taxes as a result of the acquisition. The proforma results are not necessarily indicative either of results of operations that actually would have resulted had the acquisition been in effect at the beginning of the respective periods or of future results.

Microserv acquisition

On August 29, 2003, the Company acquired 100% of the stock in Microserv, Inc. (Microserv) for approximately $3.3 million. The consideration was cash of $360 thousand, 5% notes payable of $494 thousand and 442,078 shares of our stock valued at $4.23 per share, or $1.87 million and fees and related costs of approximately $575 thousand. The shares were discounted approximately 14% from the quoted market value of $4.92 per share due to various trading restrictions and restrictions on transfer as such shares were not registered.

The primary reasons for the acquisition of Microserv were to expand our geographic base and strengthen our service delivery capability. Microserv also added a number of prestigious customers, added key management, and will enhance our ability to grow our partnership arrangements with the global service provider community. The results of Microserv have been included in the consolidated financial statements from the date of the acquisition. Microserv is a high availability enterprise maintenance company.

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Total intangible assets of $804 thousand are being amortized over their weighted-average useful lives and include client contracts of $635 thousand (eight years) and non competition agreements and other intangibles (two to eight years).

The total purchase price of $3.3 million included $614 thousand of direct acquisition costs related to investment banking, legal and accounting services. Also, $124 thousand in restructuring costs were recorded as part of the acquisition as a result of positions eliminated. The terms of the contract provided for additional consideration of $250 thousand to be paid if certain accounts of the acquired company exceed certain targeted levels, by August 30, 2004. The targeted levels were achieved, and accordingly $250 thousand was recorded as additional goodwill.

In conjunction with the acquisition of Microserv, the Company issued $494 thousand in notes to the former Microserv shareholders. Interest is payable at the rate of 5% quarterly and in arrears. Interest payments were made to three individuals, one of whom was a 5% shareholder/employee, one a director and one who is an executive in the Company. Because the Company was not in compliance with its revolving credit agreement at December 31, 2004, the Company was unable to repay the notes and, as a result, the interest rate was increased to 10% effective February 1, 2005. The notes were classified as current liabilities in its financial statements. Concurrent with the amendment of the revolving credit agreement (See Note 6), the Company received consent from the bank to repay the notes in full.

The Company issued 50,000 warrants to purchase common stock at $3.19 per share. The fair value of the Company’s warrants was estimated on the date of issuance using the Black-Scholes option pricing model as prescribed by SFAS No. 123 and EITF 96-18. “Equity Instruments That are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services” using the following assumptions: fair market value of common stock $4.78, risk free rate of return of .95%, no dividend yield, expected volatility of 43% and weighted-average expected life of 4 years. The weighted average fair value of the warrants calculated using the Black-Scholes option price model granted was $2.32 for the warrants issued in conjunction with the Microserv acquisition. The Black-Scholes value of the warrants issued totaled approximately $117 thousand.

5. GOODWILL AND OTHER INTANGIBLE ASSETS

The following is a schedule of amortizable intangible assets as of March 31,

					2005							2004
	Estimated
	Amortization
	period		Gross		Accumulated			Net		Gross		Accumulated			Net
(Amounts in thousands):	(in months)		Assets		Amortization			Assets		Assets		Amortization			Assets
Client master contracts		60-90		1,345		(196	)		1,149		635		(46	)		589
Backlog		48		96		(38	)		58		96		(14	)		82
Subcontractor provider network		36		64		(41	)		23		64		(15	)		49
Non compete		24-36		109		(30	)		79		9		(2	)		76
			$	1,614	$	(305	)	$	1,309	$	804	$	(77	)	$	727

The weighted average estimated amortization period as of March 31, 2005 is 60 months.

There were no intangible assets reclassified to goodwill upon the adoption of SFAS 142. The Company considers itself to have a single reporting unit. The Company performed its annual impairment test as of March 31, 2005 and 2004 and determined that based upon the implied fair value of the Company (which includes factors such as, but not limited to, the Company’s market capitalization and control premium), there was no impairment of goodwill.

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For the fiscal year ended March 31, 2005 amortization of intangible assets was $227 thousand. Amortization expense for intangible assets was $81 thousand and $15 thousand for the fiscal years ended March 31, 2004 and 2003, respectively. The Company estimates aggregate future amortization expense for intangible assets remaining as of March 31, 2005 as follows:

Fiscal Year ended March 31,

2006	$	322
2007		272
2008		231
2009		221
2010		150
Thereafter		113
Total	$	1,309

Actual amortization expense to be reported in future periods could differ from these estimates as a result of new intangible asset acquisitions and other relevant factors.

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6. LONG-TERM DEBT

The Company was not in compliance with the covenants of its revolving credit agreement at March 31, 2005. The Company requested and received a waiver for its non-compliance with its covenants through March 31, 2005. On June 29, 2005, the Company and its lender amended the agreement, modifying the covenants and extending the maturity of date to June 30, 2007. The Company believes that it will be in compliance with its amended revolving credit agreement prospectively.

	March 31,
	(Amounts in thousands)
Long-term debt consists of:	2005		2004
Revolving credit agreement dated June 29, 2005 maturing June 30, 2007 with a maximum borrowing limit of $12.0 million. Amounts available under this agreement are determined by applying stated percentages to the Company’s eligible receivables and inventory. At March 31, 2005 and 2004, $2.6 million and $2.3 million, respectively, was available to the Company under the terms of the agreement. The facility bears interest at the bank’s prime rate plus 3/4%. The interest rate at March 31, 2005 and 2004 was 5.75% and 5.00%, respectively.
Total bank debt	$	9,463	$	7,227
7% Convertible subordinated debenture with an affiliate (see Note 13) dated January 27, 1998. Principal due in full on July 1, 2007. Interest payable semiannually in arrears beginning August 1, 1998. Convertible to common stock by note holder at any time at a conversion price of $3.19 per common share. Subsequent to year end the notes were paid in full.		400		400
Subordinated note with an affiliate (see Note 13) dated October 8, 1998. Principal due on July 1, 2007. Interest accrues annually at 8%.		690		690
Subordinated note with an affiliate (see Note 13) dated October 13, 1998. Principal due on July 1, 2007. Interest accrues annually at 8%.		310		310
Subordinated note with an affiliate (see Note 13) dated November 2, 1998. Principal due on July 1, 2007. Interest accrues annually at 8%. Subsequent to year end the notes were paid in full.		500		500
Subordinated note with an affiliate (see Note 13) dated November 5, 1998. Principal due on July 1, 2007. Interest accrues annually at 8%. Subsequent to year end the notes were paid in full.		500		500
Subtotal – debt affiliated parties		2,400		2,400
5% Notes issued to former Microserv shareholders (see Note 4) Subsequent to year end the notes were paid in full.		494		494
6% notes issued to former AlphaNational shareholders due March 31, 2006 (see Note 4)		168		—
Other debt. Interest rates 0.0% to 1.9% due in 48 and 36 months.		20		48
Total debt		12,545		10,169
Less current maturities		679		523
Total long-term debt	$	11,866	$	9,646

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Minimum future principal payments on long-term debt are as follows.

(Amounts in thousands)

Year ended March 31,	Total
2006	$	679
2007		3
2008		11,863
Total	$	12,545

The carrying value of the revolving credit agreement approximates fair market value at March 31, 2005. Because other subordinated debt of $400 thousand 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.

As a requirement under certain contracts we are required to post performance bonds. In order to secure the bonds aggregating $168 thousand, we have issued letters of credit to the insurance carrier as collateral for these bonds. The letters of credit expire on June 30, 2006.

7. ACCRUED EXPENSES

Accrued expenses consist of the following:

(Amounts in thousands)	March 31,
	2005		2004
Accrued lease payments	$	1,369	$	1,162
Accrued vacation		906		804
Accrued payroll		1,431		979
Payroll taxes accrued and withheld		231		183
Other accrued expenses		839		571
	$	4,776	$	3,699

8. STOCK–BASED COMPENSATION

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 280,000 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 400,000 shares.

Stock-based incentive awards granted under the 1994 Employee Stock Option Plan prior to March 31, 2001 were stock options with 5 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 90 days to exercise vested options. The plan expired on September 15, 2004.

On September 14, 1997, shareholders approved the Non-Employee Director Stock Option Plan (“1997 Plan”). The maximum number of shares of the Company’s common stock subject to the 1997 Plan and approved for issuance was

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originally 100,000 shares either authorized and unissued or shares held in treasury. The initial stock-based incentive awards granted under the 1997 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 plan expired on September 18, 2004.

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.

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 as amended by SFAS No. 148, using the following assumptions for the fiscal years ended March 31, 2005, 2004 and 2003: risk-free interest rate of 2.63% ,0.95%, and 3.73% respectively, dividend yield of 0%, 0% and 0% respectively, volatility factor related to the expected market price of the Company’s common stock of 36.25, 43.3%, and 43.3%,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 fiscal 2005, 2004 and 2003 were $1.43, $1.48, and $2.20, respectively.

A summary of options activity is as follows:

				Weighted
	Number of			Average Exercise Price Per
	Shares			Share
Outstanding at April 1, 2002		365,250		$	5.30
Granted		51,000			3.50
Exercised		(750	)		2.60
Forfeited/Expired		(3,083	)		3.25
Outstanding at March 31, 2003		412,417			5.09
Granted		38,000			5.16
Exercised		—			—
Forfeited/Expired		(32,500	)		5.49
Outstanding at March 31, 2004		417,917			5.07
Granted		96,800			4.56
Exercised		(21,500	)		3.48
Forfeited/Expired		(32,500	)		3.77
Outstanding at March 31, 2005		460,217		$	5.13

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The following table summarizes the information for options outstanding and exercisable under the Company’s Stock option plans at March 31, 2005.

				Options Outstanding
				Weighted Average	Options Outstanding				Options Exercisable
		Options		Remaining	Weighted Average		Options		Weighted Average
Range of Exercise Prices		Outstanding		Contractual Life	Exercise Price		Exercisable		Exercise price
$	10.25		24,250	3 years	$	10.25		24,250	$	10.25
	7.03		10,500	4 years		7.03		10,500		7.03
	5.57-7.56		82,000	5 years		6.02		82,000		6.20
	5.38-7.06		71,500	6 years		5.76		71,481		5.76
	1.80-4.05		87,000	7 years		3.51		50,672		3.30
	3.10-5.00		50,167	8 years		3.47		15,667		3.78
	4.11-5.70		38,000	9 years		5.16		4,628		4.11
	4.45-5.02		96,800	10 years		4.61		72,000		4.58
$	2.60-$7.56		460,217		$	5.13		149,750	$	5.45

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, (2% beginning January 2004) and at the Company’s discretion, additional amounts based upon the profitability of the Company. The Company’s contributions were $64 thousand, $102 thousand and $109 thousand for the years ended March 31, 2005, 2004 and 2003, 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 fiscal years ended March 31, 2005.

11. INCOME TAXES

The components of income tax (benefit) expense is as follows for the years ended March 31:

(Amounts in thousands)	2005			2004			2003
Current expense:
Federal	$	—		$	14		$	18
State		51			136			42
Total current:		51			150			60
Deferred expense:
Federal		(688	)		(3,712	)		—
State		(156	)		(188	)		—
Total deferred:		(844	)		(3,900	)		—
Income tax (benefit) expense	$	(793	)	$	(3,750	)	$	60

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

(Amounts in thousands)	2005		2004
Deferred tax assets:
Accounts receivable reserves	$	115	$	60
Inventory reserve		661		380
Inventory capitalization		102		92
Depreciation/amortization		209		77
Accrued compensation/vacation		348		321
Abandonment of space		69		—
AMT credit carryforwards		93		88
Net operating loss carryforward		3,039		2,748
Deferred gain on building sale		107		134
		4,744		3,900
Deferred tax liabilities:		—		—
		4,744		3,900
Valuation allowance		—		—
Net deferred tax asset	$	4,744	$	3,900

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.

Management regularly evaluates the realizability of its deferred tax assets given the nature of its operations and the tax jurisdictions in which it operates. The Company adjusts its valuation allowance from time to time based on such evaluations. Based upon the Company’s historical taxable income, when adjusted for non-recurring items, net operating loss carryback potential and estimates of future profitability, management concluded at March 31, 2004 that future income will more than likely be sufficient to realize its deferred tax assets. Accordingly, we reversed the offsetting valuation allowance in its entirety based on the weight of the positive and negative evidence regarding recoverability of the Company’s deferred tax assets, which resulted in a $3.8 million tax benefit in the fiscal year ended March 31, 2004. Management believes that based on the weight of the evidence, past profitability, and estimates of future profitability, including the gain resulting from the sale of our secure network services business, that the valuation allowance established in prior years is no longer necessary.

The Company has $8.6 million of net operating loss carryforwards, which expire in fiscal years 2019 through 2025. As a result of the sale of the secure network services business completed on June 30, 2005, the Company expects to utilize the net operating loss carry forward in its entirety during fiscal year 2006. Therefore a corresponding portion of the deferred tax asset has been reclassified as a current asset to reflect the utilization of the net operating loss.

The differences between the provision for income taxes at the expected statutory rate of 34% for continuing operations and those shown in the consolidated statements of operations are as follows for the years ended March 31:

	2005			2004			2003
(Benefit) provision for income taxes		(34.0	)%		34.0	%		34.0	%
(Reduction) increase in taxes resulting from:
State taxes, net of federal benefit		(7.1	)		6.2			5.0
Other state taxes, net of federal benefit					12.2			0.0
Permanent items		4.0			9.1			0.0
Other		1.1			(1.1	)		(7.8	)
Change in valuation allowance for deferred tax assets		—			(845.0	)		(22.8	)
Total		(36.0	)%		(784.6	)%		8.4	%

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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, net of sublet rental income under operating leases as of March 31: (Amounts in thousands)

Year ending March 31,
2006	$	713
2007		495
2008		292
2009		207
2010		102
Thereafter		—
Total minimum lease payments	$	1,809

Deferred income of $278 thousand and $337 thousand at March 31, 2005 and 2004, respectively, represents the deferred gain on the sale – lease-back of the Company’s office complex. The deferred income is being recognized as a reduction of rent expense over the remaining life of the lease.

Total rent expense under operating leases was $1.13 million, $782 thousand and $632 thousand for the fiscal years ended March 31, 2005, 2004 and 2003, 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, 2005 are $1.1 million.

13. RELATED PARTY TRANSACTIONS

Nancy Scurlock and the Arch C. Scurlock Children’s Trust, which are affiliates, are the owners of 784,422 shares, or 27% of the Company’s common stock, holds $400 thousand 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 8% Promissory Notes dated October 8, 1998, October 13, 1998, November 2, 1998 and November 5, 1998, respectively. Interest expense on the subordinated debt totaled $188 thousand for fiscal year 2005, $221 thousand for fiscal year 2004, and $300 thousand for each fiscal year 2003. Subsequent to year end and after receiving consent from our bank, the balance of the subordinated notes was reduced to $1.0 million. In addition, the maturity of the notes was extended to July 1, 2007. (See Note 6).

In conjunction with the acquisition of AlphaNational Technology Services, Inc. which was completed on September 30, 2004, the Company issued $168 thousand in notes to the former AlphaNational shareholders. Interest is accrued at the rate of 6%. (See Note 4).

During the fiscal year ended March 31, 2004, the lender on our revolving credit facility approved principal payments of $1.6 million to reduce the Company’s 7% convertible subordinated debt. After the payment, the outstanding principal balance was $400 thousand. The bank also approved $300 thousand in payments for accrued interest. During the fiscal year ended March 31, 2003 after receiving waivers from the bank, we made payment to the affiliates of $225 thousand for accrued interest. On January 2, 2002, we made a payment of $100 thousand to the Affiliates for interest due. At March 31, 2005 and 2004, interest payable to the Estate was $100 thousand and $140 thousand, respectively.

On July 23, 2003, the Company completed a private placement of 291,971 shares of its common stock, at $4.11 per share for a total of $1.2 million. The purchasers included four members of the management team as well as certain directors and one existing shareholder of the Company. The private placement also involved the issuance of warrants to purchase 58,394 shares of common stock at an exercise price of $4.93.

The fair value of the warrants granted to the participants of the private placement was estimated to be approximately $69 thousand using the Black-Scholes option pricing model with the following assumptions: fair market value of common stock of $4.11, no dividend yield, expected volatility of 43%, weighted average expected life of four years and risk free rate of return of .95%. The $69 thousand is reported as a reduction of the proceeds of the issuance of the common stock.

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In conjunction with the acquisition of Microserv, the Company issued $494 thousand in notes to the former Microserv shareholders. Interest is payable at the rate of 5% quarterly and in arrears. Interest payments were made to three individuals, one of whom was a 5% shareholder/employee, one a director and one who is an executive in the Company. Because the Company was not in compliance with our revolving credit agreement at December 31, 2004, the Company was unable to repay the notes and, as a result, the interest rate was increased to 10% effective February 1, 2005. The notes are classified as current liabilities in our financial statements as they were not repaid upon maturity on February 1, 2005. Concurrent with the amendment of the revolving credit agreement on June 29, 2005 (See Note 6.), the Company requested and received consent from the bank to repay the notes in full.

14. COMMITMENTS AND CONTINGENCIES

Costs incurred by the Company on the performance of United States Government contracts are subject to audit by the Defense Contract Audit Agency. 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. 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.

15. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

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

(Amounts in thousands)	2005		2004		2003
Interest	$	644	$	611	$	649
Income taxes		—	$	81	$	22
Disclosure of non-cash financing activities:
6% notes payable to former AlphaNational shareholders	$	168	$	—	$	—
5% notes payable to former Microserv shareholders	$	—	$	494	$	—
Common stock issued for the purchase of AlphaNational	$	1,028	$	—	$	—
Common stock issued for the purchase of Microserv	$	—	$	1,871	$	—
Fees to investment bankers	$	—	$	117	$	—
Fair value of assets acquired	$	—	$	1,619	$	—
Warrants issued in connection with private placement	$	—	$	69	$	—

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16. EARNINGS PER SHARE

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

	Years Ended March 31,
(Amounts in thousands except share data)	2005			2004		2003
Numerator for earnings per share:
Net income as reported - Basic	$	(1,411	)	$	4,228	$	648
Interest on convertible subordinated debt (net of tax)		—			77		—
Net Earnings - - Dilutive	$	(1,411	)	$	4,305	$	648
Denominator:
Denominator for basic earnings per share- Weighted-average shares outstanding		3,043,465			2,638,345		2,175,781
Effect of dilutive securities:
7% convertible debenture		—			97,324		—
Employee stock options		42,243			43,226		36,579
Non qualified stock options		564			2,124		—
Warrants		8,650			6,637		—
Dilutive potential common shares
Denominator for diluted earnings per share – adjusted weighted-average shares and assumed conversions		3,094,922			2,787,656		2,212,360
Earnings per share - Basic:	$	(.46	)	$	1.60	$	.30
Earnings per share - Diluted	$	(.46	)	$	1.54	$	.30

The computation of basic earnings per share is based on the weighted average number of shares outstanding during the period. Diluted earnings 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. No effect is given to dilutive securities for loss periods.

17. 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.

The Company has a number of significant customers. The Company’s largest customer accounted for 14%, 15% and 16% of the Company’s revenues for the years ended March 31, 2005, 2004 and 2003, respectively. The Company’s five largest customers, collectively, accounted for 63%, 56%, and 57%, of revenues for the years ended March 31, 2005, 2004 and 2003, respectively. The Company anticipates that significant customer concentrations will continue for the foreseeable future, although the customers which constitute the Company’s largest customers may change.

Revenues from services rendered to the United States Government and the relative percentages of such revenues to revenues from continuing operations for the fiscal years ended March 31, 2005, 2004 and 2003 were $13.5 million (22%), $11.0 million (22%), and $12.1 million (24%). Revenues for the secured network services business were $13.5 million, $9.5 million and $11.4 million for fiscal years 2005, 2004 and 2003, respectfully. As result of the sale on of this business on June 30, 2005, these revenues will not be recurring.

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18. UNAUDITED QUARTERLY RESULTS OF OPERATIONS:

                      (Amounts in thousands except share data)

	June 30,		September 30,		December 31,			March 31,
	2004		2004		2004			2005(2)
Revenues	$	13,441	$	14,809	$	15,605		$	18,151
Gross Margin		1,665		1,671		(36	)		834
Net income	$	91	$	44	$	(1,035	)	$	(511	)
Basic earnings per share	$	.03	$	.02	$	(.33	)	$	(.16	)
Diluted earning per share	$	.03	$	.01	$	(.33	)	$	(.16	)

	June 30,		September 30,		December 31,		March 31,
	2003		2003		2003		2004(1)
Revenues	$	10,676	$	12,461	$	13,380	$	13,020
Gross Margins		1,320		1,496		1,578		1,534
Net income	$	51	$	152	$	202	$	3,823
Basic earnings per share	$	.02	$	.06	$	.07	$	1.31
Diluted earning per share	$	.02	$	.06	$	.07	$	1.25

(1)	See Note 11 to the consolidated financial statements for discussion on deferred tax benefit.
(2)	Includes reversal of a loss accrual of $300 thousand recorded during the quarter ended December 31, 2004 resulting from the startup of a new long-term, nation-wide, enterprise maintenance contract.

19. SUBSEQUENT EVENT

On June 30, 2005, the Company simultaneously entered into and closed on an asset purchase agreement with INDUS Corporation pursuant to which it sold substantially all of the assets and certain liabilities of its secure network services business. The purchase price was approximately $12.5 million, subject to adjustments described in the asset purchase agreement based on the net assets of the business on the date of closing. The asset purchase agreement provides that $3.0 million of the purchase price will be held in escrow. Of this amount, $625,000 will be held as security for the payment of its indemnification obligations pursuant to the asset purchase agreement, if any, and will be released to the Company eighteen (18) months following the date of the asset purchase agreement unless a certain key government contract, referred to as the Key Contract, is not assigned (referred to as a novation) as of such time. A portion of the escrow amount equal to $2.0 million (which includes the portion referenced above for indemnification obligations), plus any interest or other income earned thereon, will also serve as security for a payment obligation the Company will have to INDUS Corporation if the novation of the Key Contract from us to INDUS Corporation is not approved by such government customer and received within two years from the date of the asset purchase agreement. If such novation of the Key Contract is not received by the second anniversary of the date of the asset purchase agreement or if such novation is affirmatively rejected prior to such time under circumstances not giving rise to the rescission right referenced below, the Company will be obligated to pay to INDUS Corporation an amount equal $2.0 million with the entire amount then held in escrow being released to INDUS Corporation as full or partial payment of such obligation, as the case may be. The Company will be obligated to pay directly to INDUS Corporation the amount, if any, by which the balance of escrow funds at the time of disbursement is less than $2.0 million. Finally, a portion of the escrow amount equal to $1.0 million serves as security for a payment obligation the has to INDUS Corporation in connection with a failure to obtain certain consents related to the transaction. In addition, INDUS Corporation has certain rescission rights. First, if the government customer to the Key Contract rejects the novation of such Key

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Contract on or before the six month anniversary of the date of the asset purchase agreement and the government customer takes action to preclude the Company from providing INDUS Corporation with the economic benefit of such Key Contract (whether by subcontract or otherwise), INDUS Corporation may rescind the entire sale transaction in lieu of being paid the $2.0 million amount referenced above. Second, if the Company is unable to provide INDUS Corporation with evidence of the government’s approval of the assignment to INDUS Corporation to a material contract (other than the Key Contract) on or before a date six months from the date of closing, INDUS Corporation may rescind the transaction. The asset purchase agreement contains representations, warranties, covenants and related indemnification provisions, in each case that are customary in connection with a transaction of this type; however, certain of the representations and warranties require updating to a date which is the earlier of the contract novation or thirty months from the closing. In addition, survival periods applicable to such updated warranties may be extended together with related indemnification periods. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Sale of Secure Network Services Business.”

In connection with the asset purchase agreement, The Company also transferred to INDUS Corporation all of its right, title and interest in and to our Federal Supply Service Information Technology (Schedule 70) Contract (the “Contract”) with the federal government and a Blanket Purchase Agreement (“BPA”) that the Company entered into with one federal agency pursuant to the Contract. Since the Company has a need to utilize the Contract and BPA in connection with businesses that it has retained, the Company will enter into a transition services agreement with INDUS Corporation with respect to the Contract and BPA in order to continue performing existing, and to receive new, task/delivery orders from federal government agencies awarded under the Contract and BPA until such time as the Company is awarded a new Federal Supply Service Information Technology Contract

The secure network services business comprised approximately $13.5 million, or 22%, and $9.5 million, or 19%, of the Company’s revenues for the fiscal years ended 2005 and 2004 and represented 7% of its assets at March 31, 2005.

The Company estimates the gain on the sale of the secure network services business after taxes, fees and costs to be approximately $5.0 million. The recognition of the gain on the sale of the secure network services business is subject to certain contingencies, and as such, the gain will be deferred until the contingencies are resolved.

The Company expects that it will use approximately $9.0 million of the proceeds from the sale of the secure network services business to repay indebtedness and accrued interest and the remainder of the proceeds will be used for working capital purposes.

The unaudited pro forma financial information presented reflects the estimated pro forma effect of the sale of the secure network services business. The following unaudited pro forma condensed consolidated financial statements are included: (a) an unaudited pro forma condensed consolidated statements of operations for the years ended March 31, 2005, 2004 and 2003 giving effect to the sale of the secure network services business as if it occurred on April 1, 2004, 2003 and 2002, respectively; and (b) an unaudited pro forma condensed consolidated balance sheet at March 31, 31, 2005 and 2004, giving effect to the sale of the secure network services business as if it occurred at the beginning of each period.

The unaudited pro forma condensed consolidated financial statements include specific assumptions and adjustments related to the sale of the secure network services business. These pro forma adjustments have been made to illustrate the anticipated financial effect of the sale of the secure network services business. The adjustments are based upon available information and assumptions that the Company believes are reasonable as of the date of this filing. However, actual adjustments may differ materially from the information presented. Assumptions underlying the pro forma adjustments are described in the accompanying notes, which should be read in conjunction with the unaudited pro forma condensed consolidated financial statements. These pro forma condensed consolidated statements of operations do not include anticipated gain on the sale of the secure network services business of approximately $5.0 million. The recognition of the gain on the sale of the secure network services business is subject to certain contingencies, and as such, the gain will be deferred until the contingencies are resolved.

The unaudited pro forma financial statements are presented for informational purposes only and do not purport to be indicative of the financial position which would actually have been obtained if the transaction had occurred in the periods indicated below or which may exist or be obtained in the future. The information is not representative of future results of operations or financial position. The unaudited condensed pro forma financial information is qualified in its entirety by and should be read in conjunction with the more detailed information and financial data appearing in the Company’s historical consolidated financial statements and notes thereto included herein. In the opinion of management, all material adjustments necessary to reflect the disposition of the secure network services business by the Company have been made.

Proforma Statement of Operations (Unaudited)

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						For the year ended
(amounts in thousands, except share data)						March 31, 2005
	Actual					Adjustments			Proforma
Revenues	$	62,006		(1	)	$	(13,580	)	$	48,426
Operating loss		(1,541	)	(2	)		(2,240	)		(3,781	)
Interest Expense		663		(3	)		483			180
(Loss)income before income taxes		(2,204	)	(2	)		(1,757	)		(3,961	)
Income tax (benefit) expense		(793	)	(4	)		(632	)		(1,425	)
Net (loss) Income	$	(1,411	)			$	(1,125	)	$	(2,536	)
(Loss)earnings per share - basic	$	(0.46	)						$	(0.83	)
(Loss)earnings per share - diluted	$	(0.46	)						$	(0.83	)

The proforma adjustment to the historical financial statements are:

(1)	Reflects the elimination of in revenues attributable to the secure network services business as a result of its sale.
(2)	Reflects the reduction of gross margin attributable to the secured networks services business as a result of the sale.
(3)	Interest savings as a result of assumed reduction in notes payable of $9.0 million using sale proceeds
(4)	Income tax effect of the foregoing adjustments

Proforma Statement of Operations (Unaudited)

						For the year ended
(amounts in thousands, except share data)						March 31, 2004
	Actual					Adjustments			Proforma
Revenues	$	49,537		(1	)	$	(9,481	)	$	40,056
Operating loss		(1,541	)	(2	)		(1,040	)		14
Interest Expense		576		(3	)		526			50
Income before income taxes		478		(2	)		(514	)		(36	)
Income tax (benefit) expense		(3,750	)	(4	)		(185	)		(3,935	)
Net income	$	4,228				$	(329	)	$	3,899
Earnings per share - basic	$	1.60							$	1.48
Earnings per share - diluted	$	1.54							$	1.40

The proforma adjustment to the historical financial statements are:

(1)	Reflects the elimination of in revenues attributable to the secure network services business as a result of its sale.
(2)	Reflects the reduction of gross margin attributable to the secured networks services business as a result of the sale.
(3)	Interest savings as a result of assumed reduction in notes payable of $9.0 million using sale proceeds
(4)	Income tax effect of the foregoing adjustments

Proforma Statement of Operations (Unaudited)

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	For the year ended
(amounts in thousands, except share data)	March 31, 2003
	Actual				Adjustments			Proforma
Revenues	$	50,418	(1	)	$	(11,444	)	$	38,974
Operating loss		1,337	(2	)		(1,112	)		225
Interest Expense		629	(3	)		526			103
Income before income taxes		708	(2	)		(586	)		122
Income tax (benefit) expense		60	(4	)		(211	)		(151	)
Net Income	$	648			$	(375	)	$	273
Earnings per share - basic	$	0.30						$	0.13
Earnings per share - diluted	$	0.30						$	0.12

The proforma adjustment to the historical financial statements are:

(1)	Reflects the elimination of in revenues attributable to the secure network services business as a result of its sale.
(2)	Reflects the reduction of gross margin attributable to the secured networks services business as a result of the sale.
(3)	Interest savings as a result of assumed reduction in notes payable of $9.0 million using sale proceeds
(4)	Income tax effect of the foregoing adjustments

The unaudited consolidated pro-forma Balance Sheets at March 31, 2005 and 2004 give effect to the sale of the Company’s secure network services business as if the transaction was completed at the beginning of each fiscal year. The results are presented for informational purposes and are not indicative of actual results.

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Proforma — Balance Sheet (Unaudited)

	For the years ended
	March 31, 2005										March 31, 2004
	As										As
	reported				Adjustments			Proforma			reported				Adjustments			Proforma
ASSETS
CURRENT ASSSETS
Cash	$	1,264	(2	)	$	12,500		$	4,420		$	430	(2	)	$	12,500		$	3,586
			(5	)		(9,344	)						(5	)		(9,344	)
Trade accounts receivable, net		12,468	(1	)		(1,949	)		10,519			9,364	(1	)		(1,949	)		7,415
Inventory, net		5,600							5,600			5,845							5,845
Prepaid expenses and other current assets		487	(1	)		(16	)		471			599	(1	)		(16	)		583
Deferred tax asset		3,814	(3	)		(3,039	)		775			1,204	(3	)		(1,204	)		—
TOTAL CURRENT ASSETS		23,633				(1,848	)		21,735			17,442				(13	)		17,429
PROPERTY AND EQUIPMENT, net		1,608	(1	)		(64	)		1,544			1,598	(1	)		(64	)		1,534
GOODWILL AND OTHER INTANGIBLE ASSETS (net)		7,438							7,438			4,606							4,606
OTHER ASSETS		141							141			149							149
DEFERRED TAX ASSET		930				632			1,526			2,696	(3	)		(1,650	)		1,046
TOTAL ASSETS	$	33,750			$	(1,280	)	$	32,470		$	26,491			$	(1,727	)	$	24,764
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable	$	5,955	(1	)	$	(500	)	$	5,455		$	3,024	(1	)	$	(500	)	$	2,524
Accrued expenses		4,776	(1	)		(229	)		8,115			3,699	(1	)		(229	)		5,795
			(3	)		725							(3	)		725
			(4	)		3,193							(4	)		1,950
			(5	)		(350	)						(5	)		(350	)
Deferred maintenance revenues		3,776							3,776			2,543							2,543
Current portion of long-term debt		17							17			29							29
Notes payable		662	(5	)		(494	)		168			494	(5	)		(494	)		—
TOTAL CURRENT LIABILITIES		15,186				2,345			17,531			9,789				1,102			10,891
LONG-TERM BANK DEBT		9,463	(5	)		(6,100	)		3,363			7,227	(5	)		(6,100	)		1,127
OTHER LONG-TERM DEBT		3							3			19							19
SUBORDINATED DEBT - AFFILIATE		2,400	(5	)		(1,400	)		1,000			2,400				(1,400	)		1,000
DEFERRED INCOME		278				—			278			337				—			337
TOTAL LIABILITIES		27,330				(5,155	)		22,175			19,772				(6,398	)		13,374
STOCKHOLDERS’ EQUITY
Common Stock		827							827			764							764
Additional paid in capital		9,011							9,011			7,962							7,962
(Accumulated deficit) retained earnings		(3,206	(6	)		5,000			669			(1,795	(6	)		5,000			2,876
			(7	)		(1,125	)						(7	)		(329	)
Less treasury stock at cost		(212				—			(212	)		(212				—			(212	)
TOTAL STOCKHOLDERS’ EQUITY		6,420				3,875			10,295			6,719				4,671			11,719
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	33,750			$	(1,280	)	$	32,470		$	26,491			$	(1,727	)	$	24,764

(1)	Reflects the elimination of net assets sold in connection with the sale of the secure network services business.
(2)	Reflects the cash proceeds received from the sale of $12.5million and includes amounts held in escrow at closing of $3.0 million, which is reflected in the cash balance.
(3)	Records the provision for income taxes utilizing the net operating loss carryforward and estimated additional income taxes.

