10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED DECEMBER 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 or organization)	(IRS Employer Identification No.)

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

(703) 750-2400

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

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. þ Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one): Large Accelerated filer o accelerated filer o non-accelerated filer þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes þ No

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. There were 3,172,206 shares of common stock outstanding as of February 3, 2006.

HALIFAX CORPORATION

		Page
PART I FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets — December 31, 2005 (Unaudited) and March 31, 2005		1
	Consolidated Statements of Operations — For the Three and Nine Months ended December 31, 2005 and 2004 (Unaudited)		2
	Consolidated Statements of Cash Flows — For the Nine Months Ended December 31, 2005 and 2004 (Unaudited)		3
	Notes to Consolidated Financial Statements (Unaudited)		4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		10
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		21
Item 4.	Controls and Procedures		21
PART II OTHER INFORMATION
Item 1.	Legal Proceedings		23
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		23
Item 3.	Defaults Upon Senior Securities		23
Item 4.	Submission of Matters to a Vote of Security Holders		23
Item 5.	Other Information		23
Item 6.	Exhibits		23
	Signatures		24
Exhibit 10			24
EX-10
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

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PART I FINANCIAL INFORMATION

Item 1. Financial Statements

HALIFAX CORPORATION CONSOLIDATED BALANCE SHEETS

	December 31, 2005			March 31, 2005
(Amounts in thousands)	(unaudited)
ASSETS
CURRENT ASSETS
Cash	$	555		$	1,264
Restricted cash		2,024			—
Trade accounts receivable, net		11,147			12,468
Inventory, net		6,323			5,600
Prepaid expenses and other current assets		500			487
Deferred Tax Asset		1,083			3,814
TOTAL CURRENT ASSETS		21,632			23,633
PROPERTY AND EQUIPMENT		1,220			1,608
GOODWILL		2,918			6,129
INTANGIBLE ASSETS		1,388			1,309
OTHER ASSETS		133			141
DEFERRED TAX ASSET		750			930
TOTAL ASSETS	$	28,041		$	33,750
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable	$	4,275		$	5,955
Accrued expenses		3,467			4,776
Notes payable		168			662
Income taxes payable		609			—
Deferred maintenance revenue		3,529			3,776
Current portion of long-term debt		4			17
TOTAL CURRENT LIABILITIES		12,052			15,186
LONG-TERM BANK DEBT		7,028			9,463
SUBORDINATED DEBT — PAYABLE TO AFFILIATE		1,000			2,400
OTHER LONG-TERM DEBT		—			3
DEFERRED INCOME		233			278
TOTAL LIABILITIES		20,313			27,330
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 — 3,428,890 as of December 31, 2005 and 3,177,096 as of March 31, 2005 Outstanding - 3,172,206 shares as of December 31, 2005 and 2,920,412 shares as of March 31, 2005		829			827
Additional paid-in capital		9,015			9,011
Accumulated (deficit)		(1,904	)		(3,206	)
Less Treasury stock at cost — 256,684 shares		(212	)		(212	)
TOTAL STOCKHOLDERS’ EQUITY		7,728			6,420
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	28,041		$	33,750

     See notes to Consolidated Financial Statements.

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HALIFAX CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2005 AND 2004 (UNAUDITED)

	Three Months Ended						Nine Months Ended
	December 31,						December 31,
(Amounts in thousands, except share data)	2005			2004			2005			2004
Revenues	$	13,390		$	12,645		$	42,027		$	34,511
Costs		13,076			13,017			39,437			32,956
Gross margin		314			(372	)		2,590			1,555
Selling and marketing		346			395			1,113			1,292
General and administrative		913			989			2,735			2,749
Abandonment of facilities		—			—			—			179
Severance costs		144			—			144			—
Goodwill impairment Loss		3,211			—			3,211			—
Operating loss		(4,300	)		(1,756	)		(4,613	)		(2,665	)
Other income		—			—			(5	)		(3	)
Interest expense		135			163			458			462
Loss before income taxes		(4,435	)		(1,919	)		(5,066	)		(3,124	)
Income tax benefit		(441	)		(668	)		(665	)		(1,107	)
Loss from continuing operations		(3,994	)		(1,251	)		(4,401	)		(2,017	)
Income from discontinued operations (net of taxes of $164 for nine months ended December 31, 2005 and $121 and $628 for the three and nine months ended December 31, 2004)		—			216			310			1,117
Gain on sale of discontinued operations (net of taxes of $3,900)		5,393			—			5,393			—
Net income (loss)	$	1,399		$	(1,035	)	$	1,302		$	(900	)
Earnings (loss) per share — basic
Continuing operations	$	(1.26	)	$	(.40	)	$	(1.39	)	$	(.67	)
Discontinued operations		—			.07			.10			.37
Gain on sale of discontinued operations		1.70			—			1.70			—
	$	.44		$	(.33	)	$	.41		$	(.30	)
Earnings (loss) per share — diluted
Continuing operations	$	(1.26	)	$	(.40	)	$	(1.39	)	$	(.67	)
Discontinued operations		—			.07			.10			.37
Gain on sale of discontinued operations		1.70			—			1.70			—
	$	.44		$	(.33	)	$	.41		$	(.30	)
Weighted number of shares outstanding
Basic		3,172,206			3,166,589			3,171,992			3,002,254
Diluted		3,183,370			3,238,316			3,187,613			3,052,128

     No effect is given to dilutive securities for loss periods.

     See notes to the Consolidated Financial Statements.

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HALIFAX CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED DECEMBER 31, 2005 (UNAUDITED

	Nine Months Ended
	December 31,
(Amounts in thousands)	2005			2004
Cash flows from operating activities:
Net loss continuing operations	$	(4,401	)	$	( 2,017	)
Net income discontinued operations		5,703			1,117
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization		809			797
Goodwill impairment		3,211			—
Deferred tax benefit		(253	)		(479	)
Gain on sale of discontinued operations		(5,393	)		—
Changes in operating assets and liabilities:
Accounts receivable		(922	)		(1,621	)
Inventory		(723	)		167
Prepaid expenses and other assets		(254	)		(195	)
Accounts payable and accrued expenses		(4,204	)		897
Income taxes payable		(106	)		(10	)
Deferred maintenance revenue		(247	)		409
Deferred income		(45	)		(44	)
Total adjustments		(8,127	)		(79	)
Net cash (used in) provided by operating activities		(6,825	)		(979	)
Cash flows from investing activities:
Acquisition of property and equipment		(248	)		(599	)
Proceeds from the sale of discontinued operations		13,057			—
Restricted cash (related to sale of discontinued operations)		(2,024	)		—
Payment for purchase of acquired entities (net of cash received)		(330	)		(802	)
Net cash provided by (used in) investing activities		10,455			(1,401	)
Cash flows from financing activities:
Proceeds from bank borrowing		33,080			25,145
Retirement of bank debt		(35,515	)		(23,148	)
Retirement of other-long-term debt		(1,416	)		(21	)
Retirement of acquisition debt		(494	)		—
Proceeds from issuance of common stock		6			74
Net cash (used in) provided by financing activities		(4,339	)		2,050
Net (decrease) in cash		(709	)		(330	)
Cash at beginning of period		1,264			430
Cash at end of period	$	555		$	100
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest	$	268		$	462
Cash paid for income taxes	$	66		$	80

See notes to the Consolidated Financial Statements.

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Halifax Corporation

Notes to Consolidated Financial Statements

(Unaudited)

Note 1 — Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission and in accordance with the accounting principles generally accepted in the United States of America for interim financial information. Certain information and footnote disclosures normally included in the annual financial statements have been omitted pursuant to those rules and regulations.

In the opinion of management, the accompanying unaudited consolidated financial statements reflect all necessary adjustments and reclassifications (all of which are of a normal, recurring nature) that are necessary for fair presentation for the period presented. The results of the three and nine months ended December 31, 2005 are not necessarily indicative of the results to be expected for the full fiscal year. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in Halifax Corporation’s (the “Company”) annual report on Form 10-K for the year ended March 31, 2005 filed with the Securities and Exchange Commission. Certain reclassifications have been made to the prior period financial statements to conform to the current presentation.

Note 2 — Sale of Secure Network Services Business

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, in addition to adjustments for working capital of approximately of $608,000 for total consideration approximately $13.1 million. The asset purchase agreement provided that $3.0 million of the purchase price was to be held in escrow to serve as security to obtain certain consents, novations and indemnification obligations. At December 31, 2005, $2.0 million plus accrued interest of $24,000 remained in escrow, which is reflected on the accompanying balance sheet as restricted cash. On July 8, 2005, the $1.0 million held in escrow to serve as security to obtain certain consents was released to the Company. Certain novations and consents required under the asset purchase agreement were received and on January 26, 2006 $1.375 million plus accrued interest of $24,000 was paid and released to the Company. Accordingly, $625,000 of the original escrow amount remains in escrow as security for the payment of the Company’s 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. (See Note 2 of the notes to Consolidated Financial Statements contained in the Company’s Form 10-Q for the quarter ended September 30, 2005 for a discussion of the provisions relating to the novations and consents the Company was required to and did obtain.)

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. As of December 31, 2005, the Company is not aware of any claims, either asserted or unasserted associated with remaining amounts in escrow.

In connection with the asset purchase agreement, the Company also transferred to INDUS Corporation all of its right, title and interest in and to its 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 the Company has retained, it has entered into a transition services agreement with

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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 our revenues for the fiscal years ended 2005 and 2004 and represented 7% of the Company’s assets at March 31, 2005.

As a result of receiving notification that the key contract had been novated, the Company recorded a gain on the sale of the secure network services business after taxes, fees and costs of approximately $5.4 million (net of income taxes of approximately $3.9 million). As a result of the sale of the secure network services business, the Company expects to utilize its net operating loss carryforward of approximately $3.0 million in fiscal year ending March 31, 2006 and has reduced its deferred tax asset accordingly. (See Note 6.)