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(4)	Reflects estimated transaction costs, fees and expenses
(5)	Reflects the approximate use of $9.0 of the proceeds to repay indebtedness
(6)	Reflects the estimated gain on sale of secure network services business (after contingencies are resolved), net of taxes and transaction costs.
(7)	Impact on earnings for the elimination of earnings for the secure network services business

Halifax Corporation

Schedule II, Valuation and Qualifying Accounts

March 31, 2005

	Balance at						Balance at
	beginning						end of
	of year		Additions		Deductions		Year
Year Ended March 31, 2003
Allowance for doubtful Accounts	$	290,000	$	120,000	$	140,000	$	270,000
Allowance for inventory Obsolescence	$	600,000	$	165,000	$	135,000	$	630,000
Year Ended March 31, 2004
Allowance for doubtful Accounts	$	270,000	$	84,000	$	206,000	$	148,000
Allowance for inventory Obsolescence	$	630,000	$	379,000	$	57,000	$	952,000
Year Ended March 31, 2005
Allowance for doubtful Accounts	$	148,000	$	179,000	$	29,000	$	298,000
Allowance for inventory Obsolescence	$	952,000	$	1,044,000	$	280,000	$	1,716,000

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

On July 28, 2004, our Audit Committee engaged Grant Thornton LLP (“Grant Thornton”) as our independent auditor to audit the Company’s consolidated financial statements for the fiscal year ending March 31, 2005. Deloitte & Touche LLP (“Deloitte”) who had been engaged by the Company as the independent accountants to audit our consolidated financial statements was dismissed effective July 28, 2004.

The decision to change our independent accountants from Deloitte to Grant Thornton was approved by the Audit Committee of the Board of Directors.

The reports of Deloitte, on the financial statements of us during the two-year period ended March 31, 2004, did not contain an adverse opinion, or a disclaimer of opinion, and were not qualified or modified as to uncertainty, audit scope, or accounting principles, except for our changing its accounting for goodwill and other intangible assets during fiscal 2003 as a result of adopting statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets.” During the two-year period ended March 31, 2004, and interim period from April 1, 2004 through July 28, 2004, we did not have any disagreements with Deloitte on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Deloitte, would have caused it to make a reference to the subject matter of the disagreements in connection with its reports.

Deloitte was provided with a copy of this disclosure and was requested by us to furnish a letter addressed to the SEC stating whether Deloitte agreed with the above statements. A copy of this letter was filed as exhibit 16.2 to our current report of Form 8-K filed on July 30, 2004.

Item 9A. Controls and Procedures

Evaluation of the Company’s Disclosure Controls and Internal Controls. The Company evaluated the effectiveness of the design and operation of its “disclosure controls and procedures” as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (“the Act”), as of the end of the period covered by this Form 10-K (“Disclosure Controls”). This evaluation (“Disclosure Controls Evaluation”) was done under the supervision and with the participation of management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”).

The Company’s management, with the participation of the CEO and CFO, also conducted an evaluation of the Company’s internal control over financial reporting, as defined in Rule 13a-15(f) of the Act, to determine whether any changes occurred during the period ended March 31, 2005 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting (“Internal Controls Evaluation”).

Limitations on the Effectiveness of Controls. Control systems, no matter how well conceived and operated, are designed to provide a reasonable, but not an absolute, level of assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. The Company conducts periodic evaluation of its internal controls to enhance, where necessary, its procedures and controls.

Conclusions. Based upon the Disclosure Controls Evaluation, the CEO and CFO have concluded that the Disclosure Controls were effective in reaching a reasonable level of assurance that information required to be disclosed by the Company in the reports it files or submits under the Act is recorded, processed, summarized and reported within the specified time periods in the Securities and Exchange Commission’s rules and forms.

Based on the Internal Controls Evaluation, there were no changes in internal controls over financial reporting as defined in Rule 13a-15(f) of the Act that have materially affected, or are reasonably likely to materially affect internal controls over the Company’s internal control over financial reporting.

Item 9B. Other Information

None.

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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 is incorporated by reference from our definitive proxy statement for our 2005 annual meeting of shareholders 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 contained in Part I, Item 4A “Executive Officers of the Registrant” of this Form 10-K is hereby incorporated by reference in this Item 10.

Code of Conduct and Ethics

We have adopted a Code of Conduct and Ethics that applies to all directors, officers, including our chief executive officer, chief financial officer, controller and persons performing similar functions, and employees. Copies of our Code of Conduct and Ethics are available without charge upon written request directed to Halifax Corporation, Attn: Secretary, 5250 Cherokee Avenue, Alexandria, VA 22312.

Item 11. Executive Compensation

The information required to be included in Item 11 of Part III of this Form 10-K is incorporated by reference from our definitive proxy statements. For our 2005 annual meeting of shareholders 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 and Related Stockholder

Matters

The information required to be included in Item 12 of Part III of this Form 10-K is incorporated by reference from our definitive proxy statement for our 2005 annual meeting of shareholders to be filed with the SEC not later than 120 days after the end of our fiscal year covered by this report.

Item 13. Certain Relationships and Related Transactions

The information required to be included in Item 13 of Part III of this Form 10-K is incorporated by reference from our definitive proxy statement for our 2005 annual meeting of shareholders to be filed with the SEC not later than 120 days after the end of our fiscal year covered by this report.

Item 14. Principal Accountant Fees and Services

The information required to be included in Item 14 of Part III of this Form 10-K is incorporated by reference from our definitive proxy statement for our 2005 annual meeting of shareholders to be filed with the SEC not later than 120 days after the end of our fiscal year covered by this report.

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PART IV

Item 15. Exhibits, Financial Statement Schedules

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

1. Consolidated Financial Statements

o Independent Auditors’ Reports

o Consolidated Statements of Operations for the years ended March 31, 2005, 2004, and 2003

o Consolidated Balance Sheets as of March 31, 2005 and 2004

o Consolidated Statements of Cash Flows for the years ended March 31, 2005, 2004, and 2003

o Consolidated Statements of Changes in Stockholders’ Equity (Deficit) for the years ended March 31, 2005, 2004 and 2003

o Notes to Consolidated Financial Statements

2. Financial Statement Schedule

o 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.

3.	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.)
2.1	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.)
2.2	Agreement and Plan of Merger, dated August 29, 2003 for the Acquisition of Microserv, Inc. by Halifax Corporation. (Incorporated by reference to Exhibit 99.1 to Form 8-K dated September 12, 2003.)
2.3	Agreement and Plan of Merger dated September 30, 2004 by and among AlphaNational Technology Services, Inc., Halifax Corporation, Halifax-AlphaNational Acquisition, Inc., et al. (Schedules and exhibits are omitted pursuant to Regulation S-K, Item 601(b)(2); The Company agrees to furnish supplementally a copy of such schedules and/or exhibits to the Securities and Exchange Commission upon request.) (Incorporated by reference from Exhibit 2.1 to Form 8-K dated September 30, 2004.)
2.4	Asset Purchase Agreement by and among Halifax Corporation, Indus Acquisition, LLC and Indus Corporation dated as of June 30, 2005. (Schedules and exhibits are omitted pursuant to Regulation S-K, Item 601(b)(2); Halifax agrees to furnish supplementally a copy of such schedules and/or exhibits to the Securities and Exchange Commission upon request).
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, 2004.)

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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	Research Industries Incorporated Promissory Note dated October 8, 1998. (Incorporated by reference to Exhibit 4.11 to Form 10-K for the year ended March 31, 2002.
4.2	Research Industries Incorporated Promissory Note dated October 13, 1998. (Incorporated by reference to Exhibit 4.12 to Form 10-K for the year ended March 31, 2002.)
4.3	Research Industries Incorporated Promissory Note dated November 2, 1998. (Incorporated by reference to Exhibit 4.13 to Form 10-K for the year ended March 31, 2002.)
4.4	Research Industries Incorporated Promissory Note dated November 5, 1998. (Incorporated by reference to Exhibit 4.13 to Form 10-K for the year ended march 31, 2002.)
4.5	Research Industries Incorporated Promissory Note dated January 27, 1998. (Incorporated by reference to Exhibit 4.15 Form 10-K for the year ended March 31, 2003.)
4.6	Amendment to Amended Revolving Credit and Security Agreement by and between the Company and Southern Financial Bank dated August 20, 2003 (Incorporated by reference to Exhibit 99.1 to Form 10-Q for the quarter ended September 30, 2003.
4.7	Form of 5% note issued to Microserv Shareholders (Incorporated by Reference to Exhibit 99.6 to Form 8-K dated August 29, 2003.)
4.8	Amended Revolving Credit and Security Agreement by and between the company and Provident Bank dated November 8, 2004.. (Incorporated by reference to Exhibit 99.1 to Form 8-K .)
4.9	Second Amended and Restated Loan and Security Agreement dated as of the 29th day of June, 2005, by and between Halifax Corporation, Halifax Engineering, Inc., Microserv LLC and Halifax AlphaNational Acquisition, Inc. and Provident Bank and related documents
4.10	Amendment to 8% Promissory Notes dated October 8, 1998, October 13, 1998, November 2, 1998 and November 5, 2005 held by Nancy M. Scurlock
4.11	Amendment to 8% Promissory Notes dated October 8, 1998, October 13, 1998, November 2, 1998 and November 5, 2005 held by The Arch C. Scurlock Children’s Trust, dated December 9, 2003
4.12	Amendment to 7% Subordinated Debenture dated January 27, 1998 and modified on August 7, 2003 and September 30, 2003 held by Nancy M. Scurlock
4.13	Amendment to 7% Subordinated Debenture dated January 27, 1998 and modified on August 7, 2003 and September 30, 2003 held by The Arch C. Scurlock Children’s Trust, dated December 9, 2003
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).
10.4	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.)

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10.5	Charles L. McNew Executive Severance Agreement, dated March 31, 2001. (Incorporated by reference to Exhibit 10.8 to Form 10-K for the year ended March 31, 2001.)
10.6	Severance Agreement of Joseph Sciacca, dated May 10, 2000. (Incorporated by reference to Exhibit 10.9 to Form 10-Q for the quarter ended September 30, 2001.)
10.7	Severance Agreement of James Sherwood, dated November 9, 1999. (Incorporated by reference to Exhibit 10.11 to Form 10-Q for the quarter ended September 30, 2001.)
10.8	Director Stock Option Plan dated September 19, 1997. (Incorporated by reference to Exhibit 10.13 to Form 10-K for the year ended March 31, 2002.)
10.9	Severance Agreement of Hugh Foley, dated January 17, 2003. (Incorporated by reference to Exhibit 10.14 to Form 10-K for the year ended March 31, 2003.)
10.10	Registration Rights and First Offer Agreement dated August 29, 2003. (Incorporated by reference to Exhibit 99.2 to Form 8-K dated August 29, 2003.)
10.11	Employee Severance and Restricted Covenant Agreement with Jonathan Scott, dated August 29, 2003. (Incorporated by reference to Exhibit 99.4 to Form 8-K dated August 29, 2003.)
10.12	Voting Agreement, dated August 29, 2003 between Microserv, Inc. and certain shareholders of Halifax Corporation. (Incorporated by reference to Exhibit 99.5 to Form 8-K dated August 29, 2003.)
10.13	Amended and Restated Banking Agreement by and between the Company, Halifax Engineering, Inc., Microserv LLC, and Halifax AlphaNational Acquisition, Inc and Provident Bank dated November 8, 2004. (Incorporated by reference to Exhibit 10.1 to Form 10-Q for quarter ended September 30, 2004.)
10.14	Registration Rights Agreement among the Company and L. L. Whiteside, Charles A. Harper, Morris Horn and Dan Lane dated September 30, 2004. (Incorporated by reference to Exhibit 10.2 to Form 10-Q for quarter ended September 30, 2004.)
10.15	Employee Severance and Restrictive Covenant Agreement between the Company and L.L. Whiteside dated September 30, 2004. (Incorporated by reference to Exhibit 10.3 to Form 10-Q for quarter ended September 30, 2004.)
10.16	Summary Term Sheet of Director Fees and Officer Compensation
21.1	Subsidiaries of the registrant.
23.	Independent Registered Public Accounting Firm Consent
23.1	Independent Registered Public Accounting Firm Consent
31.1	Certification of Charles L. McNew, Principal Executive Officer, of Halifax Corporation dated July 13, 2005. 31.2 Certification of Joseph Sciacca, Principal Financial Officer, of Halifax Corporation dated July 13, 2005.
32.1	Certificate of Charles L. McNew, Principal Executive Officer, of Halifax Corporation dated July 13, 2005 pursuant to 18US.C. Section 1350.
32.2	Certificate of Joseph Sciacca, Principal Financial Officer, of Halifax Corporation dated July 13, 2005 pursuant to 18 U.S.C. Section 1350.

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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: 7/13/05

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	President and Chief Executive Officer and Director, (Principal Executive Officer)	7/13/05
/s/Joseph Sciacca Joseph Sciacca	Vice President, Finance, and Chief Financial Officer, (Principal Financial Accounting Officer)	7/13/05
/s/John H. Grover John H. Grover	Chairman of the Board of Directors	7/13/05
/s/Thomas L. Hewitt	Director	7/13/05
Thomas L. Hewitt
/s/John M. Toups	Director	7/13/05
John M. Toups
/s/Daniel R. Young	Director	7/13/05
Daniel R. Young
/s/Arch C. Scurlock, Jr.	Director	7/13/05
Arch C. Scurlock, Jr.
/s/Gerald F. Ryles	Director	7/13/05
Gerald F. Ryles

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EX-2.4

Exhibit 2.4

ASSET PURCHASE AGREEMENT

BY AND AMONG

INDUS CORPORATION,

INDUS SECURE NETWORK SOLUTIONS, LLC,

AND

HALIFAX CORPORATION

Dated as of June 30, 2005

ASSET PURCHASE AGREEMENT

          ASSET PURCHASE AGREEMENT, dated as of June 30, 2005 (this “Agreement”), by and among INDUS Corporation, a Virginia corporation (“Parent”), INDUS Secure Network Solutions, LLC, a Virginia limited liability company and a wholly-owned subsidiary of Parent (the “Buyer”), and Halifax Corporation, a Virginia corporation (the “Seller”). Certain capitalized terms in this Agreement are defined in Section 8.1 hereof.

W I T N E S S E T H:

          WHEREAS, each of Parent and the Buyer desires for the Buyer to purchase or acquire from the Seller, and the Seller wishes to sell, assign and transfer to the Buyer, substantially all of the assets and properties used in connection with the business of the “Secure Network Services” division of the Seller as such business is presently conducted and has been conducted in the past (such business, the “Business”), all for the purchase price and the assumption of the liabilities set forth herein, and upon the terms and subject to the conditions hereinafter set forth.

          NOW, THEREFORE, in consideration of the covenants, representations and warranties made herein, and of the benefits to be derived hereby, the parties hereto agree as follows:

ARTICLE I

SALE AND PURCHASE OF THE ASSETS

     1.1 Assets. On the basis of the representations, warranties, covenants and agreements and subject to the satisfaction or waiver of the conditions set forth in this Agreement, at the Closing (as defined in Section 2.1), the Seller will sell, transfer, convey, assign and deliver to the Buyer, and the Buyer will purchase or acquire from the Seller, all right, title and interest of the Seller in and to the assets, properties and other rights (excluding the Excluded Assets (as defined in Section 1.2)) owned, leased, licensed or used by the Seller solely in the operation of the Business (the “Assets”) including, without limitation:

          (a) all accounts, notes and other receivables solely relating to the Business;

          (b) all of the Seller’s rights arising under the Contracts listed on Schedule 1.1(b) and any other Contracts solely applicable to the Business;

          (c) all of the Seller’s ownership or leasehold rights, as the case may be, in the Equipment and the other assets set forth on Schedule 1.1(c);

          (d) all of the Seller’s rights in and to the Purchased Intellectual Property;

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          (e) all of the Seller’s intangible assets used solely in conducting the Business (to the extent not otherwise already included within Purchased Intellectual Property);

          (f) all of the Seller’s written or electronic information relating to the Business (including, without limitation, documentation, databases, downloads, product descriptions, vulnerability alerts, interoperability testing, general technical data, partner extranets, customer lists, customer files and other written accounts of the Seller), and other reasonably and specifically requested information, in each case, to the extent transferable;

          (g) all of the Seller’s permits, franchises and licenses used solely in conducting the Business, to the extent such licenses are transferable under applicable Law;

          (h) all of the Seller’s goodwill and going concern value relating solely to the Business and the business appurtenant thereto;

          (i) all of the Seller’s deposits, credits, pre-paid expenses, deferred charges, advance payments, security deposits, rights to escrows and prepaid items relating solely to the Contracts;

          (j) all of the Seller’s books, records, manuals, documents, correspondence, sales and credit reports, customer lists, literature, brochures, advertising material and the like incidental to or used in conducting the Business;

          (k) [intentionally omitted]

          (l) all of the Seller’s claims, claims in action, causes of action and judgments related solely to the Business;

          (m) all of the Seller’s inventories used solely in conducting the Business, including all inventories of raw materials, work in process, finished products, goods, spare parts, replacement and component parts, and office and other supplies, including inventories held at any location controlled by any Seller and inventories previously purchased and in transit to any Seller at such locations; and

          (n) rights with respect to the employment of the Division Employees (as defined in Section 3.1.13.

Subject to the terms and conditions hereof, at the Closing, the Assets shall be transferred or otherwise conveyed to the Buyer free and clear of all liabilities, obligations and Liens of any nature whatsoever excepting only Assumed Liabilities (as defined in Section 1.3).

     1.2 Excluded Assets. Notwithstanding the foregoing, the Assets shall not include the assets, properties and other rights of the Seller listed or described in Schedule 1.2 attached hereto (collectively, the “Excluded Assets”), which Excluded Assets shall not be sold or transferred to Buyer and shall be retained by the Seller:

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     1.3 Assumption of Liabilities. Subject to the terms and conditions set forth herein, at the Closing, the Buyer shall assume and agree to pay, honor and discharge promptly as they become due the liabilities reflected on Schedule 1.3 attached hereto, including, without limitation, any and all liabilities, obligations, commitments and claims of any nature whatsoever related to or arising out of the Contracts, bids, proposals and other agreements listed on Schedule 1.3 after the Closing Date (including, without limitation the CBA (as defined in Section 3.1.13), except for any obligation, liability or claim resulting from any breach by any Seller of any such Contract occurring prior to the Closing Date (as defined in Section 2.1) (collectively, all such items contemplated by this sentence shall be referred to herein as the “Assumed Liabilities”); provided, however, subject to the terms contained in the Subcontract (as defined in Section 4.4(a)) (including, without limitation, Article I thereof), that the Buyer’s assumption of the Assumed Liabilities with respect to the prime Government Contracts listed on Schedule 4.4(a) shall be effective upon the novation of such prime Government Contracts to the Buyer and in such case Assumed Liabilities shall not include any obligation, liability or claim resulting from any breach by Seller of any such Contract occurring prior to such novation.

     1.4 Excluded Liabilities. Notwithstanding any provision hereof or any schedule or exhibit hereto and regardless of any disclosure to Buyer, except for the Assumed Liabilities, the Buyer shall not assume any liabilities, obligations or commitments of the Seller relating to or arising out of the operation of the Business or the ownership of the Assets prior to the Closing, including, but not limited to accounts payable, Taxes or obligations or liabilities relative to the employment or termination of any employees of the Seller as of the Closing Date (the “Excluded Liabilities”).

ARTICLE II

THE CLOSING

     2.1 Place and Date. The parties shall use commercially reasonable efforts to consummate the closing of the sale and purchase of the Assets and the assumption of the Assumed Liabilities (the “Closing”) without being physically present at one location. If Closing at one location is required, such Closing shall take place at the offices of Venable LLP, 8010 Towers Crescent Drive, Suite 300, Vienna, Virginia, and in any event, at 10:00 a.m., Eastern time, on the date of this Agreement, which date shall be referred to as the “Closing Date.”

     2.2 Purchase Price. On the terms and subject to the conditions set forth in this Agreement, Parent agrees to deliver or cause to be delivered the amounts set forth in clauses (a) and (b) of this Section 2.2 (collectively, the “Purchase Price”). The Purchase Price shall be payable as follows:

          (a) An amount, in cash, equal to (i) Twelve Million Five Hundred Thousand Dollars ($12,500,000), less (ii) the Escrow Amount (as defined in subsection (b) below), plus or minus (iii) the amount by which the Estimated Closing Date Net Assets (as defined in Section 2.4(a)) is greater than, or less than, $1,271,000 (which amount the parties agree is the amount of the “Net Assets” of the Business as of December 31, 2004, defined as the total amount (in U.S. Dollars) of the assets of the Business less the liabilities of the Business as of such date, all as

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determined on a pro forma basis and set forth in the balance sheet of the Business prepared by Seller as of December 31, 2004 previously provided to Parent and attached hereto as Schedule 2.4(a)(2)) (the “Cash Payment”), shall be paid to the Seller at Closing by wire transfer of immediately available funds to such bank account or accounts as per written instructions of the Seller, given to Parent at least five days prior to the Closing; and

          (b) Three Million Dollars ($3,000,000) (the “Escrow Amount”) shall be delivered to the Escrow Agent pursuant to the terms and conditions of Section 2.3.

     2.3 Escrow Amount. At Closing, Parent shall pay or cause to be paid the Escrow Amount to the Escrow Agent in cash payable by wire transfer of immediately available funds for deposit in an escrow account in accordance with the terms and conditions of the Escrow Agreement to be entered into by and among Parent, the Seller and the Escrow Agent in substantially the form attached hereto as Exhibit A (the “Escrow Agreement”). Six Hundred Twenty Five Thousand Dollars ($625,000) of the Escrow Amount (the “Indemnification Escrow Amount”), plus any interest or other income earned thereon (such collective amount, the “Indemnification Escrow Fund”), shall serve as security for the payment of indemnification obligations of the Seller pursuant to Section 6.1 of this Agreement and shall be held and distributed by the Escrow Agent in accordance with the terms and conditions of the Escrow Agreement. One Million Dollars ($1,000,000) of the Escrow Amount (the “Assignment Failure Escrow Amount”), plus any interest or other income earned thereon (such collective amount, the “Assignment Failure Escrow Fund”), shall serve as security for the payment of the Assignment Failure Amount if and when the Seller becomes obligated to pay such Assignment Failure Amount pursuant to Section 6.8 of this Agreement and shall be held and distributed by the Escrow Agent in accordance with the terms and conditions of the Escrow Agreement. The entire Escrow Amount, plus any interest or other income earned thereon (such collective amount, the “Escrow Fund”), shall serve as security for the payment of the Novation Failure Amount if and when the Seller becomes obligated to pay such Novation Failure Amount pursuant to Section 6.7 of this Agreement and shall be held and distributed by the Escrow Agent in accordance with the terms and conditions of the Escrow Agreement.

     2.4 Purchase Price Adjustment.

          (a) The Purchase Price shall be adjusted on a dollar-for-dollar basis (either up or down, as the case may be) in accordance with this Section 2.4 based on the amount by which the Closing Date Net Assets (as defined below) either is greater than or less than $1,300,000 (the “Estimated Closing Date Net Assets”), which amount was determined from the estimated pro forma balance sheet of the Business as of the Closing Date (the “Closing Date Balance Sheet”) attached hereto as Schedule 2.4(a)(1), prepared by Seller consistently with the pro forma balance sheet of the Business as of December 31, 2004 previously provided to Parent and attached hereto as Schedule 2.4(a)(2). The term “Closing Date Net Assets” shall mean the total amount (in U.S. Dollars) of the assets of the Business less the liabilities of the Business determined from on the Closing Date Balance Sheet (as defined in Section 2.4(b)).

          (b) Within forty-five (45) days after the Closing Date, Seller shall cause to be prepared and delivered to the Parent (i) a pro forma balance sheet of the Business as of the

4

Closing Date (the “Closing Date Balance Sheet”) and (ii) a statement of the Closing Date Net Assets, each prepared consistently with Schedule 2.4(a)(1) and Schedule 2.4(a)(2), together with the work papers or other supporting documentation used to prepare the Closing Date Balance Sheet. The Parent shall cooperate with Seller after the Closing Date in furnishing information, documents, evidence and other assistance to Seller to facilitate the completion of the Closing Date Balance Sheet within the aforementioned time period. If within thirty (30) days following delivery of the Closing Date Balance Sheet, the Parent does not give Seller written notice of its objection to the statement of the Closing Date Net Assets determined from the Closing Date Balance Sheet (which such notice must contain a statement of the basis of the Parent’s objection), then such statement shall be conclusive and binding on the parties.

          (c) If the Parent gives Seller a timely written notice of objection to the statement of the Closing Date Net Assets determined from the Closing Date Balance Sheet (which such notice must contain a statement of the basis of the Parent’s objection), and if the parties are unable to resolve the Parent’s objections within fifteen (15) days following such objection, then the issue(s) in dispute will be submitted to the Washington, D.C. office of BDO Seidman, LLP, or to another independent public accounting firm of national standing mutually agreed upon by Parent and Seller (the “Auditor”), for resolution. The determination of the Auditor shall be set forth in a written notice delivered to Parent and the Seller by the Auditor and will be conclusive and binding on the parties. The fees and expenses of the Auditor shall be split equally and severally by Buyer and Parent, on the one hand, and Seller, on the other hand.

          (d) At such time as the statement of Closing Date Net Assets is finalized pursuant to Section 2.4(b) or Section 2.4(c), as the case may be, if the Closing Date Net Assets are:

                  (i) less than the Estimated Closing Date Net Assets, the Seller shall pay to Parent the amount of such deficiency in cash within ten (10) Business Days after (x) expiration of the thirty- (30-) day period referred in Section 2.4(b) above or (y) the Auditor delivers written notice of its determination pursuant to Section 2.4(c) above; and

                  (ii) greater than the Estimated Closing Date Net Assets, the Parent shall pay or caused to be paid to Seller the amount of such deficiency in cash within ten (10) Business Days after (x) expiration of the thirty- (30-) day period referred in Section 2.4(b) above or (y) the Auditor delivers written notice of its determination pursuant to Section 2.4(c) above.

     2.5 Procedure at Closing. On the Closing Date, the parties agree to take the following steps listed below (provided, however, that upon their completion all such steps shall be deemed to have occurred simultaneously):

                  (a) Parent shall pay the Cash Payment and the Escrow Amount in accordance with Sections 2.2, 2.3 and 5.3.

                  (b) The Seller shall deliver to Parent and the Buyer the Closing documents specified in Section 5.1.

5

                  (c) The Seller shall deliver to the Buyer such bills of sale, deeds, assignments, assumption agreements, certificates of title and other documents and take other necessary action as may be reasonably requested by the Buyer in order to convey good and marketable title to all of the Assets, free and clear of all Liens and in order to carry out the intentions and purposes of this Agreement.

ARTICLE III

REPRESENTATIONS AND WARRANTIES

     3.1 Representations and Warranties of the Seller. The Seller hereby represents and warrants to Parent and Buyer, subject to such exceptions as are specifically disclosed in the disclosure schedule and schedule of exceptions (the “Seller Disclosure Schedules”) delivered herewith and dated as of the date hereof, as follows:

          3.1.1 Organization and Qualification. The Seller is a corporation duly organized, validly existing and in good standing under the Laws of the Commonwealth of Virginia and has the necessary corporate power and authority to conduct the Business as now conducted and to own, use, license and/or lease the Assets.

          3.1.2 Authorization, etc. The Seller has the necessary corporate power and authority to execute and deliver this Agreement and the other agreements which are attached (or forms of which are attached) as exhibits hereto (such agreements, collectively with the novations to Buyer of prime Government Contracts listed on Schedule 4.4(a), the “Ancillary Agreements”) to which the Seller is a party, to perform fully its obligations hereunder and thereunder, and to consummate the transactions contemplated hereby and thereby. The execution and delivery by the Seller of this Agreement and each of the Ancillary Agreements to which it is a party, and the consummation of the transactions contemplated hereby and thereby, have been duly authorized by all requisite corporate action of the Seller. The Seller has duly executed and delivered this Agreement and each of the Ancillary Agreements to which it is a party. This Agreement and each the Ancillary Agreements to which the Seller is or will become a party constitute or will constitute, as applicable, the legal, valid and binding obligations of the Seller enforceable against it in accordance with their respective terms.

          3.1.3 [intentionally omitted]

          3.1.4 Meetings Regarding Business. Within the past five years, no deliberations by Sellers’ board of directors or any committee of such board have ever addressed the Assets or the Business, including without limitation relating to the performance of the Business, any lack of customer satisfaction related to the Business, or the Business’ performance of its Government Contracts or any other Assets.

          3.1.5 No Conflicts. The execution and delivery by the Seller of this Agreement and the Ancillary Agreements to which the Seller is or will be a party do not, and the performance by the Seller of its obligations under this Agreement and the Ancillary Agreements

6

to which the Seller is or will be a party and the consummation of the transactions contemplated hereby and thereby do not and will not:

                  (a) conflict with or result in a violation or breach of any of the terms, conditions or provisions of the articles of incorporation or bylaws of the Seller;

                  (b) subject to obtaining the consents, approvals and actions, making the filings and giving the notices disclosed in Schedule 3.1.5(b) of the Seller Disclosure Schedules, if any, conflict with or result in a violation or breach of any Law or Order applicable to the Seller or any of its assets and properties, including, without limitation, the Assets; or

                  (c) except as disclosed in Schedule 3.1.5(c) of the Seller Disclosure Schedules, (i) conflict with or result in a violation or breach of, (ii) constitute a default (or an event that, with or without notice or lapse of time or both, would constitute a default) under, (iii) require the Seller to obtain any consent, approval or action of, make any filing with or give any notice to any Person as a result or under the terms of, (iv) result in or give to any Person any right of termination, cancellation, acceleration or modification in or with respect to, (v) result in or give to any Person any additional rights or entitlement to increased, additional, accelerated or guaranteed payments or performance under, (vi) result in any contract termination or the imposition of any reduction in price, labor rate, direct rates, indirect rates or other economic benefit of the Contracts, (vii) result in the creation or imposition of (or the obligation to create or impose) any Lien upon the Seller or any of its assets and properties, including, without limitation, the Assets, under or (viii) result in the loss of any material benefit under, any of the terms, conditions or provisions of any Contract.

          3.1.6 Seller Financial Statements. Schedule 3.1.6 of the Seller Disclosure Schedules attaches (a) the pro forma balance sheet of the Business as at December 31, 2004 and related statement of statement of income for the nine (9) months ended December 31, 2004 (excluding the notes related thereto), and (b) the pro forma balance sheet of the Business as at March 31, 2005 (the “Most Recent Balance Sheet”) and related statement of income for the twelve (12) months ended March 31, 2005 (excluding the notes related thereto) (together, the “Business Financials”). The accounting principles used in calculating individual line item balances contained in the Business Financials are consistent with GAAP; provided, however, that the form of presentation, including, but not limited to, the absence of footnotes, is not in conformity with GAAP. The Business Financials are materially complete and correct, are in accordance with the books and records of the Seller and present fairly, in all material respects, the financial condition and operating results of the Business as of the dates and during the periods indicated therein.

          3.1.7 Assets. Except as disclosed in Schedule 3.1.7, the Seller has good title to all the Assets free and clear of any and all Liens other than Permitted Liens. The Assets constitute all assets necessary for the conduct of the Business as now conducted and as conducted in the past two years and will be sufficient in all material respects to carry on the Business after Closing as now conducted and as conducted in the past two years, without interruption or disruption. The Assets are in reasonably good repair and operating condition (subject to normal wear and tear) and there are no facts or conditions affecting the Assets which

7

could, individually or in the aggregate, interfere in any material respect with the use, occupancy or operation thereof as currently used, occupied or operated, or their adequacy for such use.

          3.1.8 Absence of Changes. The Seller has conducted the Business only through the Seller and not through any direct or indirect Subsidiary or Affiliate of the Seller. No part of the Business is operated by the Seller through any entity other than the Seller. Since March 31, 2005, there has been no change in the condition (financial or otherwise), business, net worth, assets, properties or Liabilities of the Business which has had or is likely to have a Material Adverse Effect, and there has been no occurrence, circumstance or combination thereof which would reasonably be expected to result in any such Material Adverse Effect before or after the Closing Date. In addition, without limiting the generality of the foregoing, except as expressly contemplated by this Agreement and except as disclosed in Schedule 3.1.8 of the Seller Disclosure Schedules, since December 31, 2004:

                  (a) the Seller has not entered into any Contract, other than with Parent or its Affiliates, commitment or transaction or incurred any Liabilities with respect to the Business outside of the ordinary course of business consistent with past practice;

                  (b) there has not been any material amendment or other material modification (or agreement to do so) or violation of the terms of any of the Contracts;

                  (c) the Seller has not entered into or amended any Contract pursuant to which any other Person is granted by the Seller production, marketing, distribution, licensing, sublicensing or similar rights with respect to any products or services of the Business or Purchased Intellectual Property;

                  (d) no Action or Proceeding has been commenced or, to the Knowledge of the Seller, has been threatened (whether orally or in writing), by or against the Seller relating to the Assets or the Business;

                  (e) there has not been any transfer (by way of a Contract or otherwise) by Seller to any Person of Seller’s rights in and to any Purchased Intellectual Property;

                  (f) the Seller has not made or agreed to make any material disposition or sale of, waiver of rights to, license or lease of, or incurrence of any Lien on, any Assets;

                  (g) the Seller has not made or agreed to make any purchase of any assets and properties of any Person in connection with or related to the Business other than (i) acquisitions of inventory, or licenses of assets or properties, in the ordinary course of the Business consistent with past practice, and (ii) other acquisitions in an amount not exceeding ten thousand dollars ($10,000) in the case of any individual item or twenty-five thousand dollars ($25,000) in the aggregate;

                  (h) the Seller has not made or agreed to make any capital expenditures in connection with the Business or commitments for additions to property, plant or equipment used in the Business constituting capital assets in the aggregate in an amount exceeding twenty-five thousand dollars ($25,000);

8

                  (i) the Seller has not made or agreed to make any write-off or write-down, any determination to write off or write-down, or revalue, any of the Assets, or change any reserves or Liabilities associated therewith, in the aggregate in an amount exceeding five thousand dollars ($5,000);

                  (j) the Seller has not made or agreed to make payment, discharge or satisfaction, in an amount in excess of five thousand dollars ($5,000), in any one case, or twenty-five thousand dollars ($25,000) in the aggregate, of any claim, Liability or obligation (whether absolute, accrued, asserted or unasserted, contingent or otherwise) relating to or adversely affecting the Business, other than the payment, discharge or satisfaction in the ordinary course of business of Liabilities reflected or reserved against in the Business Financials and other than Liabilities incurred in the ordinary course of the Business since December 31, 2004;

                  (k) the Seller has not failed to pay or otherwise satisfy any Liabilities presently due and payable of the Seller relating to the Business (other than delays in the ordinary course of the Seller’s business consistent with past practices that would not reasonably be expected to have a Material Adverse Effect), except such Liabilities relating to the Business which are being contested in good faith by appropriate means or procedures and which, individually or in the aggregate, are not material;

                  (l) except for borrowings against receivables in the ordinary course of business at the Seller corporate level, the Seller has not incurred any Indebtedness or guaranteed any Indebtedness of any other Person in connection with the Business;

                  (m) other than in the ordinary course of business for non-executive employees and other than entering into the CBA, the Seller has not entered into, amended, modified or terminated any employment or compensation agreement with, or increased or otherwise changed any compensation or benefits payable or to become payable by the Seller to, any director, employee, agent or consultant of the Seller who is employed by or providing service to the Seller in connection with the Business;

                  (n) there has been no material physical damage, destruction or other casualty loss (whether or not covered by insurance) affecting any of the Assets; and

                  (o) neither the Seller or any of its Affiliates has entered into or approved any contract, arrangement or understanding or acquiesced in respect of, any arrangement or understanding, to do, engage in or cause, or having the effect of any of the foregoing.

          3.1.9 No Undisclosed Liabilities. There are no Liabilities arising out of or otherwise directly or indirectly relating to the Assets or the Business except (i) as disclosed in Schedule 3.1.9 of the Seller Disclosure Schedules and (ii) as disclosed or reserved against in the Business Financials.

          3.1.10 Taxes.

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                  (a) The Seller has properly prepared and timely filed all Tax Returns required to be filed. All such Tax Returns are true, correct and complete in all material respects. All Taxes owed by the Seller (whether or not shown on any Tax Return) have been paid except for Taxes not yet due. The Seller has not received any notice of Tax deficiency or additional assessment from any Governmental Authority with respect to Liabilities for Taxes payable by the Seller. Since December 31, 2001, no claim has ever been made by any Governmental Authority in any jurisdiction where the Seller does not file Tax Returns that the Seller is or may be subject to taxation by that jurisdiction. There are no Liens with respect to Taxes on any of the Assets.

                  (b) The Seller has withheld and paid all Taxes required to have been withheld and paid in connection with amounts paid or owing to any employee, independent contractor, creditor, stockholder or other third party, and all Forms W-2 and 1099 required with respect thereto have been properly completed and timely filed.

                  (c) There is no material dispute or claim concerning any Tax Liability of the Seller either (A) claimed or raised by any Governmental Authority in writing or (B) as to which any of the stockholders, directors or officers of the Seller has Knowledge based upon personal contact with any agent of such Governmental Authority.

                  (d) Schedule 3.1.10(d) of the Seller Disclosure Schedule lists all federal, state, local, and foreign Tax Returns filed with respect to the Seller for taxable periods ended on or after December 31, 2001, indicates those Tax Returns that have been audited, and indicates those Tax Returns that currently are the subject of audit. The Seller has delivered to Buyer correct and complete copies of all federal Tax Returns, examination reports, and statements of deficiencies assessed against or agreed to by the Seller since January 1, 2001. The Seller has not waived any statute of limitations in respect of Taxes or agreed to any extension of time with respect to a Tax assessment or deficiency.

                  (e) None of the Assumed Liabilities represent an obligation by the Seller to make any payments that are not fully deductible as a result of the provisions set forth in Sections 162(m) or 280G of the Code or the Treasury Regulations thereunder (or any corresponding provisions of state, local or foreign Tax Law) or would result in an excise Tax to the recipient of any such payment under Section 4999 of the Code. The Seller is not a party to any Tax allocation or sharing agreement. The Seller (A) has never been a member of an “affiliated group” (within the meaning of Section 1504(a) of the Code) filing a consolidated federal Income Tax Return, and (B) has no Liability for the Taxes of any Person other than the Seller (i) under Treasury Regulation §1.1502-6 (or any similar provision of state, local or foreign Law), (ii) as a transferee or successor, (iii) by contract, or (iv) otherwise.

                  (f) The unpaid Taxes of the Seller (A) did not, as of the most recent fiscal month end, exceed the reserve for Tax Liabilities (rather than any reserve for deferred Taxes established to reflect timing differences between book and Tax income) set forth on the face of the most recent balance sheet (rather than in any notes thereto) and (B) do not exceed that reserve as adjusted for the passage of time through the Closing Date in accordance with the past custom and practice of the Seller in filing its Tax Returns.

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                  (g) The Seller has not been, and will not be, required to include any item of income in, or exclude any item of deduction from, taxable income for any Tax period (or portion thereof) ending on or after the Closing Date as a result of (A) any change in method of accounting for a Tax period ending on or prior to the Closing Date under Section 481 of the Code (or any corresponding or similar provision of state, local or foreign Income Tax Law); (B) any “closing agreement” as described in Section 7121 of the Code (or any corresponding or similar provision of state, local or foreign Income Tax Law); or (C) any installment sale or open transaction disposition made on or prior to the Closing Date.

                  (h) The Seller has not distributed stock of another Person, and has not had its stock distributed by another Person, in a transaction that was purported or intended to be governed in whole or in part by Sections 355 or 361 of the Code.

          3.1.11 Legal Proceedings. Except as set forth in Schedule 3.1.11 of the Seller Disclosure Schedules:

                  (a) there are no Actions or Proceedings pending or, to the Knowledge of the Seller, threatened (whether orally or in writing), against or adversely affecting the Seller relating to the Assets or the Business or in connection with or relating to the transactions contemplated by this Agreement;

                  (b) to the Knowledge of the Seller, there are no facts or circumstances that could reasonably be expected to give rise to any material Action or Proceeding against or adversely affecting the Seller relating to the Assets or the Business or in connection with or relating to the transactions contemplated by this Agreement; and

                  (c) with respect to or otherwise affecting the Business or the Assets, the Seller has not received notice, and does not otherwise have Knowledge of any Orders outstanding against the Seller.

Schedule 3.1.11 of the Seller Disclosure Schedules sets forth all Actions or Proceedings against or affecting, or, to the Knowledge of the Seller, threatened (whether orally or in writing) against, the Seller relating to the Assets or the Business during the three (3)-year period prior to the date hereof.

          3.1.12 Compliance with Laws and Orders. The operation of the Business as currently conducted does not violate any Law or Order applicable to the Business, the Seller or any of its assets and properties. Neither the Seller nor any of its directors, officers, Affiliates, agents or employees has violated in any material respect or is currently in default or violation in any material respect under, any Law or Order applicable to the Business or any of the Assets. The Seller is not aware of any claim of violation, or of any actual violation, of any such Laws or Orders by the Seller, other than violations which could not reasonably be expected to have a Material Adverse Effect.

          3.1.13 Employees, Labor Matters, etc. Schedule 3.1.13(a) lists each Person currently employed by the Seller solely in connection with the Business (the “Division Employees”), and Schedule 3.1.13(b) lists each Person currently employed by the Seller in part

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in connection with the Business and in part in connection with other of the Seller’s businesses or operations. The Division Employees constitute all persons necessary for the conduct of the Business as now conducted and as conducted in the past two years and will be sufficient, assuming they continue to be employed by the Parent or Buyer after the Closing in connection with the Business, in all material respects to carry on the Business after Closing as now conducted and as conducted in the past, without interruption or disruption. Except for that certain Agreement between Seller and Local 99-99A International Union of Operating Engineers effective April 1, 2005 (the “CBA”) and except as disclosed on Schedule 3.1.13(c), the Seller is not a party to any collective bargaining agreement with respect to any of its employees. The Seller has made all contributions and payments required under the CBA, including without limitation all contributions to (a) the Health and Welfare Trust Fund of the International Union of Operating Engineers, Local 99-99A (Article V), (b) the Central Pension Fund of the International Union of Operating Engineers and Participating Employers (Article V), and (c) the Local 99 IUOE Joint Apprenticeship Trust (Article IV) (collectively, the “Trust Funds”). The Seller has no Liability under any of the Trust Funds except as expressly set forth in the CBA and, to the Knowledge of the Seller, none of the Trust Funds is underfunded. Furthermore, there is no pending dispute, and the Seller has no knowledge of any potential dispute, between the Seller and any of the Trust Funds concerning the payment of any contributions. With respect to the Business, the Seller is in material compliance with all applicable Laws respecting employment and employment practices, terms and conditions of employment and wages and hours, and occupational safety and health pertaining to the Seller and is not engaged in any unfair labor practice within the meaning of any applicable Law, including Section 8 of the National Labor Relations Act. With respect to the Business, there is no unfair labor practice, charge or complaint or any other matter against or involving the Seller pending or, to the Seller’s Knowledge, threatened (whether orally or in writing) before any Governmental Authority. With respect to the Business, here is no labor strike, dispute, slowdown or stoppage pending or to the Seller’s Knowledge, threatened (whether orally or in writing) against the Seller. No certification or decertification question or organizational drive exists or has existed within the past twelve (12) months respecting the Business. The Seller has not experienced any organized work stoppage or other similar labor difficulty involving the Division Employees. There are no charges, investigations, administrative proceedings or formal complaints of discrimination (including discrimination based upon sex, age, marital status, race, national origin sexual preference, handicap or veteran status) pending or, to the Seller’s Knowledge, threatened (whether orally or in writing) before any Governmental Authority, including the Equal Employment Opportunity Commission, against the Seller, and, to the Seller’s Knowledge, no basis for any such material charge, investigation, administrative proceeding or complaint exists. With respect to the Business, except as set forth on Schedule 3.1.13(d), there have been no audits of the equal employment opportunity practices of the Seller. The Seller has not mis-characterized or mis-classified any Division Employee as an independent contractor.

          3.1.14 Plans; ERISA.

                  (a) Employee Benefit Plans. Schedule 3.1.14 sets forth a true and complete list of each “employee benefit plan,” as such term is defined in section 3(3) of ERISA, whether or not subject to ERISA, and each bonus, incentive or deferred compensation, severance, termination, retention, change of control, stock option, stock appreciation, stock

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purchase, phantom stock or other equity-based, performance or other employee or retiree benefit or compensation plan, program, arrangement, agreement, policy or understanding, whether written or unwritten, other than “multiemployer plans” within the meaning of section 4001(a)(3) of ERISA or as described in Section 413 of the Code (each, a “Multiemployer Plan”), that provides benefits or compensation with respect to any Division Employee (collectively, the “Plans”). The Seller has provided or made available to the Parent complete and correct lists of all the benefits enjoyed by the Division Employees and copies of all written Plans and descriptions of all unwritten Plans. The Seller has not communicated to any Division Employee any intention or commitment to modify any Plan or to establish or implement any other employee or retiree benefit or compensation arrangement applicable to any Division Employee.

                  (b) Each Plan has been administered in material compliance with all applicable Laws, including without limitation ERISA, if applicable, and the applicable provisions of the Code, and in accordance with its terms and any related agreements or documents. There is no pending or, to the Seller’s Knowledge, threatened (whether orally or in writing) assessment, complaint, proceeding or investigation of any kind before any Governmental Authority related to any Plan, nor is there any basis therefore.

                  (c) Except with respect to the Central Pension Fund of the International Union of Operating Engineers and Participating Employers, Seller does not contribute to any Multiemployer Plan or any Plan subject to Section 412 of the Code or Section 302 or Title IV of ERISA; nor has Seller maintained any such Multiemployer Plan or such other Plan for any employees for the 5 year period preceding the date of this Agreement for which Seller has liability under Title IV of ERISA as of the date of this Agreement. The Seller has no current responsibility to make any withdrawal liability payments to any such multiemployer plan, nor would the transaction contemplated by this Agreement result in any withdrawal liability of Seller under any multiemployer plan, as determined in accordance with Section 4203 and 4205 of ERISA, regardless of whether Parent or Buyer assumes such multiemployer plan. Furthermore, there is no pending claim, and the Seller has no knowledge of any potential claim, between the Seller and any multiemployer plan concerning payment of any withdrawal liability payments. The Seller has not received any notice of any failure by a multiemployer plan to satisfy the minimum funding requirements of Section 412 of the Code, and has not applied for, and has not received, a waiver of such minimum funding requirements with respect to any multiemployer plan. Seller has provided or made available to the Parent a copy of any opinion letter or determination letter issued by the IRS with respect to any Plan’s qualification under Code Section 401(a) or (k).

          3.1.15 Real Property.

                  (a) Schedule 3.1.15(a) of the Seller Disclosure Schedules contains a true and correct list of (i) each parcel of real property leased, utilized and/or operated by the Seller (as lessor or lessee or otherwise) in connection, directly or indirectly, with the Business (the “Leased Real Property”) and (ii) all Liens relating to or affecting any parcel of Leased Real Property. True, correct and complete copies of the documents under which the Leased Real Property is leased, subleased (to or by the Seller or otherwise), utilized, and/or operated (the “Lease Documents”) have been made available to Parent and such Lease Documents are

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unmodified and in full force and effect. The Seller does not own any real property other than Seller owned leasehold improvements, if any, on Leased Real Property.

                  (b) Subject to the terms of the Lease Documents, the Seller has a valid and subsisting leasehold estate in and the right to quiet enjoyment of each of the Leased Real Properties for the full term of the leases (including renewal periods) relating thereto. Each Lease Document referred to in Schedule 3.1.15(a) is a legal, valid and binding agreement, enforceable in accordance with its terms in all material respects, except as such enforceability may be limited by bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium or other similar Laws relating to the enforcement of creditors’ rights generally and by general principles of equity, of the Seller, and of each other Person that is a party thereto, and except as set forth in Schedule 3.1.15(b) of the Seller Disclosure Schedules, there is no, and neither the Seller nor any of its Affiliates has received notice of any, default (or any condition or event which, after notice or lapse of time or both, would constitute a default) thereunder. The Seller does not owe brokerage commissions or finders fees with respect to any such Leased Real Property.

                  (c) Except as disclosed in Schedule 3.1.15(c) of the Seller Disclosure Schedules, all improvements on the Leased Real Property (i) comply in all material respects with and are operated in material accordance with applicable Laws and all applicable Liens, Consents, contracts, covenants and restrictions and (ii) are in all material respects in good operating condition and in a state of good maintenance and repair, ordinary wear and tear excepted, and such improvements are in all material respects adequate and suitable for the purposes for which they are presently being used and there are no condemnation or appropriation proceedings pending or, to the Knowledge of the Seller, threatened (whether orally or in writing) against any of such real property or the improvements thereon.

          3.1.16 Tangible Personal Property. The Seller is in possession of and has good and marketable title to, or has valid leasehold interests in or valid rights under contract to use, all tangible personal property used in the conduct of the Business, including tangible personal property reflected on the Business Financials and tangible personal property of the Business acquired since March 31, 2005, other than property disposed of since such date in the ordinary course of business consistent with past practice. Except (a) for the Liens disclosed in Schedule 3.1.16 of the Seller Disclosure Schedules and purchase money liens on equipment purchases or product purchases in the ordinary course of the Business for which the purchase price is not yet due and payable, or (b) as disclosed in Schedule 3.1.16 of the Seller Disclosure Schedules, all such tangible personal property of the Business (including plant, property and equipment) is owned by the Seller free and clear of all Liens and is suitable in all material respects for the conduct by the Seller of the Business as presently conducted, and is in good working order and condition in all material respects, ordinary wear and tear excepted, and its use complies in all material respects with all applicable Laws.

          3.1.17 Intellectual Property.

                  (a) Schedule 3.1.17(a) of the Seller Disclosure Schedules lists all Registered Purchased Intellectual Property owned by the Seller as well as all material Purchased Intellectual Property that is not Registered Purchased Intellectual Property.

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                  (b) The Seller has all requisite right, title and interest in or valid and enforceable rights under Contracts or Law to use all Purchased Intellectual Property that is used by the Seller to conduct the Business in the ordinary course. Each item of Purchased Intellectual Property listed in Schedule 3.1.17(a) of the Seller Disclosure Schedules is owned exclusively by the Seller (excluding Intellectual Property licensed to the Seller under any license) in its own name and is free and clear of any Liens.

                  (c) Except as identified in Schedule 3.1.17(c) of the Seller Disclosure Schedules, since December 31, 2003, other than in the ordinary course of business, the Seller has not transferred ownership of or granted any license of or other right to use or authorized the retention of any rights to use any Intellectual Property that is or was, as of that date, Purchased Intellectual Property to any other Person.

                  (d) The Purchased Intellectual Property constitutes all the Intellectual Property used in and/or necessary to the conduct of the Business as currently conducted, including the design, development, distribution, marketing, manufacture, use, import, license, and sale of the products, technology and services of the Business.

                  (e) Schedule 3.1.17(e) of the Seller Disclosure Schedules lists all Contracts (including all inbound licenses) to which the Seller is a party with respect to any Purchased Intellectual Property. Except as specifically identified in Schedule 3.1.17(e) of the Seller Disclosure Schedules, no Person other than the Seller has ownership rights to improvements made by the Seller in Purchased Intellectual Property that has been licensed to the Seller.

                  (f) Except as disclosed in Schedule 3.1.17(f) of the Seller Disclosure Schedules, the operation of the Business by the Seller as currently conducted, including the design, development, use, import, manufacture and sale of the products, technology or services (including products, technology or services currently under development) of the Business (to the extent such is performed by the Seller in the operation of the Business as currently conducted), does not infringe, violate or misappropriate the Intellectual Property rights of any Person, and the Seller has not received written notice from any Person within the past two (2) years claiming that such operation of the Business infringes, violates or misappropriates the Intellectual Property rights of any Person, including notice of infringement of third-party patent or other Intellectual Property rights from a potential licensor of such rights.

                  (g) Each item of Registered Purchased Intellectual Property which has actually been and currently actually is registered in the name of the Seller is, to the Seller’s knowledge, valid and subsisting, and all necessary registration and registration-related maintenance fees, renewal fees, and annuity fees in connection with such Registered Purchased Intellectual Property have been paid and all necessary registration-related documents and certificates in connection with such Registered Purchased Intellectual Property have been filed with the relevant patent, copyright, trademark or other authorities in the United States or foreign jurisdictions, as the case may be, for the purposes of maintaining such Registered Purchased Intellectual Property. In each case in which the Seller has acquired ownership of any Purchased Intellectual Property from any Person, the Seller has obtained a valid and enforceable assignment

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sufficient to irrevocably transfer all rights in such Intellectual Property (including the right to seek past and future damages with respect to such Intellectual Property) to the Seller and, to the maximum extent provided for by and required to protect the Seller’s ownership rights in and to such Intellectual Property in accordance with applicable Laws, the Seller has recorded each such assignment of Registered Purchased Intellectual Property with the relevant Governmental Authority, including the PTO or the United States Copyright Office.

                  (h) There are no licenses or other contracts between the Seller and any other Person with respect to Purchased Intellectual Property under which there is any dispute (or, to the Knowledge of the Seller, facts that may reasonably lead to a dispute) regarding the scope of such license or contract, or performance under such license or contract, including with respect to any payments to be made or received by the Seller thereunder.

                  (i) To the Knowledge of the Seller, no Person is infringing, violating or misappropriating any of the Seller’s rights in or to the Purchased Intellectual Property.

                  (j) The Seller has taken all commercially reasonable steps to protect and preserve Seller’s ownership of Purchased Intellectual Property, except where the failure to so protect and preserve Purchased Intellectual Property could not reasonably be expected to have a material adverse effect on the Business. The Seller has secured valid written assignments from all current and former consultants, third parties, Affiliates and employees (including any prior employees) who contributed to the creation or development of the Purchased Intellectual Property. In the event that the consultant is or was concurrently employed by the Seller and a third party or that Purchased Intellectual Property has been developed (in whole or in part) by an Affiliate, the Seller has taken appropriate steps to ensure that any Purchased Intellectual Property developed by such a consultant or Affiliate does not belong to the third party or Affiliate or conflict with the third party’s or Affiliate’s employment agreement (such steps include ensuring that all research and development work performed by such a consultant is not performed on the facilities of the third party or using the resources of the third party).

          3.1.18 Contracts.

                  (a) Schedule 3.1.18(a) of the Seller Disclosure Schedules contains a true and complete list of each of the Contracts (true, correct and complete copies or, if none, reasonably complete and accurate written descriptions of which, together with all amendments and supplements thereto and all waivers of any terms thereof, have been made available to Parent prior to the execution of this Agreement).

                  (b) Each Contract required to be disclosed in Schedule 3.1.18(a) of the Seller Disclosure Schedules is in full force and effect and constitutes a legal, valid and binding agreement, enforceable in all material respects in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium or other similar Laws relating to the enforcement of creditors’ rights generally and by general principles of equity. Except as disclosed in Schedule 3.1.18(b) of the Seller Disclosure Schedules, prior to the novation to Buyer of each Contract disclosed in Schedule 3.1.18(a) there is no reduction in price, labor rate, direct costs, indirect costs or other

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reduction of economic benefit, or event of default or event or condition that, after notice or lapse of time or both, would constitute a violation, breach or event of default under any Contract on the part of the Seller or, to the Knowledge of the Seller, any other party thereto.

                  (c) Except as disclosed in Schedule 3.1.18(c) of the Seller Disclosure Schedules, the Seller is not a party to or bound by any Contract that (i) automatically terminates or allows termination by the other party thereto upon consummation of the transactions contemplated by this Agreement or the Ancillary Agreements or (ii) contains any covenant or other provision which limits the Seller’s ability to compete with any Person in any line of business or in any area or territory.

                  (d) Schedule 3.1.18(d) of the Seller Disclosure Schedules lists (i) the customers of the Business and (ii) the ten (10) largest suppliers of the Business on the basis of cost of goods or services purchased or accrued for in the Business Financials. Except as disclosed in Schedule 3.1.18(d) of the Seller Disclosure Schedules, no such customer or supplier has ceased or materially reduced its purchases from or sales or provision of services to the Seller since December 31, 2003 or, to the Knowledge of the Seller, has threatened (whether orally or in writing) to cease or materially reduce such purchases or sales or provision of services after the date hereof. Except as disclosed in Schedule 3.1.18(d) of the Seller Disclosure Schedules, to the Knowledge of the Seller, no such customer or supplier is threatened with bankruptcy or insolvency. With regard to supplier supporting the Business at Fort Bragg, Seller represents that the existing “Customer Maintenance” agreement obligates the supplier, Lenel, to maintain a level of service necessary for Buyer to provide support to Fort Bragg.

          3.1.19 Government Contracts.

                  (a) (i) Schedule 3.1.19(a)(i) of the Seller Disclosure Schedules lists all Government Contracts (except for task orders and blanket purchasing agreements pursuant to Government Contracts), and with respect to each such listed Government Contract, Schedule 3.1.19(a)(i) of the Seller Disclosure Schedules accurately lists: (A) the contract name; (B) the award date; (C) the customer; (D) the contract end date; (E) the contract’s ceiling value; (F) the contract’s funded value; and (G) as applicable, whether the current Government Contract is premised on the Seller’s small business status or other preferential status.

                    (ii) Schedule 3.1.19(a)(ii) of the Seller Disclosure Schedules lists the Seller’s current project charge codes, and with respect to each such charge code, Schedule 3.1.19(a)(ii) of the Seller Disclosure Schedules accurately lists: (A) the customer; (B) the customer’s contract number corresponding to the charge code; (C) the customer’s order number; (D) the Seller’s internal project charge code number for each Government Contract; or if Seller tracks only by task/delivery order, the Seller’s internal project charge code number for each task/delivery order; (E) the corresponding project name; (F) the end date; (G) inception to June 30, 2005 funding; (H) inception to May 31, 2005 revenue received; (I) the ceiling value; and (J) payments due as of thirty (30) days or more prior to the date of this Agreement for work previously performed and billed.

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                    (iii) Schedule 3.1.19(a)(iii) of the Seller Disclosure Schedules lists all Government Bids, including task order bids under current Government Contracts submitted by the Seller and for which no award has been made thirty (30) days or more prior to the date of this Agreement, and with respect to each such Government Bid, Schedule 3.1.19(a)(iii) of the Seller Disclosure Schedules accurately lists: (A) the customer agency and title; (B) the request for proposal (RFP) number or, if such Government Bid is for a task order under a prime contract, the applicable prime contract number; (C) the date of proposal submission; (D) the expected award date, if known; (E) the estimated period of performance; (F) the estimated value based on the proposal, if any; and (G) whether such Government Bid is premised on the Seller’s small business status or other preferential status. The Seller has delivered to Parent true, correct, and complete copies of all Government Contracts and of all Government Bids and provided access to Parent to true and correct copies of all documentation related thereto requested by Parent.

                  (b) Except as set forth in Schedule 3.1.19(b) of the Seller Disclosure Schedules, (i) the Seller has not received any written, or, to Knowledge of the Seller, oral notification of cost, schedule, technical or quality problems that could reasonably result in claims against the Seller (or successors in interest) by a Governmental Authority, a prime contractor, or a higher-tier subcontractor; (ii) there are no Government Contracts pursuant to which the Seller is reasonably likely to experience cost, schedule, technical or quality problems that could reasonably result in claims against the Seller (or successors in interest) by a Governmental Authority, a prime contractor or a higher-tier subcontractor; (iii) all of the Government Contracts were legally awarded, are binding on the parties thereto, and are in full force and effect; (iv) the Government Contracts are not currently the subject of bid or award protest proceedings, and, to the Knowledge of the Seller no Government Contracts or Government Bids are reasonably likely to become the subject of bid or award protest proceedings; and (v) no Person has notified the Seller or any Affiliate, either in writing or, to Knowledge of the Seller, orally, that any Governmental Authority intends to seek the Seller’s agreement to lower rates under any of the Government Contracts or Government Bids.

                  (c) Except as set forth in Schedule 3.1.19(c) of the Seller Disclosure Schedules: (i) the Seller has fully complied with all terms and conditions of each Government Contract and Government Bid to which it is a party, and has performed all obligations required to be performed by it thereunder; (ii) the Seller and any Affiliate has complied with all statutory, regulatory and legal requirements, including, but not limited to, the Service Contract Act, the Contract Disputes Act, the Procurement Integrity Act, the Federal Procurement and Administrative Services Act, the Federal Acquisition Regulations (“FAR”) and related cost principles and the Cost Accounting Standards, where and as applicable to each of the Government Contracts and Government Bids; (iii) the representations, certifications and warranties made by the Seller with respect to the Government Contracts or Government Bids were accurate in all respects as of their effective date, and the Seller has fully complied with all such certifications; (iv) no termination for default, cure notice, show cause notice or other similar notice, either written or, to the Knowledge of the Seller, orally, has been issued and remains unresolved with respect to any Government Contract or Government Bid, and no event, condition or omission has occurred or exists that would constitute grounds for such action; (v) no past performance evaluation received by the Seller or any Affiliate with respect to any such

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Government Contract has set forth a default or other failure to perform thereunder or termination or default thereof; and (vi) no money due to the Seller pertaining to any Government Contract or Government Bid has been withheld or set-off nor has there been any attempt to withhold or set-off any money due under any Government Contract; (vii) all invoices and claims (including requests for progress payments and provisional costs payments) submitted under each Government Contract were current, accurate and complete in all material respects as of their submission date; and (viii) neither the execution, delivery nor performance of this Agreement and the Ancillary Agreements does or will conflict with or result in a breach or default under any Government Contract.

                  (d) Except as set forth in Schedule 3.1.19(d) of the Seller Disclosure Schedules, with respect to the Government Contracts, no Governmental Authority, prime contractor or higher-tier subcontractor under a Government Contract or any other Person has notified the Seller or any Affiliate, either in writing or, to the Knowledge of the Seller, orally, of any actual or alleged violation or breach of any statute, regulation, representation, certification, disclosure obligation, contract term, condition, clause, provision or specification that could reasonably be expected to have a Material Adverse Effect on the Business.

                  (e) The Seller has not taken any action and is not a party to any litigation that could reasonably be expected to give rise to (i) liability under the False Claims Act, (ii) a claim for price adjustment under the Truth in Negotiations Act, or (iii) any other request for a reduction in the price of any Government Contract, including claims based on actual or alleged defective pricing. There exists no basis for a claim of any liability of the Seller by any Governmental Authority as a result of defective cost and pricing data submitted to any Governmental Authority. The Seller is not participating in any pending claim and to the Knowledge of the Seller there is no potential claim under the Contract Disputes Act, or any other legal authority, against the United States Government or any prime contractor, subcontractor or vendor arising under or relating to any Government Contract or Government Bid.

                  (f) Except as set forth in Schedule 3.1.19(f) of the Seller Disclosure Schedules, (i) no Government Contract has been terminated for default in the past ten (10) years; and (ii) neither the Seller nor any Affiliate has received any written or, to the Knowledge of the Seller , oral notice terminating any Government Contract for convenience or indicating an intent to terminate any of the Government Contracts for convenience.

                  (g) Except as set forth in Schedule 3.1.19(g) of the Seller Disclosure Schedules, neither the Seller nor any Affiliate has received any written or oral notice of any outstanding claims or contract disputes to which the Seller or any Affiliate is a party relating to the Government Contracts or Government Bids and involving either a Governmental Authority, any prime contractor, any higher-tier subcontractor, vendor or any third party.

                  (h) Neither the Seller nor any of its respective directors, officers, Transferred Employees, or, to the Knowledge of the Seller, its non-Transferred employees, has ever been, nor is currently, suspended, debarred or proposed for suspension or debarment from bidding on any Government Contract, declared ineligible, or otherwise excluded from participation in the award of any Government Contract or for any reason been listed on the List

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of Parties Excluded from Federal Procurement and Non-procurement programs. No suspension, debarment or exclusion proceeding actions with respect to Government Contracts have been commenced or threatened (whether orally or in writing) against the Seller, or any of their respective directors, officers, Transferred Employees, or, to the Knowledge of the Seller, its non-Transferred employees. No circumstances exist that would warrant the institution of suspension or debarment proceedings against the Seller or its respective directors, officers, Transferred Employees, or, to the Knowledge of the Seller, its non-Transferred employees.

                  (i) No negative determination of responsibility has been issued against the Seller or any Affiliate with respect to any quotation, bid or proposal submitted to a Governmental Authority.

                  (j) Except as set forth in Schedule 3.1.19(j) of the Seller Disclosure Schedules, since January 1, 1998, (i) the Seller has not undergone and is not undergoing any audit, inspection, or investigation of records by any Governmental Authority relating to any Government Contract; (ii) neither the Seller nor any Affiliate has received written or oral notice of, and neither the Seller nor any Affiliate has undergone, any investigation, inspection or audit relating to any Government Contract, and (iii) no such audit, inspection, or investigation, of records is threatened, either in writing or, to Knowledge of the Seller, orally. Except as set forth in Schedule 3.1.19(j) of the Seller Disclosure Schedules, with respect to any Government Contract neither the Seller nor any Affiliate has received any official notice that Seller is or was being specifically audited or investigated by the Government Accountability Office, the Defense Contract Audit Agency of the United States Government (the “DCAA”), any state or federal agency Inspector General, the contracting officer with respect to any Government Contract, or the Department of Justice (including any United States Attorney). The Seller has not received any written or, to the Knowledge of the Seller, oral notice that any audit, inspection, or investigation of records described in Schedule 3.1.19(j) of the Seller Disclosure Schedules, has revealed any fact, occurrence or practice which could reasonably be expected to have a Material Adverse Effect. Seller shall not be required to pay, repay, remit or otherwise refund, directly or indirectly, any amount to any Governmental Authority as a result of any audit, inspection, or examination of records by any Governmental Authority, including the DCAA, with respect to services of the Seller or any Affiliate, at any time on or prior to December 31, 2004.

                  (k) During the last (5) years neither the Seller nor any Affiliate has conducted any internal audit or investigation in connection with which the Seller has used any legal counsel, auditor, accountant or investigator, and (ii) neither the Seller nor any Affiliate has made any disclosure to any Governmental Authority or other customer or prime contractor or higher-tier subcontractor related to any suspected, alleged or possible violation of a contract requirement, any apparent or alleged irregularity, misstatement, or material omission arising under or relating to a Government Contract or Government Bid, or any violation of law or regulation.

                  (l) Except as set forth in Schedule 3.1.19(l), neither Seller, nor any Affiliate, nor their respective directors, officers or employees, have been engaged in or been charged with, or received or been advised in writing by any source, or advised verbally by an authorized governmental officer or authorized point of contact of any prime contractor or higher

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tier subcontractor, of any charge, investigation, claim or assertion of, nor has Seller, nor any Affiliate, nor their respective directors, officers or employees, been subject to any criminal indictment or information, lawsuit, subpoena, civil investigative demand, administrative proceeding, voluntary disclosure, claim, dispute, mediation or arbitration with regard to, any material violation of any requirement pertaining to a Government Contract or Government Bid, including material violations of any statutory or regulatory requirements, including without limitation (i) defective pricing within the meaning of the Truth in Negotiations Act, as amended; (ii) accounting, estimating, inventory, material requirements planning, material management and accounting systems, government property records or purchasing system deficiencies; (iii) mischarging of Direct Costs or Indirect Costs; (iv) delivery to the Government or to a Government prime or subcontractor of material, components, items or services that do not or did not meet specifications or standards therefore, or delivery to the Government or to a Government prime or subcontractor of foreign-made material, components or items where domestic-made material, components or items were required; (v) improperly soliciting, obtaining, attempting to solicit or obtain or making or attempting to make any payment for any non-public proprietary or source selection information; (vi) unallowable costs, including unallowable Direct Costs or Indirect Costs; (vii) improper testing or test reports; (viii) failure to abide by the terms of a Government Contract or a Government Bid; or (ix) Laws relating to any Government Contract or Government Bid, including the following: (A) the False Statements Act (18 U.S.C. 1001), (B) the False Claims Act (18 U.S.C. 287), (C) the False Claims Act (31 U.S.C. 3729), (D) the Bribery, Gratuities and Conflicts of Interest Act (18 U.S.C. 201 and 5 U.S.C. 7353), (E) the Anti-Kickback Act (41 U.S.C. 51, 54), (F) the Anti-Kickback Enforcement Act of 1986 (Pub. L. 99-634), (G) the Arms Export Control Act (22 U.S.C. 277 et. seq.), (H) the Foreign Corrupt Practices Act (15 U.S.C. 78 m, 78 dd-1, 78 ff), (I) the Export Administration Act (50 U.S.C. App. 2401 et. seq.), (J) the War and National Defense Act (18 U.S.C. 793), (K) the Racketeer Influenced and Corrupt Organizations Act (18 U.S.C. 1961-68) or of any statute the violation of which would constitute “racketeering activity” within the meaning of such act, (L) the Conspiracy to Defraud the Government Act (18 U.S.C. 371), (M) the Program Fraud Civil Remedies Act (Pub. L. 99-509), (N) the Byrd Amendment, Pub. L. 101-121, § 319, (O) “revolving door” legislation (37 U.S.C. 801, 41 U.S.C. 423, 18 U.S.C. 207, 18 U.S.C. 208, 18 U.S.C. 218, 18 U.S.C. 281, 10 U.S.C. 2397, 10 U.S.C. 2397a, 10 U.S.C. 2397b, 10 U.S.C. 2397), (P) the Defense Production Act (50 U.S.C. App. 2061), (Q) United States antiboycott laws (the Ribicoff Amendment to the 1976 Tax Reform Act, and the 1979 Export Administration Act), (R) the Defense Industrial Security Regulation (DoD 5220.22-R) or National Industrial Security Program Operating Manual (DoD 5220.22-M), or any agreement with the Defense Security Service, (S) the FAR, any applicable supplements thereto, alternative regulations applicable in lieu thereof, or applicable predecessor regulations, (T) the Service Contract Act of 1965, as amended, (U) Cost Accounting Standards, (V) Treasury Department embargo and sanctions regulations, 31 C.F.R. Part 500 et. seq., (W) the Small Business Act, as amended, (X) Executive Order 11246, as amended, and corresponding Department of Labor regulations, (Y) the Anti-Assignment Act, 41 U.S.C. § 15, (Z) the Davis-Bacon Act, as amended, (AA) the Fair Labor Standards Act, as amended, (BB) the Walsh-Healey Act, as amended or (CC) the Drug-Free Workplace Act, as amended, nor has Seller conducted any internal investigation in connection with any such material violation on its own or with the assistance of any legal counsel, auditor, accountant or investigator outside Seller.