Note 3 — Acquisitions

On December 1, 2005, the Company acquired a contract from Technical Service and Support, Inc., (“TSSI”) for $330,000. The consideration consisted of cash at closing of $300,000 and an additional $30,000 in cash paid 30 days from the date of closing. In addition, the Company hired certain employees and subcontractors of TSSI as of December 1, 2005. The contract rights will be amortized over the remaining life of the contract of fifty-four months.

On September 30, 2004, the Company acquired 100% of the stock of AlphaNational Technology Services, Inc. (“AlphaNational”) for approximately $2.4 million. The consideration was cash of $200,000, notes payable of $168,000 and 235,249 shares of the Company’s common stock valued at $4.38 per share, or $1.03 million plus liabilities assumed of $623,000. In addition, direct acquisition costs were approximately $379,000. 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. In addition, the notes payable to the former AlphaNational shareholders were reduced from $500,000 to $168,000 based upon final adjustments to the closing balance sheet. In addition, the terms of the agreement provided for additional consideration of $150,000 to be paid if revenues of the acquired company exceeded certain targeted levels by September 30, 2005. The revenue targets were not achieved and, as a result, the additional consideration was not paid.

AlphaNational is an enterprise maintenance solutions company providing services to the national marketplace. 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 enhanced the Company’s ability to grow its partnership arrangements with the global service provider community.

Other intangible assets of $810,000 will be amortized over their weighted-average useful lives and include customer contracts of $710,000 (five years) and non-compete agreements of $100,000 (two years).

Note 4 — Accounts Receivable consisted of the following:

(amounts in thousands)	December 31, 2005			March 31, 2005
Amounts billed	$	10,728		$	12,373
Amounts unbilled		782			393
Allowance for doubtful accounts		(363	)		(298	)
Accounts receivable, net	$	11,147		$	12,468

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Note 5 — Inventory

Inventory consists principally of spare parts, computers and computer peripherals, hardware and software. Inventory was recorded on the balance sheet net of allowances for inventory valuation reserve of $747,000 and $1.8 million at December 31, 2005 and March 31, 2005, respectively.

Note 6 — Tax Matters

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. Deferred tax assets and liabilities are measured using enacted rates in effect for the year in which those temporary differences are expected to be recovered or settled. 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. Deferred tax assets are recognized for deductible temporary timing differences, along with net operating loss carryforwards and credit carryforwards, if it is more likely than not that the deferred 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. As a result of the sale of the secure network services business, the Company expects to utilize the net operating loss carryforward in its entirety. The net operating loss of approximately $3.0 million will be utilized for fiscal year ending March 31, 2006 to offset the taxable gain on the sale of the secure networks services business. Management has evaluated the remaining deferred tax asset giving consideration to the full utilization of the net operating loss carryforward and has concluded that, in its judgment, the deferred tax asset remains fully realizable and therefore a valuation allowance need not be established.

Note 7 — Goodwill and Other Intangible Assets

Due to the sale of the Company’s secure network services business as well as losses resulting form continuing operations, the Company tested its goodwill for impairment in advance of its annual testing date. The Company tested its goodwill impairment in accordance with Statement of Financial Accounting Standards Number 142, (“SFAS No. 142”) “Goodwill and Other Intangible Assets”. The resulting impairment loss was determined based on the applicable valuation methods, including the income and market approaches. The Company completed its test for impairment and recorded a $3.2 million non-cash charge for the impairment of goodwill. The charge is reflected as a component of operating loss in the accompanying consolidated statement of operations.

Note 8 — Debt Obligations

Bank Debt

On June 29, 2005, the Company and its subsidiaries amended and restated the Amended and Restated Loan and Security Agreement with Provident Bank. The maturity date is June 30, 2007. The financial covenants are more fully described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations- Liquidity and Capital Resources”. The total amount available under the agreement is $12.0 million. The amount outstanding under the agreement bears interest at the bank’s prime rate plus one-quarter percent (0.25%). The Company will also pay an unused commitment fee on the difference between the maximum amount it 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%). The fee is paid on the last day of each quarter. Additionally, the Company pays a fee of $1,000 per month. Advances under the revolving credit agreement are collateralized by a first priority security interest on all of its assets as defined in the revolving credit agreement. As of December 31, 2005, $7.0 million was outstanding and $5.0 million was available to us. The interest rate at December 31, 2005 was 7.5%.

The revolving credit agreement contains representations, warranties and covenants that are customary in connection with a transaction of this type. The revolving credit agreement also contains certain financial covenants which the Company is 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.

6

At December 31, 2005, the Company was in compliance with the financial covenants contained in its revolving credit agreement.

For more information on the Company’s amended and restated loan and security agreement see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.”

Notes Payable

In conjunction with the acquisition of AlphaNational, the Company issued notes to the former AlphaNational shareholders in the aggregate amount of $168,000, with an interest rate of 6%. The AlphaNational 6% notes mature on March 31, 2006.

Subordinated Debt — Affiliates

The Arch C. Scurlock Children’s Trust, (the “Children’s Trust”) and Nancy M. Scurlock each own 392,211 shares of the Company’s common stock or 25% in the aggregate of the Company’s common stock. The Arch C. Scurlock Children’s Trust and Nancy M. Scurlock are affiliates of the Company (“Affiliates”). Both are greater than 10% shareholders of the Company’s common stock. Arch C. Scurlock, Jr., a beneficiary and trustee of the Children’s Trust, and John H. Grover, a trustee of the Children’s Trust, are our directors. The holders of the 8% promissory notes and 7% convertible subordinated debentures are the Children’s Trust and Nancy M. Scurlock.
The Company 8% promissory notes and 7% convertible subordinated debentures are subordinated to the revolving credit agreement described above.

On June 29, 2005, the Company amended its 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.

During the quarter ended September 30, 2005 and with the consent of Provident Bank, the Company agreed to make principal and accrued interest payments on the 8% promissory notes and 7% convertible subordinated debentures aggregating $1.5 million. The Company utilized a portion of the proceeds from the sale of its secure network services business to make these payments to the holders of its 8% promissory notes and 7% convertible subordinated debentures and made such payments on July 13, 2005. After such payment, the principal balance on the 7% convertible subordinated debenture was paid in full and the aggregate principal balance of the 8% promissory notes was $1.0 million.

The Company’s revolving credit agreement requires the lender’s approval for the payment of dividends or distributions as well as the payment of principal or interest on the Company’s outstanding subordinated debt, which is owned by the Affiliates. Interest expense on the subordinated debt owned by Affiliates is accrued on a current basis.

The balance of accrued but unpaid interest due on the notes to the Affiliates was approximately $127,000 at December 31, 2005.

Note 9 — Stock Based Compensation

The Company recognizes expense for stock-based compensation arrangements in accordance with the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. Accordingly, compensation cost is recognized for the excess of the estimated fair value of the stock at the grant date over the exercise price, if any.

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In accordance with SFAS No. 148, “Accounting for Stock-Based Compensation- Transition and Disclosure” (“SFAS No. 148”), the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standard (“SFAS No. 123”) “Share-based Payment” to stock-based employee compensation is as follows:

	Three Months Ended					Nine Months Ended
	December 31,					December 31,
(Amounts in thousand, except share data)	2005		2004			2005		2004
Net Income (loss) as reported	$	1,399	$	(1,035	)	$	1,302	$	(900	)
Add: Compensation expense under APB No 25		—		—			—		—
Deduct: Stock-based compensation expense under the fair value method, net of tax		20		28			60		83
Pro-forma net loss	$	1,379	$	(1063	)	$	1,242	$	(983	)
Earnings (loss) per common share (as reported):
Basic	$	.44	$	(.33	)	$	41	$	(.30	)
Diluted	$	.44	$	(.33	)	$	.41	$	(.30	)
Pro-forma earnings (loss) per common share:
Basic	$	.43	$	(.34	)	$	.39	$	(.33	)
Diluted	$	.43	$	(.34	)	$	.39	$	(.33	)

These pro-forma amounts are not necessarily indicative of future effects of applying the fair value-based method due to, among other things, the vesting period of the stock options and the fair value of additional stock options issued in future years.

Note 10 — Recent Accounting Pronouncements

In May 2005, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 154, “Accounting Changes and Errors Corrections- a replacement of APB Opinion No. 20 and FASB Statement No. 3, (“SFAS No. 154”) . SFAS No. 154 changes the requirement for the accounting and reporting of a change in an accounting principle. SFAS No. 154 is effective for accounting changes and correction of errors in fiscal years beginning after December 15, 2005. The Company does not expect the adoption of this statement to have a material impact on its financial position or results of operations.

In December 2004, the FASB issued 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. The Company will be required to adopt SFAS 123R during the first quarter of fiscal year 2007. The Company is currently evaluating the impact that this pronouncement will have on its financial statements.

Note 11 — Contingencies

On August 17, 2005, the Company was named as a defendant in a lawsuit alleging that the Company breached its contract with a subcontractor, did not act in good faith, and further did not comply with the terms and conditions of the agreement. The plaintiff sought compensatory damages of approximately $1.6 million and punitive damages of $350,000 as well certain prejudgment and post judgment interest. If the plaintiff prevails, the Company’s results of operations, cash flows or financial position would be materially affected.

8

On January 27, 2006, the Company was granted a motion for summary judgment and the lawsuit was dismissed. Subsequently, the plaintiff filed an appeal of the ruling. Based on all of the currently available information, and discussions with legal counsel representing the Company in connection with the matter, Company management has determined that a reserve for potential loss is not necessary at this time.

As a result of continued losses on a large long-term nation-wide enterprise maintenance contract, the Company incurred an operating loss for the three and nine months ended December 31, 2005. The Company has recorded a contract loss reserve of $450,000 for estimated future losses on this contract. The Company has undertaken steps to bring final resolution to certain contract issues related to a large nation-wide enterprise maintenance contract. The loss reserve represents estimated costs to be incurred through March 31, 2006 and assumes anticipated cessation of the contract effective March 31, 2006. While the ultimate amount of additional costs to be incurred are dependent upon future developments, in management’s opinion, the reserve for contract loss is adequate to cover the future loss on the contract.

In addition, during the quarter ended December 31, 2005, the Company recorded severance costs for contracts of approximately $144,000 for employees working on several contracts that expired during the quarter ended December 31, 2005. Not withstanding the foregoing, it is reasonably possible that the reserve for contract loss and severance costs incurred may not be adequate to cover future losses on these contracts. Adjustments, if any, to estimates recorded resulting from additional costs incurred will be reflected in operations in the periods in which such adjustments are known.

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

Forward-Looking Statements

Certain statements in this document constitute “forward-looking statements” within the meaning of the Federal Private Securities Litigation Reform Act of 1995. While forward-looking statements sometimes are presented with numerical specificity, they are based on various assumptions made by management regarding future circumstances over many of which Halifax Corporation (“Halifax,” “we,” “our” or “us”) 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, anticipated cessation of a long-term enterprise maintenance contract, estimated loss reserve, 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 the difficulty to accurately estimate costs when bidding on a contract and the occurrence of start-up costs prior to receiving revenues and contracts with fixed priced 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 and our acquisition strategy, continued favorable banking relationships, the availability of capital to finance operations and planned growth 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, energy prices, continued losses, 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.

Overview

We are a nationwide high availability, multi-vendor, enterprise maintenance service provider for enterprises, including businesses, global service 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 AlphaNational Technology Services, Inc., in August 2003, we completed the acquisition of Microserv, Inc., and most recently, in December 2005, we acquired a contract from Technical Service and Support, Inc. (“TSSI”). These acquisitions significantly expanded our geographic base, strengthened our nationwide service delivery capabilities, bolstered management depth, and added several prestigious customers. In June 2005, we sold substantially all of the assets and certain liabilities of our secure network services business. We are continuing to focus on our core high availability maintenance services business while at the same time evaluating our future strategic direction.

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.

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.

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Our goal is to return to and 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 customers. 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 with new high availability maintenance contracts. 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, increased energy costs, 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.

In conjunction with the sale of our secure network services business, we have undertaken various cost containment initiatives including staff reductions and elimination of services in order to align our expenses in relation to our revenues. Many of the cost containment strategies have been implemented during the quarter ended December 31, 2005 and will continue over the next several quarters.

The industry in which we operate has experienced unfavorable economic conditions, and competitive challenges. We continue to lose money on a large nation-wide enterprise maintenance contract in spite of our efforts to stream line our service delivery operations. Our fiscal year 2006 operating results reflect the impact of this contract and 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 losses of some of our contracts, high quality and longevity of service may have little influence in the customer decision making process.

On June 30, 2005, we simultaneously entered into and closed on an asset purchase agreement with INDUS the company 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, in addition to adjustments for working capital of approximately of $608,000 for total consideration approximately $13.1 million. The asset purchase agreement provided that $3.0 million of the purchase price was to be held in escrow as security to obtain certain consents, novations, and indemnification obligations. On July 8, 2005, the $1.0 million held in escrow to serve as security to obtain certain consents was released to us. Certain novations and consents required under the asset purchase agreement were received and on January 26, 2006, and $1.375 million plus accrued interest of $24,000 was released to us. Accordingly, $625,000 of the original escrow amount remains in escrow as security for the payment of the Company’s 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. At December 31, 2005, $2.0 million plus accrued interest of $24,000 remained in escrow, which is reflected on the accompanying balance sheet as restricted cash. (See Note 2 of the notes to Consolidated Financial Statements contained in the Company’s Form 10-Q for the quarter ended September 30, 2005 for a discussion of the provisions related to the novations and consents the Company was required to and did obtain.)

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. As of December 31, 2005, we are not aware of any claims, either asserted or unasserted associated with the remaining amounts in escrow.

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In connection with the asset purchase agreement, we also transferred to INDUS Corporation all of its right, title and interest in and to its 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 have entered 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.

During the quarter ended December 31, 2005, upon the receipt of the novation of the key contract, we recorded a gain on the sale of the secure network services business after taxes, fees and costs of approximately $5.4 million (net of income taxes of approximately $3.9 million). As a result of the sale of the secure network services business, we expect to utilize our net operating loss carryforward of approximately $3.0 million in fiscal year ending March 31, 2006, and have reduced our deferred tax asset accordingly. (See Note 6 to our notes to Consolidated Financial Statements.)

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Results of Operations

The following discussion and analysis provides information management believes is relevant to an assessment and understanding of our consolidated results of operations for the three and nine months ended December 31, 2005 and 2004, respectively, and should be read in conjunction with the consolidated financial statements and notes thereto.

(Amounts in thousand, except share data and percents)

	Three Months Ended December 31,												Nine Months Ended December 31,
Results of Operations	2005			2004			Change			%			2005			2004			Change			%
Revenues	$	13,390		$	12,645		$	745			6	%	$	42,027		$	34,511		$	7,516			22	%
Costs		13,076			13,017			59			—			39,437			32,956			6,481			20	%
Percent of revenues		98	%		103	%								94	%		95	%
Gross margin		314			(372	)		686			184	%		2,590			1,555			1,035			67	%
Percent of revenues		2	%		(3	%)								6	%		5	%
Selling and marketing		346			396			(50	)		(13	%)		1,113			1,292			(179	)		(14	%)
Percent of revenues		3	%		3	%								3	%		4	%
General & administrative		913			989			(76	)		(8	%)		2,735			2,749			(14	)		(—	)
Percent of revenues		7	%		8	%								7	%		8	%
Abandonment of facility		—			—			—			—			—			179			179			100	%
Severance costs		144			—			144			100	%		144			—			144			100	%
Goodwill impairment		3,211			—			3,211			100	%		3,211			—			3,211			100	%
Operating loss		(4,300	)		(1,756	)		(2,544	)		(145	%)		(4,613	)		(2,665	)		(1,958	)		(74	%)
Percent of revenues		(32	)%		(14	)%								(11	)%		(8	)%
Other income		—			—			—			—			(5	)		(3	)		(2	)		67	%
Interest expense		135			163			(28	)		(17	%)		458			462			(4	)		(1	%)
Loss before income tax		(4,435	)		(1,919	)		(2,516	)		(131	)%		(5,066	)		(3,124	)		(1,942	)		(62	%)
Income tax benefit		(441	)		(668	)		(227	)		(34	%)		(665	)		(1,107	)		442			(40	%)
Loss from continuing operations		(3,994	)		(1,251	)		(2,743	)		(219	%)		(4,401	)		(2,017	)		(2,384	)		(118	%)
Income from discontinued operations (net of taxes)		—			216			(216	)		(100	%)		310			1,117			(807	)		(72	%)
Gain from discontinued operation		5,393			—			5,393			100	%		5,393			—			5,393			100	%
Net income (loss)	$	1,399		$	(1,035	)	$	2,434			235	%	$	1,302		$	(900	)	$	2,202			245	%
Earnings (loss) per share — basic:
Continuing operations	$	(1.26	)	$	(.40	)							$	(1.39	)	$	(.67	)
Discontinued operations		—			.07									.10			.37
Gain on sale of discontinued operations		1.70			—									1.70			—
	$	.44		$	(.33	)							$	.41		$	(.30	)
Earnings (loss) per share — diluted:
Continued operations	$	(1.26	)	$	(.40	)							$	(1.39	)	$	(.67	)
Discontinued operations		—			.07									.10			.37
Gain on sale of discontinued operations		1.70			—									1.70			—
	$	.44		$	(.33	)							$	.41		$	(.30	)
Weighted average number of common shares outstanding
Basic		3,172,206			3,166,589									3,171,992			3,002,254
Diluted		3,183,370			3,238,316									3,187,613			3,052,128

     No effect is given to dilutive securities for loss periods.

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Revenues

Revenues are generated from the sale of high availability enterprise maintenance services and technology deployment (consisting of professional services, seat management and deployment services, and product sales). 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 composition of revenues for:

(Dollar amounts in	Three Months Ended December 31,									Nine Months Ended December 31,
thousands)	2005		2004		Change		%			2005		2004		Change		%
Services	$	12,559	$	11,984	$	575		5	%	$	38,948	$	32,049	$	6,899		22	%
Product held for resale		831		661		170		26	%		3,079		2,462		617		25	%
Total Revenue	$	13,390	$	12,645	$	745		6	%	$	42,027	$	34,511	$	7,516		22	%

Revenues for the three months ended December 31, 2005 increased 6%, or $745,000, to $13.4 million from $12.6 million for the three months ended December 31, 2004. For the nine months ended December 31, 2005, revenues increased 22%, or $7.5 million, from $34.5 million to $42.0 million. Revenues from services for the three months ended December 31, 2005 increased 5%, or $575,000, to $12.6 million from $11.9 million for the three months ended December 31, 2004. For the nine months ended December 31, 2005, revenues increased 22%, or $6.9 million, to $38.9 million from $32.0 million for the comparable period ended December 31, 2004. The reasons for the increase in services revenue for both the three and nine month periods ending December 31, 2005 was the improved revenue stream from several long-term enterprise maintenance contracts, increased time and material invoicing and the inclusion of the revenues of approximately $340,000 from a contract purchased on November 30, 2005.

For the three months ended December 31, 2005, product held for resale increased $170,000, or 26%, from $661,000 for the three months ended December 31, 2004 to $831,000. Product held for resale increased 25%, or $617,000, for the nine months ended December 31, 2005, from $2.4 million for the nine months ended December 31, 2004 to $3.1 million. The increase in product held for resale was a result of several large one time orders. We have de-emphasized product sales and intend to focus primarily on our recurring services revenue model for enterprise maintenance solutions. As a result, we do not expect to see any material increases in product sales in future periods.