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                  (m) All indirect and general, administrative and selling/bid and proposal/independent research and development (G&A) expense rates are being billed consistent with DCAA-approved rates or provisional rates.

                  (n) The Seller and its Division employees who hold security clearances are in compliance with all applicable national security obligations, including those specified in the National Industrial Security Program Operating Manual, DOD 5220.22-M (January 1995), and any supplements, amendments or revised editions thereof.

                  (o) There are no events or omissions that would reasonably be expected to result in a claim or dispute against the Seller by a Governmental Authority or any prime contractor, subcontractor, vendor or other third party arising under or relating to any Government Contract or Government Bid.

                  (p) The Seller has undertaken no internal audit of any events or omissions that, at the time of the audit, the Seller or any Affiliate reasonably expected to have a material adverse effect on the performance of a Government Contract or Government Bid or an adverse effect on the Business. In addition, all Government Bids listed on Schedule 3.1.19(a) of the Seller Disclosure Schedules were submitted in the ordinary course of business of the Seller, were based on assumptions believed by the management of the Seller to be reasonable, and the Seller reasonably believes all Government Bids listed on Schedule 3.1.19(a) of the Seller Disclosure Schedules are capable of performance by the Seller in accordance with the terms and conditions of such Government Bid without a total program loss (calculated in accordance with the Seller’s accounting principles consistently applied).

                  (q) Except as set forth on Schedule 3.1.19(q) of the Seller Disclosure Schedules, no Government Contract has incurred or currently projects losses or cost overruns in an amount exceeding $5,000. No payment has been made by the Seller or by a Person acting on the Seller’s behalf, to any Person (other than to any bona fide employee or agent of the Seller, as defined in subpart 3.4 of the FAR) which is or was improperly contingent upon the award of any Government Contract or which would otherwise be in violation of any applicable procurement law or regulation or any other Laws. The Seller is not subject to any “forward pricing” regulations or agreements as contemplated, for example, in Section 9-1200 of the DCAA Contract Audit Manual (2005).

                  (r) Except as set forth on Schedule 3.1.19(r) of the Seller Disclosure Schedules, the Seller has not assigned or otherwise conveyed or transferred, or agreed to assign, to any Person, any Government Contracts, or any account receivable relating thereto, whether a security interest or otherwise.

                  (s) Except as set forth on Schedule 3.1.19(s) of the Seller Disclosure Schedules, where applicable, the Seller has reached agreement with the cognizant government audit agency approving and “closing” all indirect costs charged to Government Contracts for the years 1993 through 2004.

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                  (t) Except as set forth on Schedule 3.1.19(t) of the Seller Disclosure Schedules, no personal property, equipment or fixtures are loaned, bailed or otherwise furnished to the Seller by or on behalf of a Government in connection with any Government Contracts or Government Bids.

                  (u) The Seller certifies that, (i) no claims (whether oral or written) exist against the Seller with respect to express warranties and guarantees contained in Government Contracts on products or services provided by the Seller; (ii) no such claims have been made against the Seller in the past five (5) years; (iii) no amendment has been made to any written warranty or guarantee contained in any Government Contract that would reasonably be expected to result in a Material Adverse Effect on the Business; and (iv) Seller has not taken any action which would reasonably be expected to give any Person a right to make a claim under any written warranty or guarantee contained in any Government Contract.

                  (v) Except to the extent prohibited by applicable Law, Schedule 3.1.19(v) of the Seller Disclosure Schedules sets forth all facility security clearances held by the Seller and its Affiliates in connection with the operation of the Business.

                  (w) The Seller maintains systems of internal controls (including cost accounting systems, estimating systems, purchasing systems, proposal systems, billing systems and material management systems) that are in compliance with all applicable requirements of all of the Government Contracts and all applicable Laws.

                  (x) Neither the Seller, nor any of its respective employees, officers or agents, has violated any legal, administrative or contractual restriction concerning the employment of (or discussions concerning possible employment with) current or former officials or employees of a state, local or federal government (regardless of the branch of government), including, but not limited to, the so-called “revolving door” restrictions set forth at 18 U.S.C. § 207.

                  (y) Except as set forth on Schedule 3.1.19(y) of the Seller Disclosure Schedules, none of Seller’s Government Contracts are premised upon Seller’s small business, small disadvantaged business status, veteran owned status, protégé status, or other preferential status, nor did any Governmental Authority rely upon Seller’s small business, small disadvantaged business status, veteran owned status, protégé status, or other preferential status in evaluation any of Seller’s quotations, bids, or proposals, or in making award of any Government Contract to Seller.

                  (z) All costs (both Direct Costs and Indirect Costs) charged to Seller pursuant to any existing subcontract agreements are and shall be allowable in accordance with applicable regulations and cost accounting standards. No incurred Direct Costs and/or Indirect Costs shall be disallowed for any period of time prior to the Closing Date.

                  (aa) All Seller (or any Seller Affiliate) costs (both Direct Costs and/or Indirect Costs) that have been, prior to Closing, charged to any Government Contract shall be allowable in accordance with applicable cost accounting standards. All costs (both Direct Costs

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and Indirect Costs) to be charged by Seller (or any Seller Affiliate) to Buyer or Parent pursuant to the Transition Services Agreement (see Section 4.14 infra) shall be allowable in accordance with applicable regulations and cost accounting standards.

                  (bb) Except as set forth on Schedule 3.1.19(bb) the Seller has not had access to non-public information nor provided systems engineering, technical direction, consultation, technical evaluation, source selection services or services of any type, nor prepared specifications of work, nor engaged in any other conduct that would create in connection with any Government procurement an organizational conflict of interest as defined in the FAR or other applicable law.

                  (cc) Davis Bacon labor rates have not applied, and do not apply, to any of the Government Contracts listed in Schedule 3.1.19(a)(i), any of the entries listed on Schedule 3.1.19(a)(ii), or any of the Government Bids listed in Schedule 3.1.19(iii).

          3.1.20 Insurance. Schedule 3.1.20 of the Seller Disclosure Schedules contains a true and complete list of all insurance policies (by policy number, insurer, expiration date and type, amount and scope of coverage) held by the Seller or its Affiliates relating, directly or indirectly, to the Assets and the Business, copies of which have been provided or made available to Parent. In the three (3) year period ending on the date hereof, the Seller has not received any notice from, or on behalf of, any insurance carrier relating to or involving any adverse change or any change other than in the ordinary course of business, in the conditions of insurance, any refusal to issue an insurance policy or non-renewal of a policy, or requiring or suggesting alteration of any of the Assets, purchase of additional equipment or modification of any of the Seller’s methods of doing business. Each policy listed in Schedule 3.1.20 of the Seller Disclosure Schedules is valid and binding and in full force and effect, all premiums due thereunder have been paid and neither the Seller nor the Person to whom such policy has been issued has received any notice of cancellation or termination in respect of any such policy or is in default thereunder, and the Seller does not have any Knowledge of any default by any other Person thereunder or of any reason or state of facts that is likely to lead to the cancellation of such policies or of any threatened (whether oral or written) termination of, or material premium increase with respect to, any of such policies. The insurance policies listed in Schedule 3.1.20 of the Seller Disclosure Schedules are in amounts and have coverages as required by any Contract to which Seller is a party or by which any of the Assets is bound. Schedule 3.1.20 of the Seller Disclosure Schedules contains a list of all claims in excess of $10,000 made under any insurance policies covering the Seller in respect of the Business or the Assets in the last two (2) years. The Seller has not received any notice that any insurer under any policy listed (or required to be listed) in Schedule 3.1.20 of the Seller Disclosure Schedules is denying, disputing or questioning liability with respect to a claim thereunder or defending under a reservation of rights clause.

          3.1.21 Accounts Receivable. Except as set forth in Schedule 3.1.21 of the Seller Disclosure Schedules, the accounts and notes receivable of the Seller reflected on the Business Financials, and all accounts and notes receivable arising subsequent to March 31, 2005 in connection with or directly or indirectly relating to the Business, (a) arose from bona fide sales transactions in the ordinary course of business, consistent with past practice, and are payable on ordinary trade terms, (b) are legal, valid and binding obligations of the respective debtors

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enforceable in accordance with their respective terms, except as the enforceability thereof may be limited by bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium or other similar Laws relating to the enforcement of creditors’ rights generally and by general principles of equity, (c) are not subject to any valid set-off or counterclaim, (d) have been collected or are fully collectible (provided that after Closing Buyer uses (and Buyer hereby covenants that it will use) commercially reasonable efforts to collect the same) before the date that is one hundred fifty (150) days after the applicable invoice date (provided that the account debtor has not affirmatively rejected such invoice), net of reserves according to their terms in amounts not less than the aggregate amounts thereof carried on the Most Recent Balance Sheet; provided, however, that (i) Buyer shall provide Seller with written notice on a periodic basis (no less frequently than every fifteen (15) days) of any accounts receivable amounts existing at closing that have aged more than sixty (60) days from the date of the sale or other activity giving rise to such accounts receivable (it being the intent of the parties that Buyer shall be permitted to reasonably assist in the collections efforts with respect thereto) and (ii) if any accounts receivable of Seller on the Closing Date is not ultimately collected in the time frames reflected above and Buyer exercises its indemnification rights pursuant to Section 6.1 hereof in connection with said uncollected accounts receivable, Buyer shall immediately thereafter transfer, assign and convey to Seller all right, title and interest in and to such uncollected Accounts Receivable, and (e) do not represent obligations for goods sold on consignment, on approval or on a sale-or-return basis or subject to any other repurchase or return arrangement other than customers’ rights to inspect goods upon receipt and reject nonconforming goods.

          3.1.22 Other Negotiations; Brokers; Third-Party Expenses. Neither the Seller nor any of its officers, directors, managers, employees, agents, stockholders or Affiliates (nor any investment banker, financial advisor, attorney, accountant or other Person retained by or acting for or on behalf of the Seller or any such Person) (a) has entered into any contract or arrangement that conflicts with any of the transactions contemplated by this Agreement or (b) except as disclosed in Schedule 3.1.22 of the Seller Disclosure Schedules, has entered into any contract or arrangement with any Person regarding any transaction involving the Seller which is likely to result in Parent, the Buyer or any general partner, limited partner, manager, officer, director, employee, agent or Affiliate of any of them being subject to any claim for Liability to said Person as a result of entering into this Agreement or the Ancillary Agreements to which Seller is a party or consummating the transactions contemplated hereby or thereby. Except as set forth in Schedule 3.1.22 of the Seller Disclosure Schedules, no broker, investment banker, financial advisor or other Person is entitled to any broker’s, finder’s, financial advisor’s or similar fee or commission in connection with this Agreement and the transactions contemplated hereby based on arrangements made by or on behalf of the Seller.

          3.1.23 Solvency. Upon consummation of the transactions contemplated by this Agreement and the Ancillary Agreements, including without limitation receipt of the payments to be made to the Seller as contemplated in this Agreement, the Seller will not be insolvent.

          3.1.24 Warranty Obligations. True, correct and complete copies of all forms of written warranties, indemnification obligations, guarantees and written warranty policies of the Seller in respect of any of the Seller’s products and services relating directly or indirectly to the Business, which are currently in effect (the “Warranty Obligations”) and a list of the duration of

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each such Warranty Obligation have been made available to Parent prior to the execution of this Agreement. Except as set forth on Schedule 3.1.24 hereof, there are no Warranty Obligations currently subject to any dispute or, to the Knowledge of the Seller, threatened (whether orally or in writing) dispute. Except as disclosed in Schedule 3.1.24 of the Seller Disclosure Schedules, there have not been any material deviations from the Warranty Obligations, and no salesperson, employee or agent of the Seller other than corporate officers is authorized to undertake warranty obligations to any customer or other Person in excess of such Warranty Obligations.

          3.1.25 Foreign Corrupt Practices Act. Neither the Seller nor, to the Knowledge of the Seller, any agent, employee or other Person acting on behalf of the Seller has, directly or indirectly, used any corporate funds for unlawful contributions, gifts, entertainment or other unlawful expenses relating to political activity, made any unlawful payment to foreign or domestic government officials or employees or to foreign or domestic political parties or campaigns from corporate funds, violated any provision of the Foreign Corrupt Practices Act of 1977, as amended, or made any bribe, rebate, payoff, influence payment, kickback or other similar unlawful payment.

          3.1.26 Financial Projections. The Seller has made available to Parent certain financial projections with respect to the Business, which projections were prepared for internal use only. The Seller makes no representation or warranty regarding the accuracy of such projections or as to whether such projections will be achieved, except that the Seller represents and warrants that such projections were prepared in good faith and are based on assumptions believed by the Seller to be reasonable as of the date of this Agreement.

          3.1.27 Approvals.

                  (a) Schedule 3.1.27(a) of the Seller Disclosure Schedules contains a list of all Consents of Governmental Authorities relating to the novations to Buyer of the prime Government Contracts listed on Schedule 4.4(a) which are required to be given to or obtained by the Seller in connection with the consummation of the transactions contemplated by this Agreement and the Ancillary Agreements.

                  (b) Schedule 3.1.27(b) of the Seller Disclosure Schedules contains a list of all Consents from any and all Persons other than Governmental Authorities, including without limitation Consents from the prime contractors relating to Seller’s government subcontracts, which are required to be given to or obtained by the Seller in connection with the consummation of the transactions contemplated by this Agreement and the Ancillary Agreements.

                  (c) Except as set forth on Schedules 3.1.27(a) (which Consents of Governmental Authorities will be obtained after the Closing in accordance with Section 4.4(a) hereof) and 3.1.27(b) (copies of which Consents have been provided to Parent prior to the execution hereof), no Consents from Governmental Authorities or from Persons other than Governmental Authorities are necessary (i) in connection with the consummation of the transactions contemplated by this Agreement and the Ancillary Agreements, including without limitation the Subcontract and the assignment to Buyer of Seller’s current government

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subcontracts or (ii) for Buyer to conduct the Business in the manner it is currently being conducted.

          3.1.28 Disclosure. No representation or warranty made by the Seller contained in this Agreement, and no statement contained in the Seller Disclosure Schedules or in any certificate, list or other writing furnished to Parent pursuant to any provision of this Agreement (including the Business Financials and the notes thereto), contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements herein or therein, in the light of the circumstances under which they were made, not misleading.

     3.2 Representations and Warranties of Parent. Parent and Buyer hereby, jointly and severally, represent and warrant to the Seller as follows:

          3.2.1 Organization and Qualification. Parent is a corporation duly organized, validly existing and in good standing under the Laws of the Commonwealth of Virginia. The Buyer is a limited liability company validly existing and in good standing under the Laws of the Commonwealth of Virginia.

          3.2.2 Authorization, etc. Each of Parent and the Buyer has the necessary power and authority to execute and deliver this Agreement and the Ancillary Agreements to which it is a party, to perform fully its obligations hereunder and thereunder, and to consummate the transactions contemplated hereby and thereby. The execution and delivery by each of Parent and the Buyer of this Agreement and each of the Ancillary Agreements to which it is a party, and the consummation of the transactions contemplated hereby and thereby, have been duly authorized by all requisite corporate or limited liability company (as the case may be) action of Parent and the Buyer. Each of Parent and the Buyer has duly executed and delivered this Agreement and each of the Ancillary Agreements to which it is a party. This Agreement and the Ancillary Agreements to which Parent and/or the Buyer is or will become a party constitute or will constitute, as applicable, the legal, valid and binding obligation of Parent and/or the Buyer, as the case may be, enforceable against it in accordance with its respective terms.

          3.2.3 Legal Proceedings. There are no:

                  (a) Actions or Proceedings pending or, to the Knowledge of Parent, threatened (whether orally or in writing), against or adversely affecting Parent or the Buyer in connection with or relating to the transactions contemplated by this Agreement; or

                  (b) facts or circumstances that could reasonably be expected to give rise to any Action or Proceeding against or adversely affecting Parent or the Buyer in connection with or relating to the transactions contemplated by this Agreement.

          3.2.4 Other Negotiations; Brokers; Third-Party Expenses. Neither Parent, the Buyer nor any of their respective officers, directors, managers, employees, agents, stockholders, members or Affiliates (nor any investment banker, financial advisor, attorney, accountant or other Person retained by or acting for or on behalf of Parent, the Buyer or any such Person) (a) has entered into any contract or arrangement that conflicts with any of the transactions contemplated by this Agreement or (b) has entered into any contract or arrangement

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with any Person regarding any transaction involving Parent or the Buyer which is likely to result in the Seller or any general partner, limited partner, manager, officer, director, employee, agent or Affiliate of any of them being subject to any claim for Liability to said Person as a result of entering into this Agreement or the Ancillary Agreements to which they are a party or consummating the transactions contemplated hereby or thereby. No broker, investment banker, financial advisor or other Person is entitled to any broker’s, finder’s, financial advisor’s or similar fee or commission in connection with this Agreement and the transactions contemplated hereby based on arrangements made by or on behalf of Parent or the Buyer.

          3.2.5 Approvals.

                  (a) Except for the Consents relating to the novations to Buyer of the prime Government Contracts listed on Schedule 4.4(a), no Consents of Governmental Authorities are required to be given to or obtained by Parent or the Buyer in connection with the consummation of the transactions contemplated by this Agreement and the Ancillary Agreements.

                  (b) Except as set forth on Schedule 3.2.5 attached hereto, no Consents from any Persons other than Governmental Authorities are required to be given to or obtained by Parent or the Buyer in connection with the consummation of the transactions contemplated by this Agreement and the Ancillary Agreements.

          3.2.6 Novation Risk. Buyer was formed on May 19, 2005. For the purpose of affording Seller the opportunity to assess the risk (or lack thereof) of a novation failure attributable to Parent and Buyer, Parent and Buyer represent that during the five (5) years preceding Closing: (i) the Parent has fully complied with all terms and conditions of each of its government contracts and government bids to which it is a party, and has performed all obligations required to be performed by it thereunder; (ii) the Parent has complied with all statutory, regulatory and legal requirements, including, but not limited to, the Service Contract Act, the Contract Disputes Act, the Procurement Integrity Act, the Federal Procurement and Administrative Services Act, the FAR and related cost principles and the Cost Accounting Standards, where and as applicable to each of its government contracts and government bids; (iii) the representations, certifications and warranties made by the Parent with respect to its government contracts or government bids were accurate in all respects as of their effective date, and the Parent has fully complied with all such certifications; (iv) no termination for default, cure notice, show cause notice or other similar notice, either written or, to the Knowledge of the Parent, orally, has been issued and remains unresolved with respect to any of its government contracts or government bids, and no event, condition or omission has occurred or exists that would constitute grounds for such action; (v) no past performance evaluation received by the Parent with respect to any of its government contracts has set forth a default or other failure to perform thereunder or termination for default thereof; (vi) no negative determination of responsibility has been issued against the Parent with respect to any quotation, bid or proposal submitted to a Governmental Authority and (vii) neither the execution, delivery nor performance of this Agreement and the Ancillary Agreements does or will conflict with or result in a breach or default under any of its government contracts. For purposes of this section 3.2.6, the term “government contract” includes subcontracts where the U.S. Government is the ultimate

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customer. As of the Closing, Buyer and Parent and their applicable employees possess the requisite security clearance necessary to perform under each of the Government Contracts for which Seller is required to novate or otherwise transfer or assign to Buyer hereunder, including, without limitation, the Key Contract, pursuant to their respective terms existing as of the Closing Date.

ARTICLE IV

COVENANTS

     4.1 [intentionally omitted]

     4.2 Covenant Not to Compete; Non-Solicitation; Confidentiality.

          (a) For a period commencing upon the Closing and ending on the third anniversary of the Closing, neither Seller nor any Affiliate shall anywhere in the United States, directly or indirectly, without the prior written consent of Parent: (i) engage or participate, directly or indirectly, either as principal, agent, employee, employer, consultant, stockholder, director, officer, partner or in any other individual or representative capacity whatsoever, in the conduct or management of, or own any stock or other proprietary interest in, any business or enterprise that conducts business or operations which are the same as or substantially similar to the Business; provided, however, that the Seller may purchase or otherwise acquire up to (but not more than) three percent (3%), and Seller’s Affiliates may purchase or otherwise acquire up to (but not more than) five percent (5%), of any class of the securities of any Person (but may not otherwise participate in the activities of such Person) if such securities are listed on any national or regional securities exchange or have been registered under Section 12(g) of the Securities Exchange Act of 1934, as amended.

          (b) For a period commencing upon the Closing and ending on the third anniversary of the Closing, neither the Seller nor any Affiliate thereof, on the one hand, nor the Buyer, Parent nor any Affiliate thereof, on the other hand, shall solicit, hire or employ, or cause any other Person to solicit, hire or employ any employee or contractor then retained or employed by the other or retained or employed by the other within the one-year period immediately prior to such solicitation, hiring or employment; provided that the foregoing prohibition shall not (i) apply to any employment or consulting arrangement entered into with an individual who has responded to a general solicitation not specifically targeted at such individual or with an individual who has approached the applicable employer without having been initially solicited by the other or (ii) prohibit Buyer or Parent from hiring any Division Employee.

          (c) The Seller recognizes and acknowledges that it has had in the past, currently has, and in the future may possibly have, access to certain confidential information of the Business, such as lists of customers, operational policies, and pricing and cost policies that are valuable, special and unique assets of the Business. The Seller agrees that, from and after the date hereof, it will not use or disclose to any Person confidential information with respect to the

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Business for any purpose or reason whatsoever, unless (a) such information becomes known to the public generally through no fault of the Seller, (b) disclosure is required by applicable Law or the order of any Governmental Authority under color of law, or (c) the Seller reasonably believes that such disclosure is required in connection with the defense of a lawsuit against the Seller; and provided further, that prior to disclosing any information pursuant to clause (a), (b) or (c) above, the Seller shall, if possible, give prior written notice thereof to Parent and provide Parent with the opportunity to contest such disclosure.

          (d) Each of the covenants in this Section 4.2 is severable and separate, and the unenforceability of any specific covenant shall not affect the provisions of any other covenant. Moreover, in the event any court of competent jurisdiction shall determine that any specific covenant or the scope, time or territorial restrictions thereof are unreasonable, then it is the intention of the parties that such restrictions be enforced to the fullest extent which the court deems reasonable, and this Agreement shall thereby be reformed.

          (e) Because of the difficulty of measuring economic losses to Parent and the Buyer, on the one hand, and Seller, on the other hand, as a result of a breach of the covenants contained in this Section 4.2, and because of the immediate and irreparable damage that could be caused to such parties for which such parties would have no other adequate remedy (and for which monetary damages would not be sufficient), the parties agree that, in addition to any and all other remedies that may be available to the non-breaching party against the breaching party at law or in equity (which such remedies, notwithstanding Article VI, shall be available to the non-breaching party), the covenants contained in this Section 4.2 may be enforced by the non-breaching party against the breaching party, by application for injunctions and restraining orders or other equitable relief. The parties hereby agree that the covenants set forth in this Section 4.2 are a material and substantial part of the transactions contemplated by this Agreement.

     4.3 Employee Benefit Matters.

          (a) The Seller shall assume full responsibility and liability for offering and providing “continuation coverage” to any “qualified beneficiary” who is covered by a “group health plan” sponsored, maintained or contributed to by any Seller and who has experienced a “qualified event” or is receiving such “continuation coverage” on or prior to the Closing Date. Continuation coverage, qualified beneficiary, qualifying event and group health plan shall have the meanings given such terms under Section 4980B of the Code and Section 601 et seq. of ERISA. The Seller shall hold Parent and the Buyer and any entity required to be combined with Parent or the Buyer under Section 414 of the Code (“Affected Parties”) harmless from and fully indemnify (pursuant to Article VI hereof) such Affected Parties against any Losses (as defined in Section 6.1) incurred or suffered by such Affected Parties directly or indirectly, including reasonable attorneys’ fees and expenses, which arise or result from the Seller’s breach of this Section 4.3(a) or Parent or the Buyer being deemed to be a successor employer to the Seller.

          (b) The Seller shall be responsible for and shall cause to be discharged and satisfied in full on or prior to Closing all amounts owed to any Division Employee or other employee of the Seller, including wages, salaries, any employment, incentive, compensation or bonus agreements or other payments relating to the period of employment by the Seller, or on

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account of the termination thereof, and the Seller shall indemnify Parent and the Buyer and hold Parent and the Buyer harmless (pursuant to Article VI hereof) from any Losses thereunder; provided, however, that Buyer shall provide credit under the Parent’s respective plan to the Division Employees other than Jim Sherwood and Mike Saterbak (whose respective employment agreements shall control with respect to sick leave) for their respective number of hours of sick leave set forth on Schedule 4.3(b) attached hereto; provided, further, that the parties agree that Seller shall make payment of wages, salary or other compensation to the Transferred Employees through July 1, 2005 (such payment to be made in the ordinary course on July 8, 2005 with Buyer promptly reimbursing Seller for such wages, salary and compensation applicable to the date of July 1, 2005). Seller shall be responsible for and shall cause to be discharged as soon as practicable after Closing any obligation for contributions owed to any Plans of Seller or any ERISA Affiliate of Seller with respect to the Division Employees relating to the period of employment by the Seller, or on account of the termination thereof, and the Seller shall indemnify Parent and the Buyer and hold Parent and the Buyer harmless (pursuant to Article VI hereof) from any Losses thereunder. Neither Parent nor Buyer shall assume any liability of Seller under any of the Trust Funds, as defined in Section 3.1.13, relating to the period of employment by Seller and such liability shall remain the obligation of Seller, who shall indemnify Parent and the Buyer and hold Parent and the Buyer harmless (pursuant to Article VI hereof) from any losses thereunder.

     4.4 Consents.

          (a) Parent and the Seller acknowledge and agree that the requisite written Consents from the appropriate Governmental Authorities for the novation to Buyer of each of the prime Government Contracts listed on Schedule 4.4(a) shall be obtained after the Closing Date; provided, however, that with respect to Seller’s prime contract with the Army, Contract No. DAAB07-97-D3001, such contract shall not be novated but, rather, shall be subcontracted to Buyer. Effective upon the Closing, the Seller and the Buyer have entered into Subcontract Agreement with respect to such prime Government Contracts in the form attached hereto as Exhibit B (the “Subcontract”), pursuant to which, among other things, the practical benefits thereof shall be vested in the Buyer prior to novation thereof.

          (b) Notwithstanding that it shall be solely the Seller’s obligation to obtain from third parties all Consents, assignments and/or estoppel certificates, including, without limitation, the written Consents for the novation to Buyer of the prime Government Contracts listed on Schedule 4.4(a) and the Consents referred to in Section 6.8, (i) the Seller and Parent shall make good faith efforts, and cooperate with one another, to execute any required novation and secure all required Consents of Governmental Authorities, including the preparation and submission of all required filings, and all other Consents required in order to enable the Seller and the Buyer to effect the transactions contemplated hereby in accordance with the terms and conditions hereof (ii) Seller shall, from and after the Closing Date, use commercially reasonable efforts to obtain from the applicable federal government contracting officer or agency a written consent to the subcontracting of the Key Contract to Buyer contemplated in Section 4(a) hereof (notwithstanding the fact that such consent is not required to be obtained by Seller pursuant to the terms of the Key Contract); and (iii) Parent shall take such reasonable actions as it deems necessary, including without limitation making Jim Sherwood reasonably available to Seller in

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connection therewith, to support Seller’s obligation to obtain from third parties all Consents, assignments and/or estoppel certificates, including, without limitation, the written Consents for the novation to Buyer of the prime Government Contracts listed on Schedule 4.4(a) and the Consents referred to in Section 6.8.

     4.5 Employment of Certain Employees.

          (a) Parent shall make after Closing an offer of employment to each of the Division Employees listed on Schedule 4.5 (the “Transferred Employees”), including without limitation Myron (Mike) Saterbak and James Sherwood (the “Key Employees”). This Section 4.5 shall not prohibit Parent or the Buyer from modifying, increasing or decreasing wages and benefits provided to any Transferred Employee or to Transferred Employees in general after the Closing Date or from terminating any Transferred Employee after the Closing Date; provided, however, all Transferred Employees covered by the CBA shall be employed pursuant to the terms of the CBA. The Seller shall use reasonable efforts to assist Parent and/or the Buyer in hiring each Transferred Employee. The Seller shall not take any action, directly or indirectly, to prevent or discourage any such Transferred Employee from being employed by Parent or the Buyer, as the case may be, as of the Closing Date and shall not solicit, invite or induce or entice any such Transferred Employee to remain in the employ of the Seller or otherwise attempt to retain the services of any such Transferred Employee, except with the prior written consent of the Parent. Effective upon the Closing Date, the Seller hereby waives, for the benefit of Parent and the Buyer, any and all restrictions in any oral or written agreement with any Transferred Employee who Parent or the Buyer hires, relating to (i) non-competition with the Seller subsequent to termination of employment therewith or (ii) the maintenance of confidentiality of any information for the benefit of the Seller, but only to the extent such information is related to the Assets, the Business or Parent’s or the Buyer’s unrestricted enjoyment of the benefits thereof.

          (b) Seller shall take such actions as are necessary to cause the accounts or benefits of the Transferred Employees under any Plan maintained by Seller which is qualified under Code Section 401(a) to be 100% vested and, if the respective Transferred Employee requests, distributable within a reasonable period following the Closing Date and receipt of such request in accordance with the provisions of the Plan. If requested by Parent, Seller shall take such actions as are necessary to allow such Transferred Employees upon their request to rollover any loan notes included as part of such accounts or benefits, to the extent permitted under such a qualified Plan of Seller, to a qualified retirement plan of Parent. Further, Seller shall cause any outstanding stock options held by the Transferred Employees to acquire common stock of Seller to be 100% vested as of the Closing Date and to remain exercisable for a period of no less than ninety (90) days after the Closing Date (but no longer than the maximum term of the respective option).

     4.6 Waiver of Bulk Sales Compliance; Transfer and Sales Tax. Parent and Buyer waive compliance by Seller with applicable Laws of any jurisdiction relating to bulk transfers in connection with the transactions contemplated by this Agreement; provided, however, that the Seller shall indemnify and hold Parent and the Buyer harmless (pursuant to Article VI hereof) from and against any Losses (as defined in Section 6.1) incurred by Parent or the Buyer based on non-compliance with such bulk transfer provisions. Notwithstanding anything to the contrary set

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forth herein, nothing herein shall estop or prevent Parent, the Buyer or the Seller from asserting, as a bar or defense to any action or proceeding brought under such provisions, that such code or law is not applicable to the transactions contemplated by this Agreement. Buyer and Seller shall each pay one-half of any sales, use, transfer and similar Taxes, if any, required to be paid in connection with the transactions contemplated by this Agreement.

     4.7. Notification of Certain Matters. The Seller shall give prompt notice to Parent of any material failure of the Seller to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by the Seller hereunder. Parent shall give prompt notice to the Seller of any material failure of Parent or the Buyer to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by Parent or the Buyer hereunder. The delivery of any notice pursuant to this Section 4.7 shall not, without the express written consent of the receiving party, be deemed to limit or otherwise affect the remedies available hereunder to any party hereto.

     4.8 Corporate Existence. The Seller shall not dissolve or liquidate and shall maintain its corporate existence until the termination of the Seller’s indemnification obligations pursuant to Article VI.

     4.9 Actions After the Closing. In case at any time after the Closing any further action is necessary to carry out the purposes of this Agreement, each of the parties will take such further action (including the execution and delivery of such further instruments and documents and any actions required of the Seller under Section 5.2) as another party reasonably may request, all the sole cost and expense of the requesting party (unless the requesting party is entitled to indemnification therefor under Article VI). The Seller acknowledges and agrees that from and after the Closing Parent and the Buyer will be entitled to possession of all databases, documents, books, records (including Tax records), agreements, and financial data of any sort relating to the Business. The Seller shall promptly transfer and deliver to Parent any cash or property that the Seller may receive in respect of the Assets after the Closing. Parent shall promptly transfer and deliver to the Seller any cash or property that Parent or the Buyer may receive in respect of the Excluded Assets after the Closing.

     4.10 WARN Act. No party will take any action that will trigger liability or responsibility for any of the parties pursuant to the federal Worker Adjustment and Retraining Notification Act (“WARN Act”) or any analogous state or local version of the WARN Act.

     4.11 Allocation of Purchase Price. The Purchase Price for the Assets shall be allocated among the Assets in accordance with Schedule 4.11 attached hereto (the “Allocation Schedule”). The parties shall (a) prepare and, where applicable, file each report relating to the federal, state, local, foreign and other Tax consequences of the purchase and sale contemplated hereby (including the filing of IRS Form 8594) in a manner consistent with such Allocation Schedule and (ii) take no position in any Tax Return or other Tax filing, proceeding, audit or otherwise which is inconsistent with such Allocation Schedule.