Costs

Included within costs 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 relation to the growth in revenues, however, our overall costs as a percent of revenue are expected to decrease as cost containment efforts take effect. As a result of continued losses on a large long-term nation-wide enterprise maintenance contract, we incurred an operating loss for the three and nine months ended December 31, 2005. We have recorded a contract loss reserve of $450,000 for estimated future losses on this contract. We have undertaken steps to bring final resolution to certain contract issues related to a large nation-wide enterprise maintenance contract. The loss reserve represents estimated costs to be incurred through March 31, 2006 and assumes anticipated cessation of the contract effective March 31, 2006. While the ultimate amount of additional costs to be incurred are dependent upon future developments, in management’s opinion, the reserve for contract loss is adequate to cover the future loss on the contract.

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In addition, during the quarter ended December 31, 2005, the we recorded severance costs for contracts of approximately $144,000 for employees working on several contracts that expired during the quarter ended December 31, 2005. Not withstanding the foregoing, it is reasonably possible that the reserve for contract loss and severance costs incurred may not be adequate to cover future losses on these contracts. Adjustments, if any, to estimates recorded resulting from additional costs incurred will be reflected in operations in the periods in which such adjustments are known.

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 on profit margins. We have also been negatively impacted from high costs associated with a large nation-wide enterprise maintenance contract where the cost to deliver services has been driven by high than expected failure rates and labor costs and as a result of which we recorded a reserve for contract loss of $450,000 for the quarter ended December 31, 2005.

The variable components of costs associated with fixed price contracts are part costs, overtime, subcontracted labor, mileage reimbursed, and freight. Part costs are highly variable and dependent on several factors, based on the types of equipment serviced, equipment age and usage, and environment. 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.

Costs were comprised of the following components:

(Dollar amounts in	Three Months Ended December 31,									Nine Months Ended December 31,
thousands)	2005		2004		Change		%			2005		2004		Change		%
Direct costs	$	11,678	$	11,632	$	46		—	%	$	35,576	$	29,745	$	5,831		20	%
Indirect costs		1,398		1,385		13		1	%		3,861		3,211		650		20	%
Total costs	$	13,076	$	13,017	$	59		—	%	$	39,437	$	32,956	$	6,481		20	%

Total costs for the three months ended December 31, 2005 and 2004 remained unchanged at $13.0 million. For the nine months ended December 31, 2005, total costs increased $6.4, million or 20%, to $39.4 million compared to $32.9 million for the comparable period in 2004. The increase in costs resulted from increased costs incurred to support the increase in revenue discussed above and much higher than expected costs related to supporting a large nation-wide enterprise maintenance contract. Included in direct costs was a charge for additional costs of $450,000 and $300,000, respectively, for the three and nine month periods ended December 31, 2005 and 2004 for additional contract losses related to a large nation-wide enterprise maintenance contract through March 31, 2006 and 2005, respectively. See Note 11 of the notes to Consolidated Financial Statements.

Direct costs include the direct labor for technical services, parts and products, and other associated costs in providing our service offerings to our customers. For the three months ended December 31, 2005 and 2004, direct costs were $11.6 million. For the nine month period ending on December 31, 2005, direct costs increased 20%, or $5.8 million, to $35.6 million from $29.7 million for the same period in 2004.

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. Indirect costs increased $13,000 for the three months ended December 31, 2005 over the same period in 2004 remaining at 1.4 million. Indirect costs increased 20%, or $650,000, from $3.2 million for the nine months ended December 31, 2004 to $3.9 million for the nine months ended December 31, 2005. The increase in indirect costs was due to additional personnel costs to support the field force.

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As discussed above, many of the cost containment strategies have been implemented during the quarter ended December 31, 2005 have had some positive affect the result for the three months ended December 31, 2005. However, in spite of these efforts, we continued to absorb high costs associated with a large nation-wide enterprise maintenance contract, which has resulted in the increase in total costs for the nine months ended December 31, 2005. In addition, we have recorded a contract loss reserve of $450,000 for estimated future losses on this contract. We have undertaken steps to bring final resolution to certain contract issues related to a large nationwide enterprise maintenance contract this quarter. The loss reserve represents estimated costs to be incurred through March 31, 2006 and assumes anticipated cessation of the contract effective March 31, 2006. While the ultimate amount of additional costs to be incurred are dependent upon future developments, in management’s opinion, the reserve for contract loss is adequate to cover the future loss on the contract. Not withstanding the foregoing, it is reasonably possible that the reserve for contract loss may not be adequate to cover future losses on this contract. Adjustments, if any, to estimates recorded resulting from additional costs incurred will be reflected in operations in the periods in which such adjustments are known.

Gross Margin

As a percentage of revenues, gross margin was 2% and 6% for the three and nine months ended December 31, 2005, respectively, and (3%) and 5% for the three and nine months ended December 31, 2004, respectively. Although we have demonstrated a modest improvement in our gross margins, when compared to last year, our gross margins were negatively impacted by the continued losses incurred on a large nation-wide enterprise maintenance contract and the additional loss accrual on this contract as discussed above .

Selling and Marketing Expense

Selling and marketing expense consists primarily of salaries, commissions, travel costs and related expenses.

Selling and marketing expense was $346,000 for the three months ended December 31, 2005 compared to $396,000 for the three months ended December 31, 2004, a decrease of $50,000, or 13%. For the nine months ended December 31, 2005 compared to the nine months ended December 31, 2004 selling and marketing expense was $1.1 million compared to $1.3 million, a 14% decrease. The decrease in selling and marketing expense was the result of a reduction in personnel costs and reduced marketing efforts.

General and Administrative

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

For the three months ended December 31, 2005, general and administrative expense decreased when compared to the three months ended December 31, 2004 from $989,000 to $913,000. For the nine months ended December 31, 2005, general and administrative expenses remained unchanged at $2.7 million when compared to the nine months ended December 31, 2004.

Goodwill Impairment

Due to the sale of our secure network services business as well as losses resulting form continuing operations, we tested its goodwill for impairment in advance of its annual testing date. We tested its goodwill impairment in accordance with Statement of Financial Accounting Standards Number 142, (“SFAS No. 142”) “Goodwill and Other Intangible Assets”. The resulting impairment loss was determined based on the applicable valuation methods, including the income and market approaches. We completed our test for impairment and recorded a $3.2 million non-cash charge for the impairment of goodwill. The charge is reflected as a component of operating loss in the accompanying consolidated statement of operations.

Severance Costs and Abandonment of Facilities

During the quarter ended December 31, 2005, we recorded severance costs for employees working on several contacts that expired of approximately $144,000.

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After a review of our facility requirements in September 2004, we determined that as a result of several acquisitions we had excess space. For the nine month period ended December 31, 2004, we recorded a charge of $179,000 for the abandonment of a facility related to the sub-leasing of certain office space.

Operating Loss

With the sale of our secure network services business, the financial performance of that business was recorded as discontinued operations and, as a result, for the three months ended December 31, 2005, we incurred an operating loss of $4.3 million compared to operating loss of $1.8 million for the three months ended December 31, 2004 and a operating loss for the nine months ended December 31, 2005 of $4.6 million compared to $2.7 million for the comparable period last year.

The operating loss was the result of on-going losses in connection with the performance of a large nation-wide enterprise maintenance contract, severance costs, and an impairment charge for goodwill.

Interest Expense

Interest expense for the three months ended December 31, 2005 was $135,000 compared to $163,000 for the same period in 2004. The decrease in interest expense was related to the reductions in long term debt with the use of proceeds from the sale of the secure network services business. For the nine months ended December 31, 2005 compared to the nine months ended December 31, 2004, interest expense was $458,000 compared to $462,000. The decrease for the nine month period was the result of lower borrowings in the second half of the year compared to the prior year offset by increases in the interest rate charged to us on our bank debt due to increases in the bank’s prime interest rate.

Income Tax Benefit

Due to the loss from continuing operations, for the three months ended December 31, 2005, we recorded an income tax benefit of $441,000 compared to an income tax benefit of $668,000 for the comparable period in 2004. For the nine months ended December 31, 2005, we recorded an income tax benefit of $665,000 compared to an income tax benefit of $1.1 million for the nine months ended December 31, 2004.

Income from discontinued operations

Income from discontinued operations was $0 compared to $216,000, net of income taxes of $121,000, for the three months ended December 31, 2005 compared to December 31, 2004. For the nine months ended December 31, 2005, income from discontinued operations was $310,000, net of income taxes of $164,000 compared to $1.1 million, net of income taxes of $628,000 for the same period a year ago.

Gain on sale of discontinued operations

As a requirement of the sale of our secure network services business, we deferred the recognition of the gain on the sale until certain contract contingencies related to the novation of the Key contract were obtained. On January 26, 2006, the final novations were received and the contingencies resolved. As a result of the foregoing, we have recorded a gain on the sale of discontinued operation of approximately $5.4 million for the three and nine month period ended December 31, 2005.

Net Income (loss)

For the three months ended December 31, 2005, the net income was $1.4 million, compared to a net loss of $1.0 million for the comparable period in 2004. The primary reason for the increase in net income was the result from the gain on the sale of our secure network services business which was partially off set by the loss from continuing operations, severance costs, and a charge for the impairment of goodwill.

For the nine months ended December 31, 2005, we recorded net income of $1.3 million compared to a net loss of $900,000 for the nine months ended December 31, 2004 for the same reasons described above.

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Liquidity and Capital Resources

As of December 31, 2005, we had approximately $2.5 million of cash on hand. Sources of our cash for the three and nine months ended December 31, 2005 have been from the sale of our secure network services business and our revolving credit facility, as described below.

We anticipate that our primary sources of liquidity in fourth fiscal quarter of 2006 will be, 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” in our Form 10-K for the year ended March 31, 2005 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 pursue all potential funding alternatives in the event we need additional capital. 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 the revenue from 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 financial performance will also depend on our ability to terminate or re-negotiate the large nation-wide enterprise maintenance contract for which we recorded a reserve for contract loss of $450,000 during the quarter ended December 31, 2005. See Note 11 of the notes to the Consolidated Financial Statements. Our future financial performance could be negatively affected by unforeseen factors and unplanned expenses. See “Forward Looking Statements” and “Business – Risk Factors” in our Form 10-K for the year ended March 31, 2005.