     4.12 [intentionally omitted]

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     4.13 Public Disclosure. Parent and the Seller shall consult with each other and use reasonable efforts to agree upon the text of any press release or public statement before issuing any press release or otherwise making any public statements with respect to the transactions contemplated hereunder and shall not issue any such press release or make any such public statement prior to such consultation, except as may be required by applicable Laws or any listing agreement with, or the rules of, the American Stock Exchange.

     4.14 Transition Services Agreement. Simultaneously with the execution and delivery by all parties of the novation of the Key Contract (as defined in Section 6.7(a)) to Buyer, Seller and Buyer shall execute and deliver the Transition Services Agreement in the form attached hereto as Exhibit C (the “Services Agreement”), pursuant to Buyer will subcontract to Seller certain services included within such Key Contract, all as more particularly set forth therein.

     4.15 Updating Seller Disclosure Schedules.

          (a) From and after the Closing Date until the earlier of the date that the last of the Government Contracts to be novated pursuant to FAR Subpart 42.12 and listed on Schedule 4.4(a), including, without limitation, the Key Contract (the “Prime Contracts”), is novated pursuant to the terms of this Agreement (the “Novation Date”) and the thirty (30) month anniversary of the Closing Date (such period shall be referred to herein as the “Update Period”), Seller shall have the continuing obligation to supplement or amend promptly the Seller Disclosure Schedules delivered at Closing concurrently with the execution and delivery of this Agreement (the “Updated Schedules”) with respect to any matter solely relating to any of the Prime Contracts (the “Update Period Matters”) arising or discovered during the Update Period which, if existing or known to Seller on the Closing Date, would have been required to have been set forth or described in the Seller Disclosure Schedules delivered at Closing with respect to any of the representations and warranties contained in Section 3.1 that pertain to the Prime Contracts; provided, however, that any matters arising during the Update Period that are due to an act, omission or fault of Buyer or Parent during such Update Period shall not be deemed to be Update Period Matters. Seller shall be deemed to have breached (an “Update Representations Breach”) any representations and warranties contained in Section 3.1 for which the Update Period Matters would have been responsive (the “Update Representations”) if existing or known to Seller on the Closing Date. The Update Representations shall survive the Closing until the earlier of (i) the six month anniversary of the Novation Date and (ii) the thirty (30) month anniversary of the Closing Date; provided, however, that the survival period contemplated under this Section 4.15(a) with respect to the Update Representations shall in no way diminish or limit the survival period contemplated by Section 6.6 of this Agreement.

          (b) Buyer shall have indemnification rights contemplated by Section 6.1(a) (but subject to any and all limitations applicable to Section 6.1(a) except as the survival period applicable to the Update Representations may be extended by Section 4.15(a) of this Agreement) with respect to Losses incurred by Buyer as a result of any Update Representations Breach.

     4.16 Agreement with Seneca Creek Consulting, LLC. On or before the three month anniversary of the Closing Date, upon Buyer’s or Parent’s written request to Seller, Seller shall

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promptly assign to Buyer all rights under that certain Agreement (the “Seneca Agreement”) dated March 16, 2005 between Seller and Seneca Creek Consulting, LLC (“Seneca”) and Buyer shall assume all obligations under such Seneca Agreement, including without limitation, any fees payable to Seneca thereunder, in each case at no additional cost to Buyer (the “Assignment and Assumption”). Each of Seller and Buyer shall execute such instruments as may reasonably be required in order to accomplish such Assignment and Assumption. Neither Buyer nor Parent shall perform work with Volt Telecom in connection with the U.S. Army’s DSSMP Task Order Contract until such time as the Assignment and Assumption occurs pursuant to the terms hereof.

ARTICLE V

CLOSING OBLIGATIONS

     5.1 The Seller’s Obligations at Closing. At the Closing, the Seller (and such other parties as shall be necessary or appropriate) shall execute and/or deliver, or cause to be executed and/or delivered, to Parent:

          (a) the Bill of Sale/Assignment and Assumption Agreement in the form attached hereto as Exhibit D (the “Bill of Sale”) and such other assignments, instruments and documents as Parent shall reasonably request for the purpose of perfecting the title of the Buyer in the Assets;

          (b) copies of (i) all Consents of Governmental Authorities required to be obtained by the Seller in connection with the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby, and (ii) all other Consents (including, without limitation, all Consents required under the Contracts) required to be obtained in order to consummate the sale and transfer of the Assets pursuant to this Agreement and the consummation of the other transactions contemplated hereby (other than those Consents to be given or obtained after Closing pursuant to Section 4.4);

          (c) physical possession of the Assets;

          (d) copies of the resolutions of the Seller’s Board of Directors approving this Agreement and the transactions contemplated herein, certified by the appropriate corporate officers of the Seller;

          (e) The Subcontract;

          (f) The Employment Agreements with each of the Key Employees in the form attached hereto as Exhibit E-1 and Exhibit E-2 (the “Employment Agreements”);

          (g) the legal opinions of Ernest L. Ruffner, Esq. and Blank Rome, LLP, in each case dated the Closing Date, in the forms attached hereto as Exhibit F-1 and Exhibit F-2; and

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          (h) such other documents and instruments as Parent shall have reasonably requested.

     5.2. The Seller’s Further Assurances. From time to time after Closing, at Parent’s request and expense, the Seller shall:

          (a) execute and deliver to Parent such instruments, and take such other and further action, as may reasonably be required to carry out the intent and purpose of this Agreement; and

          (b) deliver to Parent and/or the Buyer such other data, papers and information as may be reasonably requested by Parent to assist Parent and/or the Buyer in the use of the Assets.

          If and to the extent that any asset, property or right of any Seller does not constitute an “Asset” as defined herein but is necessary to enable the Buyer to continue the Business as it is being conducted by the Seller prior to the Closing Date, the Seller, to the extent legally permissible, shall grant to the Buyer a license or other appropriate right of usage with respect to such asset, property or right, at no additional cost or expense to the Buyer, as shall be necessary to enable the Buyer to continue such business in the same manner as conducted by the Seller prior to the Closing Date. Nothing in this Section 5.2 shall relieve the Seller from any liability under this Agreement for any breach of a representation or warranty hereunder.

     5.3. Parent’s Obligations at Closing. At Closing, Parent shall:

          (a) pay the Cash Payment to the Seller in accordance with Section 2.2; and

          (b) deliver the Escrow Amount to the Escrow Agent in accordance with Section 2.3; and

          (c) copies of the resolutions of Parent’s Board of Directors and Buyer’s Sole Member and Sole Manager approving this Agreement and the transactions contemplated herein, certified by an appropriate officer of Parent and the Sole Member and Sole Manager of Buyer.

ARTICLE VI

INDEMNIFICATION

     6.1 By the Seller. The Seller covenants and agrees to defend, indemnify and hold harmless Parent and the Buyer and their respective directors, officers, employees, assigns, successors and Affiliates from and against, and pay or reimburse such Persons for, any and all claims, liabilities, obligations, losses, fines, costs (including increased costs), royalties, proceedings, deficiencies or damages, including out-of-pocket expenses and reasonable attorneys’ and accountants’ fees incurred in the investigation or defense of any of the same or in asserting any of its rights hereunder (collectively, “Losses”), resulting from or arising out of:

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          (a) any inaccuracy of any representation or warranty made by the Seller under this Agreement;

          (b) any failure of the Seller to perform any covenant or agreement contained in this Agreement;

          (c) the indemnification obligations of the Seller under Sections 4.3 or 4.6 hereof;

          (d) any Excluded Assets or Excluded Liabilities;

          (e) the operation of the Business and the Assets on or prior to the Closing Date (or, with respect to Seller’s performance of a prime Government Contract listed on Schedule 4.4(a), provided that Buyer has complied with its obligations under the Subcontract and under applicable Laws, on or prior to the date such prime Government Contract is novated to Buyer pursuant to such Section 4.4(a)), except with respect to the Assumed Liabilities;

          (f) the failure by Seller to assign to Buyer the CBA and vest fully in Buyer the economic benefit currently enjoyed by Seller thereunder (including the imposition on Buyer of obligations no more burdensome than those applicable to Seller thereunder), or the termination of DOS Classified Document Management Contract No. LMAQM-02-C-0049 (whether in the name of Seller or Parent or Buyer or an Affiliate of Parent or Buyer) resulting from or arising out of any such failure by Seller; and

          (g) the failure by Seller to assign to Buyer the Seller’s lease relating to the Leased Real Property described at Schedule 3.1.15(a) (including the consent of the landlord thereunder to such assignment) and vest fully in Buyer the economic benefit currently enjoyed by Seller thereunder (including the imposition on Buyer of obligations no more burdensome than those applicable to Seller thereunder).

     6.2 By Parent. Parent covenants and agrees to defend, indemnify and hold harmless the Seller and its directors, officers, employees, assigns, successors and Affiliates from and against, and pay or reimburse such Persons for, any and all Losses resulting from or arising out of:

          (a) any inaccuracy of any representation or warranty made by Parent or Buyer under this Agreement;

          (b) any failure of Parent or the Buyer to perform any covenant or agreement contained in this Agreement;

          (c) any Assumed Liabilities; or

          (d) the operation of the Business and the Assets after the Closing Date (or, with respect to Seller’s performance of a prime Government Contract listed on Schedule 4.4(a), provided that Buyer has complied with its obligations under the Subcontract and under

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applicable Laws, after the date such prime Government Contract is novated to Buyer pursuant to such Section 4.4(a)).

     6.3 Additional Provisions.

          (a) The maximum aggregate amount of indemnifiable Losses arising out of or resulting from the causes enumerated in Sections 6.1(a) or 6.2(a) that may be recovered from the Seller or Parent as the case may be shall not exceed Three Million One Hundred Thirty-Two Thousand and Two Hundred Fifty Dollars ($3,132,250) (the “Maximum Indemnity”); provided, however, that the limitations set forth in this Section 6.3(a) shall not apply to indemnification claims arising from any inaccuracy in or breach (or any claim by any third party alleging or constituting an inaccuracy or breach) of any representation or warranty contained in Sections 3.1.2, 3.1.7, 3.1.10 or 3.2.2.

          (b) No obligation of the Seller or Parent, as the case may be (each, an “Indemnifying Party”), with respect to any indemnifiable Loss otherwise payable by such Indemnifying Party under Section 6.1(a) or 6.2(a), as the case may be, shall be payable until such time as all indemnifiable Losses payable by such Indemnifying Party shall exceed $125,000, at which time such Indemnifying Party shall be liable in full for all Losses it is required to indemnify in excess of $62,500, subject to Section 6.3(a); provided, however, that the limitations set forth in this Section 6.3(b) shall not apply to indemnification claims arising from any inaccuracy in or breach (or any claim by any third party alleging or constituting an inaccuracy or breach) of any representation or warranty contained in Sections 3.1.2, 3.1.7, 3.1.21 or 3.2.2.

          (c) To the extent that any Indemnifying Party discharges any claim for indemnification hereunder, such Indemnifying Party shall be subrogated to all rights of the Indemnified Party (as defined in Section 6.4) against third parties.

          (d) Notwithstanding anything contained in this Agreement to the contrary, no Indemnified Party hereunder shall be entitled to Losses in the nature of incidental or consequential damages. Further, the provisions of this Article VI and Article VII shall be the sole and exclusive recourse of the Indemnified Parties for any Losses either Seller, on the one hand, or Buyer and Parent, on the other hand, may incur arising from or relating to this Agreement except (i) with respect to any equitable remedy to which any such party may be entitled (including without limitation as provided in Section 4.2) and (ii) with respect to claims based on fraud or intentional misrepresentation.

          (e) Each Indemnified Party (as defined in Section 6.4) shall use commercially reasonable efforts to pursue all available insurance recoveries in connection with any indemnification claim hereunder.

     6.4 Indemnification Procedures. In the case of any claim asserted by a third party against a party entitled to indemnification under this Agreement (the “Indemnified Party”), notice shall be given by the Indemnified Party to the Indemnifying Party promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and

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the Indemnified Party shall permit the Indemnifying Party (at the expense of the Indemnifying Party) to assume the defense of any claim or any litigation resulting therefrom; provided that (a) the counsel for the Indemnifying Party who shall conduct the defense of such claim or litigation shall be reasonably satisfactory to the Indemnified Party, (b) the Indemnified Party may participate (but not control) in such defense at such Indemnified Party’s expense, and (c) the omission by any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its indemnification obligation under this Agreement except to the extent that such omission results in a failure of actual notice to such Indemnifying Party and such Indemnifying Party incurs Losses as a result of such failure to give notice. Except with the prior written consent of the Indemnified Party, no Indemnifying Party, in the defense of any such claim or litigation, shall consent to entry of any judgment or enter into any settlement that provides for injunctive or other nonmonetary relief affecting the Indemnified Party. The Indemnified Party shall not settle or compromise any claim by a third party for which the Indemnified Party is entitled to indemnification hereunder without the prior written consent of the Indemnifying Party; provided, that in the event that an Indemnifying Party does not accept the defense of any matter as above provided, the Indemnified Party shall have the full right to defend against any such claim or demand and shall be entitled to settle or agree to pay in full such claim or demand. In any event, the Indemnifying Party and the Indemnified Party shall cooperate in the defense of any claim or litigation subject to this Article VI and the records of each shall be available to the other with respect to such defense. Any Indemnifying Party’s assumption of the defense of any claim or legal proceeding shall not prejudice the right of such Indemnifying Party thereafter to contest its obligation to indemnify the Indemnified Party in respect to the claims asserted therein.

     6.5 Indemnification Escrow Fund. Subject to the terms and conditions of the Escrow Agreement, the Indemnification Escrow Fund shall be available to any party entitled to indemnification pursuant to Section 6.1 (a “Parent Indemnified Party”) to satisfy any indemnification obligations of the Seller under this Agreement. The rights of any Parent Indemnified Party with respect to the Indemnification Escrow Fund under this Agreement and the Escrow Agreement shall be in addition to and not in limitation of any other rights and remedies to which such Parent Indemnified Party is or may be entitled under this Agreement or any of the Ancillary Agreements, or at law or in equity, including injunctive relief.

     6.6 Survival of Representations and Warranties, etc. Notwithstanding any right of Parent or the Seller (whether or not exercised) to investigate the affairs of the Seller or Parent, as the case may be, each party shall have the right to rely fully upon the representations, warranties, covenants and agreements of the other party contained in this Agreement or in any instrument delivered pursuant to this Agreement. Except for the representations and warranties set forth in Sections 3.1.2, 3.1.7, 3.1.10, 3.1.14 and 3.2.2, which shall survive the Closing and continue until the applicable statute of limitations has expired, and except as survival periods applicable to Update Representations may be extended (but not limited) pursuant to Section 4.15(a) of this Agreement, all of the representations and warranties contained in this Agreement or in any instrument delivered pursuant to this Agreement shall survive the Closing and continue until the eighteen (18) month anniversary of the Closing Date. No Action or Proceeding may be instituted to enforce, or seek damages or other remedies with respect to the breach of any representation or warranty after the expiration of the period of survival for such representation or warranty as

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described above; provided, however, that any representation or warranty the inaccuracy of which is made the basis of a claim for indemnification pursuant to Section 6.1(a) or Section 6.2(a) will survive until such claim is finally resolved if the Indemnified Party notifies the Indemnifying Party of such claim in reasonable detail prior to the date on which such representation or warranty and the respective indemnification obligation would otherwise expire under this Agreement. Subject to Article VII, the covenants and agreements set forth in this Agreement shall survive the Closing; provided, however, that in connection with a breach of said covenants and agreements, the non-breaching party shall only be permitted to make a claim against the breaching party prior to the expiration of applicable statutes of limitation.

     6.7 Novation Failure Payment.

          (a) Upon the first to occur of (i) an affirmative rejection by the appropriate contracting officer of a novation to the Buyer of that certain TAO Delivery Order issued under the Seller’s IT Schedule 70 FSS Contract and its BPA (No. W904TE-04-A-2648) with the United States Army (collectively, the “Key Contract”), or (ii) a failure of the Key Contract to be novated to Buyer on or prior to the second anniversary of the Closing (either, a “Novation Failure”), in each case not the result of any act, omission or fault of Buyer or Parent occurring after Closing, then not later than five (5) Business Days after the occurrence of such Novation Failure the Seller shall pay to Parent by wire transfer of immediately available funds Two Million Dollars ($2,000,000) (the “Novation Failure Amount”); provided, that such payment shall first be satisfied by disbursement to Parent from the Escrow Fund and in accordance with the Escrow Agreement. In view of the difficulty of estimating the damages to Parent and the Buyer upon a Novation Failure, the Novation Failure Amount is agreed upon by the parties as the liquidated damages that Parent and the Buyer will suffer as a result of the Novation Failure and not by way of penalty. The Novation Failure Amount shall be the sole recourse of Parent and the Buyer for a Novation Failure; provided, that in no event shall payment of the Novation Failure Amount pursuant to this Section 6.7 limit or restrict Parent’s and the Buyer’s available remedies under this Agreement or any of the Ancillary Agreements, or at law or in equity, for any claim not resulting from or arising out of a Novation Failure. In addition, in no event shall payment of the Novation Failure Amount be applied to or counted against the Maximum Indemnity; provided, further that the foregoing proviso shall not diminish in any way the agreement among the parties that the sole recovery by Buyer and Parent for a Novation Failure shall be the Novation Failure Amount.

          (b) The rights of Parent with respect to the Escrow Amount under this Agreement and the Escrow Agreement shall be in addition to and not in limitation of any other rights and remedies to which Parent is or may be entitled under this Agreement, or at law or in equity, including injunctive relief, to enforce payment of the full Novation Failure Amount.

     6.8 Assignment Failure Payment.

          (a) If, for whatever reason other than any act, omission or fault of Buyer or Parent occurring after Closing, Seller shall have failed to obtain and deliver to Parent or Buyer, on or prior to the second anniversary of the Closing, Consents (or novations, as the case may be) from all of the Government Entities and/or Persons other than Governmental Entities listed on

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Schedule 6.8 to Buyer itself (in its name as such or as “a wholly-owned subsidiary” of Parent or pursuant to similar language) as an approved subcontractor on the corresponding Subcontract or Seller subcontract listed on Schedule 6.8 (such failure to obtain all such Consents, an “Assignment Failure”), then not later than five (5) Business Days after the occurrence of such Assignment Failure the Seller shall be obligated to pay to Parent that aggregate percentage (up to 100%) of One Million Dollars ($1,000,000) that corresponds to those Consents listed on Schedule 6.8 that have not been obtained and delivered to Parent or Buyer on or prior to the second anniversary of the Closing (such amount, the “Assignment Failure Amount”); provided, that such payment shall be satisfied by disbursement to Parent from the Assignment Failure Escrow Fund and in accordance with the Escrow Agreement; and provided, further, that Parent and Buyer may, in their sole and absolute discretion, elect to accept a Consent listed on Schedule 6.8 that does not expressly recognize Buyer itself (in its name as such or as “a wholly-owned subsidiary” of Parent or pursuant to similar language) as an approved subcontractor on the corresponding Subcontract or Seller subcontract listed on Schedule 6.8, and in connection therewith forego the right to receive that portion of the Assignment Failure Escrow Fund that corresponds to such Consent. Additionally, notwithstanding the foregoing timing provisions, upon receipt by any party of an affirmative rejection of Buyer itself (in its name as such or as “a wholly-owned subsidiary” of Parent or pursuant to similar language) as an approved subcontractor on the corresponding Subcontract or Seller subcontract listed on Schedule 6.8 (and with respect to DOS Classified Document Management Contract No. LMAQM-02-C-0049, affirmative rejection of novation as well), Parent shall be entitled to receive, not later than five (5) Business Days after such receipt, that aggregate percentage (up to 100%) of One Million Dollars ($1,000,000) that corresponds to such Subcontract or Seller subcontract listed on Schedule 6.8 related to such rejection; provided, that such payment shall be satisfied by disbursement to Parent from the Assignment Failure Escrow Fund and in accordance with the Escrow Agreement. (Any such affirmative rejection as described in the foregoing sentence shall also be considered an “Assignment Failure” and any such amount to which Parent shall be entitled as described in the foregoing sentence shall also be considered an “Assignment Failure Amount.”) In view of the difficulty of estimating the damages to Parent and the Buyer upon an Assignment Failure, the Assignment Failure Amount is agreed upon by the parties as the liquidated damages that Parent and the Buyer will suffer as a result of the Assignment Failure and not by way of penalty. The Assignment Failure Amount shall be the sole recourse of Parent and the Buyer for an Assignment Failure; provided, that in no event shall payment of the Assignment Failure Amount pursuant to this Section 6.8 limit or restrict Parent’s and the Buyer’s available remedies under this Agreement or any of the Ancillary Agreements, or at law or in equity, for any claim not resulting from or arising out of an Assignment Failure. In addition, in no event shall payment of the Assignment Failure Amount be applied to or counted against the Maximum Indemnity; provided, further that the foregoing proviso shall not diminish in any way the agreement among the parties that the sole recovery by Buyer and Parent for an Assignment Failure shall be the Assignment Failure Amount.

          (b) The rights of Parent with respect to the Escrow Amount under this Agreement and the Escrow Agreement shall be in addition to and not in limitation of any other rights and remedies to which Parent is or may be entitled under this Agreement, or at law or in equity, including injunctive relief, to enforce payment of the full Assignment Failure Amount.

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ARTICLE VII

RESCISSION

     7.1 Rescission.

          (a) Parent and Buyer shall have the right to fully rescind this Agreement and the transactions contemplated hereby (in lieu of receiving payment of the Novation Failure Amount) in the event that on or prior to the six month anniversary of the Closing Date (i) Seller or Buyer receives written notice from the applicable government customer of an affirmative rejection of the novation of the Key Contract (not the result of actions, omissions or the fault of Buyer or Parent occurring after Closing) and (ii) the applicable government customer takes affirmative action such that Seller is unable to provide Buyer with the economic benefit of the Key Contract by subcontract or otherwise (such date of rescission contemplated by this sentence shall be referred to herein as the “Rescission Date”). For the avoidance of doubt, after the six month anniversary of Closing, the sole and exclusive remedy of Buyer for a failure to novate the Key Contract (whether or not involving an affirmative rejection of the same but not the result of any act, omission or fault of Buyer or Parent occurring after Closing) is the payment of the Novation Failure Amount pursuant to the provisions contained in Section 6.7 hereof. The rescission right contemplated by this Section 7.1(a) may be exercised by Parent and Buyer by delivering written notice to the Seller on or within ten (10) Business Days after the Rescission Date. The rescission under this Section 7.1(a) shall include, without limitation, all assignments, licenses, assumptions of liabilities and repayment to Parent of the entire Purchase Price paid to the Seller and/or the disbursement to Parent of any Escrow Amount held by the Escrow Agent. Each party to this Agreement will execute such instruments as necessary to effect the provisions of this Section 7.1(a).

          (b) Parent and Buyer shall also have the right, in addition to the right described in subsection (a) above, to fully rescind this Agreement and the transactions contemplated hereby in the event that, on or prior to the date for commencement of performance for option year 4 of Seller’s Contract No. S03HAL01 (as listed on Schedule 3.1.19(a)(i)) (the “NJVC Subcontract”), all of the following shall have transpired: (i) Seller shall have failed to obtain and deliver to Parent or Buyer (not the result of actions, omissions or the fault of Buyer or Parent occurring after Closing) a Consent from the National Geospatial-Intelligence Agency (formerly the National Imagery and Mapping Agency) to Buyer as the approved subcontractor under the NJVC Subcontract, (ii) Seller shall have failed to obtain and deliver to Parent or Buyer an affirmative written acknowledgement from the National Geospatial-Intelligence Agency that no Consent from the National Geospatial-Intelligence Agency to Buyer (or to any other Person) as subcontractor is necessary in connection with the prime government contract underlying the NJVC Subcontract and (iii) Buyer shall not have received funding recognizing Buyer itself (in its name as such or as “a wholly-owned subsidiary” of Parent or pursuant to similar language) as the subcontractor in connection with any task order or special project, including option year 4, in each case on the NJVC Subcontract; provided, however, that with respect to the foregoing clause (iii), a task order or special project prior to option year 4 shall be part of additional such task orders or special projects also in the name of Buyer itself (in its name as such or as “a wholly-owned subsidiary” of Parent or pursuant to similar language) as the subcontractor such that it is

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reasonably apparent that no Person other than Buyer itself (in its name as such or as “a wholly-owned subsidiary” of Parent or pursuant to similar language) has also been recognized as a subcontractor on the NJVC Subcontract or in connection with the prime government contract underlying the NJVC Subcontract. The rescission right contemplated by this Section 7.1(b) may be exercised by Parent and Buyer by delivering written notice to the Seller on or within ten (10) Business Days after the Rescission Date. The rescission under this Section 7.1(b) shall include, without limitation, all assignments, licenses, assumptions of liabilities and repayment to Parent of the entire Purchase Price paid to the Seller and/or the disbursement to Parent of any Escrow Amount held by the Escrow Agent. Each party to this Agreement will execute such instruments as necessary to effect the provisions of this Section 7.1(b).

     7.2 Effect of Rescission. In the event of the rescission of this Agreement pursuant to Section 7.1(a) or (b), this Agreement shall forthwith become void, and there shall be no liability or obligation on the part of any party hereto or its officers, directors or stockholders. Notwithstanding the foregoing sentence, (a) the provisions of Article VI (but only with respect to claims unrelated to a Novation Failure), Section 7.1, this Section 7.2, Section 8.1, Section 8.2 and Section 8.6.4 shall remain in full force and effect and survive any termination of this Agreement; and (b) each party shall remain liable for any breach of this Agreement prior to its termination.

ARTICLE VIII

DEFINITIONS, MISCELLANEOUS

     8.1 Definition of Certain Terms. The terms defined in this Section 8.1, whenever used in this Agreement (including in the Schedules), shall have the respective meanings indicated below for all purposes of this Agreement. All references herein to a Section, Article or Schedule are to a Section, Article or Schedule of or to this Agreement, unless otherwise indicated.

          Actions or Proceedings: means any action, suit, complaint, petition, investigation, proceeding, arbitration, litigation or Governmental Authority investigation, audit or other proceeding, whether civil or criminal, in law or in equity, or before any arbitrator or Governmental Authority.

          Affected Parties: as defined in Section 4.3(a).

          Affiliate: of a Person means a Person that directly or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, the first Person. “Control” (including the terms “controlled by” and “under common control with”) means the possession, directly or indirectly, of the power to direct or cause the direction of the management policies of a Person.

          Agreement: this Asset Purchase Agreement, including the Exhibits and Schedules hereto.

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          Ancillary Agreements: means the Escrow Agreement, the Subcontract, the Bill of Sale, the Services Agreement and the Employment Agreements.

          Auditor: as defined in Section 2.4(c).

          Assets: as defined in Section 1.1.

          Assignment and Assumption: as defined in Section 4.16.

          Assignment Failure: as defined in Section 6.8.

          Assignment Failure Amount: as defined in Section 6.8.

          Assignment Failure Escrow Amount: as defined in Section 2.3.

          Assignment Failure Escrow Fund: as defined in Section 2.3.

          Assumed Liabilities: as defined in Section 1.3.

          Bill of Sale: as defined in Section 5.1(a).

          Business: as defined in the preambles.

          Business Day: shall mean a day other than a Saturday, Sunday or other day on which commercial banks in Washington, D.C. are authorized or required to close.

          Business Financials: as defined in Section 3.1.6.

          Buyer: as defined in the first paragraph of this Agreement.

          Cash Payment: as defined in Section 2.2.

          Closing: as defined in Section 2.1.

          Closing Date: as defined in Section 2.1.

          Closing Date Balance Sheet: as defined in Section 2.4(a).

          Closing Date Net Assets: as defined in Section 2.4(a).

          Code: the Internal Revenue Code of 1986, as amended, and the rules and regulations promulgated thereunder.

          Consent: any consent, approval, authorization, waiver, permit, concession, agreement, registration, or certificate of, or filing with or report or notice to, any authorized representative of a Person, including but not limited to any Governmental Authority.

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          Contract: any note, bond, mortgage, contract, prime contract, subcontract, license, lease, sublease, covenant, commitment, power of attorney, proxy, indenture, engagement letter or agreement, contract extension, rebid, existing proposal, bid, purchase order and other commitments or other agreement or arrangement, oral or written, directly or indirectly relating to the Business, to which the Seller is a party or by which the Seller or any of the Assets is bound, including any Government Contract.

          Direct Costs: as defined in FAR Section 2.101.

          Equipment: (i) all furniture, fixtures, vehicles, furnishings, molds, toolings, parts, tools, dials, jigs, patterns, office equipment, machine tools and other items of equipment owned or leased by the Seller that are used presently or are used on the Closing Date by the Seller solely in the conduct of the Business, including without limitation those items listed on Schedule 1.1(c); (ii) all computers, computer support equipment and software, telephone and communication systems and security systems owned or leased by the Seller that are presently used or used on the Closing Date by the Seller solely in the conduct of the Business, including without limitation those items listed on Schedule 1.1(c); (iii) all other furniture, supplies, maintenance equipment and other incidental tangible personal property owned or leased by the Seller that are presently used or are used on the Closing Date by the Seller solely in the conduct of the Business; and (iv) all other items of tangible personal property owned or leased by the Seller that are presently used or used on the Closing Date by the Seller solely in the conduct of the Business.

          ERISA: the Employee Retirement Income Security Act of 1974, as amended.

          ERISA Affiliate: each trade or business (whether or not incorporated) which, together with the Seller, would be treated as a “single employer” within the meaning of Code sections 414(b), (c), (m), (n) or (o).

          Escrow Agreement: as defined in Section 2.3.

          Escrow Agent: Branch Banking and Trust Company.

          Escrow Amount: as defined in Section 2.2.

          Estimated Closing Date Net Assets: as defined in Section 2.4(a).

          Excluded Assets: as defined in Section 1.2.

          Excluded Liabilities: as defined in Section 1.4.

          GAAP: generally applied accounting principles in the United States of America.

          Government: the government of the United States of America, its agencies and instrumentalities; the government of any state of the United States of America, its agencies and instrumentalities; and any local government located within the United States of America, its agencies and instrumentalities.

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          Government Bid: any proposal or offer, solicited or unsolicited made by the Business of Seller prior to the Closing Date which, if accepted, would result in a Government Contract. A Government Bid: (i) includes any proposal or offer made by the Business of Seller that has been accepted by the Business of Seller but has not resulted in a Government Contract prior to the Closing Date; and (ii) does not include any proposal or offer made by the Business of Seller that has been accepted and has resulted in a Government Contract prior to the Closing Date.

          Government Contract: any Contract of the Business that is currently active in performance or that has otherwise not been closed out and released with no further liability to the Business of Seller, or that had been active in performance at any time in the five (5) year period prior to the Closing Date, between the Business of Seller, on the one hand, and (i) any Governmental Authority, (ii) any prime contractor of a Governmental Authority in its capacity as a prime contractor, or (iii) any subcontractor at any tier with respect to any contract of a type described in clauses (i) or (ii) above, on the other hand. A task, purchase or delivery order under a Government Contract shall not constitute a separate Government Contract, for purposes of this definition, but shall be part of the Government Contract to which it relates.

          Governmental Authority: any nation or government or any state, any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, including, without limitation, any government authority, agency, department, board, commission or instrumentality of the United States or any State of the United States.

          Income Tax: means (a) any income, alternative or add-on minimum tax, gross income, gross receipts, franchise, profits, including estimated taxes relating to any of the foregoing, or other similar tax or other like assessment or charge of similar kind whatsoever, excluding any Other Tax, together with any interest and any penalty, addition to tax or additional amount imposed by any Governmental Authority responsible for the imposition of any such Tax (domestic or foreign); or (b) any Liability of a Person for the payment of any taxes, interest, penalty, addition to tax or like additional amount resulting from the application of Treas. Reg. Section 1.1502-6 or comparable provisions of any Governmental Authority in respect of a Tax Return of a relevant group or any Contract.

          Indemnified Party: as defined in Section 6.4.

          Indemnification Escrow Amount: as defined in Section 2.3.

          Indemnification Escrow Fund: as defined in Section 2.3.

          Indirect Costs: as defined in FAR Section 2.101.

          Intellectual Property: means all trademarks and trademark rights, trade names and trade name rights, service marks and service mark rights, service names and service name rights, patents and patent rights, utility models and utility model rights, copyrights, mask work rights, brand names, trade dress, product designs, product packaging, business and product names, logos, slogans, rights of publicity, trade secrets, inventions (whether patentable or not), invention

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disclosures, improvements, processes, formulae, industrial models, processes, designs, specifications, technology, methodologies, computer software (including all source code and object code), firmware, development tools, flow charts, annotations, Web addresses, sites and domain names, data bases and data collections and all rights therein, other proprietary rights and information (whether or not subject to statutory registration), and all related technical information, manufacturing, engineering and technical drawings, know-how and all pending applications for and registrations of patents, utility models, trademarks, service marks and copyrights, and the right to sue for past infringement, if any, in connection with any of the foregoing, and all documents, disks, records, files and other media on which any of the foregoing is stored.

          IRS: the United States Internal Revenue Service or any successor entity.

          Key Employees: as defined in Section 4.5.

          Law: all provisions of all (i) constitutions, statutes, laws (including the common law), rules, regulations, ordinances, codes or orders of any Governmental Authority, and (ii) orders, decisions, injunctions, judgments, and decrees of any Governmental Authority.

          Leased Real Property: as defined in Section 3.1.15.

          Lease Documents: as defined in Section 3.1.15

          Liability or Liabilities: means all indebtedness, obligations and other liabilities of a Person, whether absolute, accrued, contingent (or based upon any contingency), known or unknown, fixed or otherwise, or whether due or to become due.

          Lien: any mortgage, pledge, floating charge, hypothecation, right of others, claim, security interest, encumbrance, easement, covenant, encroachment, burden, title defect, lien or right of first refusal.

          Losses: as defined in Section 6.1.

          Material Adverse Effect: any event, occurrence, fact, condition, change or effect that is materially adverse to the business, operations, results of operations, financial condition, properties, assets or liabilities of the Business when taken as a whole; provided, however, that the following, in and of themselves, are not and shall not contribute to or result in a Material Adverse Effect: (A) any changes in general economic conditions in the United States or changes generally affecting the industry in which Seller operates the Business (which changes do not disproportionately affect the Business in any material respect), (B) any outbreak of hostilities or escalation thereof involving the United States or the declaration by the United States of war or any act of terrorism (which events do not disproportionately affect the Business in any material respect), (C) any effect resulting from any change in GAAP or other accounting requirements or principles or any change in applicable rules or regulations or the interpretation thereof, or (D) the announcement or pendency of any of the transactions contemplated hereby.

          Novation Failure: as defined in Section 6.7.

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          Novation Failure Amount: as defined in Section 6.7.

          Order: means any writ, judgment, decree, injunction or similar order of any Governmental Authority (in each such case whether preliminary or final).

          Other Tax: means any sales, use, ad valorem, business license, withholding, payroll, employment, excise, stamp, transfer, recording, occupation, premium, property, value added, custom duty, severance, windfall profit or license tax, governmental fee or other similar assessment or charge, together with any interest and any penalty, addition to tax or additional amount imposed by any Governmental Authority responsible for the imposition of any such tax (domestic or foreign).

          Parent: as defined in the first paragraph of this Agreement.

          Permitted Liens: Liens for Taxes not yet due and payable or which are being contested in good faith and by appropriate proceedings if adequate reserves with respect thereto are maintained on the Seller’s books in accordance with GAAP as consistently applied by the Seller.

          Person: any natural person, firm, partnership, association, corporation, company, trust, business trust, Governmental Authority or other entity.

          Plans: as defined in Section 3.1.14(a).

          PTO: the United States Patent and Trademark Office or any successor entity.

          Purchase Price: as defined in Section 2.2.

          Purchased Intellectual Property: means any Intellectual Property that (a) is owned by or licensed to the Seller; and (b) is used by the Seller in or necessary for the conduct of the Business.

          Registered Intellectual Property: means all United States, international and foreign: (a) patents and patent applications (including provisional applications); (b) registered trademarks and service marks, applications to register trademarks and servicemarks, intent-to-use applications, or other registrations or applications to trademarks or servicemarks; (c) registered copyrights and applications for copyright registration; (d) any mask work registrations and applications to register mask works; and (e) any other Intellectual Property that is the subject of an application, certificate, filing, registration or other document issued by, filed with, or recorded by, any state, government or other public legal authority.

          Registered Purchased Intellectual Property: means all Registered Intellectual Property that (a) is owned by or licensed to the Seller; and (b) is used by the Seller in or necessary for the conduct of the Business.

          Seller: as defined in the first paragraph of this Agreement.

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          Seller Disclosure Schedules: as defined in Section 3.1.

          Subsidiary: each corporation or other Person in which a Person owns or controls, directly or indirectly, capital stock or other equity interests representing at least 50% of the outstanding voting stock or other equity interests.

          Tax or Taxes: means Income Taxes and/or Other Taxes, as the context requires.

          Tax Laws: means the Code, federal, state, county, local or foreign laws relating to Taxes and any regulations or official administrative pronouncements released thereunder.

          Tax Returns: means any return, report, information return, schedule, certificate, statement or other document (including any (i) amendments thereof and (ii) related or supporting information) filed or required to be filed with, or, where none is required to be filed with a Governmental Authority, the statement or other document issued by, a Governmental Authority in connection with any Tax.

          Transaction Expenses: as defined in Section 8.2.

          Transferred Employees: as defined in Section 4.5.

          Treasury Regulations: means the federal Income Tax regulations promulgated under the Code, as amended from time to time, and including corresponding provisions of succeeding regulations.

          Warranty Obligations: as defined in Section 3.1.24.

     8.2 Expenses. Subject to Article VI and Section 7.2, the Seller and Parent shall bear their respective expenses, costs and fees (including attorneys’, auditors, and financing commitment fees) in connection with the transactions contemplated hereby, including the preparation, execution and delivery of this Agreement and compliance herewith (the “Transaction Expenses”), whether or not the transactions contemplated hereby shall be consummated.

     8.3 Severability. If any provision of this Agreement, including any phrase, sentence, clause, section or subsection is inoperative or unenforceable for any reason, such circumstances shall not have the effect of rendering the provision in question inoperative or unenforceable in any other case or circumstance, or of rendering any other provision or provisions herein contained invalid, inoperative, or unenforceable to any extent whatsoever.

     8.4 Notices. All notices, requests, demands, waivers and other communications required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been duly given if (a) delivered personally, (b) sent by next-day or overnight mail or delivery (with confirmation receipt) or (c) sent by fax (with overnight delivery of copy) as follows:

          (i) if to Parent or the Buyer to,

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INDUS Corporation

1951 Kidwell Drive, Eighth Floor

Vienna, Virginia 22182

Fax: (703) 506-6776

Attention: Chief Financial Officer

with a copy to:

Joseph C. Schmelter, Esq.

Venable LLP

8010 Towers Crescent Drive, Suite 300

Vienna, Virginia 22182

Fax: (703) 821-8949

(ii) if to the Seller:

Halifax Corporation

5250 Cherokee Avenue

Alexandria, Virginia 22312

Fax: (703) 658-2411

Attention: President and CEO

with a copy to:

Barry Genkin, Esq.

Blank Rome LLP

One Logan Square

Philadelphia, Pennsylvania 19103-6998

Fax: (215) 832-5514

     or, in each case, at such other address as may be specified in writing to the other parties hereto.

     All such notices, requests, demands, waivers and other communications shall be deemed to have been received (x) if by personal delivery on the day after such delivery, (y) if by next-day or overnight mail or delivery, on the day delivered, or (z) if by fax, on the next day following the day on which such fax was sent, provided that a copy is also sent by overnight (with confirmation receipt) mail.

     8.5 Knowledge. When used herein, the phrase “to the Knowledge of Seller,” “Known to Seller” or similar phrases means the actual knowledge of Charles McNew, James Sherwood, Joseph Sciacca, Ernest L. Ruffner, Doug Randalls and Myron (Mike) Saterbak, and the phrase “to the Knowledge of Parent,” “Known to Parent” or similar phrases means the actual knowledge of Shivram Krishnan, Donald Shoff, Al Blumenthal and Jeff Rosolio.

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     8.6 Miscellaneous.

          8.6.1 Headings. The headings contained in this Agreement are for purposes of convenience only and shall not affect the meaning or interpretation of this Agreement.

          8.6.2 Entire Agreement. This Agreement (including the Exhibits and Schedules hereto) and the Ancillary Agreements constitute the entire agreement and supersede all prior agreements and understandings, both written and oral, between the parties with respect to the subject matter hereof, including, without limitation, that certain Letter of Intent dated May 3, 2005

          8.6.3 Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed an original and all of which shall together constitute one and the same instrument.

          8.6.4 Governing Law, etc. This Agreement shall be governed in all respects, including as to validity, interpretation and effect, by the internal laws of the Commonwealth of Virginia, without giving effect to the conflicts of law rules thereof. Each of Parent, the Buyer and the Seller hereby irrevocably submit to the jurisdiction of the state courts of the Commonwealth of Virginia located in Fairfax County, Virginia and the United States District Court for the Eastern District of Virginia solely in respect of the interpretation and enforcement of the provisions of this Agreement and of the documents referred to in this Agreement, and hereby waive, and agree not to assert, as a defense in any action, suit or proceeding for the interpretation or enforcement hereof or of any such document, that it is not subject thereto or that such action, suit or proceeding may not be brought or is not maintainable in said courts or that the venue thereof may not be appropriate or that this Agreement or any of such document may not be enforced in or by said courts, and the parties hereto irrevocably agree that all claims with respect to such action or proceeding shall be heard and determined in such a court.

          8.6.5 Binding Effect. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, successors and permitted assigns.

          8.6.6 Assignment. This Agreement shall not be assignable or otherwise transferable by any party hereto without the prior written consent of the other parties hereto; provided, however, that that the prior written consent of the Seller shall not be required for any collateral assignment by Parent or Buyer of the Parent’s or Buyer’s rights and remedies under this Agreement to any lender of Parent or Buyer under credit and collateral agreements, as such agreements may be amended, modified or replaced from time to time. The Seller hereby agrees to execute and deliver such documents, instruments and agreements not adverse to Seller and at the expense of Parent as such lender may reasonably require to confirm, reaffirm or perfect such collateral assignment.

          8.6.7 No Third Party Beneficiaries. Except as provided in Sections 6.1 and 6.2, nothing in this Agreement shall confer any rights upon any Person other than the parties hereto and their respective heirs, successors and permitted assigns.

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          8.6.8 Amendment; Waivers, etc. No amendment, modification or discharge of this Agreement, and no waiver hereunder, shall be valid or binding unless set forth in writing and duly executed by the party against whom enforcement of the amendment, modification, discharge or waiver is sought. Any such waiver shall constitute a waiver only with respect to the specific matter described in such writing and shall in no way impair the rights of the party granting such waiver in any other respect or at any other time. Neither the waiver by any of the parties hereto of a breach of or a default under any of the provisions of this Agreement, nor the failure by any of the parties, on one or more occasions, to enforce any of the provisions of this Agreement or to exercise any right or privilege hereunder, shall be construed as a waiver of any other breach or default of a similar nature, or as a waiver of any of such provisions, rights or privileges hereunder. The rights and remedies herein provided are cumulative and are not exclusive of any rights or remedies that any party may otherwise have at law or in equity. The rights and remedies of any party based upon, arising out of or otherwise in respect of any inaccuracy or breach of any representation, warranty, covenant or agreement or failure to fulfill any condition shall in no way be limited by the fact that the act, omission, occurrence or other state of facts upon which any claim of any such inaccuracy or breach is based may also be the subject matter of any other representation, warranty, covenant or agreement as to which there is no inaccuracy or breach.

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     IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date first above written.

INDUS CORPORATION:
By:	/s/ Shivram M. Krishnan
	Shivram M. Krishnan
	President and CEO
INDUS SECURE NETWORK SOLUTIONS, LLC:
By:	INDUS Corporation, Sole Member
	By:	/s/ Shivram M. Krishnan
		Shivram M. Krishnan
		President and CEO
HALIFAX CORPORATION:
By:	/s/ Charles L. McNew
	Charles L. McNew
	President and CEO

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     The schedules and exhibits listed below are omitted pursuant to Regulation S-K, Item 601(b)(2); Halifax Corporation agrees to furnish supplementally a copy of such schedules and/or exhibits to the Securities and Exchange Commission upon request.

Schedules

Schedule 1.1(b) — Contracts Included Within Assets
Schedule 1.1(c) — Equipment Included Within Assets
Schedule 1.2 — Excluded Assets
Schedule 1.3 — Assumed Liabilities
Schedule 2.4(a)(1) — Estimated Closing Date Net Assets; Closing Date Balance Sheet
Schedule 2.4(a)(2)) — December 31, 2004 Balance Sheet
Schedule 3.1.5(b) — No Conflicts
Schedule 3.1.5(c) — No Conflicts
Schedule 3.1.6 — Financial Statements
Schedule 3.1.7 — Assets
Schedule 3.1.8 — Absence of Changes
Schedule 3.1.9 — Undisclosed Liabilities
Schedule 3.1.10(d) — Taxes
Schedule 3.1.11 — Legal Proceedings
Schedule 3.1.13(a) — Employees; Labor Matters
Schedule 3.1.13(b) — Employees; Labor Matters
Schedule 3.1.13(c) — Employees; Labor Matters
Schedule 3.1.13(d) — Employees; Labor Matters
Schedule 3.1.14 — Employee Benefit Plans; ERISA
Schedule 3.1.15(a) — Real Property
Schedule 3.1.15(b) — Real Property
Schedule 3.1.15(c) — Real Property
Schedule 3.1.16 — Tangible Personal Property
Schedule 3.1.17(a) — Intellectual Property
Schedule 3.1.17(c) — Intellectual Property
Schedule 3.1.17(e) — Intellectual Property
Schedule 3.1.17(f) — Intellectual Property
Schedule 3.1.18(a) — Contracts
Schedule 3.1.18(b) — Contracts
Schedule 3.1.18(c) — Contracts
Schedule 3.1.18(d) — Contracts
Schedule 3.1.19(a)(i) — Government Contracts
Schedule 3.1.19(a)(ii) — Government Contracts
Schedule 3.1.19(a)(iii) — Government Contracts
Schedule 3.1.19(b) — Government Contracts
Schedule 3.1.19(c) — Government Contracts
Schedule 3.1.19(d) — Government Contracts
Schedule 3.1.19(f) — Government Contracts
Schedule 3.1.19(g) — Government Contracts
Schedule 3.1.19(j) — Government Contracts

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Schedule 3.1.19(l) — Government Contracts
Schedule 3.1.19(q) — Government Contracts
Schedule 3.1.19(r) — Government Contracts
Schedule 3.1.19(s) — Government Contracts
Schedule 3.1.19(t) — Government Contracts
Schedule 3.1.19(v) — Government Contracts
Schedule 3.1.19(y) — Government Contracts
Schedule 3.1.19(bb) — Government Contracts
Schedule 3.1.20 — Insurance
Schedule 3.1.21 — Accounts Receivable
Schedule 3.1.22 — Other Negotiations; Brokers; Third-Party Expenses
Schedule 3.1.24 — Warranty Obligations
Schedule 3.1.27(a) — Approvals
Schedule 3.1.27(b) — Approvals
Schedule 3.2.5 — Consents
Schedule 4.3(b) — Transferred Employees Accrued Sick Leave
Schedule 4.4(a) — Consents for Novation of Prime Government Contracts
Schedule 4.5 — Transferred Employees; Key Employees
Schedule 4.11 — Allocation Schedule
Schedule 6.8 — Assignment Failure

Exhibits

Exhibit A — Escrow Agreement
Exhibit B — Subcontract
Exhibit C — Transition Services Agreement
Exhibit D — Bill of Sale
Exhibit E-1 — Employment Agreement
Exhibit E-2 — Employment Agreement
Exhibit F-1 — Form of Opinion of Ernest L. Ruffner, Esq.
Exhibit F-2 — Form of Opinion of Blank Rome, LLP

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EX-4.9

Exhibit 4.9

SECOND AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT

     It is hereby agreed as of the 29th day of June, 2005, by and between HALIFAX CORPORATION, a Virginia corporation (“Halifax”), HALIFAX ENGINEERING, INC., a Virginia corporation (“Engineering”), MICROSERV LLC, a Delaware limited liability company (“Microserv”) and HALIFAX ALPHANATIONAL ACQUISITION, INC., a Delaware corporation (“AlphaNational”; collectively with Halifax, Engineering and Microserv, “Borrower”), and PROVIDENT BANK, a Maryland banking corporation (“Bank”), of Baltimore, Maryland, and the successor by merger to Southern Financial Bank that this Second Amended and Restated Loan and Security Agreement (the “Agreement”) combines, amends and replaces the Amended and Restated Loan and Security Agreement dated November 8, 2004, Security Agreement dated as of March 6, 2002, Change in Terms Agreements dated as of March 12, 2002 and April 3, 2003, ARTS Security and Finance Agreement dated as of September 9, 2003 and the Amended and Restated Loan and Security Agreement dated November 8, 2004, each executed by Halifax and Bank, as amended. The terms of the Agreement are as follows:

I. DEFINITIONS

A. Specific Definitions. The following terms have the following definitions (each definition is equally applicable to the singular and plural forms of the terms used, as the context requires):

1.	“Account Debtor” means any person or entity who is or who may become obligated to make payments to Borrower, including, but not limited to, payments owed to Borrower under, with respect to, or on account of Receivables.
2.	“Assignment of Claims Act” means, collectively, the Assignment of Claims Act of 1940, as amended, 31 U.S.C. § 3727, 41 U.S.C. § 15, any applicable rules, regulations and interpretations issued pursuant thereto, and any amendments to any of the foregoing.
3.	“Borrowing Base” has the meaning ascribed to such term in the Formula Advance Addendum executed the date hereof by and between Borrower and Bank.
4.	“Collateral” means all of the now owned and hereafter acquired assets, properties and property rights of Borrower with respect to which Borrower has at any time granted a security interest or lien to Bank or has at any time otherwise assigned or pledged to Bank as security for any of the Obligations.
5.	“Equipment” means all of the now owned and hereafter acquired machinery, equipment, furniture, fixtures (whether or not attached to real property), vehicles, supplies and other personal property of Borrower other than inventory, including any leasehold interests therein and all substitutions, replacement parts and annexations thereto, and including all improvements and accessions thereto and all spare parts, tools, accessories and attachments now owned or hereafter acquired in connection therewith, and any maintenance agreements applicable thereto, and all proceeds and products thereof, including sales proceeds, and all rights thereto.
6.	“G.A.A.P.” means, with respect to any date of determination, generally accepted accounting principles as used by the Financial Accounting Standards Board and/or the American Institute of Certified Public Accountants consistently applied and maintained throughout the periods indicated.
7.	“Government” means the United States of America or any agency or instrumentality thereof.
8.	“Government Contract” means any contract with the Government under which Borrower is the prime contractor.
9.	“Inventory” means all of Borrower’s now owned and hereafter acquired inventory, wherever located, including, but not limited to, goods, wares, merchandise, materials, raw materials, parts, containers, goods in process, finished goods, work in progress, bindings or component materials, packaging and shipping materials and other tangible or intangible personal property held for sale or lease or furnished or to be furnished under contracts of service or which contribute to the finished products or the sale, promotion, storage and shipment thereof, all goods returned for credit, repossessed, reclaimed or otherwise reacquired by Borrower, whether located at facilities owned or leased by Borrower, in the course of transport to or from Account Debtors, placed on consignment, or held at storage locations, and all proceeds and products thereof and all rights thereto, including, but not limited to all sales proceeds, all chattel paper related to any of the foregoing and all documents, including, but not limited to, documents of title, bills of lading and warehouse receipts related to any of the foregoing.
10.	“Line of Credit” means any line of credit facility extended by Bank to Borrower pursuant to Paragraph II.A of this Agreement and otherwise in accordance with the terms of this Agreement.
11.	“Loan” means one or more credit facilities, including any Line of Credit, provided by Bank to Borrower pursuant to the terms of this Agreement and all accompanying Loan documents, including, but not limited to, one or more promissory notes of Borrower payable to the order of Bank, as the same may be amended, modified, extended, renewed, supplemented, restated or replaced from time to time.

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12.	“Maximum Line of Credit Amount” means Twelve Million Dollars ($12,000,000).
13.	“Obligations” means collectively the obligations of Borrower to pay to Bank: (i) any and all sums due to Bank under or pursuant to the Loan or otherwise under the terms of this Agreement or any accompanying Loan documents; (ii) any and all sums advanced by Bank to preserve or protect the Collateral or to preserve, protect, or perfect Bank’s security interests and liens in the Collateral; (iii) the expenses of retaking, holding, preparing for sale, selling or otherwise disposing of or realizing on the Collateral, or of any exercise by Bank of Bank’s rights in the event of a default by Borrower, together with Bank’s attorneys’ fees, expenses of collection, and court costs; and (iv) any other indebtedness or liability of Borrower to Bank, whether direct or indirect (by way of endorsement, guaranty, pledge or otherwise), liquidated or unliquidated, joint or several, absolute or contingent, contemplated or uncontemplated, or otherwise arising from any loan, note, letter of credit, guaranty, overdraft, or any other duty owed by Borrower to Bank, now existing or hereafter arising.
14.	“Other Obligor” means any person or entity that is now or hereafter liable, directly, contingently or otherwise, upon or in connection with any of the Obligations or that has granted any lien or security interest to or for the benefit of Bank to secure any of the Obligations, including, but not limited to, any guarantor, surety, endorser, or co-maker of any of the Obligations.
15.	“Receivables” means all of Borrower’s now owned and hereafter acquired and/or created Accounts, accounts receivable, contracts, contract rights, Instruments, Documents, Chattel Paper, Deposit Accounts, notes, notes receivable, drafts, acceptances, General Intangibles (including, but not limited to, trademarks, tradenames, licenses, copyrights and patents), and other choses in action (not including salary or wages), and all proceeds and products thereof, and all rights thereto, including, but not limited to, proceeds of Inventory and returned goods and proceeds arising from the sale or lease of or the providing of Inventory, goods, or services by Borrower, as well as all other rights of any kind, contingent or non-contingent, of Borrower to receive payment, benefit, or credit from any person or entity, including, but not limited to, the right to receive tax refunds or tax rebates.
16.	“VDOT Contract” means Contract #844 between Halifax Technology Services Company (predecessor by merger to Halifax) and Virginia Department of Transportation and Virginia Retirement Systems for Provision of Services for Information Technology/Enterprise Architecture, dated November 1, 1998, as amended.
17.	“VDOT Vendor Liens/Assignments” means liens on or assignments of receivables from the VDOT Contract given to vendors supplying equipment and software provided by Borrower to the customer pursuant to the VDOT Contract, but only to the extent they relate to the acquisition of such equipment and software.

B.

UCC Definitions. The terms “Accounts,” “As-Extracted Collateral,” “Chattel Paper,” “Deposit Accounts,” “Documents,” “Electronic Chattel Paper,” “Fixtures,” “General Intangibles,” “Goods,” “Investment Property,” Instruments, “ “Letter-of-Credit Rights,” “Payment Intangibles,” “Software” and “Tangible Chattel Paper” have the respective meanings given to those terms in Maryland Uniform Commercial Code — Secured Transactions, Title 9, Commercial Law Article, Annotated Code of Maryland, as amended (“Article 9”).

C.

Accounting Terms. The accounting terms used in this Agreement have the meanings customarily given them in accordance with G.A.A.P., unless this Agreement expressly provides a different meaning.

II. BASIC TERMS OF LOAN

A.

Line of Credit. Subject to the continued compliance of Borrower with the terms of this Agreement and all other accompanying Loan documents and the continued absence of any default by Borrower or any Other Obligor hereunder and thereunder, Bank may advance to Borrower, for use by Borrower as hereafter provided, such sums as Borrower may request, but which shall not exceed in the aggregate at any one time outstanding the lesser of the Borrowing Base or the Maximum Line of Credit Amount. Borrower shall not request any advance of proceeds of the Line of Credit which exceeds the Maximum Line of Credit Amount or the Borrowing Base or which would cause the aggregate amount of advances made and outstanding under the Line of Credit to exceed the Maximum Line of Credit Amount or the Borrowing Base. If the aggregate amount of advances made and outstanding under the Line of Credit shall at any time and for any reason exceed the Maximum Line of Credit Amount or the Borrowing Base, Borrower shall immediately pay Bank the excess. Each advance shall be by automatic credit. Bank shall make all advances by depositing funds in Borrower’s commercial account number 20-65310679 or such Bank account as may be agreed upon by Borrower and Bank. Borrower shall use the proceeds of the Line of Credit for short term working capital purposes including the financing of Borrower’s contracts and accounts receivable. Within such limitations and subject to all of the terms and conditions set forth herein and in the other accompanying Loan documents, Borrower may borrow, repay, and reborrow funds under the Line of Credit in accordance with the terms and conditions of this Agreement.

B.

Advance Procedure. With respect to each advance and all matters and transactions in connection therewith, Borrower hereby irrevocably authorizes Bank to accept, rely upon, act upon and comply with any oral or written instructions, requests, confirmations and orders of any employee or representative of Borrower who is so authorized or designated as a signer of Loan documents under the provisions of Borrower’s most recent Banking and Borrowing Resolutions or similar document on file with Bank. Borrower acknowledges that the transmission between Borrower and Bank of any such instructions, requests, confirmations and orders involves the possibility of errors, omissions, mistakes and discrepancies and agrees to adopt such internal measures and operational procedures as may be necessary to protect its interest. By reason thereof, Borrower hereby assumes all risk of loss and responsibility for, releases and discharges Bank from any and all responsibility or liability for, and agrees to indemnify, reimburse on demand and hold Bank harmless from, any and all claims, actions, damages, losses, liability and expenses by reason of, arising out of, or in any way connected with or related to: (i) Bank’s accepting, relying and acting upon, complying with or observing any such instruction, request, confirmation or order; and (ii) any such error, omission, mistake, or discrepancy, provided such error, omission, mistake or discrepancy is not the result of negligence on the part of Bank.

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C.	Evidence of Loan; Terms of Repayment. The interest rates on the Loan and the method of calculating interest upon the Loan, the term of the Loan, the method and times of repayment, and other conditions pertaining to the repayment of the Loan shall at the option of Bank be evidenced by Bank’s form of promissory note or as otherwise set forth in appropriate writings between the parties as determined by Bank. The Loans shall be subject to annual internal reviews of the Bank concurrent with the delivery of the Borrowers’ annual modified financial statements, with the next review expected to be completed by August 31, 2005. In the absence of a promissory note or other applicable writing, the Loan shall be deemed to be otherwise conclusively evidenced by Bank’s record of advances of proceeds of the Loan and Bank’s record of receipt of repayments and other bookkeeping entries reflecting the payment of principal and interest, and interest shall be deemed to accrue at the interest rate reflected on Bank’s records.
D.	Statement of Account. Bank may at any time or from time to time render a statement or statements of account to Borrower for the Obligations or any portion thereof. Each such statement shall be deemed to be correct and conclusively binding on Borrower unless Borrower notifies Bank to the contrary in writing within thirty (30) days from the date of any such statement which Borrower deems to be incorrect.
E.	ARTS Fee. Borrower shall pay Bank a monthly ARTS fee of $1,000 per month subject to change as announced by the Bank from time to time. Bank may debit Borrower’s operating account to effectuate such payment, payable in arrears.
F.	Unused Commitment Fee. Borrower agrees to pay an unused commitment fee on any difference between the Maximum Line of Credit Amount and the amount of advances under the Line of Credit, determined by the average of the daily amount of credit outstanding during the specified period. The fee will be calculated by multiplying such difference by one-quarter percent (0.25%). This fee is due on June 30, 2005, and on the last day of each following quarter until the Line of Credit has been terminated, payable in arrears. Bank may debit Borrower’s operating account to effectuate such payment.
G.	Commitment Fee. Prior to the execution of this Agreement, Borrower has paid Bank a non-refundable commitment fee of Thirty Thousand Dollars ($30,000).

III. GRANT OF SECURITY INTEREST

A. Collateral. As collateral security for all Obligations of Borrower to Bank, and in consideration of advances from Bank to Borrower, Borrower (other than Halifax) hereby grants and pledges to Bank, and Halifax hereby confirms and restates its prior grant and pledge to Bank of, a continuing security interest in all of the following property:

1.	All of Borrower’s Equipment;
2.	All of Borrower’s Receivables;
3.	All of Borrower’s Inventory;
4.	All of Borrower’s now owned or hereafter acquired Goods, Chattel Paper (including without limitation all Electronic Chattel Paper and Tangible Chattel Paper), Instruments, Documents, Investment Property, General Intangibles (including without limitation all Payment Intangibles and Software), Deposit Accounts, Letter-of-Credit Rights, As-Extracted Collateral and Fixtures.
5.	Other: Federal Assignment Claims Act assignment on all U.S. Government contracts in excess of $100,000.00 and for a term of six (6) months or more.

Borrower also hereby grants and pledges (or with respect to Halifax, confirms and restates its prior grant and pledge) to Bank of a continuing security interest in: (i) all proceeds (including insurance proceeds) and products of the above-described Collateral; (ii) any of Borrower’s assets in which Bank has been or is hereafter granted a security interest under any other security agreements, notes or other obligations or liabilities between Borrower and Bank; (iii) any accounts, property, securities, Investment Property or monies of Borrower which may at any time be maintained at, assigned to, delivered to, or come into possession of, Bank, as well as all proceeds and products thereof; and (iv) all of the books and records pertaining to any of the above-described items of Collateral.

B. Borrower’s Obligations. Borrower’s Obligations under this Agreement are irrevocable, absolute and unconditional, and direct, immediate and primary.

IV.	REPRESENTATIONS AND WARRANTIES
	Borrower represents and warrants that:

A.

Accuracy. All information, financial statements and data submitted to Bank by Borrower or any Other Obligor are true, accurate and complete in all material respects.

B.

Authority. Halifax is duly organized and existing in good standing under the laws of the Commonwealth of Virginia. Engineering, Microserv and AlphaNational are each duly organized and existing in good standing under the laws of the State of Delaware. Borrower is qualified to do business and in good standing in all jurisdictions where it conducts its business or its Receivables are located, and has all requisite power, authority, licenses and permits to own its property and carry on its business, and Borrower shall deliver to Bank a written opinion of counsel to such effect if requested by Bank. None of the terms and conditions herein, or of any other agreement executed by Borrower, are in violation of the charter or by-laws, or other organizational documents of Borrower, any contractual obligation Borrower may have with any third party, or any order or decree by which Borrower is bound, and the execution

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	and delivery of this Agreement have been duly authorized by appropriate corporate, limited liability company or partnership action, and Borrower shall deliver to Bank a written opinion of counsel to such effect if requested by Bank.
C.	Litigation. No litigation or other proceeding before any court or administrative agency is pending, or to the knowledge of Borrower, is threatened against Borrower, the outcome of which could materially impair Borrower’s financial condition or its ability to carry on its business. Borrower is not the subject of any pending bankruptcy proceeding nor subject to the continuing jurisdiction of a bankruptcy court as the result of an approved plan of reorganization.
D.	Financing Statements. No financing statement relating to any of the Collateral is on file in any place, except for any financing statement, (i) naming Bank as secured party or (ii) which solely identifies VDOT Vendor Liens/Assignments. The financing statement naming Bank as secured party shall be amended following the consummation of the sale of the Secure Network Services division to terminate the Bank’s lien on that division’s assets only.
E.	Assurance of Title. Borrower is the owner of all of the Collateral, or, if proceeds of any note or notes secured hereby are being used to purchase the Collateral, Borrower shall be the owner thereof, free and clear of all claims, encumbrances, charges and liens, except for VDOT Vendor Liens/Assignments, purchase money security interests or as herein provided.
F.	Addresses. The principal place of business of Borrower, the books and records relating to Borrower’s business and the Collateral, and the Collateral (other than trunk stock) are located at the address(es) set forth on Exhibit A to this Agreement.
G.	Hazardous Substances. Borrower has never received any notification, citation, complaint or notice of investigation relating to the making, storing, handling, generating or transporting of any materials or substances which under applicable laws require special handling in collection, storage, treatment or disposal (“Hazardous Substances”), and Borrower does not own, make, store, handle, dispose of or transport any Hazardous Substances in violation of any applicable laws.
H.	ERISA. Borrower and each of its affiliates and subsidiaries (“ERISA Affiliates”) which are under common control, or are part of a controlled group, within the meaning of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), are in compliance with all applicable provisions of ERISA with regard to each of its employee benefit plans (as defined in ERISA) (“Employee Benefit Plans”). Neither a reportable event (as defined in ERISA) nor a prohibited transaction (as defined in ERISA) has occurred with respect to any Employee Benefit Plan of Borrower or any ERISA Affiliate. Immediately upon the occurrence of any such reportable event, Borrower shall promptly furnish to Bank notice thereof, as filed with Pension Benefit Guaranty Corporation (“PBGC”). Neither Borrower nor any ERISA Affiliate has completely or partially withdrawn from any multiemployer plan and no such multiemployer plan is in reorganization, all as provided by ERISA. Borrower and each ERISA Affiliate has met its minimum funding requirements and has no unfulfilled obligations under ERISA to contribute to any Employee Benefit Plan. Borrower shall promptly notify Bank of any assertion by PBGC of liability of Borrower or any ERISA Affiliate under Title IV of ERISA. The failure of Borrower to pay within 30 days the amount of any liability under Title IV of ERISA demanded by PBGC shall constitute a default hereunder.
I.	Taxes. There are no unpaid Federal, State, city, county, or other taxes owed by Borrower, there are no Federal, State, city, county or other tax liens presently filed against Borrower, and there are no outstanding personal property taxes of any kind.
J.	Debarment and Suspension. No event has occurred and, to the knowledge of Borrower, no condition exists that may result in the debarment or suspension of Borrower from any contracting with the Government, and neither Borrower nor any affiliate of Borrower has been subject to any such debarment or suspension prior to the date of this Agreement.
K.	Subsidiaries. Except for Engineering, AlphaNational and Microserv, Halifax does not have any subsidiaries with assets having a value in excess of $100. None of Engineering, AlphaNational and Microserv has any subsidiaries with assets having a value in excess of $100.
L.	VDOT Contract. Borrower has provided Bank a true and complete copy of the VDOT Contract (including any amendments to the original contract).

V.	COVENANTS
	Borrower covenants that:

A.	Costs. Borrower shall pay all costs and expenses incident to the making of the Loan and perfection of Bank’s security interests hereunder, including, but not limited to, all attorneys’ fees (to the extent not prohibited by law) and all recordation costs and taxes incident to filing of financing statements and continuation statements in respect thereof.
B.	Further Documents. Borrower shall execute and deliver to Bank from time to time any instruments or documents, including, but not limited to, financing statements, amendments, continuation statements, mortgages, loss payable endorsements for insurance policies, and assignments of insurance policies and proceeds, and shall do all things necessary or convenient to carry into effect the provisions of this Agreement. Borrower designates Bank or any of its officers as attorney-in-fact to sign Borrower’s name on any such instruments or documents, to file the same as may be appropriate, and to request and endorse Borrower’s name to any and all requests described in Section 9-210 of Article 9. Borrower agrees that filed photocopies of financing statements and continuation statements shall be sufficient to perfect Bank’s security interest hereunder.
C.	Taxes. Borrower shall pay and discharge, when due, all taxes, levies, liens, and other charges on any of its assets and shall pay promptly, when due, all other taxes, including withholding taxes.