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.

We expect to continue to require funds to meet remaining interest and principal payment obligations, capital expenditures and other non-operating expenses. 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.

At December 31, 2005, we had working capital of $9.6 million compared to working capital of $8.4 million at March 31, 2005. The current ratio was 1.80 at December 31, 2005 compared to 1.56 at March 31, 2005. The increase in working capital was primarily attributable to using the proceeds from the sale of our secure network services business described elsewhere to reduce debt.

On June 30, 2005, we sold our secure network services business for $12.5 million. The gain on the sale of the business was $5.4 million net of taxes and fees. The proceeds were used to reduce debt and provide working capital. Capital expenditures for the nine months ended December 31, 2005 were $248,000 as compared to $599,000 for the same period 2004. We anticipate fiscal year 2006 technology requirements to result in capital expenditures totaling approximately $700,000. We continue to sublease a portion of our headquarters building which reduces our rent expense by approximately $400,000 annually.

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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. The maturity date is June 30, 2007. 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%). The fee is paid on the last day of each quarter. 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%). Additionally, we 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 December 31, 2005, $7.0 million was outstanding and $5.0 million was available to us. The interest rate at December 31, 2005 was 7.5%.

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) maintaining the Company’s accounts in a cash collateral accounts at Provident Bank, the funds in which accounts we may apply in our discretion, 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.

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, 2005, we were in compliance with the financial covenants contained in our revolving credit agreement.

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, we are generally required to invest significant initial start-up funds which are subsequently billed to customers and as a result may be required to draw down on our credit facility.

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.

19

In conjunction with the acquisition of AlphaNational, we issued notes to the former AlphaNational shareholders in the aggregate amount of $500,000, with an interest rate of 6% per annum. Based upon final adjustments to the September 30, 2004 closing balance sheet, the aggregate balance of the notes was reduced to $168,000. The notes mature on March 31, 2006. Interest is payable quarterly and in arrears.

During the quarter ended September 30, 2005 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 $100,000 on the 7% convertible subordinated debentures and 8% promissory notes. We used 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 $1.0 million in the reduction in the principal amount of the 8% promissory notes dated October 8, 1998 and October 13, 1998. After giving effect to these payments the aggregate principal amount to the holders of the 8% promissory notes was $1.0 million. Interest payable to the affiliates was approximately $127,000 at December 31, 2005.

Our subordinated debt agreements with Nancy Scurlock and the Arch C. Scurlock Children’s Trust, which are affiliates, totaled $1.0 million at December 31, 2005. 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 December 31, 2005, the affiliates held in the aggregate $500,000 and $500,000 face amounts of our 8% promissory notes, with an aggregate outstanding principal balance of $1.0 million.

On June 29, 2005, we amended our 8% promissory notes with these affiliates to extend the maturity date to July 1, 2007, which is the next day immediately succeeding the expiration of the revolving credit agreement. The holders of our 8% promissory 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.

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 sold 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 there is no gain or loss recognized. 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.

Recent Accounting Pronouncements

In May 2005, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 154, “Accounting Changes and Errors Corrections- a replacement of APB Opinion No. 20 and FASB Statement No. 3, (“SFAS No. 154”) . SFAS No. 154 changes the requirement for the accounting and reporting of a change in an accounting principle. SFAS No. 154 is effective for accounting changes and correction of errors in fiscal years beginning after December 15, 2005. The Company does not expect the adoption of this statement to have a material impact on its financial position or results of operations.

In December 2004, the FASB issued 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. The Company will be required to adopt SFAS 123R during the first quarter of fiscal year 2007. The Company is currently evaluating the impact that this pronouncement will have on its financial statements.

20

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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. 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 results of operations and financial condition.

The definitive extent of the interest rate risk is not quantifiable or predictable because of the variability of future interest rates and business financing requirements. 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 December 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 in our annual report on Form 10-K for the year ended March 31, 2005 contains descriptions of funded debt and should be read in conjunction with the table below.

	Period Ending		Fair Value
(Amounts in thousands)	December 31,		December 31,
Debt obligations	2005		2005
Revolving credit agreement at the prime rate plus 1/4%. Due June 30, 2007. Average interest rate of 7.50%.		7,028		7,028
8% subordinated notes payable to affiliate due July 1, 2007		1,000		1,000
6% notes issued to former AlphaNational shareholders		168		168
Notes Payable GMAC interest rate 0.0% to 1.9% due in 48 and 36 months.		4		4
Total fixed rate debt		1,172		1,172
Total debt		8,200		8,200

At December 31, 2005, we had $8.2 million of debt outstanding of which $1.2 million bears fixed interest rates. If the interest rates charged to us on our variable rate debt were to increase significantly, the effect could be materially adverse to our future operations.

We conduct a limited amount of business overseas, principally in Western Europe. At the 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.

Item 4. Controls and Procedures

Quarterly 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-Q (“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 December 31, 2005 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting (“Internal Controls Evaluation”).

21

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 are 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 accumulated, recorded, processed, summarized, communicated to the Company’s management to permit timely decisions regarding disclosure, and reported within the specified time periods in the Securities and Exchange Commission’s rules and forms.

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.

22

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Except as discussed below, 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. 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.

On August 17, 2005, the Company was named as a defendant in a lawsuit filed by BIS Computer Services, Inc. in the United States District Court for the Eastern District of Virginia alleging that the Company breached its contract with BIS Computer Services, Inc., a subcontractor, did not act in good faith, and further did not comply with the terms and conditions of the agreement. The plaintiff sought compensatory damages of approximately $1.6 million and punitive damages of $350,000 as well certain prejudgment and post judgment interest. If the plaintiff prevails, the Company’s results of operations, cash flows or financial position would be materially affected.

On January 27, 2006, the Company was granted a motion for summary judgment and the lawsuit was dismissed. Subsequently, the plaintiff filed an appeal of the ruling. Based on all of the currently available information, and discussions with legal counsel representing the Company in connection with the matter, Company management has determined that a reserve for potential loss is not necessary at this time.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3. Defaults Upon Senior Securities

None

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

None

Item 5. Other Information

None

Item 6. Exhibits

Exhibit 10	Solutions Engagement Agreement
Exhibit 31.1	Certification of Charles L. McNew, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2	Certification of Joseph Sciacca, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1	Certification of Charles L. McNew, Chief Executive Officer, pursuant to 18 U.S.C. Section 1350 (Section 906 of the Sarbanes-Oxley Act of 2002)
Exhibit 32.2	Certification of Joseph Sciacca, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350 (Section 906 of the Sarbanes-Oxley Act of 2002)

23

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

HALIFAX CORPORATION

             (Registrant)

Date: February 14, 2006	By:	/s/ Charles L. McNew
		Charles L. McNew
		President & Chief Executive Officer
		(principal executive officer)
Date: February 14, 2006	By:	/s/ Joseph Sciacca
		Joseph Sciacca
		Vice President, Finance &
		Chief Financial Officer
		(principal financial officer)

24

EX-10

Exhibit 10

Solutions Engagement Agreement

Agreement #4902P20043

This Base Agreement (“Base Agreement”) dated as of 3/18/2002 (“Effective Date”), between International Business Machines Corporation (“Buyer”) and Halifax Corporation (“Supplier”), establishes the basis for a multinational procurement relationship under which Supplier will provide Buyer the Deliverables and Services described in SOWs issued under this Base Agreement. Deliverables and Services acquired by Buyer or Customer on or after the Effective Date will be covered by this Base Agreement. This Base Agreement will remain in effect until terminated.

1.0     Definitions:

“Affiliates” means entities that control, are controlled by, or are under common control with, a party to this Agreement.

“Agreement” means this Base Agreement and any relevant Statements of Work (“SOW”), Work Authorizations (“WA”), and other attachments or appendices specifically referenced in this Agreement.

“Business Partner Agreement” means an agreement executed between Buyer and Supplier to promote, market, and support certain products and services.

“Customer” means Buyer’s customer.

“Deliverables” means items that Supplier prepares for or provides to Buyer or Customer as described in a SOW. Deliverables include Equipment, Program Products, Developed Works, Preexisting Materials and Tools.

“Developed Works” means all work product (including software and its Externals) developed in the performance of this Agreement as described in a SOW and does not include Preexisting Materials, Tools, Program Products, or items specifically excluded in a SOW.

“Equipment” means a machine, its features, elements, cables, or accessories, including the documentation required to install, support, use, and maintain it.

“Externals” means any pictorial, graphic, audiovisual works, reports or data generated by execution of code and any programming interfaces, languages or protocols implemented in the code to enable interaction with other computer programs or end users. Externals do not include the code that implements them.

“Inventions” means ideas, designs, concepts, techniques, inventions, discoveries or improvements, whether or not patentable, conceived or reduced to practice by Supplier or Supplier Personnel in performance of this Agreement.

“Joint Inventions” means Inventions made by Supplier or Supplier Personnel with Buyer Personnel.

“Participation Agreement” or “PA” means an agreement signed by one or more Affiliates which incorporates by reference the terms and conditions in this Base Agreement, any relevant SOW, and other attachments or appendices specifically reduced in the PA.

“Personnel” means agents, employees or subcontractors engaged or appointed by Buyer or Supplier.

“Preexisting Materials” means items including their Externals, contained within a Deliverable, in which the copyrights are owned by a third party or that Supplier prepared or had prepared outside the scope of this Agreement. Preexisting Materials exclude Program Products and Tools, but may include material that is created by the use of Tools.

“Prices” means the agreed upon payment and currency for Deliverables and Services, including all applicable fees, payments and taxes, as specified in the relevant SOW and/or WA.

“Program Products” means Supplier’s commercially available software and the documentation required to install, support, use, and maintain it.

“Services” means work that Supplier performs for Buyer as described in a SOW.

“Statement of Work” or “SOW” means any document that:

1. identifies itself as a statement of work;

2. is signed by both parties;

3. incorporates by reference the terms and conditions of this Base Agreement; and

4. describes the Deliverables and Services, including any requirements, specifications or schedules.

“Tools” means software that is not commercially available and its Externals, required for the development, maintenance or implementation of a software Deliverable other than a Program Product.

“Work Authorization” or “WA” means Buyer’s authorization in either electronic or tangible form for Supplier to conduct transactions under this Agreement in accordance with the applicable SOW (i.e., a purchase order, bill of lading, or other Buyer designated document). A SOW is a WA only if designated as such in writing by Buyer.

2.0     Statement of Work

Supplier will provide Deliverables and Services as specified in the relevant SOW only when specified in a WA. Supplier will begin work only after receiving a WA from Buyer. Buyer may request changes to a SOW and Supplier will submit to Buyer the impact of such changes. Changes accepted by Buyer will be specified in an amended SOW or change order signed by both parties.

Form Title: Solutions Engagement Agreement
Form Owner: Global Procurement 1 of 9 Form Release: 8/98
Revision: 09/01

Solutions Engagement Agreement

Agreement # 4902P20043

3.0     Pricing

Supplier will provide Deliverables and Services to Buyer for the Prices. Except for pre-approved expenses specified in the relevant SOW, the Prices for Deliverables and Services specified in a WA and accepted by Buyer will be the only amount due to Supplier from Buyer. Suppler is not entitled to payment under this Agreement for activities also covered by a Business Partner Agreement with Buyer.

4.0     Payments and Acceptance

4.1     Payments and Acceptance Terms

Terms for payment will be specified in the relevant SOW and/or WA. Payment of invoices will not be deemed acceptance of Deliverables or Services, but rather such Deliverables or Services will be subject to inspection, test, acceptance or rejection in accordance with the acceptance or completion criteria as specified in the relevant SOW and/or WA. Buyer or Customer may, at its option, either reject Deliverables or Services that do not comply with the acceptance or completion criteria for a refund, or require Supplier, upon Buyer’s written instruction, to repair or replace such Deliverables or re-perform such Service, without charge and in a timely manner.

4.2     Outsourcing License

In the event Buyer provides outsourcing services to licensees of a Program Product, Buyer will not owe Supplier a fee for access to or assignment of a license to such Program Product or for transfer of the applicable Program Product to a Buyer computer system which is of like configuration as the computer system for which the Program Product was licensed. The foregoing is subject to Buyer providing Supplier notice of such Program Product to be managed by Buyer and provided the Program Product will only be used on behalf of the licensee. Upon expiration or termination of the agreement to provide outsourcing services to the licensee, Buyers right to use that copy of the Program Product will end.

For those Program Products acquired directly by Buyer from Supplier, Buyer shall be free to continue to use such Program Products in support of its business needs, including in support of the provision of Services to Buyer’s Customers, at no additional fee, subject to the continued compliance with the terms of the Agreement. Buyer shall have the right to assign the license it has acquired from Supplier hereunder to its Customer at no additional cost, provided that Buyer gives Supplier thirty (30) days prior written notice of its intent to assign such rights, and provided further that Buyer’s Customer signs Supplier’s license, and/or such other contractual document as may be reasonably required for such Program Product support.

5.0     Electronic Commerce

To the extent permitted by local law, the parties will conduct transactions using an electronic commerce approach under which the parties will electronically transmit and receive legally binding purchase and sale obligations (“Documents”), including electronic credit entries transmitted by Buyer to the Supplier account specified in the relevant SOW and/or WA. The parties will enter into a separate agreement governing the transmission of such electronic transactions and associated responsibilities of the parties.

6.0     Warranties

6.1     Ongoing Warranties

Supplier makes the following ongoing representation and warranties:

1. it has the right to enter into this Agreement and its performance of this Agreement will comply, at its own expense, with the terms of any contract, obligations, including any between Supplier and its end-users; or any law, regulation or ordinance to which it is or becomes subject;

2. it is incorporated or organized as a partnership;

3. no claim, lien, or action exists or is threatened against Supplier that would interfere with Buyer’s rights under this Agreement;

4. Deliverables and Services do not infringe any privacy, publicity, reputation or intellectual property right of a third party;

5. all authors have agreed not to assert their moral rights (personal rights associated with authorship of a work under applicable law) in the Deliverables, to the extent permitted by law;

6.     Deliverables are free from defects in design (except for written designs provided by Buyer unless such designs are based entirely on Supplier’s specifications), material and workmanship and Deliverables and Services will conform to the warranties, specifications and requirements in this Agreements for one year from the date of acceptance, except for a conflict between the warranties in this Agreement and Supplier’s warranty for Program Products, and in that event Supplier’s license warranties shall apply;

7. it will not engage in electronic self-help;

Form Title: Solutions Engagement Agreement	2 of 9	Form Release: 8/98
Form Owner: Global Procurement		Revision: 09/01

Solutions Engagement Agreement

Agreement # 4902P20043

8. Deliverables are safe for use consistent with the warranties, specifications and requirements in this Agreement;

9 Deliverables do not contain harmful code;

10. Services will be performed using reasonable care and skill and in accordance with the relevant SOW and/or WA;

11. Deliverables and Services which interact in any capacity with monetary data are euro ready such that when used in accordance with their associated documentation they are capable of correctly processing monetary data in the euro denomination and respecting the euro currency formatting conventions (including the euro sign) provided that products and systems not provided by Supplier are capable of interacting with Supplier’s euro ready Deliverables and Services;

12. none of the Deliverables contain nor are any of the Deliverables manufactured using ozone depleting substances known as halons, chlorofluorocarbons, hydrochlorofluorocarbons, methyl chloroform and carbon tetrachloride as defined by the Montreal Protocol;

13. Deliverables are new and do not contain used or reconditioned parts;

14. it is knowledgeable with, and is and will remain in full compliance with all applicable export and import laws, regulations, orders, and policies (including, but not limited to, securing all necessary clearance requirements, export and import licenses and exemptions from, and making all proper filings with appropriate governmental bodies and/or disclosures relating to the release or transfer of technology and software to non U.S. nationals);

15. it will not export, directly or indirectly, any technology, software or commodities provided by Buyer or their direct product to any of the countries or to nationals of those countries, wherever located, listed in U.S. Export Administration Regulations’ Country Groups D:1 and E:2, as modified from time to time, unless authorized by appropriate government license or regulations;

16. it will not use, disclose, or transfer across borders any information that is processed for Buyer that may identify an individual (Personal Data), except to the extent necessary to perform under this Agreement, and

17. it will comply with all applicable data privacy laws and regulations, will implement and maintain appropriate technical and other protections for the Personal Data, and will cooperate fully with Buyer’s requests for access to, correction of, and destruction of Personal Data in Supplier’s possession.

6.2     Standard Warranties

Buyer may pass Supplier’s standard warranty for Equipment or Program Products through to the Customer. The Customer may deal directly with Supplier under such warranty and in the event Supplier’s standard warranty is more favorable than the warranties in this Agreement, Supplier’s standard warranty will apply. If Supplier is not the original manufacturer, Supplier will pass through to Buyer or Customer all warranties provided by the original manufacturer. In the event of a conflict between the Supplier, standard warranties, original manufacturer’s warranties and the warranties in this Agreement, the warranties more favorable to Buyer or Customer apply.

THE WARRANTIES IN THIS AGREEMENT ARE IN LIEU OF ALL OTHER WARRANTIES AND CONDITIONS, EXPRESS OR IMPLIED, INCLUDING THOSE WARRANTIES OR CONDITIONS OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.

6.3     Warranty Redemption

Subject to Section 9.0 Supplier Liability for Third Party Claims, if Deliverables or Services do not comply with the warranties in this Agreement, Supplier will repair or replace Deliverables or re-perform Services, without charge and in a timely manner. If Supplier fails to do so, Buyer or Customer may repair or replace Deliverables or re-perform Services and Supplier will reimburse Buyer for actual and reasonable expenses. Any reimbursement for Program Products pursuant to the foregoing sentence shall be limited to two times that amount of license fees and maintenance services specified in the SOW.

7.0     Delivery

Deliverables or Services will be delivered as specified in the relevant SOW and/or WA. Buyer may cancel or reschedule the delivery date or change the delivery point as specified in the relevant SOW and/or WA. Risk of loss and title to any tangible property will pass to Buyer or Buyer’s Customer at the delivery point. If Supplier cannot comply with a delivery commitment, Supplier will promptly notify Buyer of a revised delivery date and Buyer may:

1. cancel without charge Deliverables or Services not yet delivered; and

2. exercise all other remedies provided at law, in equity and in this Agreement.

8.0     Intellectual Property

8.1     Work Made for Hire

Form Title: Solutions Engagement Agreement	3 of 9	Form Release: 8/98
Form Owner: Global Procurement		Revision: 09/01

Solutions Engagement Agreement

Agreement # 4902P20043

All Developed Works belong exclusively to Buyer or Customer and are works made for hire. If any Developed Works are not considered works made for hire owned by operation of law, Supplier assigns the ownership of copyrights in such works to Buyer or Customer.

8.2 Preexisting Materials

Supplier will not include any Preexisting Materials in any Deliverable unless they are listed in the relevant SOW. Supplier grants Buyer a nonexclusive, worldwide, perpetual, irrevocable, paid-up, license to prepare and have prepared derivative works of Preexisting Materials and to use, have used, execute, reproduce, transmit, display, perform, transfer, distribute, and sublicense Preexisting Materials or their derivative works, and to grant others the rights granted to this Subsection.

8.3 Tools

Supplier will not include Tools in Deliverables unless they are listed in the relevant SOW. Supplier grants Buyer a nonexclusive, worldwide, perpetual, irrevocable, paid-up, license to prepare and have prepared derivative works of Tools, and to use, have used, execute, reproduce, transmit, display and perform Tools or their derivative works. The rights and licenses granted by Supplier to Buyer under this subsection include the right of Buyer to authorize others to exercise any of the rights granted to Buyer in this Subsection.