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D.	Laws. Borrower shall comply at all times with all laws, ordinances, rules and regulations of any Federal, State, municipal or other public authorities having jurisdiction over Borrower, the Collateral or any of Borrower’s other assets, including, but not limited to, ERISA and all laws relating to Hazardous Substances.
E.	Name and Location. Borrower shall immediately advise Bank in writing of the opening of any new place of business or the closing of any of its existing places of business, and of any change in Borrower’s name or the location of the places where the Collateral, or books and records pertaining to the Collateral, are kept.
F.	Books and Records. Borrower shall maintain such records with respect to the Collateral and the condition (financial and otherwise) and operation of Borrower’s business as Bank may request from time to time, and shall furnish Bank such information with respect to the Collateral, Account Debtors, and the condition (financial and otherwise) and operation of Borrower’s business, including, but not limited to, balance sheets, operating statements, and other financial information, as Bank may request from time to time. Bank may at any time and without prior notice to Borrower and without the consent of Borrower directly contact Account Debtors and verify or confirm the status of the Receivables. Borrower shall furnish Bank or cause to be furnished to Bank such financial information with respect to any Other Obligor, including, but not limited to, balance sheets, operating statements, personal financial statements and other financial information, as Bank may request from time to time. Bank may discuss the affairs, finances and accounts of Borrower with any of Borrower’s officers and directors and its independent accountants.
G.	Field Examination. Bank or any of its agents or representatives may from time to time, during normal business hours, inspect, check, make copies of or extracts from the books, records and files of Borrower, and visit and inspect Borrower’s offices and any of the Collateral wherever located. Borrower shall make same available at any time for such purposes, and shall pay all expenses related to such inspections. Unless an Event of Default has occurred and is continuing, such examinations will not be conducted more frequently than semi-annually.
H.	Reporting Requirements. In addition to such other information (financial and otherwise) as Bank may require from time to time, Borrower shall submit to Bank all information to be submitted pursuant to the Reporting Requirements Addendum attached hereto, as amended from time to time.
I.	Misrepresentation. Borrower shall not make or furnish Bank any representation, warranty, or certificate in connection with or pursuant to this Agreement which is materially false.
J.	Insurance. Borrower has and shall maintain insurance on all of its assets and properties, including, but not limited to, the Collateral, at all times and against hazards, with companies, in amounts and in form acceptable to Bank. Borrower shall annually submit to Bank original insurance certificates providing that such insurance policies have a Lenders Loss Payable Clause and Additional Insured, and shall be noncancellable unless thirty (30) days prior notice of cancellation is provided to Bank. In event of any loss thereunder, the carriers named therein are hereby directed to make such payment for loss solely to Bank, and not to Borrower and Bank jointly or to any other person. If any insurance losses are paid by check, draft or other instruments payable to Borrower or to Borrower and Bank jointly, Bank may endorse the name of Borrower thereon and do such other things as Bank may deem advisable in order to reduce the same to cash. In addition, Borrower shall maintain at all times, public liability insurance and all other coverages required by Bank, naming Bank as additional insured, with companies, in amounts and in form acceptable to Bank. All loss recoveries received by Bank upon any insurance may be applied and credited by Bank at its discretion to the Obligations.
K.	Bank’s Duty of Care. Except as provided in this Paragraph V.K., Bank’s sole duty with respect to the Collateral shall be to use reasonable care in the custody, use, operation and preservation of the Collateral in its possession, and Borrower shall reimburse Bank for all costs and expenses, including insurance costs, taxes and other charges, incurred in connection with the custody, use, operation, care or preservation of the Collateral, such reimbursement to be secured as provided above in Paragraph III. In the event that Bank takes possession of the Collateral by foreclosure as provided in Paragraph VII.C. herein or otherwise, Bank may, but shall be under no obligation to, take such actions as it may deem appropriate to protect the Collateral by insurance or otherwise, and any expense so incurred shall likewise be reimbursed and secured as provided above in Paragraph III. Bank shall incur no liability to Borrower for any failure to provide adequate protection or insurance for the Collateral acquired by Bank. Bank shall not be obligated to take any steps necessary to preserve any rights in any of the Collateral against prior parties, and Borrower hereby agrees to take such steps. Borrower hereby waives the defense of unjustifiable impairment of collateral with respect to the Collateral and any other collateral for any of the Obligations.
L.	Equipment. If the Collateral includes Equipment, then the covenants in this Paragraph V.L. apply:

1.	Repair. Borrower shall keep and maintain the Equipment in good order and repair and in working condition.
2.	Personalty. The Equipment shall be and shall remain personal property and nothing shall affect the character of the same or cause the same to become realty without the written consent of Bank, or prevent Bank in its option from removing same from premises on which they may become attached, in event of default hereunder.
3.	No Sale of Equipment. Without the prior written consent of Bank, Borrower shall not sell or otherwise dispose of any of the Equipment, except that items of Equipment may be sold or exchanged if such Equipment either (a) is replaced in the ordinary course of Borrower’s business to the satisfaction of Bank by Equipment of a similar value and which is subject to a security interest of Bank that is prior to all liens other than purchase money security interests or (b) has a fair market value (in the aggregate) of less than Ten Thousand Dollars ($10,000).
4.	Vehicles. If the Collateral includes a motor vehicle for which a certificate of title is issuable, Borrower shall deliver to Bank the certificate of title issued with respect to such vehicle and shall cause a statement of Bank’s security interest to be noted as a lien on such certificate of title.

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M. Receivables. If the Collateral includes Receivables, then the covenants in this Paragraph V.M. apply:

1.	Bona Fide. Each and every Receivable shall (i) be bona fide, be for a certain undisputed claim or demand for the amount Borrower represented to be owing thereon, (ii) represent a sale and delivery of personal property sold or work and labor done, (iii) not be subject to any set-off, counterclaim, or contingent liability upon the fulfillment of any contract or condition whatsoever, and (iv) shall not be subject to any prohibition or limitation upon assignment except as required by the Assignment of Claims Act.
2.	Books. If requested by Bank, Borrower shall make all necessary entries in its books to disclose the grant of a security interest in Receivables to Bank, and permit Bank to verify Receivables.
3.	Mail. Upon demand, Borrower shall open all mail only in the presence of a representative of Bank, who may take therefrom any remittance on Receivables securing the Obligations. Bank is also granted the power of attorney to have mail delivered to Bank, and not to Borrower, and to open all mail and take therefrom any remittance on any Receivables.
4.	Signatures. Bank or its representative may endorse or sign the name of Borrower on remittances in respect of Receivables, invoices, assignments, financing statements, notices to Account Debtors, bills of lading, storage receipts, or other instruments or documents in respect of Receivables or the property covered thereby.
5.	Collections. Borrower shall notify all Account Debtors to make payment of their Receivables to Bank for the deposit to the Cash Collateral Account as herein provided. Each Account Debtor shall be instructed to pay its Receivables (i) if by paper check, by mailing such check to the following address: Halifax Corporation, P.O. Box 9002, Warrenton, VA 20188, and (ii) if by electronic funds transfer, by wiring funds to Halifax Corporation, a/c # 76-65310763, Provident Bank ABA # 2520 7301 8. If Borrower receives any payment of a Receivable, it shall receive such payments on accounts as agent of and for Bank and shall transmit to Bank, on the day thereof, or at other mutually agreed upon intervals, all original checks, drafts, acceptances, notes and other evidences of payment received in payment of or on account of Receivables, including all cash monies similarly received by Borrower. For such purpose, Borrower does hereby grant to Bank access to any post office boxes in which mail is received. Until delivery of all such remittances to Bank, Borrower shall keep the same separate and apart from Borrower’s own funds, capable of identification as the property of Bank, and shall hold the same in trust for Bank. Further, Borrower agrees that Bank may pay, for the account of Borrower, any taxes, levies, or other charges affecting Borrower’s assets, including, but not limited to, Inventory or Equipment which Borrower fails to pay, including all other taxes and levies, and any such payment shall constitute a liability of Borrower. Bank shall have the right to receive, indorse, assign and deliver in Bank’s name or Borrower’s name any and all checks, drafts and other instruments for the payment of money relating to the Receivables, and Borrower hereby waives notice of presentment, protest and non-payment of any instrument so endorsed. Borrower constitutes Bank or Bank’s designee as Borrower’s attorney-in-fact with power with respect to the Receivables: (i) to endorse Borrower’s name upon any notes, acceptances, checks, drafts, money orders or other evidences of payment of Collateral that may come into Bank’s possession; (ii) to sign Borrower’s name on any invoices relating to any of the Receivables, drafts against Account Debtors, assignments and verifications of Receivables and notices to Account Debtors; (iii) to notify the post office authorities to change the address for delivery of mail addressed to Borrower to such address as Bank may designate; (iv) to receive, open, and dispose of mail addressed to Borrower; (v) to do all other acts and things necessary, proper, or convenient to carry out the terms and conditions and purposes and intent of this Agreement. The power of attorney hereby granted, being coupled with an interest, is irrevocable while any of the Obligations remain unpaid or unperformed. Bank may, without notice to or consent from Borrower and without affecting Borrower’s obligations hereunder, sue upon or otherwise collect, extend the time of payment of or compromise or settle for cash, credit or otherwise upon any terms, any of the Receivables or any securities, guaranties, instruments or insurances applicable thereto or release the obligor thereon. Bank is authorized and empowered to accept the return of any Collateral represented by any of the Receivables without notice to or consent by Borrower, all without discharging or in any way affecting Borrower’s liability to Bank. Bank does not, by anything herein or in any assignment or otherwise, assume any of Borrower’s obligations under any contract or agreement assigned to Bank, and Bank shall not be responsible in any way for the performance by Borrower of any of the terms and conditions thereof.
6.	Cash Collateral Account. All remittances in payment of the Receivables securing the Obligations shall be deposited with Bank (or any other bank designated by Bank) in an account designated as “Provident Bank (name of Borrower), Cash Collateral Account”, if the Bank should desire. Such deliveries and deposits shall be made daily and each deposit shall be accompanied by a report in such form as Bank shall require. All funds held in the Cash Collateral Account may be applied against the Obligations at the discretion of Borrower. In the event any checks or drafts deposited in the Cash Collateral Account are dishonored, Bank is hereby irrevocably authorized to debit any other account of Borrower at Bank in an amount equal to the amount of the checks or drafts dishonored and deposit such sums in the Cash Collateral Account. If thereafter the dishonored check or draft is honored and Bank receives immediately available funds therefore, Bank shall deposit such funds into the account of Borrower which was previously debited. If any checks or drafts deposited in the Cash Collateral Account are drawn on a financial institution located outside of the United States of America, Bank is hereby irrevocably authorized to debit any other account of Borrower at Bank in an amount equal to the United States dollar equivalent of the amount of such checks or drafts and deposit such sums in the Cash Collateral Account. Upon receipt of immediately available funds for any such checks or drafts Bank shall deposit the collected funds into Borrower’s account at Bank which was previously debited. All of the Borrower’s primary operating accounts shall be maintained with the Bank for the term of this facility.
7.	Cancellation of Contracts. Borrower shall notify Bank in writing of any cancellation of a contract having annual revenues in excess of $250,000.

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8.	Government Contracts. In the event any Receivables arise out of contracts with the Government, Borrower shall assign to Bank all Government Contracts with amounts payable of $100,000 or greater and in duration of six (6) months or longer, and execute all other agreements, instruments and documents and shall perform all further acts that Bank may require to ensure compliance with the Assignment of Claims Act with respect to such Government Contracts.
9.	VDOT Contract Amendments. Borrower shall promptly provide Bank with copies of all amendments to the VDOT Contract.
10.	VDOT Vendor Liens/Assignments. Upon request, Borrower shall promptly provide Bank with copies of all documents effectuating or related to any VDOT Vendor Liens/Assignments.

N. Inventory. If the Collateral includes Inventory, then the covenants in this Paragraph V.N. apply:

1.	Signatures. Bank or its representative may endorse or sign the name of Borrower on remittances in respect to Inventory, assignments, invoices, financing statements, notices to debtors, bills of lading, notices to suppliers, storage or other instruments or documents in respect to Inventory or the property covered thereby.
2.	Audit. Bank or its representative may from time to time verify Inventory, through actual count or otherwise, and Borrower shall make same available at any time for such purpose.
3.	Sales. So long as neither Borrower nor any Other Obligor is in default of any of the Obligations, Inventory subject to Bank’s continuing security interests may be sold by Borrower in the ordinary course of business, but shall not otherwise be taken or removed from Borrower’s premises.

O. Investment Property. If the Collateral includes stocks, bonds or other Investment Property of Borrower, then the covenants in this Paragraph V.O. apply:

1.	Transfers. All certificates or instruments representing or evidencing such investment property shall be in suitable form for transfer by delivery, shall be in form and substance satisfactory to Bank and shall be delivered to and held by or on behalf of Bank; Bank is hereby authorized, at its option and without any obligation to do so, to transfer to or to register in the name of its nominee(s) all of any part of such Investment Property, and to do so before or after default or the maturity of the Obligations secured hereby, with or without notice to Borrower; Bank shall have the right at any time to exchange certificates or instruments representing or evidencing such Investment Property for certificates or instruments of smaller or larger denominations; Bank shall have control over any securities accounts or security entitlements which constitute Collateral, pursuant to terms acceptable to Bank.
2.	Dividends. In the event that a stock dividend is declared, or any stock split-up made, with respect to any security pledged hereunder, or cash or other property is distributed in connection with a partial or total liquidation or dissolution or in connection with a reduction of capital, capital surplus or paid-in surplus, or property other than cash is distributed as a dividend, all the certificates for the shares representing such stock dividend or stock split-up, and all of such cash and other property, shall be delivered, duly endorsed, to Bank as additional security hereunder.
3.	Attorney-in-Fact. Borrower hereby appoints Bank Borrower’s attorney-in-fact with full authority in the place and stead of Borrower and in the name of Borrower or otherwise, from time to time in Bank’s discretion to take any action and to execute any instrument which Bank may deem necessary or advisable to accomplish the purposes of this Agreement, including, but not limited to, receiving, endorsing and collecting all checks and other Instruments made payable to Borrower representing any dividend, interest payment, or other distribution in respect of the pledged Investment Property or any part thereof and giving full discharge for the same.

P.	Government Contract Audits. Promptly after Borrower’s receipt thereof, Borrower shall furnish Bank with notice of any final decision of a contracting officer disallowing costs aggregating more than $100,000 which disallowed costs arise out of any audit of Government Contracts of Borrower.
Q.	Subsidiaries. If any Borrower creates or acquires a subsidiary containing assets having a value in excess of $100, Borrower shall cause such subsidiary to become a Borrower or Other Obligor hereunder (in a form acceptable to Bank).
R.	Change in Control or Sale. Without the prior written consent of Bank, Borrower shall not permit a change in ownership of more than 25% of the stock or other equity interests of Halifax, Engineering, AlphaNational, Microserv or any other entity constituting a Borrower, or permit any such entity to enter into any merger or consolidation, or sell or lease substantially all of its assets.
S.	Sale or Assignment of Contract or Subsidiary. Without the prior written consent of Bank, Borrower shall not sell or assign any or all interest in any (i) contract or (ii) any subsidiary of Halifax, Engineering, AlphaNational, Microserv or any other entity constituting a Borrower.
T.	Dividends. Without the prior written consent of Bank, Borrower shall not make any distributions on behalf of equity or pay any dividends.
U.	Payments of Debt. Without the prior written consent of Bank, Borrower shall not make any payments of debt to any person or entity, or make any distributions (including loans or withdrawals) of any kind to any officers, employees or members, other than (i) purchase money financings permitted hereunder, (ii) payments to employees (including loans and travel advances) made in the ordinary course

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of business, (iii) payments to the former shareholders of the predecessor by merger to Microserv pursuant to certain notes dated August 29, 2003 in the original principal amount of $494,000 and which matured on February 1, 2005 as long as the Borrower is in compliance with all other loan covenants, and (iv) payments to the Bank.

V.

Further Covenants. Without the prior written consent of Bank, Borrower shall not: (i) other than purchase money security interests or VDOT Vendor Liens/Assignments, pledge or grant any security interest in any Collateral to anyone except Bank, nor permit any financing statement (except Bank’s financing statement) to be on file in any public office with respect thereto; (ii) other than purchase money security interests or VDOT Vendor Liens/Assignments, permit or suffer any lien, levy or other encumbrance to attach to any of the Collateral or to any other assets of Borrower, except for liens and encumbrances in favor of Bank; (iii) permit a material change in any Receivable, or a material change in the terms of any contract giving rise to a Receivable; (iv) make any agreement, compromise, settlement, bulk sale, lease or transfer of assets other than in the normal course of business; (v) create, incur or assume any liability for borrowed money, except borrowings from Bank, trade debt, and purchase money financings not to exceed $250,000 in any one year; (vi) assume, guarantee, endorse or otherwise become liable in connection with the obligations of any person, firm or corporation, except by endorsement of instruments for deposit or collection or similar transactions in the ordinary course of business; or (vii) purchase or acquire substantially all of the assets or the obligations or stock of any person, firm or corporation or other enterprises whatsoever, other than the direct obligations of the United States or Bank.

VI. EVENTS OF DEFAULT. The following shall constitute a default hereunder if existing fifteen (15) days after written notice thereof has been given to the Borrower; provided, however, that the occurrence of an event under Paragraphs VI.D, VI.F, VI.H or VI.I or a failure by Borrower to make any payment hereunder when due shall automatically be a default hereunder:

A.	Nonperformance. Default by Borrower under, or breach of any provision or warranty of, this Agreement, any other instrument, agreement or document in connection with any of the Obligations, or any other instrument, agreement or document of Borrower with Bank, whether such instrument, agreement or document presently exists or is hereafter executed; or default by any Other Obligor under, or breach of any provision or warranty of, this Agreement, any other instrument, agreement or document in connection with any of the Obligations, or any other instrument, agreement or document of any Other Obligor with Bank, whether such instrument, agreement or document presently exists or is hereafter executed;
B.	Representations and Warranties. Any warranty, representation, or statement made to Bank by or on behalf of Borrower or any Other Obligor proving to have been incorrect in any material respect when made or furnished;
C.	Financial Condition. A determination by Bank in good faith, but in its sole discretion, that the financial condition of Borrower or any Other Obligor is unsatisfactory; insolvency of Borrower or any Other Obligor; suspension of business, or commission of an act amounting to business failure by Borrower or any Other Obligor;
D.	Assignments. Any assignment made by Borrower or any Other Obligor for the benefit of creditors;
E.	Judgments. The entry of any final judgment against Borrower or any Other Obligor for the payment of money in excess of $100,000.00;
F.	Bankruptcy. Institution of bankruptcy, insolvency, reorganization or receivership proceedings by or against Borrower or any Other Obligor in any State or Federal court or the appointment of a receiver, assignee, custodian, trustee or similar official under any Federal or State insolvency or creditors’ rights law for any property of Borrower or any Other Obligor; provided that Borrower shall have sixty (60) days to dismiss any involuntary bankruptcy proceeding to which it does not consent;
G.	Extraordinary Acts. A dissolution, liquidation or reorganization of Borrower or any Other Obligor which is a corporation, partnership, limited liability company or other legal entity;
H.	Attachments. The levy upon or attachment of any property of Borrower or any Other Obligor, or the recordation of any Federal, State or local tax lien against Borrower or any Other Obligor that has not been removed or satisfied within thirty (30) days;
I.	Change in Ownership. A change in more than 25% of the ownership of Halifax without the prior written consent of Bank;
J.	Cross-Default. The occurrence of any event which is, or would be with the passage of time or the giving of notice or both, a default under any indebtedness in excess of $100,000 of Borrower or any Other Obligor to Bank or to any person other than Bank;
K.	Loss or Damage; Transfer or Encumbrance. Any material loss, theft or substantial damage not fully insured for the benefit of Bank to any of the assets of Borrower or any Other Obligor or the transfer or encumbrance of any material part of the assets of Borrower or any Other Obligor other than in the ordinary course of business of Borrower or such Other Obligor;
L.	Debarment or Suspension. The debarment or suspension of Borrower or any Other Obligor from any contracting with the Government; or
M.	Financial Information. The failure of Borrower or any Other Obligor to furnish Bank such financial information as Bank may require from time to time.

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VII. REMEDIES

A.	Specific Rights and Remedies. In addition to all other rights and remedies provided by law and the Loan documents, Bank, on the occurrence of any default, may: (i) accelerate and call due and payable any and all of the Obligations, including all principal, accrued interest and other sums due as of the date of default; (ii) impose the default rate of interest provided in any promissory note evidencing the Loan, with or without acceleration; (iii) file suit against Borrower or against any Other Obligor; (iv) seek specific performance or injunctive relief to enforce performance of the Obligations, whether or not a remedy at law exists or is adequate; (v) exercise any rights of a secured creditor under the Uniform Commercial Code, including the right to take possession of the Collateral without the use of judicial process or hearing of any kind and the right to require Borrower to assemble the Collateral at such place as Bank may specify; (vi) cease making advances or extending credit to Borrower and stop and retract the making of any advance which may have been requested by Borrower; and (vii) reduce the Maximum Line of Credit Amount. Borrower also hereby authorizes Bank, upon a default, but without prior notice to or demand upon Borrower and without prior opportunity of Borrower to be heard, to institute an action for replevin, with or without bond as Bank may elect, to obtain possession of any of the Collateral. In such action for replevin, a copy of this Agreement verified by affidavit of Bank or sworn on behalf of Bank shall constitute evidence of Bank’s right to possession of the Collateral.
B.	Costs of Collection. Upon the occurrence of any default, Bank shall be entitled to recover from Borrower reasonable attorneys’ fees, plus court costs and other expenses which may be incurred by Bank in the enforcement or attempted enforcement of its rights hereunder, whether against any third party, Borrower, or any Other Obligor. Expenses recoverable from Borrower shall (to the extent not prohibited by law) include costs of collection, including such portion of Bank’s overhead as Bank shall allocate to collection and enforcement of the Obligations in Bank’s sole but reasonable discretion, salaries, out-of-pocket travel, living expenses and the hiring of agents, consultants, accountants, or otherwise. All sums of money thus expended, and all other monies expended by Bank to protect its interest in the Collateral (including insurance, taxes or repairs) shall be repayable by Borrower to Bank on demand, such repayment to be secured as provided in Paragraph III hereof.
C.	Foreclosure. Upon the occurrence of any default, in addition to other remedies provided under the Uniform Commercial Code, Bank at any time then or thereafter, in its discretion, may lawfully enter any of Borrower’s premises or the premises where the Collateral is located, and with or without judicial process, lawfully remove, under Section 9-609 of the Uniform Commercial Code, the Collateral or records thereof to such place as Bank may deem advisable, or require Borrower to assemble and make any or all such Collateral available at such reasonable place as Bank may direct, and realize upon (by public or private sale or in any other manner) all or any part of the Collateral and, unless the Collateral is perishable or threatens to decline speedily in value, or is of a type customarily sold on a recognized market, Bank shall give Borrower, and other parties entitled to notice, reasonable notice in writing before the sale of the Collateral or any part thereof at public auction or private sale, in one or more sales, at such price or prices, and upon such terms either for cash or credit or future delivery as Bank may elect, and at any such public sale Bank may bid for and become the purchaser of any or all of such Collateral; and/or Bank may foreclose its security interest in the Collateral in any way permitted by law. In connection with any notices to be given pursuant to this Paragraph VII.C., it is agreed in all instances that five (5) business days notice constitutes reasonable notice. Any such notice shall be deemed given when delivered or deposited in the U.S. mail with first class postage. The net proceeds of any such sale or sales and any amounts received in liquidation of the Collateral, less all costs and expenses incurred in connection therewith, including the costs of collection described in Paragraph VII.B above and, at the option of Bank or as required by law, less any prior lien claims, shall be applied against the Obligations in the order that Bank in its sole discretion shall decide, and Borrower or other party entitled thereto shall be entitled to any surplus resulting therefrom. No action taken by Bank pursuant hereto shall affect Borrower’s continuing liability to Bank for any deficiency remaining after any foreclosure. It is mutually agreed that it is commercially reasonable for Bank to disclaim all warranties which arise with respect to the disposition of the Collateral.
D.	Redemption. The purchaser at any such sale shall thereafter hold the Collateral absolutely free from any claim or right of whatsoever kind including any equity of redemption of Borrower, and such demand, notice or right in equity are hereby expressly waived and released by Borrower.
E.	Offset. Upon the occurrence of any default, Bank is authorized to charge the sum then due to Bank against any and all monies held by or on deposit with Bank on account of Borrower or its affiliates, and to offset any amounts against any demand or depository accounts which Borrower, or its affiliates, may have with Bank and to enforce such other remedies as may be available at law or in equity, without necessity of election.
F.	Alternative Remedies. Bank may exercise its rights and remedies hereunder either alternatively or concurrently with its rights under any and all other agreements between Bank and Borrower and shall have the full right to realize upon all available Collateral, collecting on the same or instituting proceedings in connection therewith, until Bank receives payment in full of all amounts owing to Bank under any of its agreements with Borrower, including principal, interest, costs and expenses, and costs of enforcement or attempted enforcement of this or any other agreement among or between Bank and Borrower or any Other Obligors. Bank shall be under no obligation to pursue Bank’s rights against any Other Obligor or any of the collateral of any Other Obligor securing any of the Obligations before pursuing Bank’s rights against Borrower, or the Collateral.

VIII. GENERAL PROVISIONS

A. Continuity and Termination. This Agreement shall become effective immediately and remain in effect so long as any of the Obligations are outstanding and unpaid, provided that the security interests hereunder shall continue in full force and effect and are noncancellable by Borrower prior to the termination of this Agreement. This Agreement may be terminated by Borrower upon actual delivery of written notice to Bank of such intention, and payment in full of all then existing Obligations; provided, however, that such notice and payment shall in no way affect, and this Agreement shall remain fully operative with respect to, any Obligations (including contingent Obligations), or commitments which may become Obligations, entered into between Borrower and Bank prior to receipt of such notice or payment, whichever is later.

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B.	Right of Bank to Act with Respect to Other Obligors and Collateral. Borrower hereby assents to any and all terms and agreements between Bank and any Other Obligor, and all amendments and modifications thereof, whether presently existing or hereafter made and whether oral or in writing. Bank may, without compromising, impairing, diminishing, or in any way releasing Borrower from the Obligations and without notifying or obtaining the prior approval of Borrower, at any time or from time to time: (i) waive or excuse any default by any Other Obligor, or delay in the exercise by Bank of any or all of Bank’s rights or remedies with respect to such default; (ii) grant extensions of time for payment or performance by any Other Obligor; (iii) release, substitute, exchange, surrender, or add collateral of any Other Obligor, or waive, release, or subordinate, in whole or in part, any lien or security interest held by Bank on any real or personal property securing payment or performance, in whole or in part, of the obligations of any Other Obligor; (iv) release any Other Obligor; (v) apply payments made by any Other Obligor, to any sums owed by any Other Obligor to Bank, in any order or manner, or to any specific account or accounts, as Bank may elect; and (vi) modify, change, renew, extend, or amend, in any respect Bank’s agreement with any Other Obligor, or any document, instrument, or writing, embodying, or reflecting the same.
C.	Waivers By Borrower. Borrower waives: (i) any and all notices whatsoever with respect to this Agreement or with respect to any of the obligations of any Other Obligor to Bank, including, but not limited to, notice of: (a) Bank’s acceptance hereof or Bank’s intention to act, or Bank’s action, in reliance hereon; (b) the present existence or future incurring of any of the obligations of any Other Obligor to Bank or any terms or amounts thereof or any change therein; (c) any default by any Other Obligor; and (d) the obtaining or release of any guaranty or surety agreement, pledge, assignment, or other security for any of the obligations of any Other Obligor to Bank; (ii) presentment and demand for payment of any sum due from any Other Obligor and protest of nonpayment; (iii) demand for performance by any Other Obligor; and (iv) defenses based on suretyship or impairment of collateral.
D.	Information Concerning Collateral or Other Obligors. Bank shall have no present or future duty or obligation to discover or to disclose to Borrower any information, financial or otherwise, concerning any Other Obligor or any collateral securing the Obligations. Borrower waives any right to claim or assert any such duty or obligation on the part of Bank. Borrower agrees to obtain all information which Borrower considers appropriate or relevant to this Agreement from sources other than Bank and to become and remain at all times current and continuously apprised of all information concerning Other Obligors and any Collateral which is material and relevant to the Obligations of Borrower under this Agreement.
E.	Other Documents. The Obligations are or shall be evidenced by notes, guaranties, addenda or other documents which are separate agreements and may be negotiated by Bank without releasing Borrower, any Collateral or any Other Obligor. Without limitation of the foregoing, Borrower may have executed and delivered to Bank a Commercial Finance Addendum, a Reporting Requirements Addendum and/or a Financial Covenants Addendum which modify and supplement this Agreement and Borrower’s obligations hereunder. This Agreement specifically incorporates by reference all of the language and provisions of such notes, guaranties, addenda or other documents. Borrower consents to any extension of time of payment of any Obligations. If there is more than one Borrower or Other Obligor, the obligation of each of them shall be primary, joint and several.
F.	Remedies Cumulative. All rights, remedies and powers of Bank hereunder are irrevocable and cumulative, and not alternative or exclusive, and shall be in addition to all other rights, remedies and powers of Bank whether in or by any other instruments, agreements or any laws, including, but not limited to, the Uniform Commercial Code, now existing or hereafter enacted.
G.	Non-Waiver. No indulgence or delay on the part of Bank in exercising any power, privilege or right hereunder or under any other agreement executed by Borrower to Bank in connection herewith shall operate as a waiver thereof. No single or partial exercise of any power, privilege or right shall preclude other or further exercise thereof, or the exercise of any other power, privilege or right.
H.	Governing Law; Severability. This Agreement shall be construed and governed by the laws of the State of Maryland, If any part of this Agreement shall be adjudged invalid or unenforceable as of any term of court, then such partial invalidity or unenforceability shall not cause the remainder of this Agreement to be or become invalid or unenforceable, and if a provision hereof is held invalid or unenforceable in one or more of its applications, that provision shall remain in effect in all valid or enforceable applications that are severable from the invalid or unenforceable application or applications.
I.	Litigation. In the event of any litigation with respect to this Agreement, the promissory note(s) or other agreements evidencing and securing the Obligations, the Collateral, or any other document or agreement applicable thereto, Borrower waives all defenses (including the defense of statute of limitations). Borrower consents to the jurisdiction and venue of the courts of any county or city in the State of Maryland and to the jurisdiction and venue of the United States District Court for the District of Maryland in any action or judicial proceeding brought to enforce, construe or interpret this Agreement.
J.	Construction. All accounting terms not otherwise defined in this Agreement shall be interpreted in accordance with G.A.A.P. The captions are inserted only as a matter of convenience and for reference and in no way define, limit or describe the scope of this Agreement nor the intent of any provision thereof. If this Agreement is signed by two or more parties as Borrowers, the term “Borrower” shall mean each and every party signing this Agreement as a Borrower. The use of singular herein may also refer to the plural, and vice versa, and the use of the neuter or any gender shall be applicable to any other gender or the neuter.
K.	Assignment. None of the parties shall be bound by any assignment not expressed in writing. This Agreement shall inure to and be binding upon the heirs, personal representatives, successors, and assigns of Borrower and Bank, and the terms “Borrower” and “Bank” shall include and mean, respectively, the successors and assigns of Borrower and Bank.
L.	Time. Time is of the essence of all Obligations.
M.	Joint And Several Obligations. In the event there is more than one Borrower hereunder, all obligations and liabilities under this Agreement shall be joint and several obligations and liabilities of each Borrower. In addition, all covenants and agreements of Borrower hereunder shall be applicable to each Borrower individually and all Borrowers collectively. The occurrence of any event or occurrence set forth herein as a default to any one Borrower shall constitute a default under this Agreement as to all Borrowers.

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N. Notices. Any notice or demand required or permitted by or in connection with this Agreement or any other loan document shall be in writing and shall be made by hand delivery, by Federal Express or other similar overnight delivery service, or by certified mail, unrestricted delivery, return receipt requested, postage prepaid, addressed to the respective parties at the appropriate address set forth on the signature page hereof or to such other address as may be hereafter specified by written notice by the respective parties. Notice shall be considered given as of the date of facsimile or hand delivery, one (1) calendar day after delivery to Federal Express or similar overnight delivery service, or three (3) calendar days after the date of mailing, independent of the date of actual delivery or whether delivery is ever in fact made, as the case may be, provided the giver of notice can establish the fact that notice was given as provided herein. If notice is tendered pursuant to the provisions of this section and is refused by the intended recipient thereof, the notice, nevertheless, shall be considered to have been given and shall be effective as of the date herein provided. Notwithstanding anything to the contrary, all notices and demands for payment from the holder actually received in writing by Borrower shall be considered to be effective upon the receipt thereof by Borrower regardless of the procedure or method utilized to accomplish delivery thereof to Borrower.

IX. ADDITIONAL COVENANTS

A.	Conditions to Advances. Prior to or contemporaneously with any advance hereunder, Liberty Bank shall release any lien it may have on Borrower’s assets.
B.	Primary Depository. As long as this Agreement or any other credit agreement between Borrower and Bank remains in effect, Borrower shall make Bank its primary depository and cash management financial institution. All of Borrower’s Operating accounts shall provide for automatic payments of interest, late charges and service charges.

X. ADDRESSES

Address of Chief Executive Office of Borrower:	5250 Cherokee Avenue
	Alexandria, Virginia 22312
	Telephone: 703-658-2416
Address of Location of Books and Records
Relating to Collateral:	5250 Cherokee Avenue
	Alexandria, Virginia 22312
	Telephone: 703-658-2416

XI. Waiver of Trial by Jury. Borrower and Bank agree that any suit, action, or proceeding, whether claim or counterclaim, brought or instituted by or against either party hereto or any successor or assign of either party on or with respect to this Agreement or any other Loan document or which in any relates, directly or indirectly, to the Obligations or any event, transaction or the dealings of the parties with respect thereto, shall be tried only by a court and not by a jury. BORROWER AND BANK HEREBY EXPRESSLY WAIVE ANY RIGHT TO A TRIAL BY JURY IN ANY SUCH SUIT, ACTION, OR PROCEEDING. Borrower and Bank acknowledge and agree that this provision is a specific and material aspect of this Agreement between the parties and that Bank would not extend the Loan to Borrower if this waiver of jury trial provision were not a part of this Agreement.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

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     IN WITNESS WHEREOF, and intending to be legally bound hereby, Borrower has executed this Agreement under seal as of the day and year first above written at Baltimore, Maryland.

WITNESS OR ATTEST*:
*Note: Attestation of a corporate officer’s capacity to sign by another corporate officer is required in all corporate transactions.