8.4 Invention Rights

Supplier owns Inventions. Supplier grants to Buyer and Customer an irrevocable, nonexclusive, worldwide, perpetual, paid-up license under Inventions (including any patent applications filed on or patents issued claiming Inventions). The license scope is to make, have made, use, have used, sell license or transfer items and to practice and have practiced methods.

8.5 Joint Invention Rights

The parties will jointly own all Joint Inventions and resulting patents. Either party may license others under Joint Inventions (including any patent applications filed on or patents issued claiming Joint Inventions) without accounting to or consent from the other.

8.6 Perfection of Copyrights

Upon request, Supplier will provide to Buyer a “Certificate of Originality” or equivalent documentation to verify authorship of Deliverables. Supplier will confirm assignment of copyright for Developed Works using the “Confirmation of Assignment of Copyright” form and will assist Buyer in perfecting such copyrights.

8.7 Perfection of Invention Rights

Supplier will identify all countries in which it will seek patent protection for each Invention. Supplier authorizes Buyer to act as its agent in obtaining patent protection for the Inventions in countries where Supplier does not seek patent protection. Supplier will, at Buyer’s expense, assist in the filing of patent applications on Inventions and have required documents signed.

8.8 Trademarks

This Agreement does not grant either party the right to use the other party’s or their Affiliates’ trademarks, trade names or service marks.

8.9 Patents

Supplier grants to Buyer a nonexclusive, worldwide, perpetual, irrevocable, and paid-up license under any patents and patent applications licensable by Supplier to make, have made, use, have used, import, export, sell and otherwise transfer the Deliverables and use the Services to the extent authorization in this Agreement.

8.10 Program Products

Customer will receive a license agreement from Buyer or Supplier for Program Products, to which Buyer is not a party nor liable for violations. If a Program Product is available under an existing Buyer agreement, the terms of that agreement will control distribution of that Program Product. Buyer may install and test Program Products for Customer without charge. For recurring charge licenses, Buyer will notify Supplier when to begin invoicing Customer, if applicable.

9.0 Supplier Liability for Third Party Claims

Form Title:  Solutions Engagement Agreement	4 of 9	Form Release:  8/98
Form Owner:  Global Procurement		Revision:  09/01

Solutions Engagement Agreement

Agreement # 4902P20043

9.1 General Indemnification

Supplier will defend, hold harmless and indemnify, including legal fees, Buyer and Buyer Personnel against third party claims that arise or are alleged to have arisen as a result of negligent or intentional acts or omissions of Supplier or Supplier Personnel or breach by Supplier of any term of this Agreement.

9.2 Intellectual Property Indemnification

Supplier will defend, or at Buyer’s options cooperate in the defense of, hold harmless and indemnify, including legal fees, Buyer, Buyer Personnel and Customer from third party claims that Supplier’s Deliverables or Services infringe the intellectual property rights of a third party. If such a claim is or is likely to be made, Supplier will, at its own expense, exercise the first of the following remedies that is practicable:

1. obtain for Buyer and Customer the right to continue to use, sell and license the Deliverables and Services consistent with this Agreement;

2. modify Deliverables and Services so they are non-infringing and in compliance with this Agreement;

3. replace the Deliverables and Services, or other affected Deliverables or Services, with non-infringing ones that comply with this Agreement; or

4. at Buyer’s request, accept the cancellation of infringing Services and the return of infringing Deliverables and refund any amount paid.

Buyer will give Supplier prompt notice of third party claims against Buyer, and cooperate in the investigation, settlement and defense of such claims.

9.3 Exceptions to Indemnification

Supplier will have no obligation to indemnify Buyer, Buyer Personnel or Customer for claims that Supplier’s Deliverables or Services infringe the intellectual property rights of a third party to the extent such claims arise as a result of:

1. Buyer’s or Customer’s combination of Deliverables or Services with other products or services not reasonably foreseeable by Supplier and such infringement or claim would have been avoided in the absence of such combination;

2. Supplier’s implementation of a Buyer originated design and such infringement or claim would have been avoided in the absence of such implementation; or

3. Buyer’s or Customer’s modification of the Deliverables and such infringement or claim would have been avoided in the absence of such modification.

10.0 Limitation of Liability between Supplier and Buyer

In no event will either party be liable to the other for any lost revenues, lost profits, incidental, indirect, consequential, special or punitive damages. This mutual Limitation of Liability does not limit the obligations and liability of Supplier provided in Section 9.0 Supplier Liability for Third Party Claims. In no event will either party be liable for the respective actions or omissions of its Affiliates under this Agreement.

11.0 Supplier and Supplier Personnel

Supplier is an independent contractor and this Agreement does not create an agency, partnership, or joint venture relationship between Buyer and Supplier or Buyer and Supplier Personnel. Buyer assumes no liability or responsibility for Supplier Personnel. Supplier will:

1. ensure it and Supplier Personnel are in compliance with all laws, regulations, ordinances, and licensing requirements;

2. be responsible for the supervision, control, compensation, withholdings, health and safety of Supplier Personnel;

3. inform Buyer if a former employee of Buyer will be assigned work under this Agreement, such assignment subject to Buyer approval; and

4. ensure Supplier Personnel performing Services on Buyer’s or Customer’s premises comply with the On Premises Guidelines in Section 12.0 and upon request, provide Buyer, for export evaluation purposes, the country of citizenship and permanent residence and immigration status of those persons. Buyer retains the right to refuse to accept persons made available by Supplier for export reasons.

12.0 On Premises Guidelines

Supplier will ensure that Supplier Personnel assigned to work on Buyer’s or Buyer’s Customer’s premises will comply with this Section.

12.1 Access to Premises

Supplier will ensure that Supplier Personnel assigned to work on Buyer’s or Buyer’s Customer’s premises will:

Form Title:  Solutions Engagement Agreement	5 of 9	Form Release:  8/98
Form Owner:  Global Procurement		Revision:  09/01

Solutions Engagement Agreement

Agreement # 4902P20043

1. to the extent permitted by local law, participate in a preemployment criminal background check covering the counties in which the person was employed or resided for the past seven years (or longer as required by State legislation), and inform Buyer of any negative findings;

2. maintain a current and complete list of the persons’ names and social security numbers;

3. obtain for each person a valid identification badge from Buyer and ensure that it is displayed to gain access to and while on Buyer’s premises (it is Buyer’s policy to deactivate any such badge if not used for one month);

4. maintain a signed acknowledgment that each person will comply with Buyer’s Safety & Security Guidelines;

5. ensure that each person with regular access to Buyer’s and Buyer’s Customer’s premises complies with all parking restrictions and with vehicle registration requirements if any;

6. inform Buyer if a former employee of Buyer will be assigned work under this Agreement, such assignment subject to Buyer approval;

7. at Buyer’s request, remove a person from Buyer’s or Buyer’s Customer’s premises and not reassign such person to work on Buyer’s or Buyer’s Customer’s premises (Buyer is not required to provide a reason for such request); and

8. notify Buyer immediately upon completion or termination of any assignment and return Buyer’s identification badge. Upon Buyer’s request, Supplier will provide documentation to verify compliance with this Subsection.

12.2     General Business Activity Restrictions

Supplier will ensure that Supplier Personnel assigned to work on Buyer’s or Buyer’s Customer’s premises:

1. will not conduct any non-Buyer related business activities (such as interviews, hirings, dismissals or personal solicitations) on Buyer’s or Buyer’s Customer’s premises;

2. will not conduct Supplier’s Personnel training on Buyer’s or Buyer’s Customer’s premises, except for on-the-job training;

3. will not attempt to participate in Buyer or Customer benefit plans or activities;

4. will not send or receive non-Buyer related mail through Buyer’s or Customer’s mail systems; and

5. will not sell, advertise or market any products or distribute printed, written or graphic materials on Buyer’s or Buyer’s Customer’s premises without Buyer’s written permission.

12.3     Buyer’s Safety and Security Guidelines

Supplier will ensure that Supplier Personnel assigned to work on Buyer’s or Buyer’s Customer’s premises:

1. do not bring weapons of any kind onto Buyers or Buyer’s Customer’s premises;

2. do not manufacture, sell, distribute, possess, use or be under the influence of controlled substances (for nonmedical reasons) or alcoholic beverages while on Buyer’s or Buyer’s Customer’s premises;

3. do not have in their possession hazardous materials of any kind on Buyer’s or Buyer’s Customer’s premises without Buyer’s authorization;

4. acknowledge that all persons, property, and vehicles entering or leaving Buyer’s or Buyer’s Customer’s premises are subject to search; and

5. remain in authorized areas only (limited to the work locations, cafeterias, rest rooms and, in the event of a medical emergency, Buyer’s or Buyer’s Customer’s medical facilities). Supplier will promptly notify Buyer of any accident or security incidents involving loss of or misuse or damage to Buyer’s intellectual or physical assets; physical altercations; assaults; or harassment and provide Buyer with a copy of any accident or incident report involving the above. Supplier must coordinate with Buyer or Customer access to Buyer’s or Buyer’s Customer’s premises during non-regular working hours.

12.4     Asset Control

In the event Supplier Personnel has access to information, information assets, supplies or other property, including property owned by third parties but provided to Supplier Personnel by Buyer (“Buyer Assets”), Supplier Personnel:

1. will not remove Buyer Assets from Buyer’s or Buyer’s Customer’s premises without Buyer’s authorization;

2. will use Buyer Assets only for purposes of this Agreement and reimburse Buyer for any unauthorized use;

3. will only connect with, interact with or use programs, tools or routines that Buyer agrees are needed to provide Services;

4. will not share or disclose user identifiers, passwords, cipher keys or computer dial port telephone numbers; and

5. in the event the Buyer Assets are confidential, will not copy, disclose or leave such assets unsecured or unattended. Buyer may periodically audit Supplier’s data residing on Buyer Assets.

12.5     Supervision of Supplier’s Personnel

Suppliers will provide continual supervision of its Personnel provided under this Agreement, at no additional cost to Buyer. Supplier’s supervisor shall have full supervisory authority over all day-to-day employment relationship decisions relating to Supplier’s Personnel, including those decisions relating to wages, hours, terms and conditions of employment, hiring,

Form Title: Solutions Engagement Agreement
Form Owner: Global Procurement 6 of 9 Form Release: 8/98
Revision: 09/01

Solutions Engagement Agreement

Agreement # 4902P20043

discipline, performance evaluations, termination, counseling and scheduling. Supplier’s supervisors responsible for each work location will be responsible to know that work location’s planned holiday (and other closing) schedules and the impacts all such schedules have on Supplier’s Personnel. Supplier will conduct orientation sessions with its Personnel before placement on an assignment with Buyer, during which orientation such Personnel will be told who their supervisor is and how that supervisor can be contacted. Supplier will, from time to time, ensure that all of its Personnel working under this Agreement continue to be aware of this information.

13.0     Insurance

Supplier will maintain at its expense:

1. commercial general or public liability insurance with a minimum limit per occurrence or accident of 1,000,000 USD (or local currency equivalent);

2. workers’ compensation or employer’s liability insurance as required by local law, such policies waiving any subrogation rights against Buyer; and

3. automobile liability insurance as required by local statute but not less than 1,000,000 USD (or local currency equivalent) if a vehicle will be used in the performance of this Agreement.

Insurance required under clauses (1) and (3) will name Buyer as an additional insured with respect to Buyer’s insurable interest, will be primary or non-contributory regarding insured damages or expenses, and will be purchased from insurers with an AM Best Rating of B+ or better and a financial class rating of 11 or better.

14.0     Term and Termination

14.1     Termination of this Base Agreement

Either party may terminate this Base Agreement, without any cancellation charge, for a material breach of this Agreement by the other party or if the other party becomes insolvent or files or has filed against it a petition in bankruptcy (“Cause”), to the extent permitted by law. Such termination will be effective at the end of a thirty (30) day written notice period if the Cause remains uncured. Either party may terminate this Base Agreement without Cause when there are no outstanding SOWs or WAs.

14.2     Termination of a SOW or WA
Buyer may, upon written notice to Supplier, terminate a SOW or WA:

1. with Cause effective immediately; or

2. without Cause.

Upon termination, in accordance with Buyer’s written direction, Supplier will immediately:

1. cease work;

2. prepare and submit to Buyer an itemization of all completed and partially completed Deliverables and Services;

3. deliver to Buyer Deliverables satisfactorily completed up to the date of termination at the agreed upon Prices in the relevant SOW and/or WA; and

4. deliver upon request any work in process.

In the event Buyer terminates without Cause, Buyer will compensate Supplier for the actual and reasonable expenses incurred by Supplier for work in process up to and including the date of termination provided Supplier uses reasonable efforts to mitigate Buyer’s liability under this Subsection by, among other actions, accepting the return of, returning to its suppliers, selling to others, or otherwise using the canceled Deliverables (including raw materials or work in process) and provided such expenses do not exceed the Prices.

15.0     General

15.1     Amendments

This Agreement may only be amended by a writing specifically referencing this Agreement which has been signed by authorized representatives of the parties.

15.2     Assignment

Neither party will assign their rights or delegate or subcontract their duties under this Agreement to third parties or Affiliates without the prior written consent of the other party, such consent not to be withheld unreasonably, except that either party may assign this Agreement in conjunction with the sale of a substantial part of its business utilizing this Agreement. Any unauthorized assignment of this Agreement is void.

Form Title: Solutions Engagement Agreement	7 of 9	Form Release: 8/98
Form Owner: Global Procurement		Revision: 09/01

Solutions Engagement Agreement

Agreement # 4902P20043

15.2 Choice of Law and Forum; Waiver of Jury Trial Limitation of Action

This Agreement and the performance of transactions under this Agreement will be governed by the laws of the country where the Buyer entering into the relevant agreement or PA is located, except that the laws of the State of New York applicable to contracts executed in and performed entirely within that State will apply if any part of the transaction is performed within the United States. The United Nations Convention on Contracts for the International Sale of Goods does not apply. The parties expressly waive any right to a jury trial regarding disputes related to this Agreement. Unless otherwise provided by local law without the possibility of contractual waiver or limitation, any legal or other action related to this Agreement must be commenced no later than two (2) years from the date on which the cause of action arose.

15.4 Communications

All communications between the parties regarding this Agreement will be conducted through the parties’ representatives as specified in the relevant SOW.

15.5 Counterparts

This Agreement may be signed in one or more counterparts, each of which will be deemed to be an original and all of which when taken together will constitute the same agreement. Any copy of this Agreement made by reliable means (for example, photocopy or facsimile) is considered an original.

15.6 Exchange of Information

All information exchanged is non confidential. If either party requires the exchange of confidential information, it will be made under a separate signed confidentiality agreement between the parties. The parties will not publicize the terms of this Agreement, or the relationship, in any advertising, marketing or promotional materials without prior written consent of the other party except as may be required by law, provided the party publicizing obtains any confidentiality treatment available. Supplier will use information regarding this Agreement only in the performance of this Agreement. For any business personal information relating to Supplier Personnel that Supplier provides to Buyer, Supplier has obtained the agreement of the Supplier Personnel to release the information to Buyer and to allow Buyer to use such information in connection with this Agreement.

15.7 Freedom of Action

This Agreement is nonexclusive and either party may design, develop, manufacture, acquire or market competitive products or services. Buyer will independently establish prices for resale of Deliverables or Services and is not obligated to announce or market any Deliverables or Services and does not guarantee the success of its marketing efforts, if any.

15.8 Force Majeure

Neither party will be in default or liable for any delay or failure to comply with this Agreement due to any act beyond the control of the affected party, excluding labor disputes, provided such party immediately notifies the other.

15.9 Obligations of Affiliates

Affiliates will acknowledge acceptance of the terms of this Agreement through the signing of a PA before conducting any transaction under this Agreement.

15.10 Prior Communications and Order of Precedence

This Agreement replaces any prior oral or written agreements or other communication between the parties with respect to the subject matter of this Agreement, excluding any confidential disclosure agreements. In the event of any conflict in these documents, the order of precedence will be:

1.	the quantity, payment and delivery terms of the relevant WA;
2.	the relevant SOW;
3.	this Base Agreement; and
4.	the remaining terms of the relevant WA.

15.11 Record Keeping and Audit Rights

Supplier will maintain (and provide to Buyer upon request) relevant business and accounting records to support invoices under this Agreement and proof of required permits and professional licenses, for a period of time as required by local law, but not for less than three (3) years following completion or termination of the relevant SOW and/or WA. All accounting records will be maintained in accordance with generally accepted accounting principles.

Form Title: Solutions Engagement Agreement	8 of 9	Form Release: 8/98
Form Owner: Global Procurement		Revision: 09/01

Solutions Engagement Agreement

Agreement # 4902P20043

15.12 Severability

If any term in this Agreement is found by competent judicial authority to be unenforceable in any respect, the validity of the remainder of this Agreement will be unaffected, provided that such unenforceability does not materially affect the parties’ rights under this Agreement.

15.13 Survival

The provisions set forth in the following Sections and Subsections of this Base Agreement will survive after termination or expiration of this Agreement and will remain in effect until fulfilled: “Ongoing Warranties”, “Intellectual Property”, “Supplier Liability for Third Party Claims”, “Limitation of Liability between Supplier and Buyer”, “Record Keeping and Audit Rights”, “Choice of Law and Forum; Waiver of Jury Trail; Limitation of Action”, “Exchange of Information”, and “Prior Communications and Order of Precedence.”

15.14 Waiver

An effective waiver under this Agreement must be in writing signed by the party waiving its right. A waiver by either party of any instance of the other party’s noncompliance with any obligation or responsibility under this Agreement will not be deemed a waiver of subsequent instances.

16.0

ACCEPTED AND AGREED TO:	ACCEPTED AND AGREED TO:
International Business Machines Corporation	Halifax Corporation
By:	By: /s/ James L. Sherwood                                    3/22/02
Buyer Signature                                              Date	Supplier Signature                                              Date
Pam Lowe	James L. Sherwood
Printed Name	Printed Name
Procurement Professional – General Procurement	Vice President Contracts
Title & Organization	Title & Organization
Buyer Address: 4111 Northside Parkway	Suppler Address: 5250 Cherokee Ave.
Atlanta, GA 30327 USA	Alexandria VA 22312 USA

Form Title:  Solutions Engagement Agreement	9 of 9	Form Release:  8/98
Form Owner:  Global Procurement		Revision:  09/01

Solutions Engagement Agreement

Agreement # 4902P20043

Audit Rights”, “Choice of Law and Forum: Waiver of Jury Trial; Limitation of Action”, “Exchange of Information”, and “Prior Communications and Order of Precedence.”

15.14     Waiver

An effective waiver under this Agreement must be in writing, signed by the party waiving its right. A waiver by either party of any instance of the other party’s noncompliance with any obligation or responsibility under this Agreement will not be deemed a waiver of subsequent instances.

16.0

ACCEPTED AND AGREED TO:	ACCEPTED AND AGREED TO:
International Business Machines Corporation	Halifax Corporation
By: /s/ Patricia Summey 3/27/02	By: /s/ Jim May 3/22/02
Buyer Signature            Date	Supplier Signature Date
Patricia Summey	Jim May
Printed Name	Printed Name
Procurement Professional — General Procurement	VP-OPERATIONS
Title & Organization	Title & Organization
Buyer Address 4111 Northside Parkway	Supplier Address: 5250 Cherokee Ave.
Atlanta, GA 30327	Alexandria VA 22312
USA	USA

Form Title: Solutions Engagement Agreement	9 of 9	Form Release:8/98
Form Owner: Global Procurement		Revision: 09/01

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Charles L. McNew, certify that:

1.	I have reviewed this report on Form 10-Q 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 fourth 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: February 14, 2006	/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-Q 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 fourth 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: February 14, 2006	/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-Q for the period ended December 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: February 14, 2006
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-Q for the period ended December 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: February 14, 2006
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.