	HALIFAX CORPORATION
/s/Charles L. McNew	By:	/s/Joseph Sciacca	(SEAL)
(Signature)		Joseph Sciacca
		Chief Financial Officer

	HALIFAX ENGINEERING, INC.
/s/Charles L. McNew	By:	/s/Joseph Sciacca	(SEAL)
(Signature)		Joseph Sciacca
		Vice President, Secretary and Treasurer

	MICROSERV LLC
/s/Charles L. McNew	By:	/s/Joseph Sciacca	(SEAL)
(Signature)		Joseph Sciacca
		Vice President, Secretary and Treasurer

	HALIFAX ALPHANATIONAL ACQUISITION, INC.
/s/Charles L. McNew	By:	/s/Joseph Sciacca	(SEAL)
(Signature)		Joseph Sciacca
		Vice President, Secretary and Treasurer
	5250 Cherokee Avenue Alexandria, Virginia 22312 Telephone: 703-658-2416 Facsimile: 703-658-2478 Federal Tax Identification No. 54-0829246
	ACCEPTED AT FALLS CHURCH, VIRGINIA, AS OF THE DATE HEREOF: PROVIDENT BANK
	By:	/s/E. Gaye Boyette	(SEAL)
		E. Gaye Boyette
		Senior Vice President

Page 12 of 15

FINANCIAL COVENANTS ADDENDUM

THIS FINANCIAL COVENANTS ADDENDUM (“Addendum”) is dated as of June 29, 2005, by and between HALIFAX CORPORATION, a Virginia corporation (“Halifax”), HALIFAX ENGINEERING, INC., a Virginia corporation (“Engineering”), MICROSERV LLC, a Delaware limited liability company (“Microserv”), and HALIFAX ALPHANATIONAL ACQUISITION, INC., a Delaware corporation (“AlphaNational”; collectively with Halifax, Engineering and Microserv, “Borrower”) and, PROVIDENT BANK (“Bank”), a Maryland banking corporation. This Addendum is given to supplement and amend the Second Amended and Restated Loan and Security Agreement dated as of June 29, 2005, by and between Borrower and Bank (“Loan Agreement”).

I.

DEFINITIONS. The following terms have the following definitions (each definition is equally applicable to the singular and plural forms of the terms used, as the context requires):

A.	“Current Assets” means, at any time, the aggregate amount of all current assets, including, but not limited to, cash, cash equivalents, marketable securities, receivables maturing within twelve (12) months from such time, inventory (net of allowances for inventory valuation reserve), and prepaid expenses but excluding officer, stockholder and employee advances and receivables, all as determined in accordance with G.A.A.P.
B.	“Current Liabilities” means, at any time, the aggregate amount of all liabilities and obligations which are due and payable on demand or within twelve (12) months from such time, or should be properly reflected as attributable to such twelve (12) month period in accordance with G.A.A.P. Current Liabilities shall not include deferred income tax liabilities.
C.	“Current Ratio” means the ratio of Current Assets to Current Liabilities.
D.	“Debt Service Coverage Ratio” means the ratio of EBITDA to the sum of (i) Interest Expense and (ii) the current portion of long term debt excluding Subordinated Debt for the prior quarter.
E.	“EBITDA” means the sum of (i) the net income of Borrower, plus (ii) depreciation expense and amortization, plus (iii) Interest Expense, plus (iv) taxes, all determined in accordance with G.A.A.P.
F.	“G.A.A.P.” means, with respect to any date of determination, generally accepted accounting principles as used by the Financial Accounting Standards Board and/or the American Institute of Certified Public Accountants consistently applied and maintained throughout the periods indicated.
G.	“Interest Expense” means all finance charges reflected on the income statement as interest expense for all obligations of Borrower to any person, including, but not limited to, Bank, as shown on the balance sheet in accordance with G.A.A.P.
H.	“Obligations” means the “Obligations,” as defined in the Loan Agreement.
I.	“Subordinated Debt” means all obligations of Borrower to any person, payment of which has been expressly subordinated to all of the Obligations pursuant to a written agreement signed by Bank and the holder of such debt.
J.	“Tangible Net Worth” means the net worth of Borrower excluding all intangibles, including but not limited to, good will and intangible assets, all determined in accordance with G.A.A.P.
K.	“Total Liabilities” means all liabilities and obligations.

II. FINANCIAL COVENANTS. Borrower shall remain in compliance with each of the covenants set forth in the Paragraphs below.

Borrower’s Initials:

___ [x ] A. Borrower shall at all times maintain minimum Tangible Net Worth plus Subordinated Debt of not less than $3,000,000.00 through September 30, 2005, and not less than $4,000,000.00 as of December 31, 2005 and thereafter. This shall be measured on June 30, 2005 and the last date of each subsequent quarter.

Page 13 of 15

___	[x ]	B.	Borrower shall maintain a ratio of Total Liabilities less Subordinated Debt to Tangible Net Worth plus Subordinated Debt of not greater than 6.8:1 on June 30, 2005 and 4.0:1 as of September 30, 2005 and thereafter. This ratio shall be measured on June 30, 2005 and the last date of each subsequent quarter.
___	[x ]	C.	Borrower shall at all times maintain a Debt Service Coverage Ratio greater than or equal to 1.25:1 for the quarter ending on June 30, 2005 and the last day of each subsequent quarter.
___	[x ]	D.	Borrower shall maintain a Current Ratio equal to or greater than 1.4:1 on June 30, 2005 and the last day of each subsequent quarter.

III.	GENERAL PROVISIONS. This Addendum is hereby made a part of the Loan Agreement.
	IN WITNESS WHEREOF, and intending to be legally bound hereby, Borrower has executed this Addendum under seal as of the day and year first above written.

WITNESS OR ATTEST*:
*Note: Attestation of a corporate officer’s capacity to sign by another corporate officer is required in all corporate transactions.

WITNESS/ATTEST:	HALIFAX CORPORATION
/s/Charles L. McNew
(Signature)	By:	/s/Joseph Sciacca	(SEAL)
Charles L. Mcnew		Joseph Sciacca
(Print Name)		Chief Financial Officer

HALIFAX ENGINEERING, INC.
By:	/s/Joseph Sciacca	(SEAL)
	Joseph Sciacca
	Vice President, Secretary and Treasurer
MICROSERV LLC
By:	/s/Joseph Sciacca	(SEAL)
	Joseph Sciacca
	Vice President, Secretary and Treasurer

HALIFAX ALPHANATIONAL ACQUISITION, INC.
By:	/s/Joseph Sciacca	(SEAL)
	Joseph Sciacca
	Vice President, Secretary and Treasurer
ACCEPTED AT FALLS CHURCH, VIRGINIA AS OF THE DATE HEREOF
PROVIDENT BANK
By:	/s/E. Gaye Boyette	(SEAL)
	E Gaye Boyette
	Senior Vice President

Page 14 of 15

Page 15 of 15

EX-4.10

Exhibit 4.10

HALIFAX CORPORATION

AMENDMENT TO 8% PROMISSORY NOTES

     THIS AGREEMENT is made and entered into, effective for all purposes and in all respects as of the 29th day of June 2005 by and between (i) HALIFAX CORPORATION, a Virginia corporation (the “Company”) and (ii) Nancy Morrison Scurlock (“Scurlock”).

WITNESSETH

     WHEREAS, the Company is indebted to Scurlock (pursuant to the Assignment of Promissory Notes dated as of October 18, 2004 by and between the Nancy M. Scurlock Trust, dated December 9, 2002 and Scurlock) in the aggregate principal amount of One Million Dollars ($1,000,000), with interest thereon pursuant to the 8% Promissory Notes dated October 8, 1998, October 13, 1998, November 2, 1998 and November 5, 1998 (the “Notes”);

     WHEREAS, the Subordination Agreement, dated March 6, 2002, by and among the Company, Research Industries and Provident Bank (successor by merger to Southern Financial Bank) (the “Subordination Agreement”) subordinates the Notes to the Senior Loan Facility (as defined below) and prohibits repayment of principal of the Notes while the Senior Loan Facility is outstanding without prior approval from the Company’s lender under the Senior Loan Facility;

     WHEREAS, in order to correct the inherent inconsistencies between the Notes and the Subordination Agreement, the Company and Scurlock wish to extend the maturity date of the Notes to July 1, 2007, which date is the next day immediately succeeding the expiration of the Amended and Restated Loan and Security Agreement, dated as of November 8, 2004, by and between the Company, Halifax Engineering, Inc., a Virginia corporation, Microserv LLC, a Delaware limited liability company and Halifax AlphaNational Acquisition, Inc., a Delaware corporation, and Provident Bank, a Maryland banking corporation, of Baltimore, Maryland, and the successor by merger to Southern Financial Bank which Amended and Restated Loan and Security Agreement combines, amends and replaces the Security Agreement dated as of March 6, 2002, Change in Terms Agreements dated as of March 12, 2002 and April 3, 2003 and ARTS Security and Finance Agreement dated as of September 9, 2003, each executed by the Company and Bank, as amended, as may be amended and further extended from time to time (the “Senior Loan Facility”);

     WHEREAS, Scurlock wishes to waive any rights she has regarding the acceleration of the Notes and the Company’s requirement that the Company provide Scurlock with notice of events of default under the Notes which may have arisen or occurred prior to the date of this Agreement, it being understood that Scurlock is not waiving her rights regarding the acceleration of the Notes as a result of, or notice of, any events of default under the Notes arising on or after the date hereof;

     NOW, THEREFORE, in consideration of the mutual covenants made herein and other good and valuable consideration, receipt of which is hereby acknowledged, the Company and Scurlock hereby agree as follows:

     A. Recitals; Defined Terms. The foregoing recitals are hereby incorporated by this reference and made a substantive part hereof.

     B. Extension of the Maturity Date of the Notes. The Company and Scurlock hereby agree that the maturity date of the Notes shall be July 1, 2007, which date is the next day immediately succeeding the expiration of the Senior Loan Facility.

     C. Waiver of Prior Events of Default. Scurlock hereby waives any rights she has regarding the acceleration of the Notes and the Company’s requirement that the Company provide Scurlock with notice of events of default under the Notes which may have arisen or occurred prior to the date of this Agreement, it being understood that Scurlock is not waiving her rights regarding the acceleration of the Notes as a result of, or notice of, any events of default under the Notes arising on or after the date hereof.

     D. Representation and Warranties.

     1. The Company hereby represents and warrants as follows (with the effectiveness of this Agreement being further conditioned upon all such representations and warranties being true and correct in all material respects on the date of this Agreement):

(a)

The execution, delivery and performance by the Company of this Agreement have been duly authorized by all necessary corporate action; and

(b)

This Agreement constitutes the legal, valid and binding obligation of the Company enforceable against it in accordance with its terms, except to the extent that such enforcement may be limited by applicable bankruptcy, insolvency, equitable remedies and other similar laws affecting creditors’ rights generally, and except that the availability of equitable remedies is subject to the discretion of the court before which such remedies are sought.

     2. Scurlock hereby represents and warrants (with the effectiveness of this Agreement being further conditioned upon all such representations and warranties being true and correct in all material respects on the date of this Agreement) that this Agreement constitutes the legal, valid and binding obligation of Scurlock, enforceable against her in accordance with its terms, except to the extent that such enforcement may be limited by applicable bankruptcy, insolvency, equitable remedies and other similar laws affecting creditors’ rights generally, and except that the availability of equitable remedies is subject to the discretion of the court before which such remedies are sought.

     E. Effect on the Agreement. Except as specifically amended or agreed to hereby, the Notes shall continue to be in full force and effect and are hereby in all respects ratified and confirmed. This Agreement shall be binding upon, and shall inure to the benefit of, the parties hereto and their respective successors and assigns.

     F. Execution in Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute but one and the same agreement. Delivery of an executed counterpart of a signature page to this Agreement by telecopier or facsimile shall be effective as delivery of a manually executed counterpart of this Agreement.

2

3

     IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed on their behalf in their respective corporate names by their duly authorized officers all as of the date first above written.

HALIFAX CORPORATION
By:	/s/ Joseph Sciacca
	Name: Joseph. Sciacca
	Title: Chief Financial Officer
	/s/ Nancy Morrison Scurlock
	Nancy Morrison Scurlock, Individually

4

EX-4.11

Exhibit 4.11

HALIFAX CORPORATION

AMENDMENT TO 8% PROMISSORY NOTES

     THIS AGREEMENT is made and entered into, effective for all purposes and in all respects as of the 29th day of June 2005 by and between (i) HALIFAX CORPORATION, a Virginia corporation (the “Company”) and (ii) the ARCH C. SCURLOCK CHILDREN’S TRUST, dated December 9, 2003 (the “Trust”).

WITNESSETH

     WHEREAS, the Company is indebted to the Trust (pursuant to the Assignment of Promissory Notes dated as of October 18, 2004 by and between the Arch C. Scurlock Trust, dated June 13, 1997 and made irrevocable on December 9, 2002 and the Nancy M. Scurlock Trust, dated December 9, 2002 and the Trust) in the aggregate principal amount of One Million Dollars ($1,000,000), with interest thereon pursuant to the 8% Promissory Notes dated October 8, 1998, October 13, 1998, November 2, 1998 and November 5, 1998 (the “Notes”);

     WHEREAS, the Subordination Agreement, dated March 6, 2002, by and among the Company, Research Industries and Provident Bank (successor by merger to Southern Financial Bank) (the “Subordination Agreement”) subordinates the Notes to the Senior Loan Facility (as defined below) and prohibits repayment of principal of the Notes while the Senior Loan Facility is outstanding without prior approval from the Company’s lender under the Senior Loan Facility;

     WHEREAS, in order to correct the inherent inconsistencies between the Notes and the Subordination Agreement, the Company and the Trust wish to extend the maturity date of the Notes to July 1, 2007, which date is the next day immediately succeeding the expiration of the Amended and Restated Loan and Security Agreement, dated as of November 8, 2004, by and between the Company, Halifax Engineering, Inc., a Virginia corporation, Microserv LLC, a Delaware limited liability company and Halifax AlphaNational Acquisition, Inc., a Delaware corporation, and Provident Bank, a Maryland banking corporation, of Baltimore, Maryland, and the successor by merger to Southern Financial Bank which Amended and Restated Loan and Security Agreement combines, amends and replaces the Security Agreement dated as of March 6, 2002, Change in Terms Agreements dated as of March 12, 2002 and April 3, 2003 and ARTS Security and Finance Agreement dated as of September 9, 2003, each executed by the Company and Bank, as amended, as may be amended and further extended from time to time (the “Senior Loan Facility”);

     WHEREAS, the Trust wishes to waive any rights it has regarding the acceleration of the Notes and the Company’s requirement that the Company provide the Trust with notice of events of default under the Notes which may have arisen or occurred prior to the date of this Agreement, it being understood that the Trust is not waiving its rights regarding the acceleration of the Notes as a result of, or notice of, any events of default under the Notes arising on or after the date hereof;

     NOW, THEREFORE, in consideration of the mutual covenants made herein and other good and valuable consideration, receipt of which is hereby acknowledged, the Company and the Trust hereby agree as follows:

     A. Recitals; Defined Terms. The foregoing recitals are hereby incorporated by this reference and made a substantive part hereof.

     B. Extension of the Maturity Date of the Notes. The Company and the Trust hereby agree that the maturity date of the Notes shall be July 1, 2007, which date is the next day immediately succeeding the expiration of the Senior Loan Facility.

     C. Waiver of Prior Events of Default. The Trust hereby waives any rights it has regarding the acceleration of the Notes and the Company’s requirement that the Company provide the Trust with notice of events of default under the Notes which may have arisen or occurred prior to the date of this Agreement, it being understood that the Trust is not waiving its rights regarding the acceleration of the Notes as a result of, or notice of, any events of default under the Notes arising on or after the date hereof.

     D. Representation and Warranties.

     1. The Company hereby represents and warrants as follows (with the effectiveness of this Agreement being further conditioned upon all such representations and warranties being true and correct in all material respects on the date of this Agreement):

(a)

The execution, delivery and performance by the Company of this Agreement have been duly authorized by all necessary corporate action; and

(b)

This Agreement constitutes the legal, valid and binding obligation of the Company, enforceable against it in accordance with its respective terms, except to the extent that such enforcement may be limited by applicable bankruptcy, insolvency, equitable remedies and other similar laws affecting creditors’ rights generally, and except that the availability of equitable remedies is subject to the discretion of the court before which such remedies are sought.

     2. The Trust hereby represents and warrants as follows (with the effectiveness of this Agreement being further conditioned upon all such representations and warranties being true and correct in all material respects on the date of this Agreement):

(a)

The execution, delivery and performance by the Trust of this Agreement have been duly authorized by all necessary corporate action; and

(b)

This Agreement constitutes the legal, valid and binding obligation of the Trust, enforceable against it in accordance with its respective terms, except to the extent that such enforcement may be limited by applicable bankruptcy, insolvency, equitable remedies and other similar laws affecting creditors’ rights generally, and except that the availability of equitable remedies is subject to the discretion of the court before which such remedies are sought.

2

     E. Effect on the Agreement. Except as specifically amended or agreed to hereby, the Notes shall continue to be in full force and effect and are hereby in all respects ratified and confirmed. This Agreement shall be binding upon, and shall inure to the benefit of, the parties hereto and their respective successors and assigns.

     F. Execution in Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute but one and the same agreement. Delivery of an executed counterpart of a signature page to this Agreement by telecopier or facsimile shall be effective as delivery of a manually executed counterpart of this Agreement.

[Signature Page Follows]

3

     IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed on their behalf in their respective corporate names by their duly authorized officers all as of the date first above written.

HALIFAX CORPORATION
By:	/s/ Joseph Sciacca
	Name:	Joseph. Sciacca
	Title:	Chief Financial Officer
ARCH C. SCURLOCK CHILDREN’S TRUST,
dated December 9, 2002
By:	/s/ Mary Scurlock Adamson
	Name:	Mary Scurlock Adamson, Trustee
By:	/s/ John H. Grover
	Name:	John H. Grover, Trustee
By:	/s/ Arch C. Scurlock, Jr.
	Name:	Arch C. Scurlock, Jr., Trustee
By:	/s/ Nancy M. Scurlock
	Name:	Nancy M. Scurlock, Trustee

4

EX-4.12

Exhibit 4.12

HALIFAX CORPORATION

AMENDMENT TO 7% SUBORDINATED DEBENTURE

     THIS AGREEMENT is made and entered into, effective for all purposes and in all respects as of the 29^th day of June 2005 by and between (i) HALIFAX CORPORATION, a Virginia corporation (the “Company”) and (ii) Nancy Morrison Scurlock (“Scurlock”).

WITNESSETH

     WHEREAS, the Company is indebted to Scurlock (pursuant to the Assignment of Subordinated Debenture dated as of October 18, 2004 by and between the Nancy M. Scurlock Trust, dated December 9, 2003 and Scurlock) in the modified principal amount of Two Hundred Thousand Dollars ($200,000), with interest thereon pursuant to the 7% Subordinated Debenture dated January 27, 1998 and modified on August 7, 2003 and September 30, 2003 (the “Debenture”);

     WHEREAS, the Subordination Agreement, dated March 6, 2002, by and among the Company, Research Industries and Provident Bank (successor by merger to Southern Financial Bank) (the “Subordination Agreement”) subordinates the Debenture to the Senior Loan Facility (as defined below) and prohibits repayment of principal of the Debenture while the Senior Loan Facility is outstanding without prior approval from the Company’s lender under the Senior Loan Facility;

     WHEREAS, in order to correct the inherent inconsistencies between the Debenture and the Subordination Agreement, the Company and Scurlock wish to extend the maturity date of the Debenture to July 1, 2007, which date is the next day immediately succeeding the expiration of the Amended and Restated Loan and Security Agreement, dated as of November 8, 2004, by and between the Company, Halifax Engineering, Inc., a Virginia corporation, Microserv LLC, a Delaware limited liability company and Halifax AlphaNational Acquisition, Inc., a Delaware corporation, and Provident Bank, a Maryland banking corporation, of Baltimore, Maryland, and the successor by merger to Southern Financial Bank which Amended and Restated Loan and Security Agreement combines, amends and replaces the Security Agreement dated as of March 6, 2002, Change in Terms Agreements dated as of March 12, 2002 and April 3, 2003 and ARTS Security and Finance Agreement dated as of September 9, 2003, each executed by the Company and Bank, as amended, as may be amended and further extended from time to time (the “Senior Loan Facility”);

     WHEREAS, Scurlock wishes to waive any rights she has regarding the acceleration of the Debenture and the Company’s requirement that the Company provide Scurlock with notice of events of default under the Debenture which may have arisen or occurred prior to the date of this Agreement, it being understood that Scurlock is not waiving her rights regarding the acceleration of the Debenture as a result of, or notice of, any events of default under the Debenture arising on or after the date hereof;

     NOW, THEREFORE, in consideration of the mutual covenants made herein and other good and valuable consideration, receipt of which is hereby acknowledged, the Company and Scurlock hereby agree as follows:

     A. Recitals; Defined Terms. The foregoing recitals are hereby incorporated by this reference and made a substantive part hereof.

     B. Extension of the Maturity Date of the Debenture. The Company and Scurlock hereby agree that the maturity date of the Debenture shall be July 1, 2007, which date is the next day immediately succeeding the expiration of the Senior Loan Facility.

     C. Waiver of Prior Events of Default. Scurlock hereby waives any rights she has regarding the acceleration of the Debenture and the Company’s requirement that the Company provide Scurlock with notice of events of default under the Debenture which may have arisen or occurred prior to the date of this Agreement, it being understood that Scurlock is not waiving her rights regarding the acceleration of the Debenture as a result of, or notice of, any events of default under the Debenture arising on or after the date hereof.

     D. Representation and Warranties.

     1. The Company hereby represents and warrants as follows (with the effectiveness of this Agreement being further conditioned upon all such representations and warranties being true and correct in all material respects on the date of this Agreement):

(a)

The execution, delivery and performance by the Company of this Agreement have been duly authorized by all necessary corporate action; and

(b)

This Agreement constitutes the legal, valid and binding obligation of the Company, enforceable against it in accordance with its terms, except to the extent that such enforcement may be limited by applicable bankruptcy, insolvency, equitable remedies and other similar laws affecting creditors’ rights generally, and except that the availability of equitable remedies is subject to the discretion of the court before which such remedies are sought.

     2. Scurlock hereby represents and warrants (with the effectiveness of this Agreement being further conditioned upon all such representations and warranties being true and correct in all material respects on the date of this Agreement) that this Agreement constitutes the legal, valid and binding obligations of Scurlock, enforceable against her in accordance with its terms, except to the extent that such enforcement may be limited by applicable bankruptcy, insolvency, equitable remedies and other similar laws affecting creditors’ rights generally, and except that the availability of equitable remedies is subject to the discretion of the court before which such remedies are sought.

     E. Effect on the Agreement. Except as specifically amended or agreed to hereby, the Debenture shall continue to be in full force and effect and is hereby in all respects ratified and confirmed. This Agreement shall be binding upon, and shall inure to the benefit of, the parties hereto and their respective successors and assigns.

     F. Execution in Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so

2

executed and delivered shall be deemed to be an original and all of which taken together shall constitute but one and the same agreement. Delivery of an executed counterpart of a signature page to this Agreement by telecopier or facsimile shall be effective as delivery of a manually executed counterpart of this Agreement.

3

IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed on their behalf in their respective corporate names by their duly authorized officers all as of the date first above written.

HALIFAX CORPORATION
By:	/s/ Joseph Sciacca
	Name:	Joseph. Sciacca
	Title:	Chief Financial Officer
/s/ Nancy Morrison Scurlock
Nancy Morrison Scurlock, Individually

4

EX-4.13

Exhibit 4.13

HALIFAX CORPORATION

AMENDMENT TO 7% SUBORDINATED DEBENTURE

     THIS AGREEMENT is made and entered into, effective for all purposes and in all respects as of the 29^th day of June 2005 by and between (i) HALIFAX CORPORATION, a Virginia corporation (the “Company”) and (ii) the ARCH C. SCURLOCK CHILDREN’S TRUST, dated December 9, 2003 (the “Trust”).

WITNESSETH

     WHEREAS, the Company is indebted to the Trust (pursuant to the Assignment of Subordinated Debenture dated as of October 18, 2004 by and between the Arch C. Scurlock Trust, dated June 13, 1997 and made irrevocable on December 9, 2002 and the Nancy M. Scurlock Trust, dated December 9, 2002 and the Trust) in the modified principal amount of Two Hundred Thousand Dollars ($200,000), with interest thereon pursuant to the 7% Subordinated Debenture dated January 27, 1998 and modified on August 7, 2003 and September 30, 2003 (the “Debenture”);

     WHEREAS, the Subordination Agreement, dated March 6, 2002, by and among the Company, Research Industries and Provident Bank (successor by merger to Southern Financial Bank) (the “Subordination Agreement”) subordinates the Debenture to the Senior Loan Facility (as defined below) and prohibits repayment of principal of the Debenture while the Senior Loan Facility is outstanding without prior approval from the Company’s lender under the Senior Loan Facility;

     WHEREAS, in order to correct the inherent inconsistencies between the Debenture and the Subordination Agreement, the Company and the Trust wish to extend the maturity date of the Debenture to July 1, 2007, which date is the next day immediately succeeding the expiration of the Amended and Restated Loan and Security Agreement, dated as of November 8, 2004, by and between the Company, Halifax Engineering, Inc., a Virginia corporation, Microserv LLC, a Delaware limited liability company and Halifax AlphaNational Acquisition, Inc., a Delaware corporation, and Provident Bank, a Maryland banking corporation, of Baltimore, Maryland, and the successor by merger to Southern Financial Bank which Amended and Restated Loan and Security Agreement combines, amends and replaces the Security Agreement dated as of March 6, 2002, Change in Terms Agreements dated as of March 12, 2002 and April 3, 2003 and ARTS Security and Finance Agreement dated as of September 9, 2003, each executed by the Company and Bank, as amended, as may be amended and further extended from time to time (the “Senior Loan Facility”);

     WHEREAS, the Trust wishes to waive any rights it has regarding the acceleration of the Debenture and the Company’s requirement that the Company provide the Trust with notice of events of default under the Debenture which may have arisen or occurred prior to the date of this Agreement, it being understood that the Trust is not waiving its rights regarding the acceleration of the Debenture as a result of, or notice of, any events of default under the Debenture arising on or after the date hereof;

     NOW, THEREFORE, in consideration of the mutual covenants made herein and other good and valuable consideration, receipt of which is hereby acknowledged, the Company and the Trust hereby agree as follows:

     A. Recitals; Defined Terms. The foregoing recitals are hereby incorporated by this reference and made a substantive part hereof.

     B. Extension of the Maturity Date of the Debenture. The Company and the Trust hereby agree that the maturity date of the Debenture shall be July 1, 2007, which date is the next day immediately succeeding the expiration of the Senior Loan Facility.

     C. Waiver of Prior Events of Default. The Trust hereby waives any rights it has regarding the acceleration of the Debenture and the Company’s requirement that the Company provide the Trust with notice of events of default under the Debenture which may have arisen or occurred prior to the date of this Agreement, it being understood that the Trust is not waiving its rights regarding the acceleration of the Debenture as a result of, or notice of, any events of default under the Debenture arising on or after the date hereof.

     D. Representation and Warranties.

     1. The Company hereby represents and warrants as follows (with the effectiveness of this Agreement being further conditioned upon all such representations and warranties being true and correct in all material respects on the date of this Agreement):

(a)

The execution, delivery and performance by the Company of this Agreement have been duly authorized by all necessary corporate action; and

(b)

This Agreement constitutes the legal, valid and binding obligation of the Company, enforceable against it in accordance with its terms, except to the extent that such enforcement may be limited by applicable bankruptcy, insolvency, equitable remedies and other similar laws affecting creditors’ rights generally, and except that the availability of equitable remedies is subject to the discretion of the court before which such remedies are sought.

     2. The Trust hereby represents and warrants as follows (with the effectiveness of this Agreement being further conditioned upon all such representations and warranties being true and correct in all material respects on the date of this Agreement):

(a)

The execution, delivery and performance by the Trust of this Agreement have been duly authorized by all necessary corporate action; and

(b)

This Agreement constitutes the legal, valid and binding obligation of the Trust, enforceable against it in accordance with its terms, except to the extent that such enforcement may be limited by applicable bankruptcy, insolvency, equitable remedies and other similar laws affecting creditors’ rights generally, and except that the availability of equitable remedies is subject to the discretion of the court before which such remedies are sought.

2

     E. Effect on the Agreement. Except as specifically amended or agreed to hereby, the Debenture shall continue to be in full force and effect and is hereby in all respects ratified and confirmed. This Agreement shall be binding upon, and shall inure to the benefit of, the parties hereto and their respective successors and assigns.

     F. Execution in Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute but one and the same agreement. Delivery of an executed counterpart of a signature page to this Agreement by telecopier or facsimile shall be effective as delivery of a manually executed counterpart of this Agreement.

[Signature Page Follows]

3

     IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed on their behalf in their respective corporate names by their duly authorized officers all as of the date first above written.

HALIFAX CORPORATION
By:	/s/ Joseph Sciacca
	Name:	Joseph. Sciacca
	Title:	Chief Financial Officer
ARCH C. SCURLOCK CHILDREN’S TRUST,
dated December 9, 2002
By:	/s/ Mary Scurlock Adamson
	Name:	Mary Scurlock Adamson, Trustee
By:	/s/ John H. Grover
	Name:	John H. Grover, Trustee
By:	/s/ Arch C. Scurlock, Jr.
	Name:	Arch C. Scurlock, Jr., Trustee
By:	/s/ Nancy M. Scurlock
	Name:	Nancy M. Scurlock, Trustee

4

EX-10.16

Exhibit 10.16

SUMMARY SHEET OF DIRECTOR FEES AND OFFICER COMPENSATION

I. Director Compensation

     As compensation for their service as directors of Halifax Corporation (the “Company”), each non-employee member of the Board of Directors (the “Board”) receives a $1,000 annual fee. Payment of the annual fee is made at the annual meeting. Additionally, each non-employee member of the Board receives $2,000 for each regular Board meeting attended in person, $1,000 for each regular Board meeting attended telephonically and $1,000 for each special Board meeting. Directors do not receive any compensation for attendance of meetings of the committees of the Board. Non-employee directors are reimburse for reasonable expenses incurred in connection with attending meetings of the Board and committees of the Board.

     In addition, under the Non-employee Directors Stock Option Plan, each non-employee member was granted options to purchase 5,000 shares of the Company’s common stock on the first of the month following the date of the annual meeting of shareholders on which the director was initially elected and was granted options to purchase up to 2,000 shares of common stock on each annual re-election by the shareholders as a director of the Company. Such options were granted at an exercise price equal to or greater than the fair market value of the common stock on the date of grant. No further options may be granted under the Non-employee Directors Stock Option Plan.

II. Executive Compensation

Base Salaries

     The following table sets forth current base salaries of the Company’s CEO and each of the executive officers who were named in the Summary Compensation Table incorporated by reference into the Company’s annual report on Form 10-K for the year ended March 31, 2004 and who are expected to be named in the Summary Compensation Table in the Company’s incorporated by reference into the annual report on Form 10-K for the year ended March 31, 2005 (the “Named Executive Officers”).

Name	Base Salary
Charles L. McNew	$	240,000
Hugh M. Foley		145,000
Joseph Sciacca		160,000
James L. Sherwood, IV*		125,052
Jonathan L. Scott		171,538

* On June 30, 2005, Mr. Sherwood ceased to be employed by the Company.

Participation in Employee Benefit and Other Arrangements

     The Named Executive Officers are also eligible to:

• Participate in the 1994 Key Employee Stock Option Plan;

• Participate in an incentive compensation program for bonuses which are awarded based on achievement of certain objectives set by the Board of Directors by the executive officer and the Company;

• Participate in certain group life, health, medical and other non-cash benefits generally available to all salaried employees.

EX-21.1

Exhibit 21.1

Subsidiaries of the Registrant

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

EX-23

Exhibit 23

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We have issued our report dated June 17, 2005, accompanying the consolidated financial statements and schedule included in the Annual Report of Halifax Corporation and subsidiaries on Form 10-K for the year ended March 31, 2005. We hereby consent to the incorporation by reference of said report in the Registration Statement of Halifax Corporation on Form S-8 (File No. 333-41995, effective December 11, 1997).

/s/Grant Thornton

Vienna, Virginia
June 17, 2005

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in Registration Statement No. 333-41995 of Halifax Corporation and subsidiaries on Form S-8 pertaining to the Halifax Corporation 1994 Key Employee Stock Option Plan and Non-Employee Directors Stock Option Plan of our report dated June 14, 2004 (which report expresses an unqualified opinion and includes an explanatory paragraph related to the adoption of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, effective April 1, 2002), with respect to the consolidated balance sheet of Halifax Corporation as of March 31, 2004 and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for each of the two years in the period then ended appearing in the Annual Report on Form 10-K of Halifax Corporation and subsidiaries for the year ended March 31, 2005.

/s/Deloitte & Touche LLP

McLean, Virginia
July 5, 2005

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Charles L. McNew, certify that:

1.	I have reviewed this report on Form 10-K of Halifax Corporation;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)	(Intentionally omitted);
c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s forth fiscal quarter in the case of any annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting

Date: July 13, 2005	/s/Charles L. McNew
	Charles L. McNew
	Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Joseph Sciacca, certify that:

1.	I have reviewed this report on Form 10-K of Halifax Corporation;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)	(Intentionally omitted);
c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s forth fiscal quarter in the case of any annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting

Date: July 13, 2005	/s/ Joseph Sciacca
	Joseph Sciacca
	Chief Financial Officer

EX-32.1

Exhibit 32.1

HALIFAX CORPORATION

CERTIFICATION PURSUANT TO #18 U.S.C. 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

This Certification is intended to accompany the Report of Halifax Corporation (the “Company”) on Form 10-K for the period ended March 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), and is given solely for the purpose of satisfying the requirements of 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. The undersigned, in his capacity as set forth below, hereby certifies, with respect to the Report, that:

1	The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/Charles L. McNew	Date: July 13, 2005
Charles L. McNew
Chief Executive Officer

The foregoing certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Section 1350 of chapter 63 of Title 18 of the United States code) and is not being filed as part of the Report or as a separate disclosure document.

EX-32.2

Exhibit 32.2

HALIFAX CORPORATION

CERTIFICATION PURSUANT TO #18 U.S.C. 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

This Certification is intended to accompany the Report of Halifax Corporation (the “Company”) on Form 10-K for the period ended March 31, 2005, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), and is given solely for the purpose of satisfying the requirements of 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. The undersigned, in his capacity as set forth below, hereby certifies, with respect to the Report, that:

1	The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/Joseph Sciacca	Date: July 13, 2005
Joseph Sciacca
Chief Financial Officer

The foregoing certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Section 1350 of chapter 63 of Title 18 of the United States code) and is not being filed as part of the Report or as a separate disclosure document